August 15, 2006

In the Matter of Rambus: Lessons for SSOs and Their Members

14 min

The Federal Trade Commission's (FTC's) recent decision in In the Matter of Rambus holds critical lessons for standard-setting organizations (SSOs) and their members. The Commission's unanimous opinion is considered surprising, in that it directly overturns the February 2004 decision of FTC Administrative Law Judge (ALJ) Stephen J. McGuire. The Commission's legal and factual findings run directly contrary to the ALJ's on every, or nearly every, point of any legal or factual import. While the Commission had available to it additional evidence in the form of newly produced documents that had been unavailable at earlier stages of the proceeding, this does not entirely explain the turnabout. As counselors to SSOs, their officers and members, we are left to ask -- why such divergent opinions?

Rambus, Inc., a developer of computer memory technologies, participated for approximately four years as a member of the Joint Electron Device Engineering Council (JEDEC), an industry-wide, consensus-based SSO whose membership comprised manufacturers and users of semiconductor components, as well as producers of complementary products and services. While it was a member of JEDEC's JC-42.3 subcommittee, which was working to develop standards for various synchronous dynamic random access memory ("SDRAM") and double data rate synchronous dynamic random access memory ("DDR-SDRAM") technologies, Rambus simultaneously worked to develop its own SDRAM and DDR-SDRAM technologies, filing patent applications and obtaining patents on those proprietary technologies. Rambus ultimately withdrew from JEDEC, and subsequently sought licenses from SSO members that were practicing or planned to implement the standards that JEDEC had adopted, claiming that they were infringing upon its patents.

The Commission found that Rambus, in the context of its participation in JEDEC, failed to disclose its existing patents and pending patent applications, in direct violation of JEDEC's patent policies, and by doing so intentionally deceived fellow industry members to ensure its patented technologies were incorporated into the standards that were adopted. According to the FTC, Rambus improperly used its participation in JEDEC to gain information about the pending standard, and then amended its patent applications such that subsequently issued patents would cover the standard adopted. By concealing its patents and patent applications until after the standards were adopted and the market was "locked in," Rambus in essence "hijacked" the standard-setting process. Failure to disclose in this context, ruled the FTC, amounted to exclusionary conduct that significantly contributed to Rambus's eventual acquisition of unlawful monopoly power in the marketplace, in violation of Section 2 of the Sherman Act and Section 5 of the FTC Act.

In reaching its decision, the Commission rejected virtually every legal and factual finding that ALJ Stephen McGuire made. For example, ALJ McGuire's decision had rested in substantial part on his finding that JEDEC lacked a clear patent disclosure policy; the FTC, as will be discussed in more detail below, used what was essentially a "totality of the circumstances" analysis to find that the organization's policy was clear and, moreover, the group's members understood what the policy was. Similarly, McGuire found that there was no "lock-in" once the standard had been adopted, but the FTC found that lock-in existed and there was thus injury to competition. These are just two of the ways in which the FTC's opinion diverges from the ALJ's.

In reality, though, it is arguable that the FTC's reasoning in Rambus does not represent a radical change in direction for the Commission, but rather continues an enforcement strategy that the FTC has been pursuing for over a decade, as evident in settled cases such as In the Matter of Dell Computer Corp.[1] and In the Matter of Chevron Corp. and Unocal Corp. In each case, the Commission used its broad powers under Section 5 to prosecute an attempt by an intellectual property owner to "hijack" the standard-setting process. In Dell, as in Rambus, the expectations of the members of the SSO were critical to the decision -- the SSO's disclosure rules were pivotal to the FTC's findings. Because Rambus was fully litigated, however, with a well-developed factual record to support the Commission's findings, it offered a unique opportunity for the agency to expand upon the principles it began to develop in Dell and provide guidance as to what types of conduct will constitute deceptive and exclusionary conduct in the standard-setting context.

So what lessons can standard-setting bodies and their members take away from this most recent decision? How (if at all) have the antitrust rules for standard-setting changed?

Ultimately, what Rambus teaches us, in terms of how it diverges from the ALJ's decision and when read in conjunction with Dell, is that the context of the standard-setting process and the expectations of members participating in that process will play an important part in a monopolization analysis under Section 5 of the FTC Act and Section 2 of the Sherman Act. Moreover, for an SSO, having clear intellectual property right ("IPR") disclosure rules may go a long way towards setting expectations and avoiding litigation in the first place. Of course, the corollary principle for SSO members to keep in mind is that when it comes to standard-setting, silence is rarely golden: if you are participating in standard-setting you should be clear on what the IPR disclosure policies and practices are and comply early and often.

Lesson 1: Context is Critical -- What Are the Rules of the Game?

The Commission's ruling in Rambus emphasized that Rambus violated Section 2 of the Sherman Act by concealing its pending patent applications and existing patents from the other JEDEC members in a context in which the members reasonably could have expected that Rambus would not mislead them, "in light of the expectations of a cooperative relationship." In the words of the Commission:

We cannot stress too strongly the importance we place on the fact that the challenged conduct occurred in the context of a standard-setting process in which members expected each other to act cooperatively. . . . In a consensus oriented context, participants in the standard-setting process are less likely to be wary of deception; they are less likely to detect and take countermeasures to counteract it, and anticompetitive effects are more likely to result.

