Standard Setting Organizations (SSOs) create technology standards in order to ensure product or service quality, promote compatibility and interoperability of networked products, and facilitate the competitive development of new technologies. Standard-setting in patent-rich environments often requires participants to disclose relevant patents that they own and license patents essential to the standard to all participants on fair, reasonable, and nondiscriminatory (FRAND) terms. A statement issued in December 2019 by three federal agencies acknowledges the value of FRAND commitments and described them as occurring:
where a patent holder has voluntarily agreed to make available a license for the patent on reasonable and non-discriminatory (RAND) terms or fair, reasonable, and nondiscriminatory (FRAND) terms while participating in standards-setting activities at a standards-developing organization (SDO).
As the statement indicates, the essence of FRAND is that it is the product of a voluntary agreement among the participants, requiring them to make their patents available on FRAND terms.
Antitrust best achieves its purpose when it takes markets as it finds them, and then protects them from threats to competition. The antitrust tribunal must understand the market before it and the rationales and effects of its various rules. Then it considers whether a challenged restraint might operate anticompetitively so as to cause unnecessary consumer harm. For more than a century, antitrust jurisprudence has approached markets in this way. For example, Justice Brandeis’s opinion in the
Board of Trade
case began by describing the Board’s operation as a market. From that point the Court’s job was to ascertain whether the challenged rule operated anticompetitively to undermine this purpose. In the
NCAA
case nearly seventy years later it did the same thing—acknowledging the valuable market created by this joint venture of colleges to promote amateur intercollegiate athletics. It condemned a restraint on competition that reduced output and harmed consumers and was not central to the NCAA’s purpose. The list of cases in which the Supreme Court has followed this template so as to protect the competitive integrity of standard setting or other collaborative market processes is long.
In a particularly myopic decision involving the FRAND process, the Ninth Circuit made no attempt to understand that process or how the antitrust laws could be used to protect it from anticompetitive restraints. That was not entirely the court’s fault. Part of the blame lies with the Antitrust Division of the Justice Department, which intervened in the proceeding and seemed more intent on protecting Qualcomm than the competitive integrity of the FRAND process.
While the FRAND process has been highly productive, it is also fragile. Firms are tempted to make commitments at the beginning when the incentive to join is large, but renege on them later when they can profit by doing so. At least in this particular case, private FRAND enforcement had not worked very well. Qualcomm had been able to violate FRAND commitments in order to exclude rivals and obtain higher royalties than FRAND would permit, largely with impunity. Other firms will very likely follow Qualcomm’s lead. If that happens the FRAND system will fall apart, doing irreparable injury to the modern wireless telecommunications network or, at the very least, diminishing the leadership role of the United States in preserving effective network competition.
While governments can be heavily involved in standard setting, the implementation of technical standards in information technologies is largely the work of private actors. Government involvement is limited mainly to enforcement of contract, intellectual property, or antitrust law. As private actors, those involved in standard setting or compliance are fully subject to the federal antitrust laws.
This Article addresses one question: when is an SSO participant’s violation of a FRAND commitment an antitrust violation, and if it is, of what kind and what are the implications for remedies? It warns against two extremes. One is thinking that any violation of a FRAND commitment is an antitrust violation as well. In the first instance FRAND obligations are contractual, and most breaches of contract do not violate any antitrust law. The other extreme is thinking that, because a FRAND violation is a breach of contract, it cannot also be an antitrust violation. The question of an antitrust violation does not depend on whether the conduct breached a particular agreement but rather on whether it caused competitive harm. This can happen because the conduct restrained trade under section 1 of the Sherman Act, was unreasonably exclusionary under section 2 of the Sherman Act, or amounted to an anticompetitive condition or understanding as defined by section 3 of the Clayton Act. The end goal is to identify practices that harm competition, thereby injuring consumers.
The Ninth Circuit’s
Qualcomm
decision will make antitrust violations in the context of FRAND licensing much more difficult to prove, even in cases where anticompetitive behavior and consumer harm seem clear. Indeed, in this case the court itself acknowledged the harm to consumers but appeared to think that they were not entitled to protection. If this decision stands, FRAND obligations will to a larger extent have to be settled through private litigation and the federal antitrust enforcement agencies will have a diminished role. Anticompetitive behavior by one firm that is not effectively disciplined will lead others to do the same thing.
