August 23, 2006
On August 2, 2006, the Federal Trade Commission issued a broad ruling strongly rebuking Rambus Inc., a developer and licensor of computer memory technologies, for its conduct while a member of the standards-setting organization known as the "JEDEC" (Joint Electron Device Engineering Council).1 In so doing, the Commission reiterated that, when members of such organizations engage in deceptive conduct designed to gain unfair advantages over their competitors, they risk serious consequences. The Rambus ruling brings renewed focus to the legal perils of participating in standards-setting organizations (SSOs).
Increasing Significance of SSOs in a High-Tech World
Since the Industrial Revolution, modern economies have seen an ever-increasing need for standards to enable systems to operate in a networked fashion. From the railroads-which became staples of commerce because the railcars, stations and tracks were connected in an infrastructure built to standard specifications-to electricity, telephones, telegraphs, and faxes, standardization has been critical to these systems' success and usefulness in modern society. Computer systems, cellular communications, and the Internet have brought about an even greater need for uniform standards to allow such systems to communicate and operate together.
As interoperability standards have taken on an increasing role in the success or failure of modern economic endeavors, the courts have increasingly scrutinized the processes of establishing these standards. In general, the courts have recognized that uniform standards have a pro-competitive impact on the economy. Because standard technologies and products can more easily be compared and contrasted, price competition generally increases with the adoption of standards. From a consumer's perspective, setting standards can increase the value of a particular product or technology because it will be compatible with a network of other products or technologies.
Accordingly, in Allied Tube & Conduit Corp. v. Indian Head, Inc.,2 the Supreme Court recognized that "private standards can have significant pro-competitive advantages," where private bodies promote standards "based on objective expert judgments and through procedures that prevent the standards-setting process from being biased by members with economic interests in stifling product competition." In Clamp-All Corp. v. Cast Iron Soil Pipe Inst.,3 the First Circuit explained that standards-setting activity can serve to lower information costs and facilitate the creation of better products. In Consolidated Metal Prods. Inc. v. American Petroleum Inst.,4 the Fifth Circuit explained that "[e]ven if user reliance gives [the standard] influence over the market, that influence may enhance, not reduce, competition and consumer welfare."
However, setting standards can also have anti-competitive or other harmful effects when the process is abused. This is where the courts and regulatory agencies have stepped in.
The standards-setting process is fertile ground for collusion because SSOs are generally composed of competitors in the industry for which the standards are being set. There is always the potential that one group of competitors will seek to implement a set of standards that promotes their products, rather than those of another competitor or group of competitors.
Standards-setting processes can also have an anti-competitive effect when a member of the SSO manipulates these processes to its benefit, such as when it manipulates the SSO into adopting standards that are covered by that member's patents, requiring payment to that member in the form of license fees.
This latter conduct is the conduct the FTC found Rambus guilty of in its August 2 ruling.
Legal Risks of Participating in Standards-setting Organizations
Antitrust Violations
The nation's various antitrust laws are enforced by a variety of entities, including the Department of Justice (Antitrust Division), the Federal Trade Commission, the Attorneys General of the various states, and private plaintiffs who are given enforcement rights as to certain state and federal antitrust laws through the civil courts. At the federal level, the Sherman Act is the principal antitrust law implicated in connection with SSOs.5 SSOs are prone to scrutiny under the Sherman Act due to the fact that they bring competitors together to exchange product information and collaborate on what types of products to make in the future.
Collusive Conduct in Violation of the Sherman Act § 1. Section 1 of the Sherman Act prohibits conspiracies in restraint of trade, and may be applied to the activities of SSOs when they are used to exclude other competitors or to stifle competition. Where an SSO engages in acts designed to reduce output, increase prices, or curb innovation, these acts expose the SSO and its members to antitrust liability under Section 1 of the Sherman Act.
In Radiant Burners, Inc. v. Peoples Gas Light & Coke Co.,6 the Supreme Court held that the standards set by an SSO for approval of gas burners were arbitrary and capricious, and were designed to facilitate a conspiracy between utilities and the SSO in order to refuse provision of gas for use in unapproved burners. In American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp.,7 the Supreme Court upheld the liability of a SSO for acts of its agents designed to exclude a competitor's products from the market in violation of the antitrust laws.
In 2004, Congress enacted the Standards Development Organization Advancement Act of 2004 (SDOAA), clarifying that SSOs are to be judged under the antitrust "rule of reason" standard while they are engaged in the development of standards, thus removing any anticompetitive presumption that might otherwise arise due to their inherently collaborative nature. The "rule of reason" limits antitrust liability by forbidding only those arrangements where the anticompetitive consequences of such arrangements outweigh their legitimate business justifications (even though certain anticompetitive practices, such as price fixing, typically lack such justification and are therefore, per se, unreasonable).8 However, the SDOAA and its "rule of reason" standard do not apply to conduct by members of SSOs, who remain subject to ordinary antitrust law standards. Accordingly, agreements to fix prices, allocate markets, and/or exercise group boycotts remain illegal, per se; and illegal communications between competitors are not protected just because they happen in a standards-setting context.
