Known Unknowns: Uncertainty and its Implication for Antitrust Policy and Enforcement in the Standard-Setting Context

• Author: D. Bruce Hoffman,Joseph J. Simons
• Published date: 01 March 2012
• DOI: 10.1177/0003603X1205700104
• Date: 01 March 2012
• Subject Matter: Article

THE ANTITRUST BULLETIN: Vol. 57, No. 1/Spring 2012 : 89
Known unknowns: Uncertainty
and its implication for antitrust
policy and enforcement in
the standard-setting context
BY D. BRUCE HOFFMAN* & JOSEPH J. SIMONS**
This article analyzes unilateral misconduct in standard-setting
organizations, including in particular various forms of patent hold-
up. The authors identify uncertainties facing agencies and courts
reviewing such conduct and describe certain analytical frameworks
that agencies can use to determine whether enforcement action is
appropriate in a particular case. The article examines three key
“unknowns”: whether a standard-setting process was abused or
misused in some way; whether such misconduct, if any, had a
significant adverse effect on competition; and what remedy, if any,
would cure such competitive harm. The authors argue that agencies
and courts should protect the reasonable expectations of other
participants in the standard-setting process, should adopt a practical
approach (a “substantial contribution” test) to problems of causation
raised by misconduct in the standard-setting arena, and should favor
compulsory licensing as a presumptive remedy in standard-setting
* Partner, Hunton & Williams LLP, Washington, D.C.
** Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington,
D.C.
AUTHORS’ NOTE: We are grateful for the help of Daniel Francis, associate at
Hunton & Williams, without whom this article would not have been possible. Both
authors held supervisory positions at the Federal Trade Commission during the
pendency of In re Rambus.
© 2012 by Federal Legal Publications, Inc.

---

90 : T H E A N T I T R U S T B U L L E T I N : Vol. 57, No. 1/Spring 2012
cases, reserving others (such as disgorgement) for unusual cases in
which compulsory licensing fails adequately to deter or remedy
anticompetitive misconduct.
KEY WORDS: Uncertainty, standards, standard-setting, SSO, patent,
Rambus, N-DATA, collaboration.
“[A]s we know, there are known knowns; there are things we know
we know. We also know there are known unknowns; that is to say
we know there are some things we do not know. But there are also
unknown unknowns—the ones we don’t know we don’t know.”
1
Secretary of Defense Donald H. Rumsfeld.
I.
INTRODUCTION
Private standard setting promises network efficiencies, efficient spe-
cialization, and the avoidance of redundancy on the one hand, while
threatening anticompetitive collusion, patent hold-up, and the cre-
ation of market power on the other. The tension between these
“good” and “bad” aspects of standard setting, which has been
expressed and resolved in various ways at different times by courts,
agencies, and commentators, has led to considerable confusion
regarding the rules that apply to standard-setting activities and how
those rules should be interpreted and applied in practice. This confu-
sion creates significant costs that are ultimately borne by consumers.2
Arguably the most challenging antitrust issue associated with
standard setting arises in the context of unilateral patent hold-up, as
discussed in cases such as Dell, Rambus, Unocal, and Broadcom v.
Qualcomm.3 Other problems, of course, can arise during the standard-
1
U.S. Department of Defense, News Transcript, DoD News Briefing—
Secretary Rumsfeld and Gen. Myers (Feb. 12, 2002), available at http://www
.defense.gov/transcripts/transcript.aspx?transcriptid=2636.
2
See, e.g., In re Dell Computer Corp., 121 F.T.C. 616, 626 (1996) (noting
potential for ill-advised enforcement action in the SSO context to “chill
participation in the standard-setting process”).
3
Dell, 121 F.T.C. 616; Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008);
In re Union Oil Co. of Cal., Docket No. 9305, 2005 WL 2003365 (F.T.C. Aug. 2,
2005); Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 308–09 (3d Cir. 2007).

