FTC Judge Dismisses Antitrust Suit Against Rambus
February 27, 2004
The U.S. Federal Trade Commission’s (FTC) Administrative Law Judge (ALJ) last week dismissed the FTC’s complaint against Rambus alleging that Rambus had engaged in anti-competitive behavior for its conduct in a standard-setting process. This decision is a major defeat for the FTC, which has made a concerted effort recently to establish an independent antitrust violation for improper conduct during standard-setting activities. Although the FTC is likely to appeal this decision to the full Commission, the ALJ’s decision rejected almost all of the arguments the FTC made at trial. The ALJ said the FTC "failed to sustain its burden" of proving Rambus committed fraud primarily because the ALJ found that the rules of the standard-setting organization were unclear about whether participants had to disclose patents or pending patents that related to the standard. In addition, it is clear that the Federal Circuit’s decision in favor of Rambus last year in a similar case brought by Infineon, largely influenced the ALJ’s decision.
On June 19, 2002, the FTC, with the unanimous approval of the FTC commissioners, filed an administrative complaint against Rambus alleging monopolization and attempted monopolization of the dynamic random access memories(DRAMs) chip market, as well as anti-competitive behavior in violation of Section 5 of the FTC Act for its conduct in the Joint Electron Device Engineering Council (JEDEC) standard-setting process. In its complaint, the FTC alleged that Rambus, while participating in the JEDEC standard-setting process, failed to disclose a patent and several pending patents that involved technologies that were adopted in the relevant standards. By failing to disclose this information, the FTC alleged that Rambus had misled the other JEDEC participants into believing that Rambus did not possess any relevant intellectual property rights.
The ALJ held that,as a matter of law, a violation of the standard-setting organization’s rules or policies could not form the basis for antitrust liability under Section 5 of the FTC Act. Moreover, the ALJ held that even if such conduct could constitute a violation, Rambus did not have a duty to disclose patents or pending patents because the JEDEC’s patent disclosure rules did not mandate the disclosure of intellectual property. In order to find a breach of the standard-setting organization’s rules, the ALJ stated that any obligation or duty to disclose intellectual property must be clear and unambiguous. The JEDEC rules and guidelines were not clear and simply encouraged "the early disclosure and identification of patents that may relate to standards under development." The ALJ also relied heavily on the U.S. Court of Appeals for the Federal Circuit’s opinion in the Infineon matter, which also found that the JEDEC rules did not contain language requiring members to disclose relevant intellectual property. Therefore, both the ALJ and the Federal Circuit found that Rambus had not breached any duty to the other JEDEC members. Moreover, both the ALJ and the Federal Circuit found that Rambus had withdrawn from JEDEC prior to the formal consideration of the standard.
The ALJ rejected the FTC’s arguments that Rambus had made affirmative, misleading statements about its intellectual property, and the ALJ held that the evidence demonstrated that other JEDEC members knew or should have known that Rambus possessed relevant patents. The ALJ also disputed the FTC’s argument that amending a pending patent application to cover a competing product constitutes bad faith conduct. Relying on Federal Circuit precedent, the ALJ said as a matter of patent law, "it was entirely legitimate" for Rambus to seek claims covering technologies promoted by other JEDEC members that were originally disclosed in one of the patent applications. The ALJ also said that no disclosure obligation existed under JEDEC patent policy.
Finally, the ALJ held that the FTC failed to establish exclusionary conduct or intent, as required under the Sherman Act. The ALJ said that a breach of good duty does not constitute exclusionary conduct and found that Rambus’s need to maintain the confidentiality of the proprietary information contained in its patent application was a legitimate business justification for failing to disclose intellectual property and, therefore, precluded a finding of exclusionary conduct. The ALJ also held that the FTC had failed to establish that Rambus’ conduct caused anti-competitive effects because the FTC failed to show that viable alternatives existed to Rambus’s technology and that the conduct led to higher prices. The ALJ found that because the FTC did not prove that economic substitutes existed, it is unclear that JEDEC would have adopted a different technology, even if Rambus had disclosed its patents. Furthermore, the ALJ found that Rambus’s royalty rates were comparable to other licensing rates in the industry and that Rambus had legitimate justification to charge discriminatory royalty rates to companies challenging its patents because of the litigation costs involved in defending its patents against these companies.
Despite this ALJ decision, clients engaged in standard-setting activities should remain cautious and should closely monitor its standard-setting activities. The FTC is likely to appeal the ALJ's decision to the FTC Commission, which could reinstate the case. Moreover, because standard-setting activities is a high priority of the FTC, the FTC staff will likely become even more active in finding new cases to bring in that area. Therefore, it is important that clients engaged in standard-setting activities should continue to monitor closely its standard-setting activities. Standard-setting organizations and participants that operate under vague disclosure obligations risk similar investigations by the FTC. Moreover, companies may find themselves forced to pay exorbitant prices for intellectual property rights after the organization has already adopted the standard. Clients should make sure that the rules regarding patent disclosures and other issues are clear and that the members comply with the rules of the standard-setting bodies. It is important that the rules not only clearly establish whether disclosure of intellectual property is mandatory, but also should clearly articulate rules relating to other critical issues, such as whether the disclosure obligations apply to non-essential patents. If the rules are unclear, the company should be careful about permitting its employees to participate in standard-setting activities.
