Court of Appeals Rules in Rambus v. FTC

April 22, 2008. The U.S. Court of Appeals (DCCir) issued its opinion [24 pages in PDF] in Rambus v. FTC, a antitrust case regarding Rambus's participation in the JEDEC standards setting process and assertion of patent rights. The Court of Appeals set aside the FTC's order concluding that Rambus violated Section 2 of the Sherman Act and Section 5 of the FTC Act.

Background. On June 19, 2002, the FTC filed an administrative complaint against Rambus alleging anti-competitive behavior in violation of Section 5 of the Federal Trade Commission Act (FTCA) in connection with its participation in a standard setting body for dynamic random access memory products. See, story titled "FTC Files Administrative Complaint Against Rambus" in TLJ Daily E-Mail Alert No. 455, June 20, 2002.

The complaint pertained to Rambus's participation in the JEDEC Solid State Technology Association, which was formerly known as the Joint Electron Device Engineering Council. JEDEC develops and issues technical standards for a form of computer memory known as synchronous dynamic random access memory (SDRAM).

These organizations are sometimes referred to as standards setting organizations (SSOs) or standards development organizations (SDOs).

In 2006, the FTC concluded that "Rambus's acts of deception constituted exclusionary conduct under Section 2 of the Sherman Act, and that Rambus unlawfully monopolized the markets for four technologies incorporated into the JEDEC standards in violation of Section 5 of the FTC Act."

See, FTC's August 2, 2006, opinion [120 pages in PDF] in its administrative proceeding titled "In the Matter of Rambus, Inc.". See also, FTC Docket No. 9302 for hyperlinks to pleadings in this proceeding.

And see, story titled "FTC Holds That Rambus Unlawfully Monopolized Markets" in TLJ Daily E-Mail Alert No. 1,427, August 8, 2006, and story titled "FTC Files Administrative Complaint Against Rambus" in TLJ Daily E-Mail Alert No. 455, June 20, 2002.

Rambus filed the present petitions for review of FTC orders with the Court of Appeals. See, FTC's brief [PDF].

Statutes. Section 5 of the Federal Trade Commission Act, which is codified at 15 U.S.C. § 45, provides in part that "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."

Section 2 of the Sherman Act, which is codified at 15 U.S.C. § 2, provides in part that "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony ..."

However, most of the legal principles applied by the Court of Appeals in this case are found, not in these statutes, but in numerous opinions of the Supreme Court and Courts of Appeals that interpret these statutes.

Reasoning of the Court of Appeals. The Court of Appeals granted the petition, set aside the FTC's orders, and remanded to the FTC.

The Court of Appeals first summarized the order of the FTC. It wrote that Rambus has asserted that patents issued to protect its invention cover four technologies that a private SSO included in DRAM industry standards. The FTC determined that Rambus, while participating in this process, "deceptively failed to disclose to the SSO the patent interests it held in four technologies that were standardized." The FTC found this conduct monopolistic, in violation of Section 2 of the Sherman Act, and also in violation of Section 5 of the FTC Act.

The Court of Appeals held that the FTC "failed to sustain its allegation of monopolization. Its factual conclusion was that Rambus's alleged deception enabled it either to acquire a monopoly through the standardization of its patented technologies rather than possible alternatives, or to avoid limits on its patent licensing fees that the SSO would have imposed as part of its normal process of standardizing patented technologies. But the latter -- deceit merely enabling a monopolist to charge higher prices than it otherwise could have charged -- would not in itself constitute monopolization." (Italics in original.)

The proceeding is remanded to the FTC, which could retry Rambus, or proceed on a different theory. The Court of Appeals thus wrote in dicta that "We also address whether there is substantial evidence that Rambus engaged in deceptive conduct at all, and express our serious concerns about the sufficiency of the evidence on two particular points."

The Court of Appeals then offered a lengthy application of the law of Section 2 of the Sherman Act, as expounded by the courts, to the present case.

It began by noting that "the mere existence of a monopoly does not violate the Sherman Act", and that in addition to the possession of monopoly power in the relevant market, the offense of monopolization requires the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.

