The FTC’s Repair Restriction Ambition May Face Friction

By Taylor Owings & Steve Maule
September 22, 2021

“Though [FTC] Chair Khan may hope to find a healthy penumbra around the Sherman and Clayton Acts in the FTC Act, courts may rein her in when FTC actions would chill companies from innovating or responding to consumer demand.”

The Federal Trade Commission Building, originally known as the Apex Building, located at 600 Pennsylvania Avenue, NW in the Federal Triangle area of Washington, D.C.

The Federal Trade Commission Building, originally known as the Apex Building, located at 600 Pennsylvania Avenue, NW in the Federal Triangle area of Washington, D.C. Public Domain.

The Federal Trade Commission (FTC) has pledged to use more of its enforcement resources to ensure that consumers are free from manufacturer-imposed restrictions on self-repair or third-party repair. Just last week, the Democrat Commissioners voted to give the new Chair, Lina Khan, blanket authority to issue compulsory process in any investigation of “unfair, deceptive, anticompetitive, collusive, coercive, predatory, exploitative, or exclusionary acts or practices . . . related to any repair restrictions.” The breadth of that resolution suggests the FTC is poised to press this issue to the maximum extent allowed under the law. The unanswered question is: how far does the law allow the FTC to go?

The answer is, quite possibly, not as far as the White House or Chair Khan would like. One problem for the FTC: doubts about the authority granted to the agency under the FTC Act. Another hurdle will be the legal protections granted to manufacturers—both as market participants responding to consumer demand and, in many cases, as the owners of intellectual property rights. This blog has already discussed some of the ways that the “right to repair” movement might conflict with copyright protections. Here, we focus on the limits of the FTC’s authority and antitrust doctrine, as well as conflicts with patent law.

The FTC’s Authority May Be More Limited Than Its Right to Repair Ambitions

President Biden’s Executive Order on Promoting Competition in the American Economy “encourages” Chair Khan “to exercise the FTC’s statutory rulemaking authority” to address “unfair anticompetitive restrictions on third-party repair or self-repair of items.” Anticompetitive restrictions are typically addressed through the FTC’s authority to prohibit “unfair methods of competition” under Section 5 of the Act. But there is significant doubt whether Congress has ever given the FTC statutory authority to make substantive rules articulating specific practices that violate the “unfair methods of competition” prong of the FTC Act.

For example, our colleagues (former acting Chair of the FTC) Maureen Ohlhausen and (former Assistant Attorney General for Antitrust) Jim Rill explained in a white paper for the U.S. Chamber of Commerce that congressional silence is deafening when it comes to competition rulemaking. Congress explicitly authorized the FTC to use notice-and-comment rulemaking to articulate substantive principles in legislation like the Children’s Online Privacy Protection and Telemarketing and Consumer Fraud and Abuse Prevention Act. In contrast, the FTC Act grants the agency power only to issue cease-and-desist orders through adjudicative proceedings and “to make rules and regulations for the purpose of carrying out” that function.

Nevertheless, the FTC under Chair Khan seems poised to try competition rulemaking. In her academic days, Chair Khan (along with still-current-Commissioner Chopra) made the case that such rulemaking should be allowed under the law. Last month, Chair Khan signaled that she may be moving forward with the plan: the FTC requested public comment (through the official channel of notice-and-comment rulemaking, Regulations.gov) on two petitions for competition rulemaking drafted and submitted by Khan’s former employer, the Open Markets Institute.

What is more, Chair Khan and the Democrat Commissioners recently rescinded the bipartisan Statement of Enforcement Principles Regarding Unfair Methods of Competition, indicating that they are willing to challenge a significantly broader swath of conduct than can be challenged with the Clayton or Sherman Antitrust Acts. The dissenting Republican Commissioners argued that rescinding the definition leaves law-abiding companies without any guidance about what conduct is prohibited. In response, Chair Khan indicated that companies may be able to expect a rulemaking to clarify. Repair restrictions, especially those that have been upheld under traditional antitrust doctrine, may be one target.

