Monopolisation by Deception
Determining the nature and type of conduct that may expose a firm to claims of monopolisation under section 2 of the Sherman Act1 is always an interesting challenge. Certain types of conduct - for example, predatory pricing and refusals to deal - have received more attention from the courts and have benefited from the development of a more extensive framework for their analysis. One area of potentially monopolising conduct - deception and the circumstances in which it can constitute monopolising conduct - is relatively underdeveloped.
Recognition that deceptive conduct could serve as the basis for a monopolisation claim came more than 40 years ago at the intersection of intellectual property and antitrust law, with the US Supreme Court's 1965 decision in Walker Process Equipment Inc v Food Machinery and Chemical Corp.2 The court held that obtaining a patent on the basis of knowing and wilful misrepresentations to the patent office could serve as the conduct basis of a section 2 monopolisation claim when the patent was then used to exclude competition.3 Since then, cases that rely solely or primarily on deceptive conduct (other than those involving fraud on the patent office) have arisen sporadically and in varying circumstances. Many cases have stayed close to the Walker Process origins and involve patented technology and often also involve a standard-setting organisation (SSO). Other cases are entirely unrelated to patents or technology.
This article will briefly review a number of deception-based monopolisation cases and will then provide an analytical overview for discerning when deceptive conduct could serve as the basis for a section 2 claim.
Cases involving technology
The more than six years of Federal Trade Commission-initiated litigation challenging Rambus Inc's4 handling of disclosures of patents and patent applications during its participation in an SSO has greatly advanced - albeit not without controversy - the analysis of this category of conduct.
Because interoperability among software programmes and hardware is essential for computer memory, a standard-setting organisation, the Joint Electron Device Engineering Council (JEDEC), develops standards for computer memory with the goal that those standards will not require payment of substantial patent royalties by those who manufacture products to the standard. Thus, JEDEC's policies sought to avoid inclusion of patented technology in standards unless the patent holder had agreed to charge fair, reasonable and non-discriminatory (FRAND) licence fees. Rambus, a developer and licensor of computer memory technology, was a member and participated in proceedings of the JEDEC for approximately four years in the early to mid-1990s.
The FTC's view of Rambus's challenged conduct is fairly clear: Rambus did not disclose any of its patents or patent claims during its JEDEC membership, although it did disclose some patents in connection with its resignation from the JEDEC. When, on one or two occasions, a Rambus representative was asked for information about any of its patents that could cover the proposed standards under consideration, he evaded the question, providing only partial information. Equally important, throughout Rambus's JEDEC membership, Rambus used the information that it gained regarding the standards under consideration to amend and refine its patent claims with the clear purpose of making those patent claims read directly on the proposed standards and insuring the ability to collect substantial licence fees. It was undisputed that Rambus's patents ultimately gave it a monopoly position (approximately 90 per cent share) of four technology markets that were elements of the standard developed for dynamic random access memory (DRAM).
The import of these facts under the antitrust laws has been intensely disputed. The primary issues in this litigation have been
The original administrative law judge determined after a 54 day trial that the JEDEC's policies did not clearly require that Rambus disclose information about its patents or patent applications and that Rambus had legitimate business justifications for treating its patents and patent applications as trade secrets. The administrative law judge also concluded that the Federal Trade Commission's complaint counsel had not adequately demonstrated that Rambus's technology would have been rejected by the JEDEC, if Rambus had made complete disclosure.
