DOJ giving cover to monopolizing firms that breach antitrust rules

Imagine that a company makes a promise that an industry relies on, gains monopoly power as a result and then says “just kidding.” The head of the Department of Justice’s Antitrust Division, Makan Delrahim, recently gave this conduct an antitrust pass. That’s not right.

The setting for this scenario involves standards, which are ubiquitous in our high-tech, connected world. Our plugs fit into wall outlets, and our phones connect to wireless networks. The reason is simple. Industries have adopted standards with which companies build compatible products.

{mosads}Some standards implicate patents. Here, there is a real concern that after companies are locked in to a standard, the patent holder will “hold up” the industry by demanding unreasonable royalties or even blocking products from the market.

For that reason, standards organizations have required patent holders to license on fair, reasonable and nondiscriminatory terms (FRAND).

These companies are essentially saying: “We don’t know if the standard ultimately incorporates our patents, but if it does (and to encourage the consideration of our technology), we agree that we will license on reasonable and nondiscriminatory terms.”

In a series of speeches, Assistant Attorney General (AAG) Delrahim has been skeptical of “patent holdup,” and in an address on Sep. 18, he stated that FRAND abuse would not violate antitrust law. He reached this remarkable position only through a series of mischaracterizations. 

The first mischaracterization involves antitrust policy. On several occasions, Delrahim stated that the goal of antitrust law is to promote innovation and dynamic competition. Stated simply, this is the not the goal of antitrust.

Antitrust endeavors to promote consumer welfare through innovation and competition. As the Supreme Court made clear in FTC v. Actavis: “[P]atent and antitrust policies are both relevant in determining the ’scope of the patent monopoly.’”

The Supreme Court explained that it previously held that patent licenses violated antitrust law even if they “produce[d] supra-patent-permitted revenues.” 

Even on the ground of promoting innovation, Delrahim’s stance is too truncated. For it summarily resolves the debate (ongoing for at least half a century) among economists about the market structure most conducive to innovation.

In addition, it considers only the innovation contributed by the initial patent holder, not the follow-on innovation that builds on these patents.

Suggesting (without offering evidence) that any diminished return to the patent holder reduces innovation is, as two former high-ranking antitrust officials explained, “inconsistent with both sound economic analysis and patent law.”

It is also inconsistent with the Supreme Court’s reminder in Oil States v. Greene’s (in a 7-2 ruling written by Justice Thomas) that patents “involv[e] public rights.”

In addition to mischaracterizing antitrust policy, AAG Delrahim mischaracterizes the conduct at issue. He refers to FRAND as “compulsory licensing” even though a patent holder voluntarily chooses to license on FRAND terms to increase its likelihood of obtaining high volume from being part of the standard.

He overstates patent law and combines the previously separate benefits of high volume (inside the standards organization) and high royalties (outside) in offering patent holders the “greatest rewards possible.”

He references a “duty to deal” discussed in cases having little to do with FRAND promises. He uses a “narrow window” for a refusal-to-deal claim to interpret FRAND, which is essentially a duty to deal.

He lauds the “bargaining outcome that a free market dictates” without considering the role played by FRAND promises in standards markets. And he states that prospective licensees “assume the risk” that patents will cover the selected technology without acknowledging the FRAND requirements adopted to address this very concern.

AAG Delrahim also mischaracterizes antitrust law. He states that the Supreme Court, in Verizon v. Trinko, imposed a “legal rule, rather than a fact-specific rule” even though the court made clear that “[a]ntitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue” and a central aspect of the court’s decision was its emphasis on context and reliance on “a regulatory structure designed to deter and remedy anticompetitive harm.”

The Supreme Court in Trinko considered the application of the 1996 Telecommunications Act, which had required phone companies with state-provided monopolies in local service to share their network with competitors.

Because the Federal Communications Commission levied “a substantial fine” against Verizon and “imposed additional financial penalties and … daily reporting requirements,” the regulatory regime “was an effective steward of the antitrust function.” 

AAG Delrahim ignores the relevant framework in discussing the Sherman Act in a vacuum, stating that it “does not compel” a patent holder to abide by a promise to charge nondiscriminatory rates, “does not authorize courts to determine ‘reasonable’ licensing rates” and “does not police ‘fair’ prices or competition.”

In addition to these broad assertions, Delrahim rejects antitrust for even the most extreme breaches and deception by asserting that FRAND can only be “ambiguous” and by stating that “there is … no meaningful ex ante ‘deception’“ when the FRAND rate “will be determined after the fact.” 

Despite these assertions, AAG Delrahim concedes that “having one’s technology incorporated into a standard … may increase a patent-holder’s market power” and that “deception regarding a FRAND commitment” can be “clear” and “cause[] a technology to be incorporated into a standard that would not have succeeded but for a FRAND commitment.”

While acknowledging that such conduct “may occur,” he believes this will not happen “with regularity” because — neglecting the importance of licensing promises to these decisions — “the principal goal of standard setting is to select the superior technology.”

Patentees that obtain or maintain monopoly power as a result of breaching a FRAND commitment or deceiving the organization present a standard monopolization case.

Such conduct could satisfy the elements of exclusionary conduct by demonstrating an exclusion of competitors (the exclusion of rival competitive technologies not chosen by the standards organization) that results in competitive injury (price increases and innovation harms) and acquisition or maintenance of monopoly power (obtained through breach or deception). 

Standards present vital issues lying at the intersection of patent and antitrust law. Mischaracterizing the policy, conduct and law to offer antitrust immunity to anticompetitive standards conduct does not offer a justified approach.

Michael A. Carrier is a distinguished professor at the Rutgers Law School and an intellectual property fellow at the Innovators Network Foundation.