A patent holder that promises a standard-setting organization that it will license its technology on fair and reasonable terms, but reneges once its technology is adopted as the industry standard, may be held liable under the Sherman Act Section 2, the U.S. Court of Appeals for the Third Circuit announced in Broadcom Corp. v. Qualcomm Inc., No. 06-4292 (3d Cir. Sept. 4, 2007), available at 2007 U.S. App. LEXIS 21092.

The opinion reinstates Broadcom’s claims for monopolization and attempted monopolization, holding that conduct that undermines the pro-competitive benefits of standard-setting organizations may, in some circumstances, be condemned as anticompetitive.

“Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder,”  Judge Maryanne Trump Barry wrote.  Id. at *37.

The opinion was also a partial defeat for Broadcom, however, as the appeals court found that the microchip company lacked standing to assert a claim for unlawful monopoly maintenance in a market in which it neither competes nor seeks to compete.  The court also found that Broadcom failed to allege a sufficient antitrust injury to support its bid to force Qualcomm to divest its recent acquisition of Flarion, a leading developer of technology for next-generation cell phones.

The litigation is based on the core electronics used in cellular telephones.  Generally, cell phone service uses one of two standards: Code Division Multiple Access (“CDMA”) or Global System for Mobility (“GSM”).  The current generation of GSM phones uses the Universal Mobile Telecommunications System (“UMTS”) standard, adopted by the European Telecommunications Standards Institute (“ETSI”) and standard-setting counterparts in the United States.  The UMTS standard incorporates a technology, called Wideband Code Division Multiple Access (“WCDMA”), in which Qualcomm owns proprietary intellectual property rights, including patents.

In its complaint, Broadcom alleges that Qualcomm promised the ETSI that it would license its WCDMA technology on fair, reasonable, and non-discriminatory (“FRAND”) terms.  ETSI relied on this representation when it included Qualcomm’s technology in the UMTS standard, according to Broadcom’s complaint.  However, Broadcom alleges, Qualcomm breached this promise by licensing technology on non-FRAND terms.  In particular, according to the complaint, Qualcomm demanded discriminatorily higher royalties from competitors and customers that used chipsets not manufactured by Qualcomm, in an effort to obtain a monopoly in the UMTS chipset market.

Qualcomm moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), and U.S. District Court Judge Mary Little Cooper granted the motion.  The District Court reasoned that Broadcom failed to state a claim for monopolization in the WCDMA technology market because Qualcomm’s patent on the technology conferred a right to exclude competition and set the terms by which the technology would be distributed.  The District Court found that Qualcomm’s alleged deception before the standard-setting organization was of no moment under antitrust law because, no matter which technology was ultimately chosen, the adoption of a standard would necessarily eliminate competition.

The Third Circuit reversed and reinstated Broadcom’s Section 2 claims.  The court expressed concern about the dangers of deceptive conduct before standard-setting organizations, and cited a series of recent cases that demonstrate “a growing awareness of the risks associated with deceptive conduct in the private standard-setting process.”  Id. at *24 to *31, citing In the Matter of Rambus, Inc., No. 9302 (F.T.C. Aug. 2, 2006), available at 2006 WL 2330117; In the Matter of Union Oil Co. of Cal., No. 9305 (F.T.C. July 27, 2005), available at 2005 WL 2003365.

Although a patent confers a lawful monopoly over the claimed invention, the Third Circuit noted that, if the technology is adopted by a standard-setting organization and becomes “locked in” as the industry standard, the patent holder may demand supracompetitive royalties.  Measures such as commitments to fair and reasonable royalties are designed to prevent such anticompetitive outcomes.

“We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with [a standard-determining organization’s] reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent reach of that promise, is actionable anticompetitive conduct.”  Id. at *36 to *37.

The Third Circuit also reinstated Broadcom’s claim for attempted monopolization of the UMTS chipset market.  While the District Court found that Broadcom failed to allege sufficient facts showing anticompetitive conduct or a dangerous probability of achieving monopoly power, the Third Circuit found the complaint sufficient.

The Third Circuit upheld the district court’s decision to dismiss several other antitrust causes of action.  The appeals court found that Broadcom lacked standing to assert its claim that Qualcomm monopolized the markets for CDMA technology and chipsets because Broadcom failed to assert that it competes or seeks to compete in these markets.  Id. at *53.

The appeals court also upheld the dismissal of Broadcom’s claim under Clayton Act Section 7, which sought to enjoin Qualcomm’s then-pending acquisition of Flarion Technologies, a “leading developer” of technologies for next-generation cell phones.  Broadcom claimed that the acquisition was part of Qualcomm’s pattern of acquiring competitors to achieve market dominance, and claimed that it feared injury because it expected to be a competitor in these future-generation markets and might be required to license these future-generation technologies from Qualcomm.  The court found such “[h]ypothetical anticompetitive conduct” too speculative to support a claim.  Id. at *62.