clarity, a duty of good faith underlies the stan- dard-setting process” and noted that Lessons from Rambus – Play and other JEDEC members understood that applications needed to be disclosed.5 by the Rules in Standards Conversely, the Federal Circuit opined that Rambus had no duty to disclose its intention to amend pending claims to cover the pro- Setting Organizations posed standards under consideration.6 Rambus was a member of the JEDEC sub- goal of such policies is to prevent an SSO BY DEAN DUNLAVEY, PARTNER, AND MICHAEL SCHALLOP, committee addressing standards for dynamic member from concealing its or pend- 7 OF COUNSEL, LATHAM & WATKINS LLP random access memory (DRAM) chips from ing patent applications relating to a proposed February 1992 until June 1996. During this standard under consideration, only to assert time period, Rambus had pending patent he recent Federal Trade Commission the patents later – after the standard has been 1 applications with disclosures broad enough to opinion concerning Rambus, Inc. pro- adopted and the market “locked in.” cover technologies for the standards under vides important lessons for companies Manipulation of standards setting activi- T consideration. Using information from the ties may harm competition and chill stan- that participate in standards setting organi- JEDEC meetings, Rambus repeatedly dards setting efforts. In contrast, accurate and zations (SSOs). The FTC found that amended pending patent claims and filed a timely patent disclosures along with ex ante Rambus’ misconduct in concealing its series of divisional applications in order to license disclosure obligations promote pending patent applications from an SSO build a patent portfolio that would cover the informed decision-making by SSO members had harmed competition. To remedy this standards. Rambus did not disclose this concerning the benefits of the patented tech- harm, the FTC imposed mandatory patent patent activity to JEDEC.8 nology and non-patented alternatives. This licensing terms on Rambus, with royalty In June 1996, several months after learn- can be an important factor in selecting among rates dropping to zero after three years. Two ing of an FTC consent order involving Dell competing standard proposals. Most SSO IPR dissenting commissioners expressed their Computer’s failure to disclose a patent to an policies require that members agree to license SSO,9 Rambus notified JEDEC that it was opinions that Rambus should have been essential patents on at least reasonable and 2 withdrawing from the organization. Rambus’ forced to license its patents for free. non-discriminatory (RAND) terms. This Client Alert discusses SSOs, reviews notification letter included a list of Rambus the FTC’s opinion, and presents high-level RAMBUS AND JEDEC patents. The list, however, did not include “the only then-issued patent that Rambus guidance for companies participating – or The Joint Electron Device Engineering believed covered technology under consider- contemplating participating – in SSOs. Council (JEDEC) is an SSO focused on stan- ation by JEDEC.” Even after terminating its dardizing technologies for the solid state JEDEC membership, Rambus actively sought STANDARDS SETTING ORGANIZATIONS industry. JEDEC has a patent policy that – A PRIMER requires participants and/or members to dis- information as to features of devices being Many industries have created SSOs to pro- close whether they have any issued (or pend- proposed for standardization. Rambus contin- mulgate technical standards, the objective ing) patents that may relate to, or cover, the ued to use this type of information in filing generally being to ensure that a company’s technology under consideration for adoption.3 and amending its patent applications. products can interface with products from For example, Section 8.3 of the JEDEC Internal Rambus communications advised the other suppliers. Standards facilitate and Manual 21-L, now states “The chairperson of company not to assert its patents “until ramp thereby promote compatibility and interoper- any JEDEC committee must call to the atten- reached a point of no return.” The FTC deter- ability among products offered by different tion of all those present the requirements con- mined that “after leaving JEDEC, Rambus suppliers and/or competitors. Standards set- tained in JEDEC Legal Guides and the strategically maintained its silence, thereby ting activities can have procompetitive effects prolonging the misimpression created by its obligation of all participants to inform the 10 if they increase the number of suppliers in the meeting of any knowledge they may have of prior conduct.” market and/or assure potential customers that any patents, or pending patents, that