The Federal Trade Commission came to a contrary conclusion. Unanimously, it found that Rambus did have a duty to disclose information regarding patents and patent applications that were relevant to the standards under consideration. Undoubtedly, because the policies and rules of the JEDEC were somewhat ambiguous (and had been found to be so in related private litigation5), the FTC did not rely solely upon the JEDEC's written policies.6 Instead, the FTC found a disclosure duty based on a combination of the JEDEC's policies and the special nature of an SSO, which creates an expectation of cooperation and disclosure.7
The Commission also found, on relatively weak grounds, that Rambus's conduct had contributed to its acquisition of monopoly power. The Commission initially found that Rambus had acquired its monopoly power either because Rambus's silence caused the JEDEC to establish a standard based on the Rambus technology when it would have selected an alternative, if full disclosure had been made, or because Rambus's silence deprived the JEDEC and its participants from obtaining advance assurances that Rambus would charge FRAND royalties.8 In the FTC's subsequent Opinion on Remedy,9 it made clear that the evidence did not permit it to find that the JEDEC would have chosen non-Rambus technology, if Rambus had disclosed its patents and patent applications. With this concession, the Commission's finding that Rambus had acquired monopoly power was based solely on Rambus's depriving the JEDEC of an opportunity to negotiate FRAND royalty fees in advance.10
Rambus seized on this weakness to argue on appeal that the FTC's decision was contrary to two fundamental principles of antitrust law. First, Rambus argued that competitors - even those with a substantial market position - are not obligated to assist competitors, citing Trinko.11 Second, Rambus argued that the FTC had merely found that Rambus's silence had enabled it to charge higher prices but not to obtain its monopoly position. From that, Rambus argued that charging high prices is not exclusionary conduct and is instead merely a monopolist enjoying the fruits of its monopoly.12 The DC Circuit agreed and stated that: 'Deceptive conduct - like any other kind - must have an anticompetitive effect in order to form the basis of a monopolisation claim.'13
The court made clear that deceptive conduct that enables higher prices without harming competition 'is beyond the antitrust laws' reach'.14 For deception to constitute exclusionary conduct, the court stated that the conduct needed to impair rivals in a manner that tended to bring about or protect a defendant's monopoly power.15 On this basis, the court held that the FTC had not demonstrated that Rambus's conduct was exclusionary because it had only demonstrated a loss of the JEDEC's opportunity to seek FRAND licensing terms, which the court did not consider to be a harm to competition.16
One of the numerous allegations levied against Microsoft Corporation in the monopolisation case initiated by the US government in 199817 was that Microsoft had maintained its monopoly, in part, through deception. The alleged deception was one element of a course of conduct undertaken to constrain the development of Java, a middleware software that Microsoft saw as a potential threat to Windows' position as the primary platform for software development.
A Microsoft competitor, Sun Microsystems, was developing Java as an open architecture alternative to Windows, and Microsoft took a number of steps that created the impression that it too was supporting Java. It publicly announced a plan to promote Java, created a Java Virtual Machine (JVM), which translates bytecode into instructions to the operating system, and distributed a set of software development tools that it created to assist independent software vendors in designing Java applications.
In each of these steps, however, Microsoft added undisclosed features that instead impeded Java's development. Microsoft intentionally made its JVM inconsistent with Sun Microsystems' JVM and then entered into a series of agreements with independent software vendors that required those vendors to use only Microsoft's JVM. Microsoft also intentionally designed the software development tools so that any software developed using those tools would run properly only on Microsoft's version of Java for Windows and not on Sun Microsystems' version.
The court concluded that developers had relied upon Microsoft's public commitment to cooperate with Sun Microsystems in Java's development and used Microsoft's development tools, believing that the resulting software could run on either Microsoft's or Sun Microsystems' Java runtime environment for Windows. Microsoft documents, in the court's view, demonstrated that Microsoft intended to deceive Java developers in order to limit Java's threat to Microsoft's monopoly in the market for operating systems. The court specifically held that Microsoft's intentional design of the Java developer tools 'served to protect its monopoly of the operating system and was therefore anticompetitive and exclusionary in violation of Section 2 of the Sherman Act'.18
Last year, the Third Circuit Court of Appeals lent further support to the development of the monopolisation by deception analysis while reversing a lower court's rejection of deceptive conduct as a basis for a section 2 violation.19 Broadcom Corporation, a company that supplies semiconductors for wired and wireless broadband communications, accused Qualcomm, which develops digital wireless communications technologies, of deceiving an SSO in the establishment of a mobile telephone standard known as the Universal Mobile Telephone System (UMTS).
The allegations of the complaint - which have yet to be proven - stated that Qualcomm had induced the relevant SSO to include Qualcomm's patent-protected technology in the UMTS standard by falsely agreeing to abide by the SSO's policies that require FRAND licensing terms. According to the allegations of the complaint, despite promising to adhere to FRAND terms, Qualcomm had nonetheless charged higher royalties to those companies that used chipsets not manufactured by Qualcomm, demanded royalties on portions of UMTS chipsets for which Qualcomm did not hold a patent, and provided discounts and incentives to those cell phone manufacturers who used only Qualcomm-manufactured UMTS chipsets.20
The court compared the case before it to Aspen Skiing21 and found similarities to a defendant with monopoly power who terminated a voluntary agreement - the FRAND commitment - for anti-competitive purposes. It similarly distinguished the Trinko case, observing that, unlike Trinko,22 Qualcomm had not been forced to participate in dealing with competitors by a regulatory framework that would also monitor Qualcomm's behaviour. Instead, the court relied on the allegations that Qualcomm had actively marketed its technology for inclusion in the industry-wide standard and had voluntarily agreed to license its technology on FRAND terms.