Not only did the Ninth Circuit reject application of the antitrust laws in this case, it also appeared to repudiate antitrust’s consumer welfare principle, saying:
. . . [T]he district court correctly defined the relevant markets as “the market for CDMA modem chips and the market for premium LTE modem chips.” Nevertheless, its analysis of Qualcomm’s business practices and their anticompetitive impact looked beyond these markets to the much larger market of cellular services generally. Thus, a substantial portion of the district court’s ruling considered alleged economic harms to OEMs—who are Qualcomm’s
customers
, not its competitors—resulting in higher prices to consumers. These harms, even if real, are not “anticompetitive” in the antitrust sense— at least not
directly
—because they do not involve restraints on trade or exclusionary conduct in “the area of effective competition.”
The quotation is from the Supreme Court’s decision in
Ohio v. American Express Co.
, where the Supreme Court said only that a relevant market is “the area of effective competition.” The Ninth Circuit panel apparently believed that antitrust harm could occur only to producers inside the relevant market, which typically excludes most customers. The Ninth Circuit did not quote the Supreme Court’s decision one year later in
Apple v. Pepper
, that “Ever since Congress overwhelmingly passed and President Benjamin Harrison signed the Sherman Act in 1890, ‘protecting consumers from monopoly prices” has been “the central concern of antitrust.’”
The very reason we condemn restraints under the antitrust laws is because they result in lower output and higher prices, harming consumers. The Ninth Circuit panel appeared to believe that higher prices for OEMs—that is, the manufacturer customers who purchase chips for inclusion in their devices— is not the kind of injury that concerns the antitrust laws. Rather, it must be harm to competitors.
Customers are often, even typically, not producers in the relevant market. Nevertheless, they are clearly antitrust’s protected class. For example, while exclusive dealing in the first instance might deny selling opportunities to a rival producer, we condemn it because it threatens price increases to their buyers and those who purchase from them. Indeed, the reason we have market power requirements in antitrust cases in the first place is to distinguish harms to rivals that are likely to result in market price increases from those that are not. Competitor exclusion in a competitive market is not an antitrust violation because, while it injures the competitor is does no consumer harm. That is the all-important difference between business torts and antitrust law.
Patent holders who participate in SSOs generally agree to provide timely disclosure of their patents or patent applications that are reasonably expected to read on the participants’ technology. They also agree in advance to license their patents thought to be essential to the standard on FRAND terms. The Patent Act itself does not impose this obligation. Patentees who are not involved in SSOs have no obligation other than market pressures to submit their patents to a standard or engage in FRAND licensing.
In networked technologies, however, these market pressures can be substantial. For example, if a patentee refuses to commit its patented technology to an industry standard, the SSO is likely to adopt a different standard that is not believed to infringe those patents. Or if a patentee refuses to commit to license a patent to all comers on a nondiscriminatory basis, then the SSO may respond by seeking an alternative standard. These actions are driven by the SSO’s goal of competitive creation of a technology when interoperability among diverse producers is a necessary component. Just as any producer, firms involved in the implementation of networked technology seek to minimize their costs by avoiding unnecessary or unnecessarily costly patents. Such avoidance is a socially valuable form of cost minimization.
The FRAND obligation generally requires patentees to license freely to all qualified participants, whether or not they are competitors of the patent holder. Further, they must settle royalty disputes in a reasonable manner—if necessary, through a third party, such as a court or arbitrator. If reference to an arbitrator is contractually specified, such agreements may also be subject to compulsory arbitration under the Federal Arbitration Act.
The FRAND system facilitates competition by assuring new firms as well as existing ones that they will be able to operate on the networked technology. Royalties to the owners of these patents are generally measured by the value that the contributed patent makes to the standard. Importantly, tribunals seek to measure these values “ex ante,” or prior to the patent’s adoption into a standard and at a time when there is a fuller range of competitive alternatives. Once the standard is adopted and implementers have incorporated it into their own technologies, a standard essential patent is likely to be in a much stronger position, approaching monopoly in some cases. Patents that are committed in this way are described as “standard essential patents” (SEPs), or as being “FRAND encumbered.” Qualcomm was able to evade this “ex ante” requirement by insisting on purchaser acceptance of a license on its own terms before it would sell chips.
