[Rutgers Professor Michael Carrier recently posted as a guest at Patently-O arguing in favor of the FTC's position in Rambus and the Supreme Court granting certiorari.  I thought Professor Crouch might be interested in sharing with his readers a different perspective on the merits of the FTC's petition for cert in Rambus sketched out in my December 1, 2008 post on the topic.  He has graciously agreed to share that post at Patently-O and I thought I would re-post here for our readers as well.]

As noted, the FTC has exercised its right under 15 USC 56(a)(3) to petition for a writ of certiorari to review the judgment of the D.C. Circuit in its FTC v. Rambus. The FTC press release is here. The petition is here. The questions presented, as framed by the Commission are:

1. Whether deceptive conduct that significantly contributes to a defendant’s acquisition of monopoly power violates Section 2 of the Sherman Act.

2. Whether deceptive conduct that distorts the competitive process in a market, with the effect of avoiding the imposition of pricing constraints that would otherwise exist because of that process, is anticompetitive under Section 2 of the Sherman Act.

I do not believe the FTC has presented a convincing case for granting cert. Further, I don’t think the Supreme Court should grant cert in Rambus for reasons I’ll discuss in the post. For a more detailed exposition on some of the issues touched upon by this post, see my article with Bruce Kobayashi, Federalism, Substantive Preemption and Limits on Antitrust: An Application to Patent Holdup (forthcoming in the Journal of Competition Law and Economics).

The FTC lists what I count as five separate reasons to grant the petition:

(1) the D.C. Circuit applied an overly restrictive “but-for” causation standard that would require the Commission to show that Rambus’s conduct was anticompetitive (”the court of appeals erred in supposing that a Section 2 tribunal must identify a particular anticompetitive effect in order to find liability”);

(2) the court erred in its application of NYNEX v. Discon, Inc. to Rambus to conclude that the loss of an opportunity for the SSO (JEDEC) to obtain a RAND commitment from Rambus was not an anticompetitive effect under the antitrust laws;

(3) the Supreme Court should grant the petition to clarify “the governing standards of causation in Section 2 cases”;

(4) the D.C. Circuit decision is at odds with the Third Circuit’s Broadcom decision which held that the loss of a RAND commitment due to deception is a proper basis for Section 2 liability; and

(5) the set “inconsistent set of rules” creates a conflict that “threatens confusion regarding the conduct of participants in industry-wide standard setting,” “will discourage participation in standard setting proceedings,” and “ultimately harm consumers.”

I want to examine some of those issues more closely, sketching out reasons why I do not believe that they warrant cert, and also highlight some issues the FTC did not but should have addressed in its brief to make the case more compelling. All of that below the fold.

I. Did the D.C. Circuit Apply an Inappropriately Stringent Causation Standard?

The FTC focuses primarily on what it perceives as the D.C. Circuit’s failure to adopt a more lenient causation standard in favor of what it describes as a “but-for” causation standard. According to the FTC, the D.C. Circuit required the Commission to demonstrate that JEDEC would have selected an alternative non-proprietary standard but-for Rambus’s deceptive acts. Recall that the Commission concluded that the world without Rambus’s conduct would have resulted in one of two possible and mutually exclusive states: (1) JEDEC would have selected alternative non-proprietary technologies, or (2) JEDEC would have still selected Rambus but secured a RAND commitment. So there are really two possible causal pathways here. The first is that Rambus’s deceptive conduct caused the exclusion of rival technologies that would have been selected otherwise. The second is that Rambus’s deceptive conduct did not cause the adoption of Rambus technologies, but did cause JEDEC to miss an opportunity to secure a RAND commitment from Rambus. Significantly, the FTC argues that Rambus’s conduct is actionable under Section 2 under either causal pathway.

Lets start with some propositions on which the FTC and D.C. Circuit appear to agree. First, deception that significantly contributes to the acquisition of market power, i.e. market power that is not lawfully acquired before the deception, can constitute actionable conduct under Section 2. Second, price-increasing deception by a firm already possessing lawfully acquired monopoly power is not actionable under Section 2 pursuant to NYNEX. This begs the questions: was Rambus’s conduct protected by NYNEX or not? What conditions must hold for NYNEX to apply in patent holdup cases?

