3rd Circuit Rules that Deception of SDO Can Give Rise to Claims for Violation of Sherman Act

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.

Outline of Article:

1. Introduction.
2. Reaction to the Court of Appeal's Opinion.
3. District Court.
4. Court of Appeals: Holding.
5. Court of Appeals: Noerr-Pennington Doctrine.
6. Court of Appeals: Standards Development Process.
7. Court of Appeals: Patent Hold Ups.
8. Antitrust Agencies.
9. Amicus Briefs.
10. Case Information.

1. Introduction. The District Court held that deceptive conduct regarding patents in a standards determination process does not constitute a violation of antitrust law. It dismissed the complaint.

The key part of the Court of Appeals' opinion is its holding that this can violate Section 2 of the Sherman Act. It reversed reversed the judgment of the District Court on the counts alleging monopolization and attempted monopolization.

In reaching this outcome, the Court of Appeals addressed at length the economics and law of the standards determination process, patents, and antitrust. The District Court reasoned that deceptive conduct with respect to patents in the standards determination process cannot violate antitrust law because patents confer monopolies, and standards eliminate competition. The Court of Appeals rejected this reasoning. Instead, it wrote that SDOs can be pro-competitive and advance consumer welfare, and expounded reasons why.

SDOs have proceeded with the understanding that their activities are pro-competitive. Moreover, the Federal Trade Commission (FTC) and the Department of Justice's (DOJ) Antitrust Division have concluded that SDOs can be pro-competitive, and taken actions, given speeches, and issued a business review letter to this effect. The District Court's decision was in conflict. The 3rd Circuit has now issued a detailed and well reasoned opinion that rejects the District Court's approach, and sustains the approach of the SDOs and the FTC and DOJ. It is the first Court of Appeals to do so.

In addition, the holding and analysis in the Court of Appeals opinion applies to private SDOs in other industry sectors, and deceptive conduct by participants in those SDO processes.


3G. 3rd Generation.

CDMA. Code Division Multiple Access, a cellular technology, and alternative to GSM. Verizon and Sprint use CDMA. It is not at issue in this case.

ETSI. European Telecommunications Standards Institute, an SDO. Its standards development process is at issue in this case.

FRAND. Fair, Reasonable And Non-Discriminatory, one set of possible attributes of patent licensing terms.

GSM. Global System for Mobility, a cellular technology used by AT&T and T-Mobile.

IEEE. Institute of Electrical and Electronics Engineers, an SDO, and amicus curiae.

OASIS. Organization for the Advancement of Structured Information Standards, an SDO, and amicus curiae.

PICMG. PCI Industrial Computer Manufacturers Group, an SDO, and amicus curiae.

RAND. Reasonable And Non-Discriminatory.

SDOs. Standards Determining Organizations, such as the ETSI, IEEE, VITA, OASIS Group, and PICMG.

UMTS. Universal Mobile Telephone System. UMTS is the standard used in 3G GSM cellular networks.

VITA. VMEbus International Trade Association, an SDO for the board and bus industry, and amicus curiae.

WCDMA. Wideband CDMA. Qualcomm's WCDMA technology is at issue in this case.

This case involves the development of standards by the European Telecommunications Standards Institute (ETSI). The ETSI developed a mobile telephone standard known as Universal Mobile Telephone System (UMTS) for GSM path networks.

The ETSI requires a commitment from vendors (such as Qualcomm) whose technologies are included in standards to license their technologies on fair, reasonable, and non-discriminatory (FRAND) terms. Broadcom alleges in this action that Qualcomm committed to license its WCDMA technology on FRAND terms, that in reliance thereon the ETSI then included Qualcomm's technology in the UMTS standard, but that Qualcomm then licensed its technology on non-FRAND terms.

2. Reaction. David Dull, General Counsel of Broadcom, stated in a release that "We are pleased that we will get our day in court and will have the opportunity to show how Qualcomm's conduct violates our nation's antitrust laws".

He added that "We have already seen a finding of standards abuse against Qualcomm in a patent case in San Diego federal court, and are optimistic that we will prevail in New Jersey as well. We plan to return to district court and proceed to trial as soon as practicable."

Qualcomm also issued a release in which it emphasized the the Court of Appeals affirmed the dismissal of some of the other claims in the complaint.

As for the Court of Appeals reversal of the District Court as to Sections 1 and 2 of the Sherman Act, Qualcomm wrote that "the Court was required by settled procedural rules to accept as true at this stage of the case all allegations made by Broadcom in its complaint. QUALCOMM vigorously disputes Broadcom's remaining allegations and is confident that judgment will ultimately be entered in its favor on the entire complaint, including both claims reinstated by the Court of Appeals' decision."

