The intersection of competition laws and licensing Standard Essential Patents (SEPs) remains both a hotly litigated area and one that has drawn the attention of regulators. Chief Judge Barbara Lynn of the Northern District of Texas recently addressed allegations of antitrust violations against an SEP licensing pool and its individual licensors, after the Department of Justice submitted an amicus brief regarding these issues. The Court's decision provides important guidance defining the contours of SEP licensing and the reach of US antitrust laws.
Continental Automotive Systems—a provider of control units that enable cars to communicate using 2G, 3G, and/or 4G cellular technology—sued the Avanci patent pool and several of its individual licensors (collectively, "Defendants") claiming Defendants: (1) refused to license SEPs to Continental despite commitments made to standard bodies to license their SEPs on Fair, Reasonable, and Non-Discriminatory ("FRAND") terms; and (2) charged Continental's downstream customers—automobile manufacturers ("OEMs")—non-FRAND rates, violating Sherman Act §§ 1 and 2. Continental argued Avanci's royalty rates were excessive because Avanci sought as much as US$15 per finished automobile, while the chip within Continental's control units that enabled cellular connectivity costs US$20 or less. Continental further claimed it was injured by Defendants' refusal to license SEPs and by the possibility that OEMs would seek indemnity for Avanci's "excessive" royalties.
The gist of Continental's antitrust claim was that the Avanci licensing pool was a horizontal agreement among competitors to charge non-FRAND terms. Defendants moved to dismiss the complaint for, among other reasons, lack of Article III and antitrust standing and failure to state a claim. Continuing a recent trend, the DOJ filed an amicus brief stating that Continental's complaint failed to state a harm to the competitive process, which was fatal to its purported antitrust claims.
Despite finding Article III standing, the Court ultimately agreed Continental did not have antitrust standing and that it failed to state a claim under the Sherman Act.
Continental's failure to allege antitrust standing
Although the Court found that Continental had Article III standing based on its inability to obtain SEP licenses from Defendants, it nevertheless found that Continental lacked standing to bring Sherman Act claims because it failed to plead an "antitrust injury."
The Court found that Continental's alleged inability to obtain FRAND licenses for the SEPs from Defendants "does not harm [Continental's] competitive position or its position as a consumer of products used in its devices." Slip Op. at 13. Specifically, "[e]ven in light of Defendants' allegedly anti-competitive conduct, [Continental] can still produce [its control units] for the OEMs, since, according to Plaintiff, Defendants are actively licensing the SEPs to the OEMs." Id. The Court went further, stating that "[Continental] may be able to produce [control units] at a lower cost, since it would not have to pay a license for an SEP, because the OEMs have one." Id.
As a result, the Court held that Continental lacked antitrust standing because the "claimed antitrust violations are directly felt by the OEMs, which are allegedly forced to obtain SEP licenses on non-FRAND terms." Id. at 15. Because the OEMs bore the costs of an Avanci license, Continental, in the Court's view failed "to show that it is the best entity to assert the antitrust claims." Id. at 16. Continental thus lacked antitrust standing.
Continental failed to state a claim under Sherman Act § 1
Despite finding a lack of antitrust standing, the Court addressed Continental's antitrust claims. The Court first rejected Continental's claims that the licensing pool constituted a conspiracy in restraint of trade under Sherman Act § 1. The Court applied a rule-of-reason analysis, following cases involving "a licensing pool that horizontally fixes prices by setting prices for each member's licenses." Id. at 17. Under that test, Continental did not allege an unlawful restraint of trade because "[t]he Avanci agreement allows the Licensor Defendants to independently license the SEPs outside of the [Avanci] platform." Id. at 18.
Continental had argued that the Licensor Defendants were disincentivized from separate licensing that might depart from Avanci's platform, making the opportunity for separate licensing illusory or unrealistic. The Court disagreed, finding instead that licensors' adhering to Avanci's terms in independent license negotiations merely constituted "parallel conduct and the possibility of concerted action, which are insufficient to state a claim of an unlawful agreement to restrain trade." Id. The Court acknowledged, however, that its decision may have differed if the Avanci agreements had not allowed the licensors to license their SEPs outside of the Avanci platform.