Let’s start there and focus on the causal pathway involving deception that only results in higher prices because it involves the loss of an opportunity to secure a RAND commitment but not exclusion of rival technologies. Is that deception protected by NYNEX or not? We know that NYNEX applies only when the monopoly power is lawfully acquired and precedes the deception. So the key question appears to be whether Rambus’s market power came before or after the deceptive conduct. To foreshadow where I’m going with this, assume that NYNEX does apply because for example, it can be shown that Rambus had a strong patent and high quality technology. Under this scenario, we know that NYNEX applies. It follows that one of the two causal pathways does not characterize a violation of Section 2 because the price-increasing deception is NYNEX-protected. Here is where the causation issue comes in. If we assume that one causal pathway is NYNEX-protected and perfectly legal — the one where Rambus’s deception results only in the loss of a RAND commitment — what burden does the FTC face in establishing that the deceptive conduct would have resulted in JEDEC selecting an alternative non-proprietary technology? While these are two separate inquiries — the NYNEX question and the causation question — they are inextricably intertwined. Indeed, I believe that resolution of the NYNEX issue resolves the causation question. Nonetheless, we’ll begin by at least framing the causation issue.

The FTC characterizes (brief, p. 16-17) the D.C. Circuit’s causation test as “a strict ‘but for’ causation test for Section 2 cases” that “finds no support in this Court’s prior pronouncements.” Thus, the FTC contends, the “court of appeals erred in supposing that a Section 2 tribunal must identify a particular anticompetitive effect in order to find liability. This follows from the causation principles discussed above: just as the monopoly may have multiple causes, conduct may have variety of anticompetitive effects.” The FTC assumes that both causal pathways characterize anticompetitive conduct under Section 2 — and implicitly that NYNEX does not apply. Under this view, the FTC faults the D.C. Circuit for requiring that it show that one but-for world was likely to the exclusion of the other because both involve illegal conduct under Section 2. Assuming this premise about the but-for world where Rambus would have still been selected but without a RAND commitment, the FTC’s argument makes some sense. The D.C. Circuit erred by requiring the FTC to show conclusively which but-for world would have prevailed because both would have been illegal anyway.

The premise of that causation argument is that both causal paths involve illegal conduct — but that begs the NYNEX question. The D.C. Circuit argues that the causal path involving deception that avoids the RAND term is not necessarily actionable. It depends on whether it is NYNEX protected, e.g. whether the deception came before or after the acquisition of monopoly power. If NYNEX applies, the antitrust analysis of the causal pathway relating Rambus’s conduct to a but-for world of “Rambus with RAND” reveals that the conduct is simply not illegal. Under this view, the D.C. Circuit’s position that the FTC must prove that Rambus engaged in illegal rather than perfectly legal behavior doesn’t seem controversial or incorrect.

One can reconcile the positions as follows. Both the FTC and the D.C. Circuit accept that there must be a causal showing that deception significantly contributes to some anticompetitive effect. The disagreement is over whether both paths involve anticompetitive effects or just one. If the FTC is right, the D.C. Circuit requirement that the FTC prove which one of these but-for worlds would have happened is misguided. If the D.C. Circuit is right, requiring that the FTC prove that Rambus traveled the illegal causal pathway rather than the perfectly legal path is correct because the D.C. Circuit is merely requiring a demonstration than an anticompetitive act occurred. Either way, the point is that the resolution of the causation issue turns on the issue of whether NYNEX renders the “Rambus with RAND” path immune from liability. So who is right? The answer is in Part II below.

Two quick but (I think) interesting notes first. So what is the appropriate causation standard in this setting where one potential but for world leads to a legal result and the other state to an anticompetitive result? Interestingly, while the Hovenkamp et al IP and Antitrust treatise is cited in two places in the FTC brief, it does not cite the language from the 2008 Supplement addressing this issue and cited by the D.C. Circuit:

An antitrust plaintiff must establish that the SSO would not have adopted the standard in question but for the misrepresentation or omission.

Well, no wonder they didn’t cite it.

Second, while we’re discussing causation and the burden facing plaintiffs alleging harm in deception-based Section 2 cases, I’d mention another interesting omission from the FTC brief. The same Areeda & Hovenkamp treatise cited throughout the brief, in the context of cases involving deception and tortious behavior under Section 2, notes that (at ¶ 782a) “[T]he antitrust court must, therefore, insist on a preliminary showing of significant and more than temporary harmful effects on competition (and not merely upon a competitor or customer) before considering a tort as an exclusionary practice. In the absence of such a preliminary showing, the defendant should win summary judgment.” Indeed, in Section 2 claims involving deception and allegedly tortious conduct, courts often require some preliminary showing that the deceptive conduct results in harm to competition. This preliminary showing is often justified on the grounds that there is a presumption that deception and tortious conduct if easily offset and will not have anticompetitive effects. Of course, one can argue that these claims aren’t true in the SSO setting where one might contend deception is much more likely to result in competitive harm and so maybe shouldn’t apply here. There might be something to that. But the cases that the FTC cites for causation are not SSO cases either, e.g. Standard Oil and the traditional requirement of this “extra” and more rigorous preliminary showing in deception based Section 2 to show the link between the conduct and anticompetitive effect are simply not discussed.

