Lessons from Rambus – Play by the Rules in Standards Setting
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clarity, a duty of good faith underlies the stan- dard-setting process” and noted that Rambus Lessons from Rambus – Play and other JEDEC members understood that patent 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 patents 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 (intellectual property 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- computer memory 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