might be Rambus subsequently launched an standardized products will be generally avail- involved in the work they are undertaking.”4 aggressive patent licensing campaign against able and supported in the future. While com- JEDEC’s patent policy also requires that the the manufacturers of industry-standard petitors collaborate to achieve greater patent owner indicate its willingness to grant DRAM chips, backed by several lawsuits. compatibility and interoperability, they con- licenses on RAND or FRAND (free, reason- This campaign resulted in helping the com- tinue to compete on implementation and other able and non-discriminatory, also referred to pany increase its annual revenue to nearly differentiating features of product and service as royalty free, RF) terms. $200 million in 2006, most of this being 11 offerings. JEDEC’s written patent policy has been patent licensing revenue. Companies that develop products in com- revised over time to clarify that patent appli- pliance with a standard can confront patent cations as well as issued patents must be dis- THE FTC GETS INVOLVED infringement claims from holders of patents closed. Both the FTC and the Court of Rambus’ conduct, documented in various that may be essential to or necessary to prac- Appeals for the Federal Circuit have counterclaims brought by DRAM suppliers it tice the standard. Most SSOs have adopted addressed the various revisions and have had sued for patent infringement, attracted 12 policies to create IPR ( reached diametrically opposed conclusions as the FTC’s attention. In June 2002, FTC rights) safe harbors and reduce the risk of to the guidance they provided to JEDEC par- Complaint Counsel accused Rambus of patent hold-ups. Although the terms of SSO ticipants. The FTC stated that although the engaging in a pattern of anticompetitive acts IPR policies vary significantly, a common applicable JEDEC policy was “not a model of and alleged that such behavior caused or

INTELLECTUAL PROPERTY TODAY JUNE, 2007 33 threatened to cause harm to competition and licensing terms. In a February 5, 2007 deci- GUIDANCE FOR COMPANIES consumers in violation of Section 5 of the FTC sion, however, the Commission disagreed, PARTICIPATING IN STANDARDS Act (prohibiting unfair or deceptive methods finding such remedies well within its author- 13 SETTING ACTIVITIES of competition) and Section 2 of the ity to balance competition and prevent con- The Rambus decision provides a clear 14 23 Sherman Act (prohibiting monopolization). sumer harm. warning that manipulation of standards set- On February 17, 2004, however, the ALJ over- The Commission found that compulsory ting processes can result in close antitrust seeing the proceeding entered an initial deci- licensing terms were justified, both to remedy 15 scrutiny. Potential remedies for such behavior sion in favor of Rambus. the effects of the unlawful monopoly Rambus include compulsory royalty-free licensing that Complaint Counsel successfully appealed obtained and “to inspire confidence in the can encumber patents covering next genera- the ALJ’s decision to the Commission, which standard-setting process.”24 It concluded that 16 tion technologies. overturned it in August 2006. In its opinion, to determine the appropriate royalty rate, it It is critically important that companies the Commission found that Rambus violated would have to consider the “but for” world – participating in SSOs understand the applica- the JEDEC patent policy through its deliber- in other words, what would have happened if ble patent policy and comply with it. The FTC ate decision not to disclose its patent rights. Rambus had properly disclosed its pending and European regulators, e.g., DG The Commission found that “Rambus was patent applications. The Commission Competition of the European Commission, able to distort the standard-setting process reviewed the evidence establishing that (1) emphasize the importance of an SSO’s written and engage in anticompetitive ‘hold up’ of the 17 Rambus’ technologies were superior to alter- patent disclosure policy as a means to mini- industry.” The natives, (2) nonetheless alternatives were mize the risk of the “patent ambush” perpe- 30 Commission opined that “when a firm available, (3) JEDEC had a stated preference trated by Rambus. Thus, the logical first engages in exclusionary conduct that subverts for open, patent-free standards, (4) JEDEC’s step is to review the written IPR policy. The the standard-setting process and leads to the members were highly cost-sensitive, and (5) Rambus case, however, demonstrates that fur- acquisition of monopoly power, the procom- Rambus had had a strong economic incentive ther investigation may be necessary. If the petitive benefits