Learning from Rambus—How to Tame Those Troublesome Trolls

• Author: Maurits Dolmans,Malik Dhanani,Daniel Culley
• Published date: 01 March 2012
• Date: 01 March 2012
• DOI: http://doi.org/10.1177/0003603X1205700105
• Subject Matter: Article

THE ANTITRUST BULLETIN: Vol. 57, No. 1/Spring 2012 : 117
Learning from Rambus—How to
tame those troublesome trolls
BY DANIEL CULLEY,* MALIK DHANANI**
AND MAURITS DOLMANS***
The debate over using antitrust enforcement to prevent patent hold-
up remains unresolved. The U.S. Court of Appeals muddied the
waters in Rambus, and the European Commission decision clarified
only little. The Broadcom v. Qualcomm case offers mere ad hoc
solutions for standard setting, leaving trolls untroubled. We suggest a
return to fundamentals. “Skillful silence” to lure an industry into a
lock-in, creating opportunities for hold-up to extract unfair royalties,
serves no procompetitive purpose and is not “competition on the
merits.” Antitrust law itself should in certain cases create a “duty to
alert” manufacturers to patents that are not subject to a promise to
license on FRAND terms (or a ban on concealing them). Excessive
pricing after hold-up could also be curbed under Article 102(a) TFEU
and in certain cases under section 5 of the U.S. FTC Act, limiting
patent damages to ex ante value of the technology. This would
untether the law from the particular context of SSOs, addressing
hold-up more completely and uniformly.
KEY WORDS: Patent hold-up, Rambus, first-principles approach.
* Associate, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC.
** Associate, Cleary Gottlieb Steen & Hamilton LLP, London.
*** Partner, Cleary Gottlieb Steen & Hamilton LLP, London.
AUTHORS’ NOTE: The authors and their firm have been or are counsel to various
parties in actions against Microsoft, Rambus, Qualcomm, and others in cases involv-
ing the issues that are discussed in this article. The views expressed here are solely
those of the authors and do not necessarily represent those of Cleary Gottlieb Steen &
Hamilton LLP or any of its clients.
© 2012 by Federal Legal Publications, Inc.

---

118 : 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
I.
INTRODUCTION
Standard setting plays an important role in our economy, particularly
when product or component interoperability is critical. Selecting a
standard often involves competitors evaluating competing technolo-
gies and selecting a single technology to be standardized, to the
exclusion of other patented or nonproprietary technologies. Stan-
dardization thus transforms prestandard competition among alterna-
tive technologies into post-standard competition among different, but
interoperable implementations of the standard. The Rambus case was
a prime example.1
1
In re Rambus Inc., No. 9302, slip op. at 17 (F.T.C. Aug. 2, 2006) (Comm.
Leibowitz, concurring) (holding that Rambus’s conduct constituted monopo-
lization under section 2 of the Sherman Antitrust Act). On April 22, 2008, the
Rambus decision was annulled on appeal, and an application for en banc
review was denied as moot on August 26, 2008, without further reasoning.
Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). A jury in private litigation
found that Rambus had not been in breach of any disclosure obligations.
Hynix Semiconductor Inc. v. Rambus Inc., No. 1651, C-05-00331-RMW (N.D.
Cal. Mar. 26, 2008); Hynix Semiconductor Inc. v. Rambus Inc., 441 F. Supp. 2d
1066 (N.D. Cal. 2006). See also European Commission, Notice Pursuant to Art.
27(4) Council Regulation (EC) No. 1/2003, Case COMP/38.636, Rambus Inc.,
2009 O.J. (C 133) 16 (market testing of certain proposed commitments by
Rambus and preliminary conclusion of the European Commission that Ram-
bus had violated Article 102 of the Treaty on the Functioning of the European
Union (TFEU) by requiring royalties after having breached good faith disclo-
sure obligations); Opinion of the Advisory Committee, Rambus 2010 O.J. (C
30) 14, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ
.do?uri=OJ:C:2010:030:0014:0014:EN:PDF; Comm’n Decision, Rambus (Dec. 9,
2009), available at http://ec.europa.eu/competition/antitrust/cases/dec
_docs/38636/38636_1203_1.pdf; Summary of Comm’n Decision, id. at 17–18,
available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C
:2010:030:0017:0018:EN:PDF; Letter from Neelie Kroes, European Comm’n
(Jan. 15, 2010), available at http://ec.europa.eu/competition/antitrust/cases
/dec_docs/38636/38636_1192_5.pdf. See also Samsung Elec. Co. v. Rambus
Inc., 439 F. Supp. 2d 524 (E.D. Va. 2006); Micron Tech., Inc. v. Rambus Inc., 189
F. Supp. 2d 201 (D. Del. 2002); Rambus Inc. v. Infineon Tech. AG, 164 F. Supp.
2d 743 (E.D. Va. 2001), rev’d in part, 318 F.3d 1081 (Fed. Cir. 2003). See also
Press Release, European Comm’n, Commission Confirms Sending a State-
ment of Objections to Rambus (Aug. 23, 2007), available at http://europa.eu
/rapid/pressReleasesAction.do?reference=MEMO/07/330; Press Release,
European Comm’n, Commission Market Tests Commitments Proposed by

