FTC: Rambus patent standard setting contravenes US antitrust laws

On August 2, 2006 The Federal Trade Commission unanimously decided that computer technology developer Rambus, Inc. engaged in a course of deceptive conduct that distorted a critical standard-setting process, resulting in an unlawful monopoly in the markets for four computer memory technologies relating to dynamic random access memory, or DRAM. DRAMs are memory devices that store and process information and are found in personal computers, servers, handheld devices, printers, and digital cameras throughout the world.

In an opinion by Commissioner Pamela Jones Harbour, the Commission found that Rambus’s conduct constituted deception in violation of Section 5 of the FTC Act and that this deception contributed significantly to Rambus’s acquisition of monopoly power in the four relevant markets in violation of Section 2 of the Sherman Act.

BACKGROUND
In June 2002, Commission staff filed a complaint against Rambus alleging that Rambus manipulated and deceived an industry-wide standard-setting organization, the Joint Electron Device Engineering Council (“JEDEC”) with the intent to obtain market power. According to the staff’s complaint, Rambus participated in JEDEC’s DRAM standard-setting activities for several years without disclosing to JEDEC or its members that it was actively working to develop, and possessed, a patent and several pending patent applications that involved specific technologies ultimately adopted in the standards. The complaint also alleged that Rambus waited until the industry had begun manufacturing DRAMs that complied with JEDEC standards to enforce its patents, resulting in Rambus’s acquisition of durable market power in violation of the antitrust laws.

The complaint was litigated in an administrative trial before Chief Administrative Law Judge (“ALJ”) Stephen J. McGuire. In February 2004, Judge McGuire dismissed the charges against Rambus, finding that Complaint Counsel had failed to establish that Rambus had any obligation to disclose its patents to JEDEC during JEDEC’s standardization of DRAM. see Full Docket at FTC website).

COMMISSION DECISION
The opinion of August 2, 2006 overturns Judge McGuire’s decision. Using the framework articulated by the D.C. Circuit Court of Appeals in U.S. v. Microsoft, 253 F. 3d 34 (D.C. Cir. 2001), the Commission found that “Rambus withheld information that would have been highly material to the standard-setting process within JEDEC,” and this course of conduct constituted deception under Section 5 of the FTC Act: Rambus’s conduct was calculated to mislead JEDEC members by fostering the belief that Rambus neither had, nor was seeking, relevant patents that would be enforced against JEDEC-compliant products. Rambus’s silence, in the face of members’ expectations of disclosure, created a misimpression that Rambus would not obtain and/or enforce such patents. When suspicions arose, Rambus allayed them with the reminder that it had made a prior disclosure. The message that Rambus reasonably conveyed was that Rambus would have disclosed anything if it had had anything relevant to reveal.

Overturning Judge McGuire’s findings, the Commission found that Rambus did have an obligation to disclose the existence of its patents to JEDEC. While the Commission acknowledged that the rules of JEDEC and its parent, the EIA, “are not a model of clarity,” the rules imposed a duty of good faith that suggested that disclosure of relevant patents was expected. This interpretation of the rules was reinforced by testimony of other JEDEC members that indicated that members understood that the disclosure of patents and patent applications was expected and examples of members actual disclosing patents and patent applications relating to developing standards.

The Commission found that Rambus failed to inform JEDEC that the patents covered the proposed DRAM standards and that Rambus intended to enforce these patents. Consequently, the Commission determined that “we find nothing in the record to suggest that, in the cooperative environment prevailing at JEDEC, the incidents to which the ALJ and Rambus have pointed were sufficient to put JEDEC members on notice that Rambus would pursue a deceptive course of conduct to obtain patents covering JEDEC’s standard, then engage in patent hold-up to extract royalties on terms of Rambus’s choosing.”

The Commission determined that this deceptive conduct contributed significantly to Rambus’s acquisition of monopoly power in violation of Section 2 of the Sherman Act. By hiding the potential that Rambus would be able to impose royalty obligations of its own choosing, and by silently using JEDEC to assemble a patent portfolio to cover the SDRAM and DDR SDRAM standards, Rambus’s conduct significantly contributed to JEDEC’s choice of Rambus’s technologies for incorporation in the JEDEC DRAM standards and to JEDEC’s failure to secure assurances regarding future royalty rates – which, in turn, significantly contributed to Rambus’s acquisition of monopoly power.” Moreover, the Commission found that alternative technologies existed that JEDEC could have standardized, but that Rambus’s deceptive skewed JEDEC’s ability to objectively determine the appropriate standard.

There was evidence that Rambus engaged in the destruction of documents, an issue that Rambus is currently litigating before other federal courts. However, the Commission refused to impose any sanctions for Rambus’s spoliation of documents in light of its finding that Rambus violated the antitrust laws.

The Commission ordered additional briefings to determine the appropriate remedy forRambus’s violations. In its complaint, FTC staff had sought a royalty-free license for Rambus’s patents for SDRAM and DDR SDRAM, while Rambus had sought licensing on reasonable and non-discriminatory (“RAND”) terms. It is likely that the Commission may not issue a decision regarding remedy until early 2007.

In addition to ordering Rambus to provide either a royalty-free or RAND license to SDRAM and DDR SDRAM, the Commission may also order Rambus to disgorge any profits obtained from its unlawful conduct. Moreover, although the Commission found that the industry was not locked in to subsequent generations of SDRAM that are currently in the market, i.e., DDR2 SDRAM, DDR3 SDRAM, and DDR4 SDRAM, the Commission may apply its remedy to these evolutionary technologies as a “fencing-in” provision. Such provisions have been used in technology markets where the technology in dispute becomes obsolete during the litigation and the Commission determines that the remedy must be applied to future generations of the technology in order to effectively remedy harm to consumers.

(source: (c) April J. Tabor, McDermott, Will & Emery)