Whereas the ALJ had determined that JEDEC's rules did not expressly require JEDEC members to disclose their patents and patent applications, the Commission looked beyond the SSO's express written policies to the "totality of the circumstances" in which the conduct occurred. Because JEDEC is a standard-setting body within the Electronic Industries Association ("EIA"), the Commission determined that EIA's policies requiring standardization programs to be "carried on in good faith" under principles of "fairness and unrestricted participation" required Rambus, and all EIA members, to act cooperatively. Subcommittee members were to inform the meeting of any patents or applications that might be involved in the work being undertaken. JEDEC's policies also expressly required those disclosing relevant patents or patent applications to supply "full technical information and to provide RAND assurances."

Beyond its findings that there was a disclosure policy in place, the fact that other JEDEC participants understood, and acted upon their understanding, that disclosure of patents and patent applications was required was central to the Commission's decision. Moreover, according to the Commission, Rambus was made aware of JEDEC's disclosure policy through written manuals and oral presentations, and in fact "Rambus's own documents and witnesses indicate that the company believed it should have disclosed its patent findings." (emphasis added). Whether the patent disclosure policy was clear or not (and the ALJ felt it was not), the fact that Rambus clearly believed that it should have disclosed its IPR was pivotal to the FTC's decision.

Thus, the Commission found that JEDEC's policies and practices, as well as the standard-setting participants' understandings with regard to those policies, created expectations of a consensus-oriented, cooperative environment, as opposed to the "rough and tumble of the competitive marketplace." In this context, Rambus's continued silence, coupled with evasive responses and omissions concerning its patent position, led the Commission to conclude Rambus intentionally and willfully engaged in exclusionary, deceptive conduct as those terms are defined under federal antitrust law.[2]

While the "totality of the circumstances" contextual analysis that the Commission applied in the Rambus case is perhaps unique, the fact that the Commission looked to the expectation of the SSO's members and the factors that created that expectation is consonant with its findings in the Dell case. The Commission reasoned in Dell that:

VESA's affirmative disclosure requirement creates an expectation by its members that each will act in good faith to identify and disclose conflicting intellectual property rights. Other standard-setting organizations may have different procedures that do not create an expectation on the part of their members. Consequently, the relief in this case should not be read to impose a general duty to search. [3]

In Dell, then, the SSO members' expectations (in that case, created by VESA's written disclosure requirement) were also central to the FTC's reasoning, although the Commission did not look beyond the written policy. In Rambus, with the benefit of a voluminous factual record, the FTC was able to examine context in greater detail, even when the written disclosure policies were, as the Commission conceded, "not a model of clarity."

So what is the first lesson that Rambus teaches us? Context is critical -- it is essential both to know the disclosure rules that are in place and to understand the expectations those rules create among the members of the standard-setting body. In a different factual setting, the FTC might easily have agreed with the ALJ that there was neither a clear disclosure policy nor a clear understanding of the duty to disclose, and the case would have come out an entirely different way. The corollary to this, to be discussed in more detail below, is that the clearer the expectation that the SSO can create among its members as to when to disclose IPR, the better-served both the organization and its members will be.

Lesson 2 -- Adopt Clear IPR Disclosure Rules

To play by the rules, one must know the rules. Thus, an important lesson of Rambus for standard-setting bodies and their members continues to be that you must have a clear policy and practice regarding IPR, no matter what IPR policy you choose to adopt.

In Rambus, e-mails and other documentation that came to light only after ALJ McGuire's initial decision in the case support the Commission's conclusion that Rambus knew, and simply chose to ignore, JEDEC's policies regarding disclosure. Similarly, in Dell, the Commission observed, without elaboration, "there is reason to believe that Dell's failure to disclose the patent was not inadvertent." But even in the absence of affirmative misconduct, it can be difficult for participants to know early in the process whether specific patents will be implicated. Thus, to avoid lengthy (and costly) litigation of IPR-related issues, clearly worded, broadly communicated IPR disclosure policies are advisable. Some issues to consider:

  • The Duty to Disclose. Notably, the Commission did not hold that SSOs must always require disclosure of relevant IPR in the standard-setting process. FTC staff explanations have implied that the duty to disclose arises only where there is a written policy requiring IPR disclosure, as in Dell, or at least a clear request to SSO members for IPR disclosure. The Commission's decision in Rambus appears to extend the Dell rule by inferring a 'duty to disclose' from the totality of circumstances. Under Rambus, the duty to disclose arises when the totality of circumstances indicates that there is a clearly communicated policy or practice of the standard-setting body which requires disclosure of IPR. JEDEC members were required to "reveal the existence of patents and patent applications that later might be enforced against those practicing the JEDEC standards." Before any vote to adopt a standard that would incorporate patented technologies, members were obligated to provide assurances that any patented technologies incorporated into a standard would be licensed on reasonable and nondiscriminatory ("RAND") terms.