It wrote that Rambus does not dispute the nature of the relevant markets or that its patent rights in the four relevant technologies give it monopoly power in each of those markets. Therefore, the "critical question is whether Rambus engaged in exclusionary conduct, and thereby acquired its monopoly power in the relevant markets unlawfully."

The Court of Appeals continued that to be condemned as exclusionary, a monopolist's act must have anticompetitive effect. It must harm the competitive process and thereby harm consumers. Moreover, the FTC carries the burden of proof.

The Court of Appeals wrote that the FTC "held that Rambus engaged in exclusionary conduct consisting of misrepresentations, omissions, and other practices that deceived JEDEC about the nature and scope of its patent interests while the organization standardized technologies covered by those interests. ... Had Rambus fully disclosed its intellectual property, ``JEDEC either would have excluded Rambus's patented technologies from the JEDEC DRAM standards, or would have demanded RAND assurances, with an opportunity for ex ante licensing negotiations.´´ ... But the Commission did not determine that one or the other of these two possible outcomes was the more likely."

It wrote that the FTC's "conclusion that Rambus's conduct was exclusionary depends, therefore, on a syllogism: Rambus avoided one of two outcomes by not disclosing its patent interests; the avoidance of either of those outcomes was anticompetitive; therefore Rambus's nondisclosure was anticompetitive."

The opinion continued. "We assume without deciding that avoidance of the first of these possible outcomes was indeed anticompetitive; that is, that if Rambus’s more complete disclosure would have caused JEDEC to adopt a different (open, non-proprietary) standard, then its failure to disclose harmed competition and would support a monopolization claim. But while we can assume that Rambus's nondisclosure made the adoption of its technologies somewhat more likely than broad disclosure would have, the Commission made clear in its remedial opinion that there was insufficient evidence that JEDEC would have standardized other technologies had it known the full scope of Rambus’s intellectual property." (Parentheses in original.)

Therefore, the Court of Appeals wrote, for the FTC's syllogism to survive, and for the FTC to meet its burden of proving that Rambus's conduct had an anticompetitive effect, "we must also be convinced that if Rambus's conduct merely enabled it to avoid the other possible outcome, namely JEDEC’s obtaining assurances from Rambus of RAND licensing terms, such conduct, alone, could be said to harm competition."

But, "Deceptive conduct -- like any other kind -- must have an anticompetitive effect in order to form the basis of a monopolization claim."

"The focus of our antitrust scrutiny", the Court of Appeals wrote, is "placed on the resulting harms to competition rather than the deception itself."

"Here, the Commission expressly left open the likelihood that JEDEC would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property. Under this hypothesis, JEDEC lost only an opportunity to secure a RAND commitment from Rambus. But loss of such a commitment is not a harm to competition from alternative technologies in the relevant markets." (Italics in original.)

"Indeed, had JEDEC limited Rambus to reasonable royalties and required it to provide licenses on a nondiscriminatory basis, we would expect less competition from alternative technologies, not more; high prices and constrained output tend to attract competitors, not to repel them." (Italics in original.)

The Court of Appeals concluded. "Thus, if JEDEC, in the world that would have existed but for Rambus's deception, would have standardized the very same technologies, Rambus’s alleged deception cannot be said to have had an effect on competition in violation of the antitrust laws; JEDEC’s loss of an opportunity to seek favorable licensing terms is not as such an antitrust harm. Yet the Commission did not reject this as being a possible -- perhaps even the more probable -- effect of Rambus's conduct. We hold, therefore, that the Commission failed to demonstrate that Rambus’s conduct was exclusionary, and thus to establish its claim that Rambus unlawfully monopolized the relevant markets."

Consequences of this Opinion. This opinion is a major victory for Rambus. Along with a recent jury verdict in Hynix v. Rambus, this opinion will assist Rambus in its efforts to collect patent royalties on the patents at issue.

Also, the FTC's efforts to apply competition law principles to patents and the standards setting process appear to be in disarray.