After comparing the case to Aspen Skiing and distinguishing the case from Trinko, the court held:
That (1) in an 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 [a standard-setting organisations'] reliance on that promise when including the technology in a standard and (a patent holder's subsequent breach of that promise), is actionable anticompetitive conduct.23
The court explained that deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the cost of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder. It further stated that deceptive FRAND commitments were as dangerous to the competitive process as failures to disclose intellectual property rights such as those involved in Rambus and could support allegations both of monopolisation and attempted monopolisation.
Cases not involving technology
United States Tobacco Company
In Conwood Co LP v United States Tobacco Company,24 Conwood, a competitor of United States Tobacco Company (USTC) in the moist smokeless tobacco (MST) market, claimed that USTC had engaged in a variety of actions that had maintained what even USTC conceded was its monopoly position in the MST market.25 USTC, acting as a category captain, had provided false or misleading information about the success of competitors to retailers, who expected USTC to provide neutral advice as to which products were selling best in retailers' stores. USTC also engaged in various 'ruses' to obtain false authorisation from store clerks to destroy, or remove, or both, Conwood's display racks and products from stores. The case was tried to a jury which decided, after only four hours of deliberation, that USTC had engaged in monopolising conduct and that Conwood deserved a US$350 million damage award.
USTC appealed the denial of USTC's motion for judgment as a matter of law, arguing that isolated tortious activity could not support a monopolisation claim. The Sixth Circuit rejected this position, stating that business torts can violate the antitrust laws if they have 'more than a temporary effect on competition, and not merely on a competitor or customer'.26 In affirming, the Sixth Circuit held that Conwood had presented sufficient evidence to demonstrate that USTC's conduct was more than isolated tortious activities, was exclusionary without a legitimate business justification, and had injured competition in the MST market.27 In essence, the court held that USTC's activities had subverted the competitive process by misleading retailers about competitors and competitive conditions and by removing Conwood's means of sale, its racks and product, from stores.
International Travel Arrangers
International Travel Arrangers Inc v Western Airlines Inc28 involved Western Airline, which had clear monopoly power on certain airline routes connecting to Minneapolis, and its conduct in discouraging travellers and travel agents from doing business with International Travel Arrangers Inc (ITA), which organised special travel group charters that competed on Western's routes. As part of a course of conduct, Western had arranged for an advertising agency to create and place advertisements that contained statements that were designed to discourage travellers from using ITA's services and that were found to be 'false, deceptive and misleading'.29
On the basis of these deceptive advertisements, which had discouraged consumers, and, in addition, threats to travel agents that had caused the agents to cease doing business with ITA, the lower court found a violation of both section 1 and section 2 of the Sherman Act. The Eighth Circuit affirmed the lower court's decision but declined to determine whether the deceptive advertisements were unreasonable restraints of trade in and of themselves.30 Instead, the Eighth Circuit made clear that it was basing its affirmance on the veiled threats that caused travel agents to withdraw support for ITA and on Western's pursuit of an overall 'anti-[ITA] campaign', of which the advertisements were a part.31
Caribbean Broadcasting System
In Caribbean Broadcasting System, Ltd v Cable & Wireless PLC,32 the DC Circuit held that a radio station serving portions of the Caribbean could maintain a monopolisation claim against a competing radio station on the basis of allegations that the defendant radio station had misrepresented its service territory to advertisers in a way that caused them to believe they did not need also to purchase advertising from the plaintiff in order to reach all listeners in the Caribbean and also had made 'sham' objections to a government application made by the plaintiff. In reversing the case's dismissal, the court stated that:
'Anti-competitive conduct' can come in too many different forms, and is too dependent upon context, for any court or commentator ever to have enumerated all varieties. It is a fair inference from the case law, however, that the allegations made here - namely, that the defendants made fraudulent misrepresentations to advertisers and sham objections to a government licensing agency in order to protect their monopoly - bring the defendants' conduct well within that concept.33
The court approvingly described the complaint as alleging that the defendant had 'intentionally and successfully, by means of fraud and deceit, secured monopoly power in the relevant market, used this power to raise prices, and thereby hurt US advertisers'.34
In NYNEX Corp v Discon Inc,35 the plaintiff, Discon, alleged a conspiracy to monopolise based upon NYNEX's refusal to deal with the plaintiff, who provided equipment removal services to telephone companies. NYNEX was concededly a monopolist and sole purchaser of equipment removal services in its service territory. Discon alleged that NYNEX had refused to deal with it because Discon would not participate in a rebate scheme designed to inflate NYNEX's costs and to defraud regulators who approved cost-based price increases. NYNEX instead selected an alternative provider that was willing to facilitate NYNEX's temporary inflation of its cost basis.