Having a patent declared standard essential can increase its value considerably, mainly because the promise of a license at a reasonable rate steers developmental decision making in favor of that particular technology. When a firm makes a commitment to develop its products under a particular standard, it wants assurance that it will have a durable right to operate under that standard at reasonable royalty rates. This process naturally leads to the creation of considerable path dependence in standards. It encourages firms to develop their own technology in ways that ensure interoperability but that can be costly to reverse after the fact.
This phenomenon of increased value for SEPs also motivates patent owning firms to “over-claim”—that is, to assert that patents are standard essential when subsequent litigation or evaluation determines that they are not. While FRAND agreements require participants to declare relevant patents thought to be essential, the rate of actual declaration far exceeds any rational boundary. As many as one-third to more than half of declared SEPs are very likely not essential to the standard for which they were declared, and allegations about the practice of over-declaring are currently being litigated as potential antitrust violations. In fact, overall infringement rates for SEP patents are not materially different from those for non-SEP patents. A declaration of non-infringement means that, although the patent might be valid, it does not in fact read on the defendant’s particular device or process. In effect, the patent is not a part of the defendant’s technology, and thus cannot be essential. The problem is exacerbated by the fact that, for the most part, SSOs have no process up front for reviewing or questioning individual participants’ declarations that a patent they are offering is in fact both valid and standard essential.
Ex ante, a patent may offer one of many alternative technological paths to a certain goal. However, ex post, after a standard has been adopted and others have developed their technologies in reliance, the range of acceptable alternatives can decrease dramatically. As a result, the patent whose path is adopted becomes much more valuable. In that case, a firm’s ability to evade the FRAND obligation by charging selectively higher royalties to some licensees or conditioning licenses on the purchase of other technology can be extremely lucrative for the patentee but costly to implementers of the standard and disruptive of the SSO’s developmental goals. In its
Qualcomm
decision noted above, the Ninth Circuit did not indicate any awareness of these motivations or their potential for harm.
In general, the goal of FRAND is to make patents available to participants at a price equivalent to what the patent would have been worth in the more competitive market prior to the time it was declared essential. The relevant question is what was the value of the patent’s contribution to the standard at a time when competitive alternatives may have been available, as opposed to a later time when other firms have dedicated themselves to the standard?
This approach is simply a variant of the proposition that even a monopoly market can be made competitive if we require competing firms to bid for the opportunity to be the monopolist. Even though a natural monopoly entity such as a public utility has the market power of any monopolist, someone must still choose who gets to be the monopolist. The winner will be the firm that promises the most competitive behavior, provided that it can be held to that commitment. Once the auction is over and the winner has been selected, however, it will have an incentive to renege on its auction promise and charge whatever price its newly acquired monopoly status provides. FRAND creates similar incentives, as the
Qualcomm
case illustrates.
Alternative proposals to the effect that the FRAND patentee and the licensee should split the difference between value to the patentee and value to the implementer improperly take an ex post rather than ex ante view of value and asks the royalty tribunal to divide evenly the difference between the seller’s (patentee’s) willingness to accept and the buyer’s (licensee’s) willingness to pay
after
FRAND status has been established. That may be a useful way of thinking about price in a bilateral monopoly, but only after the bilateral monopoly has formed. The competitive solution is to give the seller the price it would have obtained in a competitive market, which is manifestly not an even division of the surplus. Rather, it is a competitive return to the seller.