Rambus's General Counsel, Tom Lavelle, stated in a release that "We are very pleased with this decision by the DC Court of Appeals. As we have contended all along, Rambus did nothing wrong during its participation in the JEDEC standard-setting organization, and now the Court of Appeals has confirmed our point of view. Rambus has had to endure years of uncertainty, lost business and enormous legal fees defending this case, and we are thrilled to have this portion behind us".

He added that "This decision, especially combined with the jury verdict in March reaching the same conclusion, should put the issue to rest and allow us to focus on running our business."

Lavelle referred to the March 26, 2008, jury verdict in Hynix Semiconductor v. Rambus, U.S. District Court for the Northern District of California, San Jose Division, D.C. No. 00-cv-20905.

That other case is a patent infringement action involving the same patents of Rambus, and the same allegations of anticompetitive conduct, as in the FTC's action against Rambus. In a previous phase of the Hynix case, Rambus won a verdict of patent infringement. On March 26, the trial jury returned a verdict rejecting Hynix's claims of anticompetitive conduct by Rambus.

This matter is far from concluded. The FTC may proceed to retry Rambus. Hynix may prevail on appeal to the U.S. Court of Appeals (9thCir). Rambus is also involved in ongoing litigation with other alleged patent infringers. Nevertheless, Rambus is in a substantially stronger position now than it was a month ago.

Other Court Opinions and Administrative Actions. On September 4, 2007, the U.S. Court of Appeals (3rdCir) issued its opinion [39 pages in PDF] in Broadcom v. Qualcomm, a case regarding whether a patent holder's deceptive conduct before a private standards development organization (SDO) may be condemned under antitrust laws, and if so, what facts must be pled to survive a Rule 12(b)(6) motion to dismiss. The Court of Appeals concluded that SDOs can be pro-competitive and advance consumer welfare, and hence, a patent holder's conduct before an SDO can violate antitrust law. See, story titled "3rd Circuit Rules that Deception of SDO Can Give Rise to Claims for Violation of Sherman Act" in TLJ Daily E-Mail Alert No. 1,635, September 7, 2007.

On January 29, 2003, the U.S. Court of Appeals (FedCir) issued its split opinion in Rambus v. Infineon, a patent infringement case involving dynamic random access memory (DRAM) products. The Court of Appeals vacated the District Court's judgment of non-infringement, as a matter of claim construction. It also reversed the District Court's denial of a motion to set aside a jury verdict of fraud based on failure to disclose patent and patent application information to a standard setting body. See, story titled "Federal Circuit Rules in Rambus v. Infineon", also published in TLJ Daily E-Mail Alert No. 594, January 30, 2003.

On October 30, 2006, Thomas Barnett, Assistant Attorney General (AAG) in charge of the Department of Justice's (DOJ) Antitrust Division's (ATR) issued a business review letter to Robert Skitol, attorney for the VMEbus International Trade Association (VITA), that discloses the DOJ's views on SDOs and the standards development process. See also, DOJ release and story titled "DOJ Approves VITA Patent Policy" in TLJ Daily E-Mail Alert No. 1479, October 31, 2006.

On, January 18, 2007, Gerald Masoudi, the DOJ/ATR's Deputy AAG, gave a speech titled "Efficiency in Analysis of Antitrust, Standard Setting, and Intellectual Property". See also, story titled "DOJ's Masoudi Addresses Antitrust, Standard Setting and IPR" in TLJ Daily E-Mail Alert No. 1,528, January 29, 2007. And see, January 18, 2007, bullet points points of speech by the FTC's Alden Abbott regarding antitrust, intellectual property and standard setting.

The European Commission recently initiated a proceeding against Rambus similar to the FTC's proceeding. See, story titled "European Commission Pursues Rambus Regarding JEDEC Standards Setting Process" in TLJ Daily E-Mail Alert No. 1,627, August 23, 2007.

Case Information. The present case is Rambus v. FTC, U.S. Court of Appeals for the District of Columbia, App. Ct. Nos. 07-1086 and 07-1124, petitions for review of final orders of the FTC. Judge Williams wrote the opinion of the Court of Appeals, in which Judges Henderson and Randolph joined.