of standard setting cannot be 18 to do what was necessary to ensure that its written policy does not provide clear guidance fully realized.” The Commission concluded technology was incorporated into JEDEC’s on what, when, how and to whom members that “Rambus engaged in exclusionary con- standards. After reviewing the evidence, the must disclose essential IPR, courts and inves- duct that significantly contributed to its Commission concluded that if Rambus had tigating agencies may look to the practices acquisition of monopoly power in four related properly disclosed its pending patents, it and understandings of fellow SSO members to [DRAM] markets.”19 likely would have resulted in ex ante licens- ascertain what disclosures are required. In It is significant that the FTC found a ing negotiations for the next generation the litigation context, such members may Section 2 violation on these facts, reasoning SDRAM and DDR SDRAM technologies.25 have financial motivations to support a find- that deception qualified as an exclusionary The Commission determined the appropri- ing that the patent policy was violated. practice and therefore established the con- Accordingly, an SSO participant may decide 20 ate royalty rates by reviewing and extrapolat- duct element of a monopolization claim. ing from Rambus’ actual RDRAM license to proceed proactively and seek clarification This is generally regarded as an aggressive of the patent policy. agreements and applying a Georgia Pacific antitrust theory, because in ordinary circum- 26 Companies with pending or issued patents analysis. Using this approach, the stances companies are free to keep their that may cover certain technologies being Commission ordered that Rambus could unpublished pending patents secret. (Indeed, considered for inclusion in standards should charge maximum royalty rates of 0.5 percent the law of trade secrets proceeds from an implement an internal company process to for DDR SDRAM and 0.25 percent for assumption that competition is fostered by ensure timely and accurate disclosures pur- SDRAM for three years. After the three-year maintaining the confidentiality of certain suant to the policy. Given the potential penal- royalty period, Rambus is precluded from technology assets.) Nevertheless, the FTC ties for failing to disclose, as evidenced by seeking further patent license royalties with very clearly sided with full disclosure, opin- 27 Rambus, companies may choose to err on the ing that in an SSO setting, the prospect that respect to those technologies. Two commis- side of caution and disclose potentially essen- nondisclosure could lead to an illegitimate sioners dissented, stating that the remedies tial issued patents and pending applications. increase in patent-based monopoly power was did not go far enough and that Rambus should Special consideration may need to be given 21 the paramount concern. Rambus’ own docu- have been forced to license its patents without during the patent prosecution process to the ments provided significant evidence of receiving any royalty. effect of contemplated claim amendments. 22 “deceptive conduct,” which set up the com- The Commission also prohibited Rambus For companies with substantial patent paratively easy argument that there is no from misrepresenting its patents or patent portfolios, compliance with patent disclosure social value in deceit. applications to any SSO or its members. It obligations can be a daunting and difficult ordered Rambus to comply with SSO require- task. As a result, a common debate concern- THE FTC SETS COMPULSORY ments or policies to make complete, accurate ing SSO patent disclosure policies is whether (INCLUDING ROYALTY-FREE) and timely disclosures of its patents and or not a participant company should have a LICENSING TERMS patent applications. To ensure and oversee duty to search its entire patent portfolio for Following its August 2006 liability deci- such compliance, the order requires Rambus potentially applicable patents and pending sion, the Commission ordered additional to employ a Commission-approved compli- patents.31 Proponents of such a duty note that briefing and hearings as to the appropriate ance officer to ensure disclosure of patent the anticompetitive impact of a failure to dis- remedy. Rambus contended that the FTC did rights and to verify the accuracy of Rambus’ close can be the same whether the failure was 28 not have the authority to impose compulsory periodic audit reports to the Commission. knowing or inadvertent. Furthermore, excus- licensing terms or to order Rambus to license The FTC has partially stayed this remedy ing “inadvertent” failures can lead to situa- its disputed patent portfolio on royalty-free pending appeal.29 tions where a company’s SSO representative

