“Because of the chance of further proceedings on remand, we express briefly our serious concerns about strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of JEDEC’s patent disclosure policies and Rambus’s alleged violation of those policies.”

“Once again, the Commission has taken an aggressive interpretation of rather weak evidence.”

2) Is it OK for SSO’s to boycott patented technologies when there is no opportunity for cross licencing under the pretext of “cost”?

3) It appears Michael Carrier, as as the FTC commision did, has cherry picked the facts and ignored the non-supporting facts in the ALJ decision to match with the “conclusion” (ie Rambus is guilty). Given that Rambus has been cleared of JEDEC misconduct in multiple venues (CAFC, FTC ALJ, CADC, Supreme Court, and most recently a federal court in California) what is more likely: a) the FTC commission was prejudiced against Rambus because they both bring the case and then decide it b) the commission was right and everyone else is wrong? Given also that the FTC commission has never supported an ALJ decision of not guilty (eg Schering Plough) it is clear the answer is the former.

Let’s take a look at Schering-Plough. I recognize that the Eleventh Circuit reversed the FTC’s condemnation. But the Commission developed some pretty solid evidence that Schering paid the generics to delay entering the market. Even though there were significant safety and market concerns with one product, Schering (1) did not include its knowledgeable employees in the negotiations, (2) failed to request sales projections or research relating to the drug, (3) never followed up on unfulfilled requests for information, and (4) did not object when the generic suspended its work. If Schering were in fact interested in the generic’s product, this course of conduct (especially when contrasted with other products they were considering) would not make sense.

In short, even if some creative arrangements could slip through the cracks, congressional legislation would still be valuable in blocking at least a subset of these concerning agreements.

1. You’re right that N-Data does not support deference to SSOs. Would criticism of N-Data have been worth the price of losing some consensus? Perhaps. But I sought to emphasize as strongly as possible my main point that SSOs and their IP rules deserve deference. While I certainly could have staked out a position on N-Data, the difficulty of doing so is that it would have divided readers into those who would have been N-Raged and those who would have thought my discussion N-Lightened. Instead, I decided it was worth encouraging everyone to adopt my conclusion that “[g]iven SSOs’ significant procompetitive justifications, courts and the antitrust agencies should consider their activity under the Rule of Reason” (page 342). And that is yet another reason I am grateful for this symposium, which allows me to weigh in on important developments that did not make it into the book.

2. Fair point. My citation to your article took the easy way out by assuming the lack of Section 2 liability. A more expansive use, as you note, would cabin the application of Section 2 in this setting. And a third use, in the middle, would focus on the benefits of patent/contract/tort law in reducing the need for Section 5.

4. I do not have a fully formed framework for Section 5 that I will now (drum roll please) unveil in the comments. We agree that such a framework was not apparent in the N-Data case. So let’s see if it’s even worth considering such a framework. One way of answering this is to address your hypo, in which the patent holder would appear to be on strong grounds – no fraud or bad faith at the time of selection and a reasonable justification for the increase. I agree with you that this would not form a data point supporting a justifiable Section 5 framework.

But let me slightly modify your example. What if we remove the “change in market conditions” element of the hypo and instead replace it with “to take advantage of its monopoly power.” Because this occurs after monopoly power has been gained, NYNEX would preclude Section 2 liability. But the question then is, should this conduct be subject to challenge? My guess is that you would cover this under patent/contract/tort law. The scenario, however, could also provide a setting in which Section 5 could be applied.

What could a Section 5 framework look like? Perhaps some combination of monopoly power, a price increase that does not appear justified, and higher consumer prices. Of course, there are obvious costs to expanding Section 5 to price increases. And maybe those costs preclude the application of Section 5 at all. But I would allow the FTC to attempt to construct a limited framework. With such a framework in hand, we could decide that the costs of such an approach are too high. Or that the Wright/Kobayashi approach is the right answer. But before we bury Section 5, I would want to at least see if a justifiable framework is possible.

