Legal Issues Affecting Standard-Setting: Antitrust and Intellectual Property

20 min

I.  Background:  Standard-setting in the technology industry involves the interaction of many areas of the law, in particular antitrust, patent and copyright law.

A.  The Legal Framework

1.  Antitrust Law

a.  The three major antitrust laws that affect standard-setting are the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

b.  The essential antitrust problem with standard-setting, particularly in the trade association context, is that a standard adopted by a group of competitors that discriminates against/excludes/damages other competitors may violate the antitrust laws.

i.  Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988) (violation of antitrust laws found where association recruited new members to vote for standard that excluded makers of plastic conduits –– perversion of the “process”) (see below).

ii.  American Society of Mechanical Engineers v. Hydrolevel Corp., 456 U.S. 556 (1986) (violation of antitrust laws found where members of association conspired to release interpretation of relevant code which was unfavorable to competitor).

iii.  National Cooperative Research and Production Act –– The NCRA is a statute that provides for rule of reason analysis for joint ventures/consortia and sets up mechanism whereby DOJ will review a proposed venture, limiting liability to actual damages (not treble as per the Sherman and Clayton Acts).

iv.  1995 FTC/DOJ Guidelines for the Licensing of IP – The Guidelines generally set out the government’s views on IP –– that it is procompetitive, etc.  They provide for a “Safety Zone” if a restraint is not “facially anticompetitive” –– i.e., when the licensor and licensees account for 20% or less of market.

2.  Patent Law

a.  Patent law has its roots in the Constitution, which provides that “Congress shall have the power….to promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”  (Art. 1, § 8, cl. 8).

b.  The law of patents is set out in the Patent Act, codified in Title 35 of the U.S. Code, which requires an inventor seeking a patent to prove that he/she has developed a novel, useful and nonobvious process or product.

c.  The grant of a patent gives one the right to exclude others from making, using or selling the claimed technology for 20 years from the date of filing.  Patent applications are secret during the period of review, which can take years.  Types of patents include utility patents, design patents, plant patents, and the business methods patent, which has recently been rejuvenated by the courts and has taken on tremendous importance in the digital economy.

3.  Copyright Law

a.  The law of copyright is codified in Title 17 of the U.S. Code.

b.  Copyright law provides narrower protection than patent law –– it merely protects “expression,” defined as the original arrangement of symbols of communication based on the creative choice of the author.  It does not protect “ideas,” processes/methods of operation or facts.

c.  If possible, one should affirmatively assert copyright in any “expression”

d.  There two copyright issues in standard-setting in tech industries –– (1) is there a copyright for the code incorporated the standard; (2) is there a copyright in text of standard itself? (COBOL, Veeck)

B.  Antitrust Issues in Standard-Setting –– The antitrust laws and enforcers acknowledge that standard-setting is generally procompetitive.  However, formal standard-setting processes implicate concerns about anticompetitive effects. Standard-setting bodies may provide a forum for collusion, and so to the extent that even a properly adopted standard can have anticompetitive effects, there may be substantive concerns.  Procedurally, there may be concerns about manipulation or abuse of the process.

C.  IP Issues in Standard-Setting –– There is a fundamental conflict between broad IP rights (the exclusive rights granted to an inventor by patent/copyright/ law) and the necessity of interoperability in the digital economy.  In creating standards, the challenge is to balance (a) the individual ownership rights recognized by patent/copyright laws; (b) the competition values protected by antitrust laws; and (c) the need for compatibility of competitors’ products.

1.  Patent Issues and Standards

a.  Patent issues come into play where patented material is “essential” to the standard, i.e., adopters would not be able to implement the standard without infringing on the patent.  The concern is that the holder of IPR incorporated into a standard will be able to extract “monopoly rents,” thus raising costs and decreasing the likelihood that the standard will be widely adopted.

b.  Traditionally, the holder of IPR does not have to license to anyone to whom it does not want grant a license.  However, exceptions have been made by the courts in some cases involving monopolization or fraud.  E.g., Charles Pfizer & Co. v. FTC, 401 F.2d 574 (6th Cir. 1968), cert. denied 394 U.S. 920 (1969); United States v. Glaxo Group Ltd., 410 U.S. 53 (1972).