Deceptive Conduct in Violation of the Sherman Act § 2. Section 2 of the Sherman Act makes it unlawful to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations…"9
The Supreme Court has identified the basic elements of a Section 2 offense as follows:
The offense of monopoly under Section 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.10
The Federal Trade Commission has the authority to enforce Sherman Act violations under the FTC Act.11 In its recent decision, the FTC ruled unanimously that Rambus' conduct constituted exclusionary conduct under Section 2 of the Sherman Act, and that Rambus thereby unlawfully monopolized the markets for four technologies incorporated into the JEDEC standards for certain types of memory chips.
Rambus is a developer and licensor of computer memory technologies. For more than four years during the 1990s, Rambus was a member of the JEDEC, an industry-wide SSO that, among other things, sets standards for memory products so that such products can interface successfully with other computer components. The FTC found that:
JEDEC operated on a cooperative basis and required that its members participate in good faith. According to JEDEC policy and practice, members were expected to reveal the existence of patents and patent applications that later might be enforced against those practicing the JEDEC standards. In addition, JEDEC members were obligated to offer assurances to license patented technologies on RAND [reasonable and non-discriminatory] terms, before members voted to adopt a standard that would incorporate these technologies. The intent of the JEDEC policy and practice was to prevent anticompetitive hold up.12
The FTC found that Rambus had violated these policies and practices in pursuit of a monopoly on four technologies incorporated into JEDEC standards. Specifically, the FTC found that:
Through these actions, the FTC found that Rambus was able to "conceal its patents and patent applications until after the standards were adopted and the market was locked in."14
Based on this conduct, the FTC found that Rambus had violated the Sherman Act "by engaging in exclusionary conduct that contributed significantly to the acquisition of monopoly power in four relevant and related markets."15 The FTC has ordered further briefing on the proper remedy for such illegal conduct.
Liability Under Section 5 of the FTC Act
In a separate concurring opinion, Commissioner Jon Leibowitz agreed with the Commission's Opinion that Rambus had committed a violation of Section 2 of the Sherman Act, but went on to explain that Rambus' conduct also constituted a violation of the FTC Act, regardless of whether or not it met the requirements for an antitrust violation under the Sherman Act.16
Commissioner Leibowitz explained that "Rambus' deception of the JEDEC and its members injured competition and consumers alike," and for this reason Rambus' conduct not only violated antitrust laws, but also constituted an unfair method of competition in violation of the broader reach of the FTC Act.17 Commissioner Leibowitz also explained that he wrote the concurring opinion "to discuss and reemphasize the broad reach and unique role of Section 5 [of the FTC Act]."18
Unsettled Issues Regarding Rambus' Conduct
The FTC's Decision in the Rambus matter is only one chapter in the continuing saga of legal challenges to the conduct of Rambus in the course of its JEDEC membership. An appropriate FTC remedy for the adjudged misconduct has yet to be determined, and Rambus will likely appeal the ruling. Moreover, Rambus has sued, or is been sued by, several major DRAM manufacturers on various patent infringement and antitrust-related allegations surrounding patents developed in the course of Rambus' JEDEC membership. These civil actions involve pursuit of legal theories outside of the FTC Act (the FTC Act contains no provisions for private enforcement), and include not only antitrust allegations under the Sherman Act and its state counterparts, but also allegations that Rambus' conduct in the course of its JEDEC participation constituted unfair competition and/or common law fraud.
The FTC ruling and the other litigations involving Rambus' conduct while a member of the JEDEC standards-setting organization provide powerful lessons to individuals and companies who participate in such SSOs. Members or prospective members of such organizations are well advised to make sure that they fully understand the legal requirements imposed on participants before they find themselves in a Rambus-like situation.
For more information, contact:
Keith L. Slenkovich
408.282.1821
kslenkovich@thelenreid.com
Click here for more information on Thelen's Intellectual Property Litigation practice.
Endnotes
1. In the Matter of Rambus, Inc., FTC Docket No. 9301.
2. Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1988)
3. Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478 (1st Cir. 1988.), cert. denied, 488 U.S. 1007 (1989).
4. Consolidated Metal Prods. Inc. v. American Petroleum Inst., 846 F.2d 284, 296 (5th Cir. 1988).
5. 15 U.S.C. §§ 1 et seq.
6. Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961).
7. American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982).
8. P. Areeda & D. Turner, Antitrust Law at 362-63, ¶¶ 1500, 1509 (1978).
9. 15 U.S.C. § 2.
10. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
11. 15 U.S.C. § 45(a)(1).
12. In the Matter of Rambus, Inc., FTC Docket No. 9301. Decision at 4.
13. Id.
14. Id.
15. Id. at 5.
16. Leibowitz Concurring Opinion, FTC Docket No. 9302.
17. Id., p. 1.
18. Id. p. 2.
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