Michael Lindsay is an attorney in the Minneapolis office of the law firm of Dorsey & Whitney and counsel for the Institute of Electrical and Electronics Engineers (IEEE). He wrote in an e-mail to TLJ that "As a leading developer of standards, the IEEE-SA is firmly committed to the integrity of the standards development process and the establishment of legal rules that protect that process.

He continued that "The IEEE-SA took no position which side was right on the facts -- Broadcom or Qualcomm. The IEEE spoke up to protect the process. As the Third Circuit recognized, the district court's analysis of the standards development process was fundamentally flawed, and it was important to the IEEE and the other amici -- and indeed to the entire standards community to get that view corrected."

Lindsay added that "Standards development involves making technical choices, and some of the available technologies may be patent protected. SDOs have rules regarding the disclosure of IP information and the declarations that IP holders are required to make. SDOs -- and standards-implementers everywhere -- need to know that the rules mean something and that the IP declarations have real force."

"The IEEE is pleased that the Third Circuit has made this clear", said Lindsay.

3. District Court. On July 1, 2005, Broadcom filed its original complaint in U.S. District Court (DNJ) against Qualcomm alleging violation of federal antitrust laws.

See, Broadcom's amended complaint [69 pages in PDF] and story titled "Broadcom Files Antitrust Complaint Against Qualcomm" in TLJ Daily E-Mail Alert No. 1,168, July 6, 2005.

Broadcom alleged, among other things, that Qualcomm, through deception of an SDO, and predatory acquisition of a potential rival, monopolized certain markets for cellular telephone technology and components, and violated Sections 1 and 2 of the Sherman Act and Sections 3 and 7 of the Clayton Act.

Section 1 is codified at 15 U.S.C. § 1.

Section 2 is codified at 15 U.S.C. § 2. It 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, and, on conviction thereof, shall be punished".

The complaint also alleged violation of various state and common-law claims arising out of the same set of facts.

The District Court dismissed the complaint for failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure.

The gist of the District Court's reasoning on the Section 2 monopolization and attempted monopolization claims (counts one and two of the complaint) was that these allegations do not state a claim because conferring monopolies is what patents do, and eliminating competition is what standards do.

The Court of Appeals offered this summary of the District Court's reasoning. "In dismissing Broadcom’s claim of monopolization in the WCDMA technology markets, the Court reasoned that Qualcomm enjoyed a legally-sanctioned monopoly in its patented technology, and that this monopoly conferred the right to exclude competition and set the terms by which that technology was distributed." It "concluded that the inclusion of Qualcomm’s WCDMA technology in the UMTS standard did not harm competition because an absence of competition was the inevitable result of any standard-setting process. That inclusion of Qualcomm’s technology may have been the product of deception was of no moment under antitrust law, the Court continued, because no matter which company's patented technology ultimately was chosen, the adoption of a standard would have eliminated competition."

The District Court dismissed all of the federal claims for failure to state a claim, and then declined to exercise supplemental jurisdiction over the state and common law claims.

Broadcom then brought the present appeal.

4. Court of Appeals: Holding. The Court of Appeals reversed the judgment of the District Court as to some of the claims, and remanded.

The Court of Appeals held that Broadcom's complaint states claims for monopolization and attempted monopolization under § 2 of the Sherman Act. Thus, claims one and two will proceed in the District Court.

The Court of Appeals held that Broadcom lacks standing to assert a claim for unlawful monopoly maintenance in a market in which it neither competes nor seeks to compete. (This is claim seven of the complaint.) The Court of Appeals also held that Broadcom failed to allege an antitrust injury sufficient to state a claim under § 7 of the Clayton Act. (This is claim eight of the complaint.)

The Court of Appeals also reinstated Broadcom's state and common law claims.

(Broadcom did not appeal the District Court's dismissal of the claims for tying and exclusive dealing.)

5. Court of Appeals: Noerr-Pennington Doctrine. The Court of Appeals rejected Qualcomm's Noerr-Pennington defense. This doctrine is derived from two opinion of the Supreme Court of the U.S., Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and United Mine Workers v. Pennington, 381 U.S. 657 (1965).

This doctrine generally allows businesses to combine and lobby to influence the legislative, executive, or judicial branches of government or administrative agencies without antitrust liability, because the First Amendment’s right of petition protects such activities.

The Court of Appeals wrote that while "firms may enjoy broad immunity from antitrust liability for concerted efforts to influence political action in restraint of trade, even when such efforts employ unethical or deceptive methods", pursuant to the First Amendment and the Noerr-Pennington doctrine, "Private standards determining organizations, in contrast to legislative or quasi legislative bodies, have historically been subject to antitrust scrutiny."

The Federal Trade Commission (FTC) reached a related conclusion in its proceeding titled "In the Matter of Union Oil Company of California" and numbered FTC Docket No. 9305.