Anyway, if you’ve stuck with the post this long then stick around for at least one more section because its where the action is. Recall that I’ve made the case that the causation issue as characterized by the FTC essentially is subsumed by the NYNEX inquiry. In other words, is the failure to secure the RAND commitment an anticompetitive effect in the first instance? The answer under NYNEX is sometimes and the reason the D.C. Circuit decision is correct is because the FTC failed to meet its burden of demonstrating that the NYNEX conditions were not satisfied as a factual matter.

II. Is Using Deception to Avoiding a RAND Commitment Exclusionary Under Section 2?

So, is deception linked to the avoidance of a RAND commitment anticompetitive under Section 2? The short answer is that it depends on when it happens! Clearly, NYNEX immunizes the following fact pattern: (1) lawful acquisition of monopoly power, (2) bad act/ deception/ fraud, (3) evade pricing constraint resulting in consumer harm. NYNEX clearly does not immunize the following pattern: (1) fraud, (2) causes acquisition of market power, (3) exercise in the form of evading RAND commitment. So, lets get back to causation for a second.

If Rambus’s deception precedes its possession of monopoly power, the FTC is right that either causal pathway — (1) exclusion of non-proprietary technology or (2) Rambus with a RAND — involves an anticompetitive effect which is actionable under Section 2. But if Rambus had its monopoly power before it committed its deceptive acts, which presumably resulted in higher prices through violation of RAND commitments, NYNEX takes that causal path off the table for the FTC. Thus, if Rambus had monopoly power before its deceptive acts, the D.C. Circuit is absolutely correct that the FTC ought to bear the burden of showing that an illegal act (and not a NYNEX protected one) took place.

Now, we should be getting closer to resolving some issues here. So, what do we know about whether Rambus lawfully acquired monopoly power before its deceptive act or whether the deception preceded the acquisition?

Consider two possible scenarios. In the first, Rambus’s has a strong patent and a technology that is superior to rivals such that is is likely to be selected for the standard one way or another (or become the de facto standard through competition in the marketplace). In the second, Rambus has a weak patent and a weak technology that is not likely to be selected for inclusion in the standard on the merits. In the first scenario, where would one say that Rambus received its market power from? From the inclusion in the standard or the patent right embodying its superior product? If one assumes the premise that the technology would be adopted as the standard with or without the bad conduct, it becomes clear that the monopoly power was not created by the deception. There, NYNEX applies. Why? The grant of the monopoly power precedes the deception and price-increasing conduct. In the second scenario, where there are superior substitute technologies and the deception allows Rambus to earn monopoly power it would not have otherwise had by virtue of the patent grant, it becomes obvious that NYNEX doesn’t apply. Why? Because the deception caused the acquisition of monopoly power.

It should now be clear how the causation and anticompetitive effect arguments are inextricably interdependent. Specifically, the causation issue turns out whether we characterize the the “Rambus with RAND” but-for causal path as actionable under Section 2 or not. So, what should the FTC have to prove in order to establish that Rambus’s deception amounted to actionable Section 2 conduct? In addition to the standard burden in Section 2 cases, NYNEX demands that the plaintiff in patent holdup cases demonstrate that the monopoly power does not precede the price-increasing deceptive act since such conduct is legal. The plaintiff bears the burden of establishing this point. The critical point here is that the FTC did not adequately address NYNEX. It is clear that the FTC believes that the deception resulted in market power, but it did not prove it.

To be sure, the D.C. Circuit opinion is not a model of clarity on this issue. It could have and should have laid out more explicitly the nature of the factual burden that NYNEX imposes for plaintiffs in patent holdup cases. For example, the D.C. Circuit could have made more clear the nature of the FTCs failure to establish that NYNEX did not apply. However, given the FTC’s failure to establish that one of the two possible causal pathways was illegal, the D.C. Circuit correctly required that the FTC demonstrate that Rambus’s conduct had indeed resulted in the exclusion of non-proprietary technologies. But because the Commission conceded that it did not have sufficient evidence to conclude that Rambus’s deception would result in the exclusion of non-proprietary technologies, the Court could not find liability on that theory.

The critical point is that the causation burden lies with the FTC. The FTC had to demonstrate that the complained of conduct was illegal, i.e., that the deception caused the unlawful acquisition of monopoly power rather than the NYNEX-protected scenario of lawful acquisition by virtue of the patent grant and a superior product prior to deception which results in higher prices.

