Antitrust rulemaking as a solution to abuse of the standard-setting process.

• Author: Speegle, Adam
• Position: NOTE

While many recognize the critical role that technology plays in modern life, few appreciate the role that standards play in contributing to its success. Devices as prevalent as the modern laptop computer, for example, may be governed by over 500 interoperability standards, regulating everything from the USB drive to the memory chip. To facilitate adoption of such standards, firms are increasingly turning to standard-setting organizations. These organizations consist of members of an industry who agree to abide by the organization's bylaws, which typically regard topics such as patent disclosure and reasonable licensing. Problems arise, however, when members violate these bylaws after a standard has been adopted. Where a member asserts its patents against other members in violation of the organization's bylaws, that member engages in what is known as "patent holdup." Both private and public litigation have focused on curbing this practice, but the current regime remains imperfect. This Note argues that the best approach to the current problem of patent holdup requires the Federal Trade Commission to promulgate an antitrust rule. This approach combines the advantages associated with traditional enforcement with the beneficial aspects of agency rulemaking.

TABLE OF CONTENTS INTRODUCTION I. CHALLENGING PATENT HOLDUP IN STANDARD-SETTING ORGANIZATIONS A. The Problem of Patent Holdup B. Deficiencies in Private Action C. Deficiencies in the Sherman Act II. EMPLOYING SECTION 5 IN THE STANDARD-SETTING CONTEXT A. The Scope of Section 5 B. Section 5 Remedies Deficiencies in the Current Enforcement Regime C. A History of FTC Actions in the Standard-Setting Context D. Remaining Problems with Section 5 Enforcement III. ANTITRUST RULEMAKING AS A SOLUTION TO PATENT HOLDUP A. Authority for Antitrust Rulemaking B. Form of a Proposed Rule C. Broad Considerations Associated with Enforcement by Rule 1. Concerns with Enforcement by Rule 2. Benefits of Enforcement by Rule CONCLUSION INTRODUCTION

Some technological advancements provide benefits by themselves. However, the vast majority of devices available to the consumer are in reality aggregations of independent patented technologies that are packaged together and that rely on interoperability standards to function. (1) The personal computer is a prominent example of this concept. (2) Personal computers combine various technologies, such as DVD drives, USB outlets, and memory chips, which each rely on interoperability among products to be fully functional. If there were twenty different standards for DVDs that required twenty different players, consumers would experience dramatically fewer benefits. Thus, it is important that industry settle on standards for interoperability among products.

There are two primary ways in which an industry can settle on a standard: through the regular course of competition, which often gives rise to "standard wars," or through standard-setting organizations ("SSOs"). (3) Standard wars, such as the recent Blu-ray/HD DVD conflict and its predecessor the VHS/Betamax conflict, rely on the marketplace to decide which standard prevails. (4) This process can be long, and it leads consumers either to purchase the losing standard or wait for the market to decide on a standard. (5) To avoid these problems, industries can convene SSOs. (6) SSOs are groups composed of members of a certain industry, such as the memory chip industry, who meet to decide on industry standards. (7) Because the members set standards as a group, consumers benefit from interoperability among their products and are not forced to decide which standard to adopt. (8) Further, industry benefits from increased and accelerated consumer adoption of its standard. (9)

While SSOs provide many benefits to consumers and industry, some members of SSOs have devised ways to abuse the standard-setting process in order to extract greater returns. Through a practice known as "patent holdup," patent holders of a technology that will become a standard wait until their technology has been adopted by the SSO, and then "hold up" the manufacturing process by charging higher royalties to extract greater profits from the manufacturers. (10) Patent holdup harms consumers not only by increasing the price of technology (11) but also by delaying the standard-setting process and erasing the efficiency gains that attract industry to SSOs in the first place. (12)

