An October 30, 2006 Business Review letter ("BRL") from the Antitrust Division of the Department of Justice (the "Department") is a potentially important step forward in providing guidance to Standard Development Organizations (SDO’s) and their lawyers about the form of acceptable SDO patent disclosure requirements. The BRL was in response to a request by VITA, an international trade association, and its standards development subcommittee, VSO. VITA is an SDO that is accredited by the American National Standards Institute, and includes developers, vendors and users of real-time modular imbedded computing systems originally based on the VMEbus Computer Architecture. VITA sought guidance on the propriety of its proposed new rules for requiring disclosure of relevant patents and pending patent applications as a precondition to participating in standard setting activity.

The issue of disclosing pending patent applications or relevant patents held by companies involved in SDO’s has become a very hot topic since the Federal Trade Commission’s recent decision in In The Matter of Rambus, Inc., Docket No. 0302, July 31, 2006 ("Rambus"). In Rambus, the FTC held that the failure by Rambus to disclose patents it held, and others that it was applying for, which related to technology being considered for standardization by an SDO which Rambus was part of constituted an unfair trade practice, and violated Section 5 of the Federal Trade Commission Act. Counseling SDO’s on appropriate mechanisms for controlling the possibility that a standard might unwittingly require the use of patented technology owned by one or more participants in the standard setting process has been difficult in the absence of clear guidelines by the enforcement agencies on what kinds of SDO rules on patent disclosure are acceptable. While the Rambus decision itself provides some guidance, there were heated factual disputes about the extent to which the SDO involved there actually required disclosure of patents and patent applications, and the extent to which Rambus failed to adhere to those requirements. Beyond the clear prohibition on so-called "patent ambush" activities, lawyers counseling SDO’s about what is permissible in requiring patent disclosure have had no general guidance from either of the antitrust enforcement agencies about specific disclosure mechanisms which will be deemed acceptable. The VITA BRL changes that landscape.

The Antitrust Division began by noting that standard setting can have powerful pro-competitive impacts. Standards developed by VITA could actually enable broader competition in the VME industry, and spur the creation of new products by entities able to engineer to an open standard. For example, since VITA standards are backward compatible, systems utilizing VME connections can be upgraded with newer technology. VITA systems developers are given the ability to integrate a variety of components into a single system. Open standards ultimately enable competitors, downstream purchases and upstream suppliers all to benefit from a wider variety of products, rather than being confined to any proprietary technology.

The Antitrust Division then described VITA’s new proposed policy: (1) Each member of a VITA standard setting working group must promptly identify all patents or patent applications that may become essential to the implementation of the future standard; (2) Working group members must declare the maximum royalty rates and most restrictive non-royalty terms that the member company will request when licensing such patents; (3) Patent holders may subsequently submit declarations with less restrictive licensing terms, but the original declaration of licensing terms cannot be made more onerous; (4) If a working group member specifies a maximum royalty but does not include other licensing terms, members agree they must accept specific limits on grant backs, reciprocal licenses, non-asserts, covenants not to sue or defense of suspension provisions; (5) A working group member who fails to disclose a known essential patent or fails to declare associated most restrictive licensing terms on a prompt basis as defined in the rules commits to license the essential claims of the undisclosed patent on a royalty free basis; and (6) All members agreed to binding arbitration in front of a panel to be drawn from the VITA Board of Directors to resolve any disputes over applications of the disclosure rules. The proposed policy would continue the existing VITA prohibition on any negotiations or discussions at all working group meetings of specific licensing terms among working group members or with third parties.

The Department began its substantive analysis by noting that the Supreme Court had condemned activities where SDO members conspired with one another, or manipulated standard setting processes, to injure a horizontal competitor. The Department went on to note that these cases resulted in many SDO’s implementing rules strictly forbidding all activities that could potentially result in antitrust liability, including restrictions on any discussions about the terms and conditions of licenses to patents that could be essential to a standard. The Department noted that VITA’s proposed policy would relax such restrictions somewhat by requiring patent holders to make the unilateral declarations described above, while maintaining a prohibition on joint negotiation and discussion of patent licensing terms.

Having defined the question, the Department’s analysis was surprisingly short. The Department began by noting that standard setting processes could not be used to cloak naked price fixing or bid rigging, and that since such activities did not seem to be reasonably implied from the proposed VITA rule changes, the Department would proceed to analyze the proposed VITA rule changes under the rule of reason. Then, in what will likely become the most often cited portion of the BRL, the Department acknowledged the powerful pro-competitive rationales for requiring standard setting participants to disclosure patents. Essentially, such disclosure would allow each member of the VITA standard setting working group to compare the most restrictive licensing terms associated with each alternative technology, including freely available public domain technologies, when deciding which technology to support for inclusion in the draft standard. This created the possibility that a standard setting organization like the VITA might decide that a cheaper, less technologically elegant solution would be best given the potential cost of a technologically better proprietary solution. Participants in a standard setting organization with rules like the ones proposed by the VITA should be encouraged to compete by submitting declarations that would increase the chances that its patented technology would be selected. As the Rambus litigation worked its way through the Federal Trade Commission, a spirited debate emerged among economists and lawyers advising SDO’s about whether stringent patent disclosure rules would ultimately wind up impeding standard setting activity. While certainly not explicitly taking sides in that debate, the VITA business review letter can be seen as a ringing endorsement of stringent patent disclosure rules if particular SDO’s chose to deploy them.

Finally, the Department took considerable comfort in VITA’s continued prohibition of discussions about patent licensing terms. It noted that working group members would not set actual licensing terms, which still have to be negotiated separately outside the organization, subject only to restrictions imposed by the patent holder’s unilateral declaration of its most restrictive terms pursuant to VITA rules. The Department closed with an admonition that it would not hesitate to condemn any use of the declaration process as a cover to fix downstream prices of VME products or of efforts by patent owners to rig declarations of licensing terms.

Authored By:

David Garcia

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