2.  Copyright Issues and Standards

a.  Copyright raises different issues than patent law in the standard-setting context, because it is often more difficult to define what is protected.  Some things that are copyrightable about a standard may ultimately be patentable as well.

b.  Software is generally protected by copyright, but copyright law does not necessarily protect every element in software.  For example, copyright may not protect process–driven interfaces, elements dictated by efficiency, elements dictated by external factors, etc.

c.  The courts have often been reluctant to grant/enforce proprietary rights in aspects of software that are essential to achieving compatibility among systems or are incorporated into standards.  Courts often try to write around the copyright or grant an implied license.

d.  Veeck v. Southern Building Code Congress International, Inc., 293 F.3d 791 (5th Cir. 2002) – Important new case in which the Fifth Circuit held that in creating model codes or standards, an organization creates copyrightable works of authorship.  However, when those codes are enacted into law, they become the law of the governmental entities adopting them, and so may be reproduced and/or distributed at will as the law of those jurisdictions.  Not all courts, however, have agreed with the Veeck court.  See, e.g., Practice Management Information Corporation v. American Medical Association, 121 F.3d 516 (9th Cir. 1997).

The Interaction between IP and Antitrust in the Standard-Setting ContextIt is often necessary to incorporate IP into standards.  The most important issue to standard-setting organizations today is how to balance antitrust and IP law concerns.

A.  The antitrust laws focus on how the IP came to be incorporated into the standard and how the IP rights are enforced.  The “essential facilities” doctrine says that the denial of access to a resource essential to competition in a downstream market may violate the antitrust laws.  Nonetheless, the doctrine is usually applied to physical facilities, not IP.  Process and enforcement are ultimately key.

1.  Note that there is a difference between formal standard-setting and situations in which a standard arises de facto in the marketplace.  When something becomes the standard through market dominance (e.g., DOS, IBM computer system architecture), serious competitive issues may arise if the holder of the IP that is the standard abuses that position. 

a.  For instance, when an IP owner makes an interface/information available for free so that the technology will become a standard, and then ceases to license or offers to do so on unreasonable terms, there could be an antitrust violation.

b.  Example – the Kodak ISO litigation, in which the court found that users had been “locked in” to using patented technologies.  See Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997).  But consider the more recent opinion of Federal Circuit in the Xerox case, In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000).

c.  Nonetheless, refusal to deal (within reasonable parameters) is one of basic rights of IPR holder.

B.  IP and the antitrust laws are not always in direct conflict: the antitrust law has become increasingly focused on creating and safeguarding market conditions that promote innovation.  The trend over the years has swung back and forth, and is now largely pro–IP.

1.  Standard-setting activities are usually analyzed under the rule of reason, which balances the anti–competitive effects of and pro–competitive justifications for the conduct at issue.  The rule of reason asks –– is there injury to competition?

2.  The FTC held a series of ongoing workshops last year on the issue.  Some industry players have requested guidelines from FTC, but others feel such guidelines would inhibit competition. 

3.  The FTC has provided some guidance in evaluating the legality of standardization programs under the antitrust laws – it suggests that standards should be voluntary; groups should not exclude competition or control production.  The process is very important – it should be fully open to membership, everyone needs a voice, procedures must be clear, technical justifications must be articulated.

4.  An October 2003 FTC Report “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy” reiterates the Commission’s concerns about the impact of the patent system on fair competition.

5.  Most recently, the FTC has been active in the enforcement context – particularly in the Rambus and Unocal cases.  You do not want to be the target of an FTC administrative complaint!

