“For over a decade, the FTC and DOJ had worked both in parallel and together to address the potential competitive harms posed by patent hold-up. The recent divergence between the DOJ and FTC on this issue is a troubling development that creates uncertainty.”
On May 2, the Antitrust Division of the U.S. Department of Justice (DOJ) took the unusual step of submitting a Statement of Interest in the Federal Trade Commission’s (FTC’s) case against Qualcomm to take a position contrary to the FTC. The DOJ argued that “[b]ecause an overly broad remedy could result in reduced innovation, with the potential to harm American consumers, this Court should hold a hearing and order additional briefing to determine a proper remedy that protects competition while working minimal harm to public and private interests.” In response, the FTC informed the court that it “did not participate in or request” the DOJ’s filing, that it “disagree[d] with a number of contentions” made by the DOJ, and that the DOJ “misconstrues applicable law and the record.” In the end, the court agreed with the FTC and issued injunctive relief against Qualcomm without conducting the further remedy proceedings the DOJ advocated.
Underscoring the Divide
The public feuding between the two federal antitrust enforcement agencies about how to resolve a case litigated by one them was a remarkable spectacle. It also brought into focus a broader divide between the FTC and DOJ on the role of antitrust law in addressing patents that are essential to industry standards (SEPs) and subject to commitments to license on fair, reasonable, and non-discriminatory (FRAND) terms.
Since being confirmed as Assistant Attorney General for the Antitrust Division in September 2017, Makan Delrahim has shifted the DOJ’s longstanding focus on the risks of patent hold-up—where SEP owners take advantage of large investments by companies to develop products using a standard to extract unreasonable, non-FRAND licensing terms—to address what he views as the greater risk of patent hold-out—which he defines as potential licensees colluding on issues such as licensing terms for SEPs. In a March 16, 2018 speech, Delrahim said that “hold-up is fundamentally not an antitrust problem, and therefore antitrust law should not be used as a tool to police FRAND commitments that patent-holders make to standard setting organizations” and offered his view that “implementer hold-out poses a more serious threat to innovation than innovator hold-up.”
Joseph Simons, the FTC Chairman, addressed this divide in a September 25, 2018 speech. While he noted that “[c]onsistency across the two federal enforcement agencies is . . . beneficial,” he observed that treatment of SEPs may be an area for “some potential inconsistency” between the agencies. He elaborated that “we agree with the Division that hold-out in the standard-setting process can raise serious concerns under antitrust law when such hold-out is the result of collusion among potential adopters/licensees. But we also believe that hold-up raises potential antitrust issues, as well.” Simons committed that the FTC “will continue our economically grounded and fact-based enforcement of the antitrust laws in this area.” Consistent with that approach, the FTC contended in a December 2018 filing in the Qualcomm case that “Qualcomm’s refusal to make SEP licenses available to competitors in breach of its voluntary commitments to standard-setting organizations is anticompetitive conduct.”
Although the DOJ submission in the Qualcomm case did not take a position on the merits, it appears to have been motivated by, and is consistent with, Delrahim’s efforts to downplay the potential for harm from patent hold-up. (Delrahim, who lobbied for Qualcomm, is reportedly recused from matters involving Qualcomm and did not sign the DOJ’s Qualcomm filing.) The DOJ filing highlighted the divergence between the DOJ and FTC on this important issue. It was not always so. For over a decade, the FTC and DOJ had worked both in parallel and together to address the potential competitive harms posed by patent hold-up. The recent divergence between the DOJ and FTC on this issue is a troubling development that creates uncertainty regarding what had been a consensus area of concern for the agencies.
The Roles of the DOJ and FTC
Before turning to how the DOJ and FTC have previously addressed patent hold-up, it is worth briefly examining the dual roles of the DOJ and FTC in enforcing the antitrust laws.
Among other statutes, the DOJ Antitrust Division is charged with criminal and civil enforcement under the Sherman Act and civil enforcement under the Clayton Act. The DOJ also provides guidance on the application of antitrust laws, including by issuing business review letters advising on how it may respond to particular proposed joint ventures or other business conduct.
The FTC was created with the passage of the FTC Act, which directs the agency to prevent “unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2). As interpreted by the FTC, Section 5 of the FTC Act “encompasses not only those acts and practices that violate the Sherman or Clayton Act but also those that contravene the spirit of the antitrust laws and those that, if allowed to mature or complete, could violate the Sherman or Clayton Act.” Unlike the DOJ, the FTC does not conduct criminal enforcement.
The jurisdictions and roles of the FTC and DOJ thus overlap, including in merger reviews, investigations of anticompetitive conduct, and offering guidance on the antitrust laws. The agencies employ a “clearance” process to ensure that they do not undertake duplicative investigations that would, among other problems, subject targets to competing demands from the agencies and potentially lead to conflicting outcomes.
When it comes to the intersection of antitrust and intellectual property, both agencies have oversight responsibilities and they have collaborated to issue guidance on their shared approach to enforcement. For example, in 1995, the agencies jointly issued Antitrust Guidelines for the Licensing of Intellectual Property setting forth their policy on antitrust treatment of licensing intellectual property.
The DOJ and FTC Have Traditionally Agreed on the Dangers of Patent Hold-Up
Over the course of more than a decade—across both the Republican Bush Administration and the Democratic Obama Administration—the DOJ and FTC both consistently recognized that SEPs present a danger of hold-up, and that this was a proper subject for antitrust agency enforcement.