---

I M P L I C AT I O N S O F U N C E R TA I N T Y : 91
setting process: in particular, various forms of unlawful collusion can
occur, ranging from collusive exclusion in the development of
standards (Radiant Burners and Allied Tube4) to collusive extraction of
favorable terms from suppliers of an input to the standard (In re NCAA
I-A Walk-On Football Players Litigation5). This article focuses on the
thorny challenges that face antitrust agencies addressing unilateral, not
collusive, conduct in standard setting. Specifically, we consider the
case of a firm that (1) participates in a standard-setting activity, (2)
acquires market or monopoly power through the incorporation of its
patent into a standard, and (3) subsequently asserts that patent over
users of the standard once adoption of the standard creates switching
costs that hinder the use of any alternative technologies.6
In analyzing such conduct under the antitrust laws, agencies (and
courts) must grapple with serious uncertainties—known and
unknown unknowns, in Secretary Rumsfeld’s formulation—
regarding the conduct and its effect on the standard-setting process.
From the perspective of an antitrust agency considering whether to
bring an enforcement action in connection with alleged patent hold-
up, these uncertainties generally arise in three areas:
•
First, did something go “wrong,” in an antitrust sense, in the stan-
dard-setting process (i.e., was there improper anticompetitive, or
“exclusionary,” conduct)?
4
Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656
(1961); Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988).
5
398 F. Supp. 2d 1144, 1146–51 (W.D. Wash. 2005).
6
See generally M. Sean Royall, Amanda Tessar & Adam Di Vincenzo,
Deterring “Patent Ambush” in Standard Setting: Lessons from Rambus and
Qualcomm, ANTITRUST, Summer 2009, at 34 (noting that patent ambush can
force an “entire industry [to] face exorbitant royalty demands”). For the most
part, we use the language of monopolization in this article, but in our view,
the analysis should not be materially different under the rule of reason
framework of section 1. In most cases the defendant’s participation in the
standard-setting activity will confer some degree of monopoly or market
power (we use the terms interchangeably), directing the focus of the antitrust
analysis to the question of whether the conduct had the effect of improperly
excluding competitors and therefore limiting competition (i.e., whether it was
“exclusionary” under section 2, or whether it had an “anticompetitive effect”
under section 1’s rule of reason).

---

92 : T H E A N T I T R U S T B U L L E T I N : Vol. 57, No. 1/Spring 2012
•
Second, if so, did the wrongdoing matter (i.e., did the exclusionary
conduct “cause” the anticompetitive outcome)?
and
•
Third, if so, what is the appropriate remedy (i.e., can the agency or
court craft a remedy that will address the harm caused by the anti-
competitive conduct without imposing costs that exceed the rem-
edy’s benefits)?
In this article, we attempt to identify the most important
“unknowns” in these areas—that is, to make as many as possible of the
inquiry’s “unknown unknowns” into “known unknowns”—and to sug-
gest analytical frameworks through which they can be made known. We
begin with some general observations about standard-setting activity
and its analysis under the antitrust laws (part II). The remainder of the
article tackles each “known unknown” in sequence. First, did something
go wrong (part III)? If so, did it matter (part IV)? And if so, what remedy
is appropriate (part V)? Concluding remarks follow (part VI).
II.
SOME GENERAL OBSERVATIONS ABOUT
STANDARD SETTING
We use the broad term “standard-setting activity” to mean any
collective action among private persons—whether or not conducted
through a formal standard-setting organization (SSO)—to develop
parameters for the design, manufacture, distribution, or sale of
products or services.7 Such activity can be—and commonly is—
analyzed under section 1 of the Sherman Act (because it generally
involves collaboration and agreement among separate economic
actors8), section 2 of the Sherman Act (when it leads to the acquisition,
maintenance, or enhancement of monopoly power by a single entity,9
or where it constitutes an attempt to achieve the same10), section 5 of
7
Such activity, when not in good faith (i.e., when it is a mere “sham”
concealing naked anticompetitive conduct) should be analyzed under the
generally applicable principles of section 1, pursuant to which it may be per
se illegal.
8
See, e.g., Allied Tube, 486 U.S. at 497–98.
9
See, e.g., Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008).
10
See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 317 (3d Cir.
2007).

---

I M P L I C AT I O N S O F U N C E R TA I N T Y : 93
the Federal Trade Commission (FTC) Act (as an unfair method of
competition11 or an unfair or deceptive act or practice12), and under the
various state-law “little FTC Acts,” which generally follow the
contours of the federal legislation but which provide—as the FTC Act
does not—for private rights of action against violators.13
It is elementary that standard-setting activity can be
procompetitive.14 Collective action allows competing firms to unlock
efficiencies that would be otherwise unreachable and to direct their
activities away from redundant or duplicative activity and toward
vigorous competition in ways that make a greater contribution to
consumer welfare.15 As one former FTC official has commented, such
activity can bring very real benefits:
Standard setting benefits consumers in three fundamental ways. First, it
can increase price competition, because standard technologies and prod-...