But the FTC will also face an uphill battle in expanding the reach of “unfair methods of competition,” if its past attempts at challenging unfair methods of competition in court are any indication. That is because courts have strong guidance on how to consider the equities that motivate competition law: substantial precedent protects manufacturers from being penalized for design choices and other business conduct that improves the consumer experience. Since the 1970s, courts have uniformly determined that the competition policy codified in the FTC Act does not require different balancing of the equities. Though Chair Khan may hope to find a healthy penumbra around the Sherman and Clayton Acts in the FTC Act, courts may rein her in when FTC actions would chill companies from innovating or responding to consumer demand.

The FTC Will Need to Heed Patent Protections

Intellectual property rights will provide another check on the FTC’s “right to repair” efforts. It will be acting in the shadow of two high-profile failures to redraw the boundary between antitrust and IP: In 1-800 Contacts, the Second Circuit rejected the FTC’s argument that trademark protections should take a back seat to its competition concerns. In Qualcomm, the Ninth Circuit affirmed the company’s right to exclude competitors from making products with its patented technology, regardless of the static effects on competition in that market. In both cases, the en banc courts rejected the FTC’s requests for rehearing. These admonitions suggest that the FTC will have to be careful not to overreach when drawing new boundaries for repair restrictions.

Commissioner Christine Wilson has expressly warned her fellow commissioners not to let the crusade against repair restrictions overcome the goal of IP rights: to foster innovation by protecting significant investments in research and development. She acknowledges the FTC must look carefully at the protections that patent law provides companies in the context of repairs to patented technology.

If the FTC does indeed look, they will find that U.S. courts have been addressing the scope of the right to repair patented goods for more than 170 years—all the way back to Wilson v. Simpson, 50 U.S. 109 (1850). Although “there is no bright-line test” for determining whether a defendant’s behavior in the repair context is infringing, Sandvik Aktiebolag (Sandvik) v. E.J. Co., 121 F.3d 669, 674 (1997), court precedent distinguishes a “permissible repair” from a “forbidden reconstruction.”  See, e.g., Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961). A trio of cases illustrate this distinction.

Aro Manufacturing Company, Inc. v. Convertible Top Replacement Company, Inc., 365 U.S. 336 (1961)

The Convertible Top Replacement Company acquired rights to U.S. Patent No. 2,569,724, claiming a convertible top for automobiles with a flexible fabric top and supporting structure. While the fabric was often worn after only a few years of use, the rest of the convertible top was typically usable for the lifetime of the automobile. The defendant, Aro Manufacturing, manufactured and sold replacement fabrics, which the patent owner claimed infringed its patent. Specifically, the patent owner argued that replacing the fabric was an infringing reconstruction because the fabric was an “essential” or “distinguishing” element of the patented combination and was expensive and difficult to replace. The Supreme Court rejected those arguments. Instead, it reasoned that the invention claimed was the combination of fabric with supporting structure, meaning the replacement of the fabric alone was a non-infringing repair.

Automobile Body Parts Association v. Ford Global Technologies, 930 F.3d 1314 (Fed. Cir. 2019)

The Federal Circuit recently addressed the definition of an infringing reconstruction in another case involving automobile parts. In Automotive Body Parts Association, Ford’s design patents protected the design of its F-150 truck vehicle hood and head lamp. U.S. Patent Nos. D489,299 and D501,685. The Association sought a declaratory judgment that Ford’s design patents were invalid or unenforceable and, on appeal, argued that purchasers of Ford’s F-150 trucks are licensed to repair their trucks using replacement parts embodying the patented designs. The Federal Circuit distinguished Aro, where the spent part alone was not patented, while Ford’s design patents specifically covered the vehicle hood and head lamp designs. Thus, the court held that creation of new parts matching those designs was an infringing reconstruction. See also Aiken v. Manchester Print Works, 1 F. Cas. 245 (C.C.D.N.H. 1865).

