Posted by The National Law Review
By Elizabeth A. N. Haas, James T. McKeown & John Nagle
Recent public statements from Makan Delrahim, Assistant United States Attorney General for the Antitrust Division at the U.S. Department of Justice (DOJ), and Joseph Simons, Federal Trade Commission (FTC) Chairman, indicate that the two United States antitrust enforcement agencies may be shifting their attention from whether standard essential patent (SEP) owners have breached a commitment to license essential technology on fair, reasonable, and non-discriminatory (FRAND) terms to whether the standard setting organizations (SSOs) are stifling innovation by imposing FRAND requirements on the patent holders.
Delrahim has outlined the DOJ’s “New Madison Approach” in several public statements since taking over as the DOJ’s antitrust chief last year, including most recently at a September 18 speech, during the IAM’s Patent Licensing Conference in San Francisco1 and in remarks before the Senate Committee on the Judiciary Antitrust Subcommittee on October 3.2 His approach suggests a departure from past practices of using antitrust enforcement powers to ensure royalties for SEPs are fair, reasonable, and non-discriminatory. Delrahim’s comments also represent a break from the approach adopted over the past decade by antitrust authorities around the world on antitrust enforcement in the field of SEPs.
Simons’ recent statements, made at an event held in Washington on September 25, suggest that at least one of the new FTC commissioners shares Delrahim’s view that FRAND enforcement is not primarily an antitrust issue, marking a change from at least some predecessors. In fact, as recently as March 2018, former Commissioner Terrell McSweeny (who stepped down in April 2018) commented that the adoption of the New Madison Approach by the FTC would be contrary to sound economic principles and an abdication of its antitrust enforcement mission.
SEPs, SSOs, and FRAND
As a result of the need for technology to function properly and various components to interact, standard setting organizations (SSOs) have adopted certain technological standards. The Institute of Electrical and Electronic Engineers and the International Telecommunications Union represent two such SSOs.
Patents for technology that are necessary to meet a standard are known as standard essential patents (SEPs). In order to prevent a patent holder from manipulating the standard setting system to extract high royalties after receiving SEP status, SSOs often require that the owner of an SEP license the technology on fair, reasonable, and non-discriminatory (FRAND) terms to other members of the SSO.
Until recently, antitrust law has been viewed as one way to enforce these FRAND requirements in the United States.
DOJ’s New Madison Approach to FRAND Violations
Inspired by founding father James Madison’s views on the necessity for strong patent protection, the DOJ’s New Madison Approach has four basic premises “aimed at ensuring that patent holders have adequate incentives to innovate and create exciting new technologies, and that licensees have appropriate incentives to implement those technologies.”3
According to the New Madison Approach:
- Antitrust law should not be used as a tool to police FRAND commitments that patent holders unilaterally make to standard setting organizations.
- SSOs should not become vehicles for concerted actions by market participants to skew conditions for patented technologies’ incorporation into a standard in favor of implementers.
- SSOs should have a very high burden before they adopt rules that severely restrict the right of patent holders to exclude or amount to a de facto compulsory licensing scheme.
- A unilateral and unconditional refusal to license a patent should be considered per se legal from the perspective of antitrust law.
Delrahim’s New Madison principles flow from his view that the “hold-up problem” – where SEP-holders refuse to give licenses unless their demands, like seeking higher royalties, are met – is “fundamentally not an antitrust problem.” He believes that allowing SSOs to force holders of SEPs to grant licenses on FRAND terms dramatically favors implementers (i.e., SEP-users) and can “reduce incentives to innovate and encourage patent hold-out,” because SEP-users threaten to withhold their investment in a new standard. Further, Delrahim believes that the right to exclude is a key feature of patent rights; thus, there is nothing inherently wrong when a patent holder decides not to license its patent.
During the September 18 IAM speech, Delrahim stated that an SEP-holder has no antitrust duty to deal with implementers, even after it has unilaterally committed to license its SEPs on FRAND terms. He also said that any antitrust cause of action premised merely on a failure to abide by FRAND commitments would be inconsistent with Section 2 of the Sherman Act. Delrahim explained that this is, in part, because Section 2 of the Sherman Act is agnostic to the price that a SEP-holder charges for its SEPs and “indifferent” to price discrimination. In other words, the Act does not “police” prices but instead protects the competitive process. The Sherman Act has no place in determining what is a “fair” or “non-discriminatory” price, nor does the Sherman Act authorize a court to determine “reasonable” royalty rates, another component of a FRAND commitment.
Delrahim acknowledged, however, that a commitment to license SEPs on FRAND terms may create duties under contract law but added that “[t]ransforming such a contract obligation into an antitrust duty would undermine the purpose of the antitrust laws and the patent laws. . . .”
In his testimony before the Senate Subcommittee, Delrahim cautioned that “[t]he misapplication of antitrust laws could take away the incentive for dynamic competition” while expressing his concern that concerted action by patent users may create a monopsony effect that lowers the return on research and development.
During his IAM remarks, Delrahim also made clear that, under the New Madison Approach, the DOJ is looking to modernize its antitrust policy with respect to the treatment of intellectual property. This includes increasing its advocacy efforts both in the United States and abroad regarding key issues in this space, such as FRAND commitments. Nonetheless, Delrahim emphasized that it will ultimately be for courts to implement the Sherman Act’s principles in the context of legal disputes over these issues and encouraged courts, private litigants, and foreign enforcement bodies to utilize the DOJ’s New Madison Approach where the antitrust laws are invoked to deal with FRAND violations.