3. Let’s parse the Rambus decision to see exactly what my causation concern is. As you are well aware, the FTC concluded that “but for Rambus’s deceptive course of conduct, JEDEC [1] either would have excluded Rambus’s patented technologies from the JEDEC DRAM standards, or [2] would have demanded RAND assurances . . . with an opportunity for ex ante licensing negotiations.” (522 F.3d at 461)

My concern with the D.C. Circuit’s opinion is the high bar the court imposed on the FTC in proving the first option. The court began its important causation paragraph (id. at 463-64) by explaining that “if Rambus’s more complete disclosure would have caused JEDEC to adopt a different (open, non-proprietary) standard, then its failure to disclose harmed competition and would support a monopolization claim.” I think we agree that this statement is correct and is not covered by NYNEX. But let’s see how the D.C. Circuit fleshed out its causation standard. In other words, how did the court interpret “would have caused” in the sentence above?

It did not find this standard satisfied by its assumption that “Rambus’s nondisclosure made the adoption of its technologies somewhat more likely than broad disclosure would have.” So “somewhat more likely” is not enough.

What, then, was the FTC’s alleged deficiency? That it “made clear . . . that there was insufficient evidence that JEDEC would have standardized other technologies had it known the full scope of Rambus’s intellectual property.” Put differently, “the Commission expressly left open the likelihood that JEDEC would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property.” (Id. at 466). So the FTC, then, cannot “leave open the likelihood” that JEDEC would’ve selected Rambus’s technology even if it had been disclosed. That seems pretty close to a “but for” standard.

Turning to the facts, let’s focus on whether Rambus had monopoly power before the selection of the standard. The Commission’s 2006 opinion (on pages 74-77) included exhaustive evidence on this crucial point. And a quick review of the evidence sheds serious doubt on the proposition.

First, there was significant evidence of alternative technologies. The Commission cited 12 examples of viable, if not preferable, alternatives to the Rambus technologies offered by Samsung, Cray, Mitsubishi, Texas Instruments, IBM, Micron, and Silicon Graphics. The Commission found that “JEDEC members gave these alternatives serious, searching consideration” and that “the technologies as to which Rambus subsequently revealed patent claims sometimes were chosen only after prolonged debate.” As the Cisco representative explained: “In typical design activity, one can make any number of choices, including choosing an interface that was not encumbered by a patent or royalty.”

Second, JEDEC members were “highly sensitive” to costs. Just to offer a few examples, Rambus’s primary JEDEC representative stated that “customers are willing to leave performance on the table in exchange for having lower cost systems.” Compaq “stressed that price was the major concern for all of their systems” and Sun “echoed the concerns about low cost [and] really hammered on that point.” An internal Rambus e-mail summarized: “Our industry is very cost sensitive.”

The reason for the sensitivity was readily apparent. The Commission concluded that “[t]he total cost of payments for Rambus’s undisclosed patents could amount to several billion dollars, with some individual DRAM manufacturers each paying hundreds of millions of dollars.” To pick one example, Rambus’s requested royalty “would cost Micron hundreds of millions of dollars . . . the equivalent of 25-50% of Micron’s R&D expenditures.”

Third, the inclusion of patents in the standard would, for obvious reasons, tend to increase the cost. It thus is not a surprise that numerous witnesses testified that knowledge of patents “was an important factor in their decisions.” Sun “would have strongly opposed the use of royalty-bearing elements in an interface . . . specification.” Sanyo’s representative explained: “If I understood that there was IP on the [technology], I would have . . . changed my direction and voted to take the [alternative].” IBM’s representative noted that “[p]atent issues are a concern on every JEDEC proposal” and that when a technology was considered for the first time, “it was especially valuable to have the consideration of patents so that we could possibly avoid them.” Micron’s knowledge of Rambus’s patent applications “would have caused [them] to oppose [Rambus technologies].” JEDEC minutes stated: “The important thing is disclosure. If it is known that a company has a patent on a proposal then the Committee will be reluctant to approve it as a standard.” Numerous other examples appear in the record.