As early as 2006, the DOJ warned of the dangers of patent hold-up in a business review letter to a standard-setting organization (SSO): “Once a particular technology is chosen and the standard is developed . . . it can be extremely expensive or even impossible to substitute one technology for another. . . . Thus, those seeking to implement a given standard may be willing to license a patented technology included in the standard on more onerous terms than they would have been prior to the standard’s adoption in order to avoid the expense and delay of developing a new standard around a different technology.”
In 2007, the DOJ and FTC partnered to issue a report called Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition. The agencies described the “potential for ‘hold up’ by the owner of patented technology after its technology has been chosen by the SSO as a standard and others have incurred sunk costs which effectively increase the relative cost of switching to an alternative standard.” The agencies warned that this “power to extract higher royalties or other licensing terms” could harm consumers “if those higher royalties were passed on in the form of higher prices.”
In 2013, the DOJ partnered with the U.S. Patent & Trademark Office on a Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments. The Policy warned of the risk that SEPs could be used “to pressure an implementer of a standard to accept more onerous licensing terms than the patent holder would be entitled to receive consistent with the F/RAND commitment.” A DOJ official explained that the Statement “was informed by over a decade of thinking by the [DOJ Antitrust Division], the Federal Trade Commission (FTC), and the PTO about standards-setting activities and the IP policies of standard-setting organizations (SSOs).” (Delrahim announced in December 2018 that the DOJ was withdrawing its assent to the Statement.)
Beyond issuing guidance, the DOJ also accounted for patent hold-up in enforcement. In 2012, when the DOJ closed its investigation of Google’s acquisition of Motorola Mobility Holdings and a consortium’s acquisition of Nortel Networks’ SEPs, it explained that it had “focused on whether the acquiring firms would have the incentive and ability to exploit ambiguities in the SSOs’ F/RAND licensing commitments to hold up rivals, thus preventing or inhibiting innovation and competition,” including by “seeking to prevent or exclude products from practicing those SEPs from the market altogether.”
For its part, the FTC has challenged hold-up through seven enforcement actions over two decades. Those include a 2005 consent order with Union Oil Company of California (Unocal) after the FTC accused it of monopolizing a market for low-emission gasoline by misrepresenting in state regulatory standard-setting proceedings that an approach to reducing emissions was in the public domain when Unocal was actively pursuing patents on the technology that would later allow it to charge hold-up royalties to its competitors.
A Cause for Concern
The DOJ’s turn away from its long-held position on the risks of patent hold-up is a cause for serious concern.
First, it is bad policy. In explaining the DOJ’s about-face, Delrahim has referred to a “so-called ‘hold-up’ problem in the context of SSOs” and contended that concerns with hold-up “rely on models devoid of economic or empirical evidence that hold-up is a real phenomenon.” But the DOJ’s prior recognition of the risks of patent hold-up was well supported.
U.S. courts have long recognized that SEPs pose a hold-up threat. In 2007, for example, the Third Circuit observed that “[t]o guard against anticompetitive patent hold-up, most [standards development organizations] require firms supplying essential technologies for inclusion in a prospective standard to commit to licensing their technologies on FRAND terms.” Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 313 (3d Cir. 2007). More recently, the Ninth Circuit explained that “[t]he development of standards . . . creates an opportunity for companies to engage in anti-competitive behavior” and that “[u]sing that standard-development leverage, the SEP holders are in a position to demand more for a license than the patented technology, had it not been adopted by the SSO, would be worth.” Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1031 (9th Cir. 2015); see also, e.g., Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014) (“SEPs pose two potential problems that could inhibit widespread adoption of the standard: patent hold-up and royalty stacking”).
As to the economics of patent hold-up, the DOJ observed in a 2015 business review letter that the “economic bargaining model underlying claims of hold-up has been studied extensively and applied to the standard-setting context,” citing scholarship dating back decades. That conclusion echoed the views of the DOJ and FTC in their 2007 report that patent hold-up is simply a “variant of the classic ‘hold-up problem’.” The DOJ also noted in its 2015 letter that “litigated cases demonstrate the potential for hold up when owners of RAND-encumbered standards-essential patents make royalty demands significantly above the adjudicated RAND rate” and provided examples where licensors’ demands were on the order of about 170 to 230 times what courts determined were RAND rates.
Recognition of the dangers of hold-up is thus well supported as a matter of law and economics. To be sure, if competitors collude in an SSO to fix the terms on which they will license technology, antitrust enforcement would be appropriate. But simply because one can envision the possibility of an alternative form of anticompetitive conduct relating to standard setting does not mean that the DOJ should simply ignore the well-documented existence of another form of harm.
Second, the DOJ’s abrupt shift away from over a decade of guidance on hold-up creates uncertainty for the many industries that rely on standards. While the shift in policy has been cast as being motivated by a concern for fostering innovation, it threatens to have the opposite effect. Companies planning investments in standardized products now face greater uncertainty about whether they can count on established rules, particularly as articulated in the DOJ’s business review letters, to safeguard their ability to license SEPs on FRAND terms.
Third, that a change in administration has led the DOJ to turn away from a long-held, bipartisan approach plays into the perception that antitrust enforcement is increasingly a political tool. While there may be higher profile examples of the politicization of antitrust enforcement, any step that suggests that a change in administration, not law and economics, will lead to wholesale departure from existing antitrust policy is troubling.