In order to combat these abusive practices, both the government and private parties have brought actions against SSO members who use patent holdup tactics, but the current state of the law has failed to establish sufficient disincentives to prevent these tactics for good. Reliance on private parties and the Sherman Act has proven ill suited for this new wave of anticompetitive practice. In response, the Federal Trade Commission ("FTC" or "the Commission") has invoked section 5 ("Section 5") of the Federal Trade Commission Act ("FTCA"), which declares unlawful "[u]nfair methods of competition," to combat these abuses. (13) This approach, while somewhat effective, remains an incomplete solution due to concerns arising from the expansion of the provision's application to a point at which it begins to harm industry participants and elicit judicial and congressional backlash. (14) There is, however, an alternative approach. By adopting a rule under the "unfair methods of competition" prong of the FTCA, the FTC can benefit from the independence and flexibility of Section 5, give greater notice to industry of what practices will be unlawful, and assure the courts that this new application of Section 5 will not lead to limitless expansion of the provision.

This Note argues that the FTC should use its antitrust rulemaking authority to promulgate a rule that declares it a violation of Section 5 of the FTCA for firms to engage in deception and other anticompetitive conduct in abuse of the standard-setting process. Part I explains the problem of patent holdup and reveals how reliance on private action and the Sherman Act's monopolization provision is insufficient to combat it. This insufficiency is due to inherent limitations in the antitrust statute and contract law. Part II discusses the benefits and drawbacks of an "independent" (15) Section 5 in the standard-setting context and argues that Section 5, while an improvement over Sherman Act and contract litigation, still presents an incomplete solution to patent holdup. Finally, Part III advocates promulgation of an antitrust rule by the FTC that draws on the benefits of Section 5 while providing clear boundaries that should alleviate industries' and courts' major concerns.

1. CHALLENGING PATENT HOLDUP IN STANDARD-SETTING ORGANIZATIONS

   The problem of patent holdup cannot be solved by reliance on SSOs, private actions, or the Sherman Act. Section I.A looks at the abuses that have developed to take advantage of the standard-setting process and explains how these abuses result in anticompetitive consequences that require legal action. Section I.B surveys the efforts that SSOs and private parties take to combat these abuses and explains how these efforts face inherent limitations that make reliance on them insufficient. Section I.C examines the Sherman Act's application in the standard-setting context and discusses how limitations both in the underlying statute and in legal precedent make the Sherman Act a tool ill suited to combating abuse in SSOs.

   1. The Problem of Patent Holdup

      SSOs are groups, often composed of competitors within an industry, that meet over a period of time to develop an industry standard. (16) During the standard-setting process, the group evaluates members' contributions (patented technologies) on their technical and practical merits. (17) SSOs may adopt either an "open" or a "closed" standard as a result of this process. (18) Open standards are those that "are not controlled by any one party and can be adopted freely by all market participants." (19) Closed standards involve one or more specific patented technologies that require royalty licensing. (20) In choosing whether to adopt an open or closed standard, the SSO may weigh the competing interests and incentives of members to decide on a standard that meets the needs of the industry and that manufacturers feel confident integrating into their products. (21)

      This process, however, has a major flaw. While it is capable of producing a number of procompetitive results, it is also open to abuse by its members through patent holdup, which may have a detrimental impact on competition and consumers. Patent holdup may take a variety of forms and may affect both open and closed standards. (22) For example, a member of an SSO may fail to disclose its patent during the standard-setting process and may either remain silent or encourage the group to adopt its technology as a standard without the other members knowing the implications of their decision. Once the SSO adopts the technology and expends a substantial amount of time and money integrating the standard into new and existing products, the patent holder may make known its ownership of the patent and bring patent infringement actions against users of the standard. (23) On the opposite end of the spectrum, a patent holder may make its patents known to the SSO and promise licensing at a nominal rate. Once the patent is integrated into the final standard, however, the patent holder may use its newly obtained market power to extract substantial royalties from the other members. (24) While these are just two examples of possibilities for abuse, there are countless variations on the general principle that they represent: patent holders can easily abuse the standard-setting process for their own gain.

      Patent holdup is harmful for a variety of reasons. First, patent holdup delays the implementation of a standard. (25) One of the reasons for forming an SSO is to accelerate the adoption of new...