The antitrust litigation against Rambus for failing to disclose patents to JEDEC, a standard setting body (SSO), took another twist last week.  In Rambus v. FTC, No. 07-1086 (D.C. Cir. 2008), the court unanimously set aside the FTC decision holding that Rambus’ conduct constituted monopolization under Section 2 of the Sherman Act.  The D.C. Circuit held that the FTC failed to carry its burden to show the conduct was exclusionary.  In dicta, the court also suggested that the FTC had taken "an aggressive interpretation of rather weak evidence" to conclude that the failure to disclose was a violation of JEDEC disclosure rules.

Rambus was a member of JEDEC in the mid-90s when JEDEC was in the process of developing standards for certain dynamic random access (DRAM) technology.  Under JEDEC rules, members were to disclose patents and patent applications relating to a technology being standardized.  Assuming proper disclosure, JEDEC could either adopt a standard which did not utilize such proprietary data, or require the member to license its proprietary data on a reasonable, non-discriminatory (RAND) terms.

According to the FTC, Rambus engaged in deceptive conduct which violated JEDEC disclosure rules by either failing to disclose patent related data, or making misleading statements about such data.  This led JEDEC to adopt standards allegedly utilizing Rambus patents, thereby permitting Rambus to acquire a monopoly and seek high licensing fees.  The FTC remedial order required Rambus to license its patents for reasonable royalty rates for three years, but thereafter forbid any royalty collection.

On appeal Rambus did not dispute the FTC findings that it had monopoly power in the markets identified by the FTC.  Rather, it focused on the conduct element of monopolization.  First, Rambus asserted the FTC erred in finding that it violated any JEDEC disclosure rules.  Second, it argued that the FTC found consequences of nondisclosure only in the alternative, ie,  it prevented JEDEC from either adopting a non-proprietary standard, or from extracting a RAND commitment from Rambus. Since the latter does not violate the antitrust laws, there is, according to Rambus,  an insufficient basis for liability.  The DC Circuit found this second argument persuasive, and cautioned that the evidence was weak on the first point.

The Court noted that the plaintiff – here the FTC – had the burden to show that the conduct is exclusionary.  Deceptive conduct, said the Court, is exclusionary only when it harms competition.  Since the FTC made its findings on this issue  in the alternative, and did not determine which of these outcomes was the more likely, it had to prove that both outcomes – the failure to adopt a non-proprietary standard or to extract a RAND licensing commitment – harmed competition.  The FTC failed to do so.  While deception can form the basis for exclusionary conduct, the Court concluded that "… an otherwise lawful monopolist’s use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition."

To reach this conclusion, the Court relied heavily on NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).  In Discon, a lawful monopoly provider of local telephone services entered into a fraudulent scheme to accept rebates from a supplier and thereby increase its costs to justify higher rates that regulators approved.  Such conduct, however, was not found to violate Section 2 since the high prices were the result of the exercise of lawful monopoly power and thus did not harm the competitive process.

Applying Discon here, the Court concluded that the failure to extract a RAND licensing commitment from Rambus, and its consequent ability to extract higher licensing fees, likewise did not harm the competitive process.  In fact, said the Court, with RAND licensing there may well have been less competition from alternative technologies.  Since the FTC was unable to show that JEDEC would have selected a nonproprietary technology had Rambus made the required disclosures, its reliance on the absence of RAND licensing to show harm to competition was insufficient.  Harm to competition, said the Court, required an antitrust plaintiff to prove the SSO would not have adopted the standard but for the misrepresentation or ommission.  If JEDEC would have standardized the same technology despite Rambus deception, then that deception cannot be said to have any effect on competition.  JEDEC’s loss of opportunity to seek favorable licensing terms, said the Court, is not an antitrust harm.

Although it did not rest its decision on this ground, the Court also expressed "serious concerns" about the strength of the evidence relied on by the FTC to support its crucial findings regarding the scope of JEDEC’s disclosure policies and Rambus’ violation of those policies.  It did so since, on remand, the FTC may evaluate the conduct under § 5 of the FTC Act, a broader standard than Section 2.  The Court conceded that JEDEC rules required disclosure of patents and patent applications, but it expressed skepticism that those rules required disclosure of potential amendments, or work in progress on those amendments.  It also questioned the FTC’s conclusion that Rambus engaged in deceptive conduct with respect to a standard adopted more than 2 years after Rambus stopped attending meetings related to that standard.  The FTC presumably will consider these comments when and if it considers the case further on remand.

While the D.C. Circuit’s opinion was not unexpected, certain aspects of its reasoning were surprising.  The use of Discon, for example, to conclude that high prices by a monopolist caused in part by fraud is not harm to competition is a bit of a stretch.  There the defendant NYNEX was already a monopolist at the time of the alleged fraud whereas here Rambus allegedly used the fraud to gain the monopoly in the first place.  Discon also involved no standard setting issues, no SSO, and no licensing issues at all, RAND or otherwise.  This latest decision in the Rambus saga may well find its way to the Supreme Court.

Authored by:

Carlton A. Varner