C.  Note also that there are special antitrust issues for standard-setting in network industries:

1.  Over–inclusiveness – Overbroadness may result in less innovation.  It can be better to have competition in standard-setting.

2.  Leveraging – Monopolists may try to manipulate standards to extend their monopolies (e.g., the Microsoft case).

3.  There may also be added benefits in terms of use, interoperability, etc.

III.  Reconciling Antitrust and IP in the Standard-Setting Context –– Recent Litigation

A.  There are two ways to address the interaction of antitrust and IP rights in standard-setting

1.  At the outset, by making sure that the standard-setting process is fair, access to proprietary information is not unduly limited, and the standards adopted have good technical support; or

2.  Post-hoc (as plaintiff or defendant in a law suit).  The problem is that lawsuits are slow and expensive.  Antitrust lawsuits are lengthy and complicated and one often needs affirmative anticompetitive behavior (U.S. v. Microsoft) or a merger for government agencies to get involved.  However, the FTC has been extremely active in this area in the past few years.

B.  Recent FTC Litigation:  The FTC is getting more involved in standard-setting issues.

1.  In re Dell Computer Corp., 121 FTC 616 (1995) –– FTC brought suit under Section 5 of the FTC Act when Dell failed to disclose, while participating in the standard-setting process (and in violation of the group’s policy), that it owned the patent for the VL Bus design incorporated into a Video Electronics Standards Association standard –– and in fact represented that the standard did not infringe –– and then attempted to enforce patent rights after the standard was adopted.  As part of the settlement, Dell agreed not to enforce its patent.

2.  Rambus –– The most recent (and most important) FTC enforcement action is In the Matter of Rambus, Inc., Docket No. 9302 (June 18, 2002).

a.  The FTC charged that Rambus, Inc. violated federal antitrust laws by intentionally deceiving the JEDEC during standard-setting activities relating to synchronous dynamic random access memory (“SDRAM”).  To avoid the incorporation of patented technologies into published standards, members of the organization at issue were required to disclose any patents or pending patent applications involving a contemplated standard.

b.  Rambus, as a member of the JEDEC group working on the relevant standards, failed to disclose that it possessed a patent and several pending patent applications relating to specific technologies eventually adopted into the relevant standards. After the standard was adopted and incorporated into the technology, Rambus asserted patent rights over the relevant standards and extorted royalties from memory manufacturers seeking to adopt the standardized technology.  The FTC charged that, by misleading the standard-setting organization and committing other anticompetitive acts (including destroying documents and other information), Rambus has violated Section 5 of the FTC Act.

c.  After a full administrative hearing, however, FTC Chief Administrative Law Judge Stephen J. McGuire found that:

i.  Rambus did not violate JEDEC’s patent policy;

ii.  The case law relied upon by the FTC could be distinguished from the circumstances of this case;

iii.  Rambus’ actions did not violate any “extrinsic duties” such as the duty of good faith to disclose relevant patent information;

iv.  Rambus did not have any patents or pending applications during its time as a JEDEC member that it was obliged to disclose;

v.  Rambus’ broadening of certain patent applications while it was a JEDEC member was not improper;

vi.  Rambus had legitimate business justifications for its actions;

vii.  The company did not knowingly violate any JEDEC disclosure rules;

viii.  There was no “causal link” between the JEDEC standards and Rambus’ acquisition of monopoly power in the relevant markets;

ix.     JEDEC members did not rely on any alleged omissions or misrepresentations by Rambus, and if they had, such reliance would not have been reasonable;

x.  The FTC staff failed to prove that there were viable alternatives to Rambus’ technology;

xi.  The challenged conduct did not cause higher prices for consumers; and
xii.  JEDEC is not locked in to using Rambus technology in the future.

d.  The FTC ruling was the second victory for Rambus in disputes over its JEDEC activities. Last year the U.S. Court of Appeals for the Federal Circuit overturned a jury’s verdict that it defrauded JEDEC. That suit was brought by Infineon Technologies AG, a Rambus rival. The U.S. Supreme Court refused Infineon’s request to review the Federal Circuit ruling.  Infineon Techs. AG et al. v. Rambus Inc., No. 03–37, cert. denied (U.S. 2003).

