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Delrahim Out Of Step With FTC, Industry, Academics On FRAND/SEP

This post was first published on Patent Progress by Jacqueline Yin. Jacqueline Yin is a Legal Fellow at the Computer & Communications Industry Association.

In the U.S., antitrust laws are typically enforced by both the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ). For example, the DOJ and FTC share the authority to enforce the Clayton Act and the Robinson-Patman Act, while the DOJ has exclusive authority to enforce Sherman Act § 1 and § 2. Under § 5 of the FTC Actthe FTC can regulate some of the conduct that the DOJ regulates under the Sherman Act. Over the years, the two agencies have developed expertise in particular industries or markets. The FTC’s expertise, for example, encompasses health care, pharmaceuticals, and certain high-tech industries, while the DOJ focuses on the financial services and telecommunications industries.  

While work by the FTC and DOJ is usually complementary, one area of law in which there may be growing divergence is in intellectual property (IP) rights, and more specifically, IP licensing. The voice driving this divergence is that of Assistant Attorney General (AAG) Makan Delrahim. Since being confirmed in September 2017, AAG Delrahim has indicated that he believes owners of Standard Essential Patents (SEPs) who refuse to license on “Fair, Reasonable And Non-Discriminatory” (FRAND) terms should not be subject to antitrust scrutiny. On the other hand, the FTC and the courts have recognized that in some situations, antitrust cases can be brought against SEP holders under § 2 of the Sherman Act or § 5 of the FTC Act. For example, the FTC sued Qualcomm in January 2017 for violation of § 5, alleging Qualcomm refused to license its alleged SEPs according to FRAND terms.

Delrahim Argues Antitrust Has Nothing To Do With FRAND

In testimony given on October 3, 2018, AAG Delrahim indicated his desire to switch from existing decades-long policy to a new approach referred to as the “New Madison” approach, which states that “antitrust law should not be used to police FRAND commitments that patent-holders unilaterally make to standard setting organizations (SSOs).” He explained his reasoning, saying:

First, the Sherman Act does not police “fair” prices or competition; it protects the competitive process.  Judge Easterbrook once asked, “Who says that competition is supposed to be fair, that we judge the behavior of the marketplace by the ethics of the courtroom? . . . When economic pressure must give way to fair conduct . . . rivals will trim their sails”; introducing conceptions of “fairness” into the Sherman Act “is to turn antitrust law on its head.”

Second, having undertaken a contractual duty to charge “nondiscriminatory” rates, the Sherman Act does not compel a patent-holder to abide by this promise. The Sherman Act is indifferent to price discrimination; indeed, in some circumstances price discrimination may be pro-competitive.

Third, the Sherman Act does not authorize courts to determine “reasonable” licensing rates.  The Supreme Court has emphasized repeatedly that antitrust law does not recognize a cause of action that would “require[] antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.”

(September 18, 2018: Antitrust Law and Patent Licensing in the Wild West.)

Consensus Amongst Practitioners; Delrahim’s Is The Rare View

At a recent ACT event, academics and practitioners alike expressed their disagreement with this position, recognizing that FRAND commitments and standard-essential patents (SEPs) create unique issues that involve antitrust concerns.

“… within any standard that the phone uses, there are patents.”

Charles Duan

Standards form “fundamental building blocks for product development” by “establishing consistent protocols that can be universally understood and adopted.” And these consistent protocols often involve patents. Discussing smartphones, Charles Duan of the R Street Institute explained that “standards are essential in this new economy… a smartphone has a lot of things in it. It has a camera, a display, a mobile communications chip… it implements a lot of standards and within any standard that the phone uses, there are patents.” Some examples include mobile network standards, such as 3G or 4G, which allow cell phones to connect to the same network.

Standards are adopted by SSOs, which consist of groups of competitors that agree on a single technological protocol for an industry. This is effectively an industry-wide agreement to use a particular patented technology and not any other—a classic antitrust cartel, but one which creates significant benefitsthat justify permitting the cartel. Implementing the standard may require using SEPs, which are patents that anyone who wants to make a standards-compliant device has to implement. SSOs impose FRAND commitments on participants in standards development in order to ensure that they can’t abuse the power over the standard that they might gain if their technology becomes standard-essential. If a potential SEP owner refuses to make a FRAND commitment the SSO may choose a different standard. Basically, the SSO and all its members agree to allow a standard to require the use of a particular SEP, granting that SEP owner a sort of monopoly, as long as the SEP owner agrees not to abuse its market power by charging unreasonable prices or discriminating amongst licensees.

