Exclusionary Conduct in the Exclusionary Conduct in the Context of Standard SettingContext of Standard Setting

William E. CohenWilliam E. CohenDeputy General Counsel for Policy StudiesDeputy General Counsel for Policy Studies

U.S. Federal Trade CommissionU.S. Federal Trade Commission

Views expressed are those of the speaker and Views expressed are those of the speaker and are not necessarily the views of the FTC or any are not necessarily the views of the FTC or any

individual Commissionerindividual Commissioner

Collaborative Standard SettingCollaborative Standard Setting

Long favored by antitrust because of Long favored by antitrust because of the potential for substantial the potential for substantial procompetitive benefitsprocompetitive benefits

Potential benefits include facilitating Potential benefits include facilitating interoperability among interoperability among complementary componentscomplementary components

Yet, standard setting displaces the Yet, standard setting displaces the normal process of selection through normal process of selection through competitioncompetition

Concern: Conduct that Distorts the Concern: Conduct that Distorts the Cooperative Standard-Setting Cooperative Standard-Setting

ProcessProcess

Allied Tube v. Indian Head (1988)– Allied Tube v. Indian Head (1988)– rigging the voterigging the vote

American Society of Mechanical American Society of Mechanical Engineers v. Hydrolevel (1982) – Engineers v. Hydrolevel (1982) – misrepresenting non-compliancemisrepresenting non-compliance

Recent years – concern with Recent years – concern with exclusionary conduct involving exclusionary conduct involving patentspatents

Patent Hold-UpPatent Hold-Up

Standard confers value beyond the Standard confers value beyond the patentpatent

Failure to disclose may allow patent Failure to disclose may allow patent holder to extract higher royalties holder to extract higher royalties laterlater

Possible limitations on exercisePossible limitations on exercise

Disclosure RequirementsDisclosure Requirements

Disclosure before standardization Disclosure before standardization decisions (“ex ante”) permits SSO decisions (“ex ante”) permits SSO participants to make their choices participants to make their choices with full awareness of consequences.with full awareness of consequences.

Disclosure may also facilitate Disclosure may also facilitate protection against hold-up through protection against hold-up through ex ante licensing commitments.ex ante licensing commitments.

Disclosure RequirementsDisclosure Requirements

A matter for choice by the SSO.A matter for choice by the SSO.

U.S. enforcement agencies have not U.S. enforcement agencies have not advocated that SSOs adopt any advocated that SSOs adopt any specific disclosure or licensing policy.specific disclosure or licensing policy.

FTC Enforcement ActionsFTC Enforcement Actions

Dell Computer – certification Dell Computer – certification requirement allegedly breached; requirement allegedly breached; • ““not inadvertent”not inadvertent”

Unocal Unocal • Alleged misrepresentation to a state Alleged misrepresentation to a state

standard-setting board that research standard-setting board that research was non-proprietarywas non-proprietary

RambusRambus

FTC found liability under FTC found liability under monopolization principles – under monopolization principles – under appeal appeal

Basic Theory – A Course of Deceptive Basic Theory – A Course of Deceptive ConductConduct• An expectation of disclosureAn expectation of disclosure• Omissions and misstatementsOmissions and misstatements

Deception as Exclusionary ConductDeception as Exclusionary Conduct

Advertising Cases – frosty reception and Advertising Cases – frosty reception and rebuttable presumption of de minimis rebuttable presumption of de minimis effecteffect

Microsoft – misrepresenting the ability of Microsoft – misrepresenting the ability of Java tools to function outside Windows Java tools to function outside Windows environmentenvironment

RambusRambus – allegedly hiding the price and – allegedly hiding the price and thwarting ability to make informed choice thwarting ability to make informed choice

Deception as Exclusionary ConductDeception as Exclusionary Conduct

Profit-Sacrifice/No Economic Sense TestsProfit-Sacrifice/No Economic Sense Tests• May miss welfare-reducing conduct that is May miss welfare-reducing conduct that is

inexpensive to execute – “cheap exclusion”inexpensive to execute – “cheap exclusion”• The wrong focusThe wrong focus

FTC opinion applied the rule-of-reason FTC opinion applied the rule-of-reason balancing testbalancing test• Focus on whether “whether the monopolist’s Focus on whether “whether the monopolist’s

conduct on balance harms competition”conduct on balance harms competition”

Deception as Exclusionary ConductDeception as Exclusionary Conduct

Misrepresentation or omissionMisrepresentation or omission Misrepresentation must be material – Misrepresentation must be material –

likely to mislead others acting likely to mislead others acting reasonably under the circumstancesreasonably under the circumstances

Misrepresentation must be Misrepresentation must be intentionalintentional

CausationCausation

Contributed significantly to SSO’s Contributed significantly to SSO’s selection of the technologyselection of the technology

SSO’s selection contributed SSO’s selection contributed significantly to acquisition of significantly to acquisition of monopoly powermonopoly power

Durability of the Market PowerDurability of the Market Power

Lock-in effectsLock-in effects

• Expense and delay from revising a Expense and delay from revising a standardstandard

• Switching costs of direct manufacturersSwitching costs of direct manufacturers

• Switching costs of producers of Switching costs of producers of complementscomplements

Breach of ContractBreach of Contract

Violation of a Duty to DiscloseViolation of a Duty to Disclose

Violation of a Licensing CommitmentViolation of a Licensing Commitment• FRAND (fair, reasonable and non-FRAND (fair, reasonable and non-

discriminatory) termsdiscriminatory) terms• Broadcom v. QualcommBroadcom v. Qualcomm• A tough issue: promise given in good A tough issue: promise given in good

faith and later repudiatedfaith and later repudiated

Need to Proceed with CautionNeed to Proceed with Caution

Concern – every commercial dispute over Concern – every commercial dispute over accuracy and completeness of disclosures accuracy and completeness of disclosures or over fulfillment of a contract could or over fulfillment of a contract could become an antitrust suitbecome an antitrust suit

Concern – firms might hold back from Concern – firms might hold back from participating in standard-setting participating in standard-setting organizations if they become concerned organizations if they become concerned with unwarranted antitrust liabilitywith unwarranted antitrust liability

Standard Setting Qualities Often Standard Setting Qualities Often May Support Antitrust InterventionMay Support Antitrust Intervention

Harm to competitionHarm to competition

Cooperative EnvironmentCooperative Environment

Invisibility of the MisconductInvisibility of the Misconduct

Clarity of the MisconductClarity of the Misconduct

Inadequacy of Remedies under Other Inadequacy of Remedies under Other LawsLaws

An Evolving Area of the LawAn Evolving Area of the Law

The The RambusRambus appeal appeal

Movement into licensing termsMovement into licensing terms

Issues with Issues with ex anteex ante bargaining – the bargaining – the possibility of collusionpossibility of collusion