Sandvik Aktiebolag v. E.J. Company, 121 F.3d 669 (1997)

Whether a defendant’s actions are permissible “repair” or an infringing “reconstruction” may also be determined using the multi-factor test outlined in Sandvik Aktiebolag. The patent owner, Sandvik, manufactured and sold a patented drill, including a drill tip that wore down with use. U.S. Patent Nos. 4,222,690 and 4,381,162. The drill tip could be resharpened several times, but if damaged, the drill was no longer useful without retipping. The patent owner did not manufacture or sell replacement tips, so the defendant, E.J., would retip drills for some customers. Retipping involved a lengthy process, including heating the tip, replacing it with new material, and machining the new material to recreate the unique geometry of the original tip. To determine whether retipping was an infringing reconstruction, the Supreme Court reasoned:

“There are a number of factors to consider in determining whether a defendant has made a new article . . ., including

  • the nature of the actions by the defendant,
  • the nature of the device and how it is designed (namely, whether one of the components of the patented combination has a shorter useful life than the whole),
  • whether a market has developed to manufacture or service the part at issue, and
  • objective evidence of the intent of the patentee.”

Based on these factors, the Supreme Court concluded the retipping was an infringing reconstruction. One critical observation in the Court’s “totality of the circumstances” review was that the patented drill was unusable once the tip was damaged. In Aro and other cases, some parts of the patented object had a “useful life much longer than that of certain parts which wear out quickly.” The Court also looked to whether there was a market to support replacement parts. In this case, there was “no evidence of a substantial market for drill retipping,” because it was not easily detached or replaced. Finally, the decision noted that the patent owner never intended to have the drill tips replaced based on the drill’s design and the absence of available replacement parts and instructions. In other cases, patent owners had clearly intended for certain parts to be replaceable.

FTC Goals May Take a Back Seat to Innovation

The FTC may face an unavoidable conflict with patent law if it tries to bolster third-party repair services that reconstruct a patented product after it is no longer useful, or if an individual replacement part is itself patented. In those cases, the FTC’s goal of protecting competition in repair markets may have to take a back seat to the dynamic competition that characterizes innovation markets.

 

The Author

Taylor Owings

Taylor Owings is a partner in Baker Botts' Antitrust and Competition Practice Group. She represents clients in civil merger and non-merger matters both in front of government agencies and in private litigation. She also counsels clients on the application of antitrust law to their business activities, with special experience in issues related to the digital economy.

Taylor Owings

Steve Maule is an Associate with Baker Botts. He practices in all areas of intellectual property law, including patent litigation, prosecution, and licensing. He has worked on patent disputes regarding semiconductor manufacturing technology and semiconductor circuitry design, as well as litigation matters involving electrical power technology, web development and internet technologies, communication systems and technologies, video display technologies, and inventor disputes. Steve also has experience preparing and prosecuting patent applications involving wireless security systems, augmented and virtual reality systems, machine learning systems, and electrical, computer, and software technologies, as well as oil and gas and mechanical technologies including subsurface sensing and control technologies. In addition, Steve is involved in Baker Botts' Emerging Company and Venture Capital (ECVC) practice and is interested in how intellectual property benefits startups and small businesses.

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There are currently 1 Comment comments. Join the discussion.

  1. Anon September 22, 2021 6:53 pm

    There is (more than a little) bit of a loaded position with the headlining quote of:

    “Though [FTC] Chair Khan may hope to find a healthy penumbra around the Sherman and Clayton Acts in the FTC Act, courts may rein her in when FTC actions would chill companies from innovating or responding to consumer demand.”

    Especially when those actions have NOT been shown to chill ANY innovation, AND they (the curtailment of the use of repair restrictions) have been actively criticized by consumers — demanding the opposite of what those in the seats of industry power want.

    The only “chilling” is to the established industry power business model.

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