Modern competition enforcers should address a fundamental question: “whether a given use of an IP right is helping to further competition or is undermining it.”

FTC Commissioner Noah Phillips

Delrahim’s sole emphasis on the term FRAND, or “fair pricing” therefore neglects the entire picture of recognizing potential competitive harms under the unique structure of standards-setting. FTC Commissioner Noah Phillips, while not explicitly criticizing Delrahim, explained Delrahim’s error with regard to FRAND patents during his keynote speech at the ACT event, stating that rather than a formalistic approach that denies antitrust concerns exist whenever IP rights are involved, modern competition enforcers should address a fundamental question: “whether a given use of an IP right is helping to further competition or is undermining it.”

“Imagine that a company makes a promise that an industry relies on, gains monopoly power as a result and then says ‘just kidding.’”

Prof. Michael Carrier

By arguing that the Sherman Act is unable to address contractual duties to charge “nondiscriminatory rates,” Delrahim also seems to neglect the Sherman Act’s ultimate aim—protecting against attempted monopolization. If a patent owner, as former DOJ Assistant Attorney General for Antitrust Renata Hesse described it at that event, has “committed to license [its patent] and told the world this is your intention” and then fails to do so, the competitive impact of that failure is a proper subject for antitrust inquiries. Professor Michael Carrier put it more bluntly in an op-ed: “Imagine that a company makes a promise that an industry relies on, gains monopoly power as a result and then says ‘just kidding.’” Carrier went on to explain that Delrahim’s position is incorrect as a matter of antitrust law and policy and offers unjustified immunity to anti-competitive conduct.  

The view that antitrust scrutiny kicks in when FRAND commitments are broken is longstanding and the consensus amongst most practitioners, academics and enforcement agencies. At the event, Prof. Carrier explained that “for the past 15 years, Republican and Democrat administrations have recognized the harm of patent holdup.” Holdup, one form of abusing SEPs to undermine competition, is when a patent owner refuses to license their SEP unless the licensee pays prices higher than FRAND rates.

As International Antitrust Enforcers Examine SEP Licensing, U.S. Consensus Is Key

At a time of close introspection into antitrust enforcement both domestically and internationally, FTC Commissioner Noah Phillips emphasized the importance of the U.S.’s role in antitrust enforcement in a speech at the 2019 Patents in Telecoms and the Internet of Things Public Workshop:

“Where we get it wrong, others may very well follow. And American firms may bear the brunt. As the oldest active antitrust regime, the U.S. is watched closely by foreign enforcers, especially those with newer antitrust authorities. That is a testament to the important work the Commission and the DOJ have done over the last couple centuries…We cannot stop researching, analyzing, and learning about the impact of IP and antitrust because the competition agencies of the world look to the FTC as a leader.”

Commissioner Phillips reiterated this sentiment again at the recent FTC Hearing on the FTC’s Role in a Changing World:

“The U.S. has an important role to play in preventing the misuse…of competition laws. We benefit from the oldest, most experienced antitrust regime in the world. The Antitrust Division of the Department of Justice has been enforcing the antitrust laws since the Sherman Act was promulgated in 1890, and the Commission has been protecting consumers and competition since it was established in 1914. Given our rich experiences, our actions are closely monitored by foreign authorities, particularly newer regimes looking to build their own experience and to establish their enforcement priorities.”

The importance of the U.S. competition regime in international enforcement means that this is an area the U.S. has to get right. Delrahim’s views on SEPs contradict both long-standing U.S. policy, case law, and well-developed economic concerns about the competitive impacts of abusive SEP licensing practices and patent holdup. His approach also appears to be contrary to the positions of several agencies in other jurisdictions, such as the European Commission and certain agencies in Asian jurisdictions. Delrahim should instead adopt the FTC’s approach of examining the actual competitive impact of a given entity’s behavior in order to ensure that competition enforcers across the world see the U.S. speaking as one on this critical topic.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.