By Alex Liang, Foley & Lardner LLP
This article is part of our Winter 2009 edition of Legal News: China Quarterly Newsletter, Eye on China.
Chinese companies have gradually recognized that participation in groups that set industry standards is often crucial to acquiring greater market share. The process of setting a standard generally involves one or more companies agreeing upon technical specifications for certain kinds of products. The result is that products complying with the standard will be compatible even if they are made by different manufacturers.
In Rambus v. ITC, the court stated that before a standard-setting organization (SSO) adopts a standard, “there is often vigorous competition among different technologies for incorporation into that standard. After standardization, however, the dynamic typically shifts, as industry members begin adhering to the standard and the standardized features start to dominate.” 522 F.3d 456 (D.C. Cir. 2008). Standards are so powerful in shaping a market that they naturally raise antitrust concerns. These antitrust concerns can intersect with patent law to create legal issues that significantly impact Chinese companies. This article will discuss some of the legal issues that Chinese companies should be aware of when participating in an SSO.
Illegal Tying, Price-Fixing, and Patent Misuse
In Princo v. ITC, the United States Court of Appeals for the Federal Circuit provided guidance as to what can be included in a patent package license and cautioned against prohibiting the development of alternative technology. 563 F.3d 1301 (Fed. Cir. 2009). In Princo, U.S. Philips Corporation (Philips) and Sony Corporation of America (Sony) each developed and patented a method to make compact discs and later pooled their patents together. Philips licensed the patent pool to Princo Corporation and Princo America Corporation (together, Princo) as part of a standard, but the standard did not allow for use of the technology developed by Sony. Princo argued that Philips engaged in illegal tying by including a non-essential patent into the license package. The Federal Circuit ruled that the concerned patent would qualify as an essential patent because the concerned patent was “reasonably necessary” to practice the standard. The court’s permissive standard recognized that patent pooling has many pro-competitive effects. On remand, this investigation is currently pending in the International Trade Commission.
Princo also argued that Philips and Sony engaged in price-fixing when they agreed not to allow a competitor to develop Sony’s technology to create a competing product. The Federal Circuit held that if such an agreement existed, Philips and Sony would violate antitrust law. The court ruled that there were “no benefits to be obtained” from foregoing alternative technology, and therefore would most likely view any agreement of non-developing technologies as per se illegal.
It also is important to recognize that one standard may be covered by many intellectual property rights (IPR). Under Princo, a bundle of IPR may be licensed through a standard. As long as the patents are “reasonably necessary” to produce products compliant with the standard, licensors should avoid illegal tying problems. However, participants in an SSO should be cautious when their activities may be perceived as an agreement to suppress a competing technology. Companies that agree to restrict the use of patents by licensing in such a way that development or implementation of one technology is hindered may be liable for patent misuse.
A Risk of Felony Punishment
SSOs frequently require participants to disclose IPR related to standards. The consequence of non-disclosure can be criminal. For example, Section 2 of the Sherman Act prohibits anti-competitive conduct and the creation of monopolies as a felony that subjects the violator to a fine and/or imprisonment.
In Rambus, Inc. v. FTC, the D.C. Circuit Court overruled a Federal Trade Commission (FTC) decision and held that Rambus did not violate Section 2 of Sherman Act by concealing its patents from an SSO. 522 F.3d 456 (D.C. Cir. 2008). The Rambus patents related to dynamic random access memory (DRAM). According to the FTC, Rambus deceptively failed to disclose the patents to the DRAM SSO. Rambus then informed manufacturers that it held patent rights over technologies embodied in the DRAM standard.
The FTC reasoned that if Rambus fully disclosed its patents, the SSO either would have excluded Rambus’ patents from the standard or would have had ex ante licensing negotiations with Rambus. In overruling the FTC, the D.C. Circuit Court found that a license, despite the increased price, did not diminish competition and, therefore, Rambus did not violate the Sherman Act. The court also found that there was insufficient evidence that the SSO would have standardized other technologies if Rambus had made full disclosure.
Although the evidence did not support a violation of the Sherman Act in the above case, companies participating in standards-setting activities should take steps to ensure compliance with the SSO’s rules regarding disclosure of IPR relating to the standards under discussion. Failure to do so could result in violation of the Sherman Act and severe penalties for the IPR holder.
Waiver, Equitable Estoppel, and Unenforceability of Patent Rights
Even when nondisclosure of IPR to an SSO does not violate Section 2 of Sherman Act, it may give rise to claims of waiver and equitable estoppel in subsequent litigation to enforce the rights. In Qualcomm, Inc. v. Broadcom Corp., the Federal Circuit found that Qualcomm Inc.’s failure to follow an SSO’s disclosure policy resulted in waiver of its right to enforce its patents against products compliant with the related standard. 548 F.3d 1004 (Fed. Cir. 2008) Qualcomm joined an SSO but did not disclose its IPR prior to the adoption of a standard. Relying on the written policy as well as the understanding of the SSO participants, the Federal Circuit held that Qualcomm had a duty to disclose IPR that “reasonably might be necessary” to practice the standard. The court held that breach of the disclosure duty made the concealed patents unenforceable against all products compliant with the related standard.