34 INTELLECTUAL PROPERTY TODAY JUNE, 2007 is deliberately kept uninformed as to patents patent policy. When direct competitors participate in 23. In the Matter of Rambus, Inc., FTC Docket 9302, and pending applications. Opponents of such an open standards committee, their work necessitates Opinion of the Commission (February 5, 2007). a duty cite to the chilling effect on participa- a written patent policy with clear guidance on the 24. Id. at 11. committee’s intellectual property position. A policy 25. Id. at 18. tion that may result from a “strict liability” that does not define clearly what, when, how, and to 26. Id. at 19. See Georgia Pacific Corp. v. United States policy. Knowledge of the applicable disclo- whom the members must disclose does not provide a Plywood Corp., 318 F. Supp. 1116, 1120-21 (S.D.N.Y. sure policy in this regard is fundamental. firm basis for the disclosure duty necessary for a 1970). Certain SSOs have adopted IPR/patent fraud verdict. Without a clear policy, members form 27. Id. at 22-23. The order also prohibits Rambus from policies that include more specific ex ante vaguely defined expectations as to what they believe enforcing any current license agreements that would the policy requires – whether the policy in fact so license disclosure obligations. For example, allow it to collect royalties greater than these capped requires or not.”). royalty rates. VITA (an international trade association) 7. DRAM chips are used in a range of , con- 28. Id. at 4-5. recently changed its IPR/patent licensing sumer electronics and communications applications. 29. In the Matter of Rambus, Inc., FTC Docket 9302, obligation to include more specific ex ante System level products that utilize this technology Motion of Respondent Rambus Inc. for Stay of Order include personal computers, computer servers, print- licensing disclosure of maximum royalty rates Pending Appeal (February 7, 2007), available at ers, video projectors, video game consoles, digital http://www.ftc.gov/os/adjpro/d9302/070216 for any non-RF licensing commitments for TVs, set-top boxes, routers and switches. 32 rammostayordpendappeal.. disclosed patents. However, while ex ante 8. In the Matter of Rambus, Inc., FTC Docket 9302, 30. See Antitrust Guidelines for Collaboration Among Opinion of the Commission (August 2, 2006), at 37- licensing commitments and discussions are Competitors, issued by the FTC and DOJ, Section 2.2 46. appealing for the potential increased certainty (April 2000), available at http:// 9. In re Dell Computer Corp., 121 FTC 616 (1995). In of license terms compared with the ambigu- www.ftc.gov/os/2000/04/ftcdojguidelines.pdf. DG Dell, the FTC brought suit under Section 5 of the FTC Competition of the European Commission has also ous F/RAND terms, such licensing raises Act when Dell failed to disclose that it owned the antitrust and competition considerations of its patent for VL Bus design incorporated into a Video considered competition implications of IPR policies of own. Unlike patent pools, most SSOs are not Electronics Standards Association (VESA) standard. SSOs and is currently investigating complaints against Qualcomm from Nokia, Ericsson, Broadcom, set up to oversee the establishment of com- Although Dell had represented to VESA that the stan- dard did not infringe its patent, it then attempted to Panasonic, and NEC on the basis mon and capped royalty rates for essential enforce patent rights after the standard was adopted. that its WCDMA technology licensing policy violates patents (e.g., most SSO IPR policies forbid As part of the settlement, Dell agreed not to enforce European competition law. discussions of pricing, distribution, market- its patent. Cf. Wang Labs., Inc. v. Mitsubishi Elecs. 31. The issue is whether participants must have actual ing, suppliers, and patent licensing royalty Am., Inc., 103 F.3d 1571 (Fed. Cir. 1997) (Mitsubishi knowledge, which is often not the case for many large rates among SSO members, who are often accused Wang of misleading JEDEC by concealing a companies with significant patent portfolios, or 33 pending patent application that related to the Single whether knowledge is “imputed” to the corporation competitors). Furthermore, agreements to In-Line Memory Modules (SIMM) standard; doctrine (thereby, in effect, require companies to perform manipulate the adoption/rejection of a partic- of equitable estoppel did not apply but Mitsubishi patent searches to satisfy their patent disclosure ular standard can themselves give rise to received an implied license to use such patented obligations). Most SSOs have patent disclosure oblig- antitrust scrutiny.34 technology due to technical exchanges between