---

L E A R N I N G F R O M R A M B U S : 119
Despite the social benefits of interoperability, standardizing on a
single technology also creates problems. Selecting a particular tech-
nology means committing to that choice for that standard and aban-
doning research tracks involving alternative technologies that may
have been good substitutes ex ante, i.e., before the standard was set.2
Once an industry has committed itself to go down the agreed road,
and investments have been sunk into implementation of the standard
(ex post), firms become locked in.3 Even if holders of patents that read
upon the standard impose high license fees or exclusionary terms and
conditions, it may be too costly to switch to an alternative. Patent
holders may be able to impose royalties up to the level of the switch-
ing costs, that is, the direct costs of developing and switching to a dif-
Rambus Concerning Memory Chips (June 12, 2009), available at http://europa
.eu/rapid/pressReleasesAction.do?reference=MEMO/09/273; Press Release,
European Comm’n, Commission Accepts Commitments from Rambus Low-
ering Memory Chip Royalty Rates (Dec. 9, 2009), available at http://europa.eu
/rapid/pressReleasesAction.do?reference=IP/09/1897; Press Release, Euro-
pean Comm’n, Commission Accepts Commitments from Rambus Lowering
Memory Chip Royalty Rates—Frequently Asked Questions (Dec. 9, 2009),
available at http://europa.eu/rapid/pressReleasesAction.do?reference
=MEMO/09/544; and Neelie Kroes, Commissioner, Opening Remarks
at Press Conference (Sept. 12, 2009), available at http://europa.eu /rapid
/pressReleasesAction.do?reference=SPEECH/09/575.
2
Standards are not always exclusive in nature, and different standards
may compete. For example, in the United States, AT&T and T-Mobile use
GSM/UMTS radio interfaces, whereas Verizon and other carriers use
CDMA2000. In certain cases, such as the standards war between HD-DVD and
Blu-ray, the standard that develops network effects will gain the upper hand.
3
Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 310 (3d Cir. 2007)
(“Although a patent confers a lawful monopoly over the claimed invention . . .
its value is limited when alternative technologies exist . . . . That value
becomes significantly enhanced, however, after the patent is incorporated in a
standard . . . . Firms may become locked in to a standard requiring the use of
a competitor’s patented technology. The patent holder’s [intellectual property
rights], if unconstrained, may permit it to demand supracompetitive
royalties.”). See also C. Madero Villarejo & Nicholas Banasevic, Standards and
Market Power, GLOBAL COMPETITION POL’Y, May 2008, at 3. See also U.S. FED.
TRADE COMM’N, THE EVOLVING IP MARKETPLACE (2011) [hereinafter EVOLVING IP
REPORT] (“Patent hold-up can overcompensate patentees, raise prices to con-
sumers who lose the benefits of competition among technologies, and deter
innovation by manufacturers facing the risk of hold-up.”).

---

120 : 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
ferent technology plus the opportunity cost of switching (that is, the
profits lost as a result of the delays, higher production costs, and
reduced functionality associated with the alternative technology).
With foreknowledge that patents apply, firms have a variety of
ways to protect themselves from the patentees’ acquiring market
power, including upfront licensing negotiations, extracting commit-
ments to license on fair, reasonable and nondiscriminatory (FRAND)
terms, or exploring alternatives in order to avoid patents or royalties
altogether. When the patent rights are undetected or concealed (so-
called submarine patents), however, patentees may acquire the power
to “hold up” industry participants, seeking higher royalties or more
costly licensing terms that harm not only producers, but also con-
sumers, who ultimately bear these higher costs. If patentees are seen
to get away with hold-up, the mere prospect that a single owner of one
essential patent could hold up an entire industry with impunity can
deter investment in innovation or the implementation of a standard,
thus depriving consumers of the benefits of innovation. This problem
arises in particular if firms have reason to fear not only that patents
remain undiscovered, but that patent holders can demand “exces-
sive”, that is, supracompetitive (cumulative or individual) royalties or
impose exclusionary terms and conditions with impunity, for exam-
ple, if no FRAND license obligations apply or such obligations are in
practice not enforced or considered too vague to be meaningful.
This concern is exacerbated in high-technology industries where
multiple patents apply to complex systems, patent ownership is
widely dispersed, and technically or commercially...