To be fair, the D.C. Circuit does make many of these points. Indeed, it explicitly and quite clearly faults the FTC for not adequately addressing NYNEX in its briefs. The FTC asserts at various points that the deceptive conduct was exclusionary and resulted in the acquisition of monopoly power, but concedes the basic point that there is insufficient evidence to conclude that the deception significantly contributed to an anticompetitive effect through the specific path of excluding a non-proprietary technology. I don’t think it is correct or fair to characterize the D.C. Circuit’s conclusion in this regard as legal error on causation or on NYNEX. Rather, I think one can reasonably interpret the D.C. Circuit to be saying that it is quite aware of what NYNEX immunizes and doesn’t and that the FTC failed as a factual matter to make a convincing showing that Rambus did not acquire monopoly power prior to the deception quite lawfully.

So far, I don’t see any compelling reason for the Supreme Court to step in here to resolve what amounts to a factual conclusion by the D.C. Circuit that the FTC failed to satisfy its burden to demonstrate that the conduct of the actionable variety rather than protected by NYNEX.

III. Is There Confusion Over the Section 2 Causation Standard?

The FTC also raises the possibility that confusion over the Section 2 causation standard warrants the Supreme Court’s attention. Again, for the reasons discussed in I and II, I don’t believe there is a wholly different standard being applied here with respect to causation. The causation issue folds into the NYNEX issue. The D.C. Circuit appears to have required the FTC to carefully separate out the causal link between deception and effects that are immunized under NYNEX because monopoly power pre-existed the deception or unlawful because the deception created the monopoly power. Such a causal showing does not appear novel by my reading of the Section 2 cases. Nor is it a significant legal dispute over the appropriate causation standard. The causation debate, in my view, boils down to a factual dispute over whether the FTC demonstrated that illegal conduct occurred. This is not the stuff that Supreme Court cases are made of in emerging bodies of law.

IV. Rambus v. Broadcom: Circuit Split, Conflict, or Much Ado About Nothing?

The FTC contends that the D.C. Circuit and Third Circuit are now in conflict because it argues that the Third Circuit has, contrary to the D.C. Circuit, concluded that deception that results in the avoidance of a RAND commitment is an anticompetitive effect under Section 2. The FTC (p. 27) argues that:

The holding of the court of appeals is also at odds with the Third Circuit’s decision in Broadcom Corp v. Qualcomm Inc., 501 F. 3d 297 (3d Cir. 2007). In Broadcom, the Third Circuit, adopting the Commissions’ reasoning in the present case, ruled that allegations that a patent holder deceived an SSO about the terms on which it would license its technologies stated a cause of action under Section 2 … . The Third Circuit ruled that, in the context of SSO deliberations, misrepresentations regarding the cost of implementing a given technology harm competition to become the standard and increase the likelihood that patent rights will confer monopoly power on the patent holder.

The source of the conflict, according to the FTC, is that Third Circuit would not require a showing that the deception actually caused the SSO to include the patent holder’s technology. While the D.C. Circuit notes that Broadcom “may have rested on the allegation that the deceit lured the SSO away from non-proprietary technology,” the FTC criticizes this view for not recognizing what the Third Circuit was really saying:

It is clear, however, that the Third Circuit viewed competitive harm in terms of the impact of Qualcomm’s deceit on the competitive standard setting process, and not — as the court did below — on the specific but for outcome of the SSO’s choice.

I’m not convinced this amounts to a circuit split. Or even an issue that requires the Supreme Court’s attention. First, Broadcom is an appeal from a district court order granting Qualcomm’s motion to dismiss. It holds that Broadcom’s allegations are sufficient to state a claim under Section 2. By the way, these allegations include that the deception induced the SSO to select Qualcomm’s technologies. The Third Circuit describes the complaint as follows:

The Complaint alleged that Qualcomm induced the ETSI and other SDOs to include its proprietary technology in the UMTS standard by falsely agreeing to abide by the SDOs’ policies on IPRs, but then breached those agreements by licensing its technology on non-FRAND terms. The intentional acquisition of monopoly power through deception of an SDO, Broadcom posits, violates antitrust law.

The Third Circuit is working a set of allegations that Qualcomm acquired monopoly power by engaging in a course of deceptive conduct which caused its inclusion in the standard. The Third Circuit decision, at its early procedural stage, does not say anything directly about causation. To the extent that it is premised on the truth of the allegation that the deception induced the selection of Qualcomm’s technologies into the standard, it also say anything about whether the mere avoidance of a RAND commitment is anticompetitive under Section 2. In my view, one has to stretch Broadcom considerably in order to create a split with Rambus with respect to causation or the scope of NYNEX. Perhaps such a split will develop as as the Third Circuit addresses, with some facts in the record, issues of causation and/ or the scope of NYNEX. But the holdings in Rambus and Broadcom are largely a function of the specific factual allegations, procedural stage, and records in each rather than a disagreement about doctrine in need of the Supreme Court’s attention.