the ations that either do not specifically address this The complexities and strategic implica- companies during joint development activities; Wang issue, or if so, the policies typically require only tions of the issues discussed above are meant was free to enforce the patent against other compa- actual knowledge of the participants (or impose a nies). “knew or should have known” standard on the partic- to provide guidelines for practitioners, and to 10. In the Matter of Rambus, Inc., FTC Docket 9302, ipants/company). Some SSOs have even specified also highlight when specialized advice from Opinion of the Commission (August 2, 2006), at 44- that a patent search is not required. See, e.g., W3C IPR/patent and antitrust experts would be 48. Patent Policy, available at http://www.w3.org/ appropriate. IPT 11. Rambus’ 10-Q filed on May 9, 2006 suggests that Consortium/Patent-Policy-20030520. (providing more than 80 percent of its annual revenue is gener- Section 6.1, which suggests that actual knowledge is ENDNOTES ated from patent licensing royalties. the standard, and 6.7, which suggests that no patent 12. Rambus had brought several lawsuits against DRAM search is required). 1. In the Matter of Rambus, Inc., FTC Docket No. 9302 manufacturers, including Infineon, Hynix and 32. See US Department of Justice Business Review Letter (February 5, 2007). The FTC’s opinion and order are Micron. regarding VITA available at http://www.usdoj.gov/ available at http://www.ftc.gov/os/adjpro/d9302/ 13. 15 U.S.C. § 45. The FTC has the authority to issue an atr/public/busreview/219380.htm (responding to a index.htm. administrative complaint by approval of the request on behalf of VITA and its standards develop- 2. The RAND terms required by most SSO IPR policies Commission. If an administrative complaint is issued, ment subcommittee, VSO, for a business review letter are generally broadly worded and do not specify the then a formal proceeding that is much like a court from the Department of Justice pursuant to the DOJ’s actual license terms. Moreover, RAND obligations do trial begins before an administrative law judge (ALJ). Business Review Procedure, 28 C.F.R. § 50.6). The not necessarily require that all licensees receive If a violation is found, a cease and desist order or DOJ generally reviews SSO activities and policies identical license terms. A RAND license obligation, other appropriate relief may be issued. Initial deci- under the rule of reason standard, absent price fixing however, at least provides reasonable assurances that sions of the ALJ may be appealed to the full or bid rigging related activities. a potential patent holder will not be able to hold up Commission, which consists of five Commissioners. 33. The DOJ has issued Business Review Letters for four the standard by refusing to license the patent or only Final decisions issued by the Commission may be patent pools, all of which were approved without any offering a license on unreasonable terms. appealed to any of the US Court of Appeals (except 3. See JEDEC’s website, available at http:// the Court of Appeals for the Federal Circuit), and ulti- subsequent enforcement activities, available at www..org/. JEDEC’s current patent policy is mately, to the US Supreme Court. http://www.usdoj.gov/atr/public/busreview/ available at http://www.jedec.org/home/patent_ 14. 15 U.S.C. § 2. letters.htm: MPEG-2 on June 26, 1997; DVD 1 on related/. 15. A timeline of the FTC investigation and the docket December 16, 1998; DVD-2 on June 10, 1999; and 4. JEDEC Manual 21-L, available at http:// are available at http://www.ftc.gov/os/adjpro/ 3G Patent Platform on November 12, 2002. www.jedec.org/Home/manuals/JM21L.pdf. d9302/index.htm. 34. See Allied Tube & Conduit Corp. v. Indian Head, Inc., 5. In the Matter of Rambus, Inc., FTC 16. In the Matter of Rambus, Inc., FTC Docket 9302, 486 U.S. 492, 509-10 (1988) (holding that vote Docket 9302, Opinion of the Commission (August 2, Opinion of the Commission (August 2, 2006). stacking by competing steel conduit companies to 2006), at 52-56. This opinion is available at 17. Id. at 3. prevent the use of alternative plastic conduit in build- http://www.ftc.gov/os/adjpro/d9302/060802commis- 18. Id. ing standards setting violated the Sherman Act); sionopinion.pdf. 19. Id. at 118. American Society of Mechanical Engineers v. 6. Rambus, Inc. v. Infineon Tech. AG, 318 F.3d 1081, 20. Id. at 28-36. Hydrolevel Corp., 456 U.S. 556, 571 (1982) (finding 1102 (Fed. Cir. 2003) (“[i]n this case there is a stag- 21. Id. at 33-35. that a manipulation of a safety code for water boilers gering lack of defining details in the EIA/JEDEC 22. Id. at 36-37. violated the Sherman Act).

INTELLECTUAL PROPERTY TODAY JUNE, 2007 35