SSOs should carefully consider whether they wish to adopt a disclosure policy for their organization, and whether the policy will apply to the entire organization or to specific subgroups within the organization. SSOs that adopt a disclosure policy should also consider whether they will also impose a licensing requirement (e.g., require licensing on RAND terms, on a royalty-free basis, etc.) SSOs adopting a policy of disclosure should ensure the policy is clearly communicated to members through broadly disseminated written policies, regularly scheduled trainings for officers and member representatives, new member orientation sessions, and/or similar outreach methods.

  • Duty to Search vs. Personal Knowledge. The Dell order indicates there may be a duty to search for patents (or patent applications) that must be disclosed. A stinging dissent in Dell 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. The Commission responds to this concern in Rambus by clarifying that the FTC's greater concern is the potentially serious chilling effect of deceptive conduct in the SSO context. As a practical matter, many SSOs have limited the knowledge requirement to "personal knowledge." Of course, an individual technical representative on a particular standard-setting committee may well have knowledge of relevant IPR in development.
  • How Much is Enough? Any policy requiring patent owners to "disclose" should clearly state whether "disclosure" requires disclosure of existing patents only, pending patent applications, essential patents only, or, as was the case in Rambus, a broader category of any IPR that may be "relevant" or "necessary" to the practice of a standard. One may also wish to consider copyright ownership issues as well, particularly when discussing software.
  • When Does One Disclose? It can be difficult for SSO participants to know early in the process whether specific patents will be implicated, as the standard, or the proprietary technology, may not yet be fully developed. Also, knowing "of" the patent is not the same as knowing that the standard would infringe the patent (unless, of course, you've been deliberately amending your patent applications to conform to the standard, as Rambus did). Frequent notice and calls for IPR are advisable, to avoid "ambush" and/or later claims that members were simply unaware of the requirement to disclose at the time the call for patents was issued.

Lesson 3 -- Learn the Golden Rule: Silence is Not Golden

The Commission's decision in Rambus also makes it clear that a standard-setting participant's silence in the context of a call for disclosure of IPR can be as bad as lying. Similarly, withdrawal from participation in the SSO in response to a call for disclosure may not be sufficient to avoid allegations of affirmative misrepresentation, if, as in Rambus, the withdrawal fails to correct earlier misrepresentations. Based on the Commission's reasoning, Rambus' silence regarding its IPR in the context of JEDEC's consensus-based, cooperative standard-setting activities acted to deprive JEDEC of information directly relevant to its standard-setting decisions, and thus distorted the standard-setting process. If Rambus had disclosed its patent claims, the JEDEC membership could have voted against including the patented technologies in the standards adopted, or, according to JEDEC's policies, could have demanded RAND assurances. The Commission concluded that it was highly likely, given JEDEC's past practices, that JEDEC would have adopted a different standard had it known that Rambus had applied for a patent. At minimum, even in the absence of a policy requiring RAND assurances, standard-setting participants fully apprised of potential patent claims before voting to adopt a standard at least conceivably have the opportunity to negotiate royalty rates ex ante (prior to the adoption of the standard), thus providing incentive for the patent owner to moderate its royalty demands.

* * *

In Rambus, the FTC continued the enforcement strategy first used in the Dell case to stop companies from hijacking the standard-setting process. Under this contextual and fact-specific analysis, the expectations of the standard-setting community are paramount to the determination of whether there has been an antitrust violation; without a clear disclosure policy, there may be no violation at all. Thus, the most important lesson SSOs can learn from Rambus is the value of a clear IPR disclosure policy, particularly in conjunction with reasonable and non-discriminatory licensing requirements, and frequent calls for disclosures in ensuring that the organization and its members are not 'ambushed' by IPR owners demanding expensive licenses for technologies necessary to practice the standards as adopted. As a corollary, Rambus teaches SSO members that silence in response to a call for IPR disclosure is not permissible, and that even omissions may constitute deceptive conduct in violation of FTC Act section 5 and monopolization in violation of the Sherman Act.

[1] In Dell, 121 FTC 616 (1995), the 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 standard promulgated by the Video Electronics Standards Association (VESA) -- and in fact represented that the standard did not infringe -- and then attempted to enforce patent rights after the standard was adopted. VESA's policy required member company representatives to certify, when voting on a standard, that "to the best of my knowledge, this proposal does not infringe on any trademarks, copyrights, or patents, with the exception of any listed on the comment page."

[2] As proscribed by Section 5 of the FTC Act, for conduct to be found deceptive, there must have been a "misrepresentation, omission, or practice" that was "material" in that it was likely to mislead "others acting reasonably under the circumstances" and thereby likely to affect their "conduct or decision[s]." To determine whether an organization's conduct is deceptive, the FTC will examine the circumstances in which the alleged "misrepresentation, omission, or practice" occurred. Under Section 2 of the Sherman Act, a defendant must act 'willfully' in acquiring or maintaining monopoly power, the defendant's conduct must harm the competitive process, and that anticompetitive harm must outweigh the conduct's procompetitive benefits.

[3] In re Dell Computer Corp., 121 FTC 616, 619 (1995) (emphasis added).