V. Confusion About Standard Setting and Interim Harm to Consumers

Finally, the FTC argues that confusion resulting from the Rambus and Broadcom decisions will create some risk that bad conduct and manipulation of SSOs will deter participation and harm consumers. I’m not convinced of this parade of horribles for a few reasons.

First, let us not forget that the debate here is whether to layer antitrust remedies on top of whatever breach of contract, tort, or patent law remedies that are available to aggrieved parties. Breach of contract will be available to SSO members when patent holders violate the by-laws requiring RAND commitments or disclosure. It is true that third party consumers will not have standing to bring such actions. As I’ve pointed out with Kobayashi, it is unclear whether breach of contract damages might be superior in this setting from an optimal deterrence standpoint. We know a Section 2 violation involves trebling plus follow-on private actions in state and federal court. To the extent that the optimal damages turn on the probability of detection, e.g. we justify trebling with the belief that the probability of detection is low enough that it is required for deterrence, it seems like the probability of detecting patent holdup is very high. Its called holdup for a reason. Generally, the holdup is announced to the SSO members and is not covert. So while it is true that third parties may not have standing to bring the contract action, the SSO members certainly have the incentive and it may be the case that expectation damages are closer to optimal deterrence than the alternative. Contract law also has the advantage of providing substantive law designed to distinguish holdup from good faith modification in response to changes in market conditions. This substantive doctrinal advantage becomes much more important when one considers the FTC’s willingness to enforce against deviations from ex ante contractual commitments even in the absence of deception, e.g. N-Data.

Further, as Kobayashi and I have also pointed out in our Federalism and Patent Holdup paper, the patent doctrine of equitable estoppel is relevant here as well:

The doctrine has been applied to cases of patent hold up where the patentee engaged in deception.111 For example, courts have applied equitable estoppel to prevent patentees from enforcing patents in which they misled or were silent regarding patents covering standards adopted by SSOs.112 The remedy in these cases, the inability to enforce the patent, would adequately cure the potential hold up based on deception problem. Moreover, use of this doctrine and remedy would be limited to cases where there is both a misleading statement and reliance on the misleading statement. The contours of any duty to disclose would be defined and evaluated by the disclosures required by the SSO, and not by a generalized duty to disclose based on the patentee’s superior knowledge.

Such an approach would allow SSOs to craft such requirements to maintain incentives for ex?ante disclosure, yet not suppress incentive for improving on the current standard. Further, this approach would not apply to cases such as N?Data, where deception is not involved, and thus would not generate the risk of chilling good faith breaches of FRAND commitments.113 Nor would use of this doctrine implicate extending or modifying current antitrust law beyond it limits. Antitrust law, therefore, would not have to bend to cover situations where proof of actual exclusion or harm to competition is absent. For these reasons, Hovenkamp suggests that use of equitable estoppel or contract law would be more appropriate than antitrust law for addressing such holdup with deception problems.

Thus, while the FTC worries that potential participants in standard setting will not be able to defend themselves against manipulation, let us not forget that these are sophisticated organizations with a toolbox that includes not only contractual responses to prevent holdup but also a host of state and federal legal remedies that do not involve the heavy hammer of antitrust. As Kobayashi and I argue in the linked paper, the Supreme Court (e.g. Credit Suisse, NYNEX, Trinko) has also acknowledged that the presence of alternative remedies and regulatory options (in this case remedies) can render expansion of antitrust liability inappropriate where there is also serious potential for false positives. On normative grounds, we argue that patent holdup is exactly this type of conduct where alternative regulatory institutions such as state and federal law render the marginal benefit of antitrust small and the marginal cost high because of the social costs of false positives in this setting.

Finally, it is not without some irony that the FTC can complain about the confusion in patent holdup doctrine. The FTC’s enforcement action in N-Data extends the patent holdup agenda (see Kobayashi and Wright Federalism and Patent Holdup paper) to cases where there is no deception whatsoever! Indeed, rather than fuss about causation and anticompetitive effects, the FTC wielded its Section 5 enforcement power to address the re-negotiation of a nominal $1,000 commitment to a RAND license several years after the commitment had been made. I suspect that if one was to ask those counseling patent holders deciding whether to participate in the standard setting process, the N-Data enforcement action is much more alarming and confusing then the Rambus decision. Relatedly, readers might enjoy the Global Competition Policy Review symposium on Section 5.