Continental failed to state a claim under Sherman Act § 2
The Court next rejected Continental's allegations of unlawful monopolization or conspiracy to monopolize under Sherman Act § 2. The Court explained that "possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct." Id. at 19 (citations omitted). The Court acknowledged that a "patent holder, of course, has a lawful monopoly to license its patent" and that an "SEP holder may obtain additional monopoly power through inclusion in a standard." Id. at 20. "This additional market power is inevitable as a very frequent consequence of standard setting, and is necessary to achieve the benefits served by the standard, including procompetitive benefits." Id. (citations omitted).
The Court similarly rejected the claim that an SEP holder abuses its monopoly power arising from the standardization process by discriminating against suppliers like Continental or extracting supracompetitive non-FRAND royalties. The Court ruled that "[i]t is not anticompetitive for an SEP holder to violate its FRAND obligations." Id. at 21. For example, "[a]n SEP holder may choose to contractually limit its right to license the SEP through a FRAND obligation, but a violation of this contractual obligation is not an antitrust violation." Id. (citations omitted). So while violating FRAND commitments might breach contractual obligations, in the Court's view it is not an antitrust violation under Sherman Act § 2.
And finally, the Court rebuffed Continental's § 2 claims that making fraudulent FRAND declarations to the standard setting organizations ("SSO") induced the SSOs to include Defendants' SEPs in their standards. The Court expressly declined to follow cases holding "that deception of an SSO constitutes the type of anticompetitive conduct required to support a § 2 claim." Id. 22. The Court instead relied on a separate line of cases, including Rambus Inc. v. F.T.C., 522 F.3d 456, 464 (D.C. Cir. 2008), holding that "[d]eceptive conduct—like any other kind—must have an anticompetitive effect in order to form the basis of a monopolization claim" and that the use "of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition." See id. at 22–23. Consequently, the Court ruled that Continental failed to state a claim under Sherman Act § 2.
The Court's decision reinforces the DOJ's view that patent and antitrust laws both "seek to achieve the same goal of protecting and promoting the reinforcing cycle of competition and innovation, which generates dynamic competition in the marketplace and ultimately allows consumers to reap the rewards of new products." Stmt. at 3.
The DOJ and the Court agreed with Defendants' position "that Continental's Section 2 claims based on alleged breaches of contractual FRAND commitments in the standard-setting context do not sound in antitrust law." Stmt. at 8; Slip Op. at 21. Specifically, the DOJ explained that neither "a patent holder's effort to maximize its licensing rates after agreeing to abide by FRAND terms" nor "a patent holder's alleged 'deception' regarding the rates it intends to charge after making a FRAND commitment" constitute unlawful exclusionary conduct, and moreover, that "there is no antitrust duty to license on FRAND terms." Stmt. at 9, 11, 15, 20. To support its conclusions, the DOJ argued that "participation in the standard-setting process is widely recognized to be procompetitive" and that standardization "shifts the timing and dimensions of competition; it does not eliminate competition." Id. at 11, 18. "Standardization sacrifices marketplace competition in favor of [procompetitive] benefits, achieved through an ex ante [(i.e., before technology standardization)] process in which rival technologies compete for inclusion in the standard." Id. at 18.
Regarding Continental's allegations that Defendants' "fraudulent" FRAND commitments induced the standards to implement Defendants' technology, the DOJ relied on Rambus to argue that "antitrust liability should attach only if the patent holder's conduct was the but-for cause of the exclusion—i.e., that the conduct 'lured the SSO away from non-proprietary technology.'" Stmt. at 24 (citations omitted). Here, Continental's general allegations did not show but-for causation between Defendants' FRAND commitments and the standards purported adoption of any particular technology.