In short, there is significant evidence that absent deception, Rambus would not have obtained monopoly power. There were numerous viable alternatives, and JEDEC members were sensitive to cost and tried to avoid patented technologies if possible. Based on this evidence, the reasonable conclusion would appear to be that the FTC showed that Rambus’s disclosure “would have caused” JEDEC to adopt a different standard.

Mike rightly notes that Congressman Rush’s bill would prohibit not merely cash reverse payments but settlements where the ANDA filer “receives anything of value” for discontinuing the manufacture of the drug. But in the first two examples of avoidance schemes I gave in my post, the generic continues to manfucture the relevant drug but does so at monopoly prices because of royalty payment obligation. I don’t think those scenarios would be covered under the Rush bill.

My basic point is that any rule focusing on the consideration paid to the ANDA filer-rather than on whether the patent infringement claim is strong or weak (which drives the social cost of allowing the settlement)–misses the boat.

But lets get back to standard setting and let me offer a few quick responses to your reply.

1. You write that the primary aim of the chapter on SSOs is to “cleanest case for antitrust to continue its deference and to gain support from as many readers as possible.” I’m not sure the lesson I learn from antitrust’s treatment of standards is deference. At least not in the patent holdup arena.

The FTC’s recent adoption of this “evasion of a pricing constraint” = monopolization meme, the high likelihood of use of Section 5 in patent holdup cases, and N-Data in particular don’t suggest deference to me. In my view, these three things are bad developments and criticizing them is worth the cost of losing some consensus.

2. Just a nit. You write that “The conclusion that Section 2 does not apply opens the door for Josh’s important work (with Bruce Kobayashi), which advocates the use of patent law’s equitable estoppel doctrine, as well as state contract and tort law to fill the gap.”

Our argument is the other way around. We argue that the adequacy of equitable estoppel and contract law to regulate opportunism in the SSO context in an environment with significant error costs weighs in favor of restricting the scope of Section 2.

3. I’m confused how you can agree with me about the application of NYNEX to patent holdup cases and simultaneously argue that the DC Circuit incorrectly applied a but-for causation standard.

There are a few problems with this argument as I see it.

The first is that NYNEX doesn’t, as you say, merely protect pricing increases after the firm is selected in the standard. It protects pricing increases after the firm has monopoly power. Those two need not be equivalent. That’s the point of Rambus.

Second, if you agree that NYNEX immunizes price increases for a firm that already has monopoly power (even when evading some pricing commitment through allegedly bad conduct), then the question is whether the patent holder had monopoly power prior to the standard. If the answer is yes, NYNEX applies to cases of mere price increases but does not immunize cases where the bad conduct results in exclusion and harm to the competitive process. My reading of Rambus (as I’ve published elsewhere) is that the D.C. Circuit is saying that the Commission did not carry its burden in demonstrating (not merely asserting) that we were not in a NYNEX protected situation.

One could call this but for causation, I guess. But demonstrating that the conduct is not clearly protected under NYNEX does not seem like legal error to me.

Finally, there is another piece of evidence to suggest that reading that the DC Circuit just doesn’t understand NYNEX is incorrect. The D.C. Circuit clearly gets that deception that causes the acquisition of market power can violate section 2. They cite Microsoft and Conwood for that proposition. To me, the more plausible reading is that the court understands Microsoft quite well, but as a factual matter points out that the Commission didn’t carry its burden in demonstrating that this conduct was illegal (not protected under NYNEX).

4. I’m still not exactly clear on where you stand with respect to appropriate application of Section 5 in the standard setting context. It sounds like you don’t think N-Data is a good case upon which to build a framework — and I agree — but any thoughts on what that framework would look like?

Let me ask a more concrete question. Take out the extreme facts of N-Data and imagine a scenario where the patent holder enters into a RAND commitment in good faith. There is no evidence of fraud or bad conduct. One year later market conditions change and the patent holder negotiates an increase. This is clearly not a Section 2 violation. Should it be under Section 5?

If the answer is yes, aren’t we finding violations for the exercise of lawfully acquired monopoly power which is clearly lawful under section 2? And if that is yes, aren’t we back to Section 5 as the minor leagues?