The SEP process has produced several disputes. Often these are simply about the size of the royalty and how it must be measured. However, patentees may also attempt to evade the general FRAND requirements that a SEP must be licensed without condition to all users of the standard and on nondiscriminatory terms. Some owners of SEPs who also make products that practice them may prefer not to license a particular patent to anyone. Or they may impose exclusive dealing or loyalty discount requirements on licensees. Alternatively, the owner of a FRAND-encumbered patent may tie it to an unregulated device. While FRAND license rates are determined by a third-party tribunal, product prices are not. By tying a patent license to its own manufactured device, the patentee might be able to obtain its full post-commitment monopoly return. In that case the seller can obtain an overcharge on the device that operates to offset the reduced FRAND royalty. This use of tying in this way to avoid regulated rates is well known in antitrust. The owner of a FRAND patent may also refuse to license it to competitors in the market for devices that practice the patent, once again in violation of its FRAND obligation to license to all qualified users on nondiscriminatory terms.. The result is reduced competition in the downstream market for devices or processes that employ the patent at issue, and in extreme cases even the creation of monopoly.
While these various attempts to evade FRAND obligations very likely breach the patentee’s contractual obligations, only a subset also constitute antitrust violations. This does not mean that the standard-setting and FRAND process in which the conduct occurred is irrelevant to antitrust analysis. To the contrary, as in any antitrust case, it forms part of the market environment in which conduct must be evaluated. In her 2019
Qualcomm
decision, Judge Lucy Koh addressed tying and exclusive dealing claims under general antitrust principles, and refusal to deal claims under the standards that the Supreme Court had developed in its
Aspen
and
Trinko
decisions. Although her opinion devoted considerable space to the importance of standard essential patents and the relevance of FRAND commitments, she addressed the antitrust claims by applying well established antitrust principles that require a showing of restraint of trade or anticompetitive exclusion. Nevertheless, anticompetitive effects become more transparent when one views the extent to which they undermined an output- and innovation-enhancing joint enterprise whose social value was not being called into question.
SSOs operated by multiple firms are joint ventures. For bona fide joint ventures that are not simply fronts for cartels, the purpose of the antitrust laws is not to destroy the venture or undermine its purpose, but rather to evaluate how the challenged restraint operates within the venture and condemn unreasonably harmful restraints. For example, when the Supreme Court struck down the NCAA joint venture’s limitation on nationally televised football games, the purpose and effect were to make the NCAA behave more competitively, in the process increasing its output. SSOs should be addressed in the same manner. The goal of the standard setting venture is to facilitate competitive operation and entry, interoperability, as well as preserve appropriate competitive incentives for research and development.
Antitrust analysis necessarily involves testing conduct against these goals, but only to the extent of looking for practices that are anticompetitive. This means it must identify practices that reduce market wide output unreasonably and increase prices, or that are unnecessarily exclusionary or harmful to consumers in other ways.
A firm’s violation of its FRAND commitment is very likely a breach of contract, as several decisions have held. The FRAND contract is incomplete, in the sense that not every term is specified in detail. But participants are subject to a contractual duty to bargain in good faith, with some terms being filled in by courts or other tribunals as necessary. The breach of contract question does not depend on whether the conduct reduced market output or excluded a rival unreasonably. It certainly does not depend on the existence of any party’s market power. Remedies are ordinarily contract damages or an injunction. Nonparties to the contract will typically be able to obtain relief only to the extent that they are third-party beneficiaries. However, the courts have had little difficulty concluding that participating members of the SSO are third-party beneficiaries of FRAND commitments. In all events, challengers will not be able to obtain antitrust law’s treble damages unless they can prove an antitrust violation.
Whether a firm’s breach of a FRAND commitment also violates the antitrust laws depends on whether the conduct in question causes competitive harm of a sort that the antitrust laws recognize. In the case of section 1 of the Sherman Act this requires a showing of a relevant agreement that is likely to reduce market output. If the conduct is reasonably ancillary to other arguably procompetitive activity, the court must also assess market power and anticompetitive effects. In the case of section 2 of the Sherman Act or section 3 of the Clayton Act, which reach mainly tying and exclusive dealing, it will require a showing of market power plus conduct that is unreasonably exclusionary.
The antitrust harm results, not from the breach of the FRAND obligation per se. Rather, it results from the creation of monopoly and higher prices for consumers. The Ninth Circuit got this issue precisely wrong, holding that the district court incorrectly focused on downstream harm to buyers when it should have looked at harm to rivals. That confuses contract or tort law with antitrust law.
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FRAND and Antitrust