In that proceeding Unocal, an oil company, argued that the Noerr-Pennington doctrine insulated it from antitrust liability for its making false representations to a government standards setting body regarding its patent rights.

See, FTC's order [2 pages in PDF], opinion [56 pages in PDF], and release. See also, story titled "FTC Rules Noerr-Pennington Doctrine Does Not Block Antitrust Action for False Representations Regarding Patents During Standards Setting Process" in TLJ Daily E-Mail Alert No. 933, July 8, 2004.

See also, FTC report [41 pages in PDF] titled "Enforcement Perspectives on the Noerr-Pennington Doctrine", and story titled "FTC Releases Report on Noerr Pennington Doctrine" in TLJ Daily E-Mail Alert No. 1,482, November 3, 2006.

6. Court of Appeals: Standards Development Process. The Court of Appeals concluded that SDOs can be pro-competitive and advance consumer welfare.

"The primary goal of antitrust law is to maximize consumer welfare by promoting competition among firms", wrote the Court of Appeals. "Private standard setting advances this goal on several levels. In the end-consumer market, standards that ensure the interoperability of products facilitate the sharing of information among purchasers of products from competing manufacturers, thereby enhancing the utility of all products and enlarging the overall consumer market."

"This, in turn, permits firms to spread the costs of research and development across a greater number of consumers, resulting in lower per-unit prices." In addition, "Industry-wide standards may also lower the cost to consumers of switching between competing products and services, thereby enhancing competition among suppliers."

"Standards enhance competition in upstream markets, as well. One consequence of the standard-setting process is that SDOs may more readily make an objective comparison between competing technologies, patent positions, and licensing terms before an industry becomes locked in to a standard. ... Standard setting also reduces the risk to producers (and end consumers) of investing scarce resources in a technology that ultimately may not gain widespread acceptance. ... The adoption of a standard does not eliminate competition among producers but, rather, moves the focus away from the development of potential standards and toward the development of means for implementing the chosen standard." (Parentheses in original. Citations to various amicus briefs omitted.)

The Court of Appeals concluded that "Each of these efficiencies enhances consumer welfare and competition in the marketplace and is, therefore, consistent with the procompetitive aspirations of antitrust law. ... Thus, private standard setting -- which might otherwise be viewed as a naked agreement among competitors not to manufacture, distribute, or purchase certain types of products -- need not, in fact, violate antitrust law."

Of course, the Court of Appeals added that "judicial acceptance, of private standard setting is without limits." It wrote that "conduct that undermines the procompetitive benefits of private standard setting may, at least in some circumstances, be deemed anticompetitive under antitrust law."

7. Court of Appeals: Patent Hold Ups. The Court of Appeals first identified and explained the concept of patent hold up. "An SDO may complete its lengthy process of evaluating technologies and adopting a new standard, only to discover that certain technologies essential to implementing the standard are patented. When this occurs, the patent holder is in a position to ``hold up´´ industry participants from implementing the standard. Industry participants who have invested significant resources developing products and technologies that conform to the standard will find it prohibitively expensive to abandon their investment and switch to another standard. They will have become ``locked in´´ to the standard. In this unique position of bargaining power, the patent holder may be able to extract supracompetitive royalties from the industry participants."

The Court of Appeals noted that the FTC has taken administrative action against patent holder that engage in patent hold ups.

The Court of Appeals held that Broadcom's complaint's "allegations that Qualcomm deceived relevant SDOs into adopting the UMTS standard by committing to license its WCDMA technology on FRAND terms and, later, after lock-in occurred, demanding non-FRAND royalties" are actionable.

Specifically, the Court of Appeals held that "(1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct."

It elaborated that "Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder."

That is, "Although a patent confers a lawful monopoly over the claimed invention", there may be alternative technologies, and when an SDO incorporates the patented technology into a standard, "adoption of the standard eliminates alternatives to the patented technology." Then, "The patent holder's IPRs, if unconstrained, may permit it to demand supracompetitive royalties." FRAND commitments constrain participants from demanding these supracompetitive royalties.

The Court of Appeals then addressed the allegations of Broadcom and specific statutory sections. It held that count one of the complaint states a claim for monopolization under § 2 of the Sherman Act, and that count two of the complaint states a claim for attempted monopolization under § 2.

8. Antitrust Agencies. The present action is private litigation brought under the federal antitrust laws. The opinion was issued by the federal judiciary.

In addition, various government executive entities, both inside and outside of the U.S., exercise antitrust enforcement authority. Several have taken actions, and disseminated information, regarding antitrust and SDOs.

The Department of Justice's (DOJ) Antitrust Division's (AT) most significant disclosure of its views on SDOs and the standards development process is found in its October 30, 2006, business review letter from Assistant Attorney General (AAG) Thomas Barnett to Robert Skitol, attorney for the VMEbus International Trade Association (VITA). See also, DOJ release and story titled "DOJ Approves VITA Patent Policy" in TLJ Daily E-Mail Alert No. 1479, October 31, 2006.

