On July 31, 2006, the Federal Trade Commission issued its long awaited decision concerning abuse of a technical standard setting process, In the Matter of Rambus, Inc., Docket No. 9302. The Rambus FTC proceeding has been closely watched by practitioners responsible for policing the involvement of companies in standard setting organizations ("SSO’s"), and the companies themselves. Standard setting is increasingly important in this era of rapid technological change, as competitors seeks to cooperatively create open standards that operate pro-competitively by providing for interoperability to increase the value and commercial acceptance of a wide variety of products.
In the case of Rambus, the industry segment involved was Dynamic Random Access Memory ("DRAM") – the integrated circuits that hold temporary instructions and data for the central processing unit or central brain of a computer system. DRAM chips are essentially the computer’s short term memory, and they comprise a worldwide annual market valued at somewhere between $35 and $40 billion dollars. Companies making the various related components that function in conjunction with DRAM in computers, and companies who purchase DRAM for inclusion in their own products, naturally wanted DRAM chips using open architectures which a variety of other technologies could be designed to operate with in an interoperable fashion. DRAM manufacturers and computer makers accordingly participated in an industry-wide SSO called the Joint Electron Device Engineering Council ("JEDEC") set up to create open, standardized architectures for DRAM chips.
Rambus, Inc. is a developer and licensor of computer memory technologies that participated in JEDEC. It makes no chips of its own, instead licensing its designs to other DRAM manufacturers for fabrication and sale. However, Rambus is alleged to have simultaneously been perfecting and refining its own patents for a competing DRAM technology during the course of its JEDEC involvement in the early and mid-1990s, and surreptitiously causing its technology to be embedded in the JEDEC standard. It then launched a wave of patent infringement suits against major DRAM manufacturers in 2001 after the Rambus technology became part of the JEDEC standards.
The infringement suits have understandably provoked a storm of litigation, including all manner of counter-claims against Rambus on the basis of its JEDEC activities. These counterclaims include equitable estoppel against the enforcement of Rambus’s patents, common law fraud claims, and alleged breaches of state law unfair competition statutes. The infringement suits also sparked the FTC’s claim that Rambus’s conduct constituted monopolization in violation of Section 2 of the Sherman Act, and therefore in turn constituted a violation of Section 5 of the Federal Trade Commission Act, ultimately resulting in the July 31, 2006 decision.
The case was originally filed on June 18, 2002 and took almost three years to complete before an FTC Administrative Law Judge. Millions of documents were produced, hundreds of witnesses were deposed and the administrative trial consumed 54 days over the course of 5 months. The ALJ issued his initial decision on February 23, 2004. He sided with Rambus in virtually every respect, and dismissed the FTC staff complaint. At the most summary level, the ALJ essentially found that: (1) JEDEC’s rules did not require Rambus to disclose pending patent applications, (2) JEDEC’s members were not deceived, (3) ultimately, even if there was deception, there were no viable alternatives to Rambus’s superior technology which would have ultimately become the JEDEC standard in any event, and (4) there was no exclusion because Rambus’s royalty rates were reasonable. The ALJ refused to broadly construe JEDEC’s rules, which he found to be inconclusive on disclosure, or to imply any sort of duty to disclose pending patent applications as part of participating in an SSO process, because imposing such a requirement would, in his view, actually have anticompetitive effects by potentially stifling innovation.
The Federal Trade Commission reversed the Administrative Law Judge’s determination in all respects. In a painstakingly 120 page analysis, the Commission concluded that Rambus’s conduct constituted monopolization in violation of Section 2 of the Sherman Act which in turn supported the Commission’s ultimate conclusion that Section 5 of the Federal Trade Commission Act had been violated.
The Commission began by defining a series of narrow relevant technology markets focusing on technologies designed to accomplish four specific operations which all DRAM chips must execute. The Commission then found that in these four narrow markets, by virtue of the patents it obtained while participating in JEDEC, Rambus possessed monopoly power because more than 90% of all DRAMs sold worldwide were manufactured pursuant to the JEDEC standard which included Rambus technology.
The heart of the Commission’s decision is a detailed evidentiary analysis of JEDEC’s rules and the expectations of its members, as demonstrated by their conduct, during the period between 1992 and the middle of 1996 when Rambus participated in JEDEC’s deliberations. After reviewing the evidence at exhaustive length, the Commission concluded that JEDEC’s rules and the actions of its other members, taken together, created an expectation on the part of the JEDEC participants that each participant would disclose any existing or pending patent applications for technology which would read on the JEDEC standard. It concluded that Rambus’s failure to so disclose was premeditated and deliberate, and consequently constituted the illegal acquisition of monopoly power in violation of Section 2 of the Sherman Act. Moreover, the Commission found that viable alternatives to the Rambus technology did exist prior to their adoption in the standard, but that once the standard was adopted, DRAM manufacturers were "locked in" and could not deviate from the Rambus technology. Finally, the Commission rejected the notion that no exclusion had occurred because Rambus’s royalty rates were fair and reasonable, and concluded instead that they reflected an improper exercise of monopoly power.
The preceding description does no more than scratch the surface of the Commission’s decision, but a few conclusions reached by the Commission along the way deserve highlighting. First, and perhaps most significant from the perspective of legal doctrine, the Commission rejected Rambus’s argument that a standard of proof beyond preponderance of the evidence ought to be applied to the staff’s claim because the staff sought to in effect preclude Rambus from enforcing its lawful patent grants. Rambus contended that complaint counsel should have to prove the essential elements of their claims by clear and convincing evidence because of the inherent tension between the patent and antitrust laws. The Commission categorically rejected the contention, instead holding that patents are not inherently in tension with the antitrust law, and do not necessarily create market power, citing the Supreme Court’s recent ground breaking decision in Illinois Tool Works Inc. v. Independent Ink Inc., 126 S. Ct. 1281 (2006). The Commission similarly rejected Rambus’s contention that a heightened burden of proof should be required to avoid the risk of chilling participation in SSO’s. To the contrary, responded the Commission, SSO’s work best when the members could depend on some assurance that other participants will not exploit the process by acting deceptively. However, the FTC stopped short of creating a presumption of disclosure, assuming SSO disclosure rules were ambiguous or silent.
The Commission also rejected Rambus’s assertion that even if it did improperly inquire monopoly power, it could not be held liable because there was no proof of competitive harm in the form of supra competitive prices to consumers. Rambus argued that royalties paid by DRAM manufacturers, even if excessive, were only wealth transfers which would impose only private costs irrelevant to overall social welfare. The Commission rejected this argument, virtually as a matter of law, finding that it failed to acknowledge the possibility of decline in DRAM output that resulted from artificially heightened DRAM prices. Reduced output would constitute a dead weight loss that decreased overall social welfare, and therefore constituted consumer injury.
The Commission did not issue a final order. Instead it left the record open and invited briefing by the parties on the appropriate scope of a remedy. The Commission’s comments in asking for this briefing seemed to create the possibility that the Commission will consider imposing an obligation on Rambus to license its intellectual property at some reasonable royalty rate which the Commission will determine. Given the potential significance of the Rambus decision on the thicket of private patent infringement litigation currently involving Rambus, the outcome of the Commission’s remedy proceeding could have enormous economic consequences for the entire DRAM industry. We will report on the Commission’s final decision after its penalty deliberations and remedy determination when the final decision is issued.