3.  Unocal –– The FTC is reportedly investigating California energy company Unocal and others for similar conduct.  In private litigation, Unocal was accused of “hijacking” California clean air standards by working with the state to set a standard and at the same time failing to disclose the prosecution of patent applications necessary to practice it.

C.  Private Litigation:

1.  Continental Airlines, Inc. v. United Airlines, Inc., 126 F. Supp.2d 962 (E.D. Va. 2001) – Continental Airlines challenged a rule at Dulles Airport imposing limits on the size of carry-on baggage.  The Association of Air Carriers serving Dulles had imposed the rule at the insistence of United Airlines.  The court struck down the rule, finding that it was not justified by safety and efficiency concerns, and that United attempted to influence the standard-setting process in an anticompetitive manner in order to relieve it from competitive pressure from air carriers which permitted larger carry-ons.  However, that decision was vacated, citing the “unique structure of Dulles,” and remanded for further proceedings.  See Continental Airlines, Inc. v. United Airlines, Inc., 277 F.3d 499 (4th Cir. 2002).

2.  Townshend v. Rockwell Int’l. Corp., 2000 U.S. Dist. Lexis 5070 (N.D. Cal. 2000) – An antitrust claim was brought in a patent infringement suit against the inventor of patented technology used in 56K modems.  Defendants alleged that the plaintiffs violated the ITU patent policy by seeking high royalty rates on patented technology incorporated into the standard, requiring mandatory cross licenses, etc. (ITU patent policy requires waiver of patent rights or non–discriminatory licensing on fair and reasonable terms.)  The court found no violation of antitrust laws, although former FTC Chair Robert Pitofsky later commented that he felt the court gave too much weight to IPR, and not enough to competitive effect.

D.  Patent/Copyright Law Defenses – Patent law has more rigid doctrines than copyright law and thus provides stricter protections.  Copyright presents tougher issues in the standard-setting context, but there are often ways to write standards around copyrighted materials due to the narrower protections it provides.  But see Lotus Dev. Corp. v. Borland International, Inc., 516 U.S. 233 (1996) (spreadsheet interface copyrightable and infringed).  In general, a number of patent and copyright defenses that may be invoked in litigation may inform how one structures the standard-setting process: estoppel, waiver, and misuse.

1.  Equitable Estoppel – Equitable estoppel is a legal doctrine that prevents enforcement of a patent where one misleads others as to one’s IP rights during the standard-setting process and then attempts to assert them after the standard has been adopted.

a.  The elements of equitable estoppel are (a) statements or actions that communicate information in a misleading manner; (b) reliance on the communications; and (c) injury resulting from the reliance.

b.  E.g., Stambler v. Diebold, Inc., 11 U.S.P.Q.2d (BNA) 1709 (E.D.N.Y. 1988), aff’d, 11 U.S.P.Q.2d 1709 (Fed. Cir. 1988) (patent holder was member of ANSI committee that considered and adopted standard that read on its patent, but did not notify ANSI of fact; when patent holder sought to enforce patent against infringer, court held claims barred by laches and estoppel).

2.  Legal Estoppel –– The doctrine of legal estoppel may be used by the courts in some contexts to imply the grant of a license.

a.  The elements of legal estoppel are (a) the parties had an existing relationship; (b) within that relationship one party transferred to the other the right to use technology; and (c) for valuable consideration.

b.  E.g., Wang SIMM case –– Wang promoted adoption of a standard incorporating a patent while the patent was pending, and failed to disclose the existence of its pending application.  Wang sued all adopters of the standard, and most of them settled.  Mitsubishi, however, fought and was found by a jury to have been given an implied license based on encouragement by Wang to adopt the standard/begin manufacturing and its actual adoption of the technology and commencement of manufacturing.  Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 29 U.S.P.Q.2d (BNA) 1481 (C.D. Cal. 1993).