In addition, on January 18, 2007, Gerald Masoudi, the DOJ/AT'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.

Also on January 18, 2007, the FTC's Alden Abbott gave a presentation regarding antitrust, intellectual property and standard setting. See, bullet points.

The FTC has also taken action three times in connection with deceptive conduct in standard settings. First, there was the administrative action against Unocal discussed above.

Second, there was its action against Rambus. On August 2, 2006, the FTC released its opinion [120 pages in PDF] in its administrative proceeding titled "In the Matter of Rambus, Inc." and numbered FTC Docket No. 9302.

The FTC concluded that Rambus unlawfully monopolized the markets for four computer memory technologies that have been incorporated into industry standards for dynamic random access memory (DRAM) chips.

The FTC opinion 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."

Section 5 of the Federal Trade Commission Act (FTCA) 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." In contrast, in the present case, Broadcom v. Qualcomm, the Court of Appeals allowed Broadcom to proceed on its claims alleging violation of Sections 1 and 2 of the Sherman Act.

See also, 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.

Third, the FTC took action against Dell over ten years ago.

The Federal Communications Commission (FCC) exercises some antitrust authority, but this has been limited to review of mergers between entities that own FCC licenses. The FCC has not focused on antitrust enforcement in the context of conduct before SDOs.

And finally, the European Commission just recently instituted an action against Rambus based upon the same conduct that was the subject of the FTC action. See, story titled "European Commission Pursues Rambus Regarding JEDEC Standards Setting Process" in TLJ Daily E-Mail Alert No. 1,627, August 23, 2007.

9. Amicus Briefs. The Court of Appeals received amicus briefs from (1) SDOs, (2) Texas Instruments, Nokia and Ericsson, and (3) the American Antitrust Institute (AAI) and Consumer Federation of America (CFA).

Five SDOs -- IEEE, VITA, Organization for the Advancement of Structured Information Standards (OASIS), The Open Group, and PCI Industrial Computer Manufacturers Group (PICMG)-- submitted a joint amicus brief in which they argued that SDOs "promote competition through the creation of standards."

They wrote that "Hundreds of nonprofit standards organizations throughout the country have developed tens of thousands of standards. Each SDO is governed by its own distinct set of rules and policies aimed at ensuring fair and open standards processes. But SDOs also depend on the application of the antitrust laws to prevent the misuse of their processes for anticompetitive purposes." (Footnote omitted.)

The SDOs did not offer any conclusions regarding Qualcomm's conduct. Rather, they argued legal principles in the abstract. They wrote that "The court below fundamentally misunderstood the way that SDOs work, the significance of a patented technology's inclusion in a standard, and the role that antitrust law must play in these situations. The rule that the district court adopted -- that a deceptive licensing commitment can never constitute an antitrust violation -- is demonstrably wrong and, if adopted by this Court, would gravely threaten the standards development process."

They added that "Mere disagreement as to the reasonableness of license terms should not ordinarily provide a basis for an antitrust claim. But a blanket rule precluding antitrust liability under all circumstances is equally inappropriate."

The SDOs concluded that "where the conduct goes beyond a mere ex post disagreement over license terms and instead entails deliberate deception before the standard's adoption, antitrust liability may be warranted." (Footnote omitted.)

The AAI and CFA submitted an amicus brief [PDF] in which they urged the Court of Appeals to reversed the District Court. They wrote that "Particularly in technology industries, standard setting can produce efficiencies that lead to increased competition, lowered costs, and increased innovation and output."

The AAI and CFA wrote that "Antitrust law is well-suited to redress and deter conduct that may frustrate or delay the emergence of the procompetitive benefits of standard-setting organizations."

They argued that "the District Court's rule of law would severely restrict these types of enforcement actions and enable firms to engage in broad forms of manipulation of the standard-setting process with the knowledge that if they succeed, the establishment of the standard will provide protection from antitrust scrutiny", and thereby harm consumers.

10. Case Information. George Cary of the Washington DC office of the law firm of Cleary Gottlieb, and David Stone of Boies Schiller & Flexner, represented Broadcom in this appeal.

Evan Chesler and Richard Stark of the New York City office of the law firm of Cravath Swaine & Moore, and William O'Shaughnessy of McCarter & English, represented Qualcomm.

This case is Broadcomm Corporation v. Qualcomm, Inc., U.S. Court of Appeals for the 3rd Circuit, App. Ct. No. 06-4292, an appeal from the U.S. District Court for the District of New Jersey, D.C. Civil No. 05-cv-03350, Judge Mary Cooper presiding. Judge Barry wrote the opinion of the Court of Appeals, in which Judge Fuentes and Garth joined.