3.  Patent/copyright misuse –– This doctrine is similar to but may go beyond antitrust law, and gives a court grounds to refuse to find infringement if public policy dictates.  It comes from common law idea of “unclean hands.”  An example is “tying” something to patented article.  While the doctrine provides a defense to infringement, its parameters are not always clear.  Moreover, misuse can be cured by a disclosure of proprietary interest on the part of the IP holder and an agreement to license on fair and reasonable terms.  A remedy can be compulsory licensing.

a.  Patent Misuse Reform Act of 1988 –– This statute says that if one is entitled to relief for infringement, the court cannot find patent misuse.  There is disagreement over how to apply this law and whether it gives too much weight to IPR.

IV.  Strategies for Avoiding Conflict between Antitrust and IPR in Standard-Setting:  Avoid problems from the start –– A proactive approach is the best approach.  The lesson of Rambus is to have a clear IPR policy no matter what the policy you choose to have is.  Then, address three issues:
A.  First Issue –– The first issue to address is whether to adopt a standard that includes IP at all.  The group could keep IP out of the process altogether, for example by focusing on performance standards rather than specific technologies, or outcomes rather than how to achieve them.  Further, the group could mandate that existing patents and/or patent applications relating to the proposed standard be disclosed to the group.

1.  Policies of national and international standard-setting groups:

a.  ISO policy –– The ISO policy on IPR discourages the use of proprietary (patented) IP in standards, and suggests that it should be incorporate only in “exceptional cases” where justified by “technical reasons.”  ISO has no policy on copyrighted source code.

b.  ANSI policy –– The ANSI policy on IPR permits incorporation of patented technology in standards if technical reasons justify that approach.  ANSI has no policy with respect to copyrighted source code.

2.  Copyright is special –– there are often ways to write around copyrighted source code, but in some cases it must be included in the standard.

3.  Note that one cannot automatically exclude technology from a standard just because it is patented, without any further evaluation or reasons for the exclusion.  See In re American Society of Sanitary Engineering, 106 FTC 324 (1995) (low tech “toilet valve case”) (FTC argued that a policy of per se exclusion of patented technologies from the standards process could result in the exclusion of innovative products from market entry).

B.  Second Issue –– If the group chooses to adopt a standard that includes an IP component, then the group should focus on three items:  procedure, disclosure, and licensing.  This will avoid “capture” of the standard or misuse of the process.

1.  Procedure –– Is the process fair?

a.  Has there been notice to proper parties?

b.  Have everyone’s views been aired?

c.  Is there transparency and openness?  Open standards are consensus–based, transparent standards.

d.  Is there a procedure for making one’s views known, responding, changing vote?

e.  Is the process protected against “hijacking” by one or a few industry leaders?  Is there a balance of interests?  (No one in group should dominate).

f.  Has consensus been achieved?  Consensus is not necessarily unanimity – it just means that everyone gets an opportunity to comment, be considered, and be notified of the outcome by group.

g.  Is there a sound technical basis for adopting a particular standard and have these technical justifications been articulated?

h.  Is the standard tailored to the technical justification or need?

i.  Standards should not overreach, or restrict or define the product more than necessary.

ii.  Take care not to stifle innovation.

iii.  Note that performance or advisory standards are often better then technical or prohibiting standards.

i.  Note that standards should be applied evenly to members and non–members.

j.  Addamax v. Open Software Foundation, 888 F. Supp. 274 (D. Mass. 1995), aff’d, 152 F.3d 48 (1st Cir.1998) –– Standard-setting is not per se illegal.  Plaintiff sued on theory that standard-setting process itself reduced market prospects and lost.

2.  Disclosure –– Have all ownership interests been disclosed?

a.  Policies of national and international standard-setting groups:

i.  ANSI encourages disclosure by owners of patents that may be incorporated into a standard, but imposes no affirmative duty to search one’s patent portfolio.  The disclosure requirement is based on personal knowledge only.  The group has no policy on copyrights.

ii.  ISO says patent owners have a duty to disclose ownership interest.  The group has no policy on copyrights.

b.  The FTC cases against Dell and Rambus highlight the potential consequences of failing to disclose ownership of patents and/or pending patent applications when the standard-setting organization requires disclosure of such information (although Rambus was not ultimately held liable). The Dell case implies that there is a duty to search for patents that must be disclosed.  A stinging dissent in the Dell case by former FTC Commissioner Azcuenaga argued that the imposition of a duty to search could slow technological growth and chill participation in the standard-setting process.  Note that later FTC staff explanations have implied that the duty to disclose arises only where there is a policy or request requiring disclosure.

c.  The burden is on the proponent of a new standard to identify and disclose IP.  Third parties can and should also disclose.

d.  Some companies even have full time employees to search their portfolios.

e.  If a group participant is not willing to disclose IPR, it should withdraw from the group, but (at least according to the FTC) even that may not be enough (Rambus).

f.  In the face of a call for disclosure, silence can be just as bad as an affirmative representation.

g.  It may be that even after IP claims have been disclosed, the group still wants to adopt a standard that includes IP (and license/pay), but everyone must have all the information at the outset to make a sound decision.

h.  Problem – It can be difficult to know early in the process whether specific patents will be implicated – frequent notice and calls for IPR are advisable.

i.  Must patent applications or pending patents be disclosed?  This is an open issue.  ANSI says only patents must be disclosed, although it encourages the disclosure of patent applications and has established an ad hoc group on the issue.  ISO says that “published” applications must be disclosed, but does not require the disclosure of unpublished applications for confidentiality reasons.  Again, the Rambus cases point up some of the hazards of not disclosing.  However, the standard for disclosure is probably that IPR will be implicated, not that it might be.  Must the IPR be necessary to practice the standard, or merely “relevant” to the standard?

j.  Of note is that even though Rambus was eventually victorious, in many ways it lost – it paid thousands of dollars in legal fees and was under the microscope for years.  Further, even after it won the private litigation, the FTC continued to pursue its case, citing different burdens of proof.  Allegations of standard-setting fraud are, as one author put is, a “scarlet letter,” and organizations are often presumed guilty until proven innocent.  You do not want to be the subject of an allegation of fraud in the standard-setting process, even if it is not true.

3.  License –– There are different options available with respect to requiring licensing of IP incorporated into a standard, but you need a policy.

a.  Option 1 –– Require free licensing of any IP incorporated into a standard.

b.  Option 2 –– Restrict terms upon which one can license IP incorporated into standard, e.g., require licensing on “nondiscriminatory” and/or “reasonable” terms (although there are often arguments over what these terms mean).

c.  ANSI and ISO combine these two approaches with respect to patented technologies incorporated as part of standards, requiring licensing for free or on nondiscriminatory and reasonable terms reached by negotiation of the parties.  The organizations do not generally review licensing terms for reasonableness absent a specific appeal.

d.  “Nondiscriminatory” does not necessarily mean that licensing terms have to be the same for all comers.

e.  It is permissible to condition licensing on reciprocity for essential technology patents also incorporated into standard.

C.  Third Issue –– What if someone discloses a patent and threatens to litigate if it is used, or refuses to license, etc.?  There is a multifactored analysis to determine if one should move forward with the IP in the standard or abandon it:

1.  How far into the process are you?

2.  How important is the standard?

3.  Is there an alternative formulation that does not include IP?

4.  Is it possible to pass the standard with the IP and disclose?  “Practice at your peril.”

5.  Is it possible to offer indemnification?