The court declined to find that the plaintiff had stated a valid claim for conspiracy to monopolise, observing that NYNEX could have selected an alternative provider for any number of non-fraudulent reasons and that the impact on both Discon and competition would have been the same. While recognising that the scheme resulted in higher prices to consumers, the court reasoned that these higher prices were the result of the fraud, not 'a less competitive market for removal services'. The Supreme Court observed that 'the freedom to switch suppliers lies close to the heart of the competitive process that the antitrust laws seek to encourage' and that transforming business practices that were offensive to proper standards of business morality into antitrust cases, particularly the per se case that Discon was pursuing, would not be consistent with basic antitrust principles.36
Forsyth v Humana Inc
In its 1997 decision in Forsyth v Humana Inc,37 the Ninth Circuit also rejected a fraudulent kickback scheme as a basis for section 2 monopolisation and attempted claims. Plaintiff had health insurance agreements with Humana that provided that Humana would pay 80 per cent of a particular hospital's charges and the insured would pay 20 per cent. Humana and the hospital engaged in an arrangement by which Humana negotiated reduced fees for its portion of the hospital charges. Humana initially paid the full 80 per cent but, without disclosure to its insured, then received a monthly rebate of an amount sufficient to repay the amount by which the hospital had agreed to discount Humana's share of the hospital charges. The court explained that, while this scheme resulted in higher percentage payments by the insured than contemplated by the contract with Humana, the scheme did not reflect a reduction in competition or antitrust injury.38
It should no longer come as a surprise to businesses (or their counsel), if it ever did, that deception can violate the antitrust laws in the appropriate circumstances. Nor should it surprise those businesses that the courts and antitrust authorities will have little sympathy for those whose dishonesty affects competition.
As a review of the cases in this article shows, deceptive conduct can give rise to successful monopolisation claims, but does not always do so. As reflected in the defendant's arguments in Conwood and the outcome in NYNEX and Humana, some deception is just a business tort that can and should be remedied without the power of treble damage antitrust claims and antitrust enforcement authorities.
The obvious and essential distinction between garden-variety dishonesty and the kind of exclusionary conduct necessary to establish monopolisation is its relationship to competition and involves the long-standing distinction between harm to competition and harm to a competitor. In order for dirty tricks and other deception to rise to the level of the requisite exclusionary conduct, the deception must affect the competitive process, not just impose a financial cost on consumers or competitors. Thus, in Conwood, USTC had literally eliminated from retail stores the very means by which Conwood sold its products and also distorted those retailers' perception of consumers' preferences among MST products. This conduct altered the process by which consumers and retailers selected among competitors' products and protected UST from that normal competitive process.
Similarly in Rambus, the competitive functioning of the relevant technology markets and the selection of the best, most cost-effective technology was distorted by a lack of information that was expected to be disclosed by marketplace participants, even though, ultimately, Rambus was found technically not to have been obligated to make the disclosures that those participants had expected. Microsoft was also based on clear evidence that Microsoft's deception had distorted the functioning of competition in the marketplace by undermining software developers' desire to design software that would operate on both Sun Microsystems' and Microsoft's Java platforms.
These situations contrast with those, for example, in Humana and NYNEX where no harm to competition was found. In each of Humana and NYNEX, evidence of higher costs for consumers - clearly the type of harm that could flow from anti-competitive behaviour - created the initial impression of exclusionary conduct. On closer examination, however, it is clear that consumers in those cases were victims of the fraud, but the vitality of the competitive process was not a victim.
Deception - whether or not affecting competition - is to be discouraged and seems, in any event, to be an unsuitable business practice for advance analysis or encouragement by antitrust practitioners. Nonetheless, after the fact, analysis of deceptive conduct may be necessary. In that case, analysis of its impact on the functioning of the competitive process should be the focus.
1 Section 2 of the Sherman Act, 15 U.S.C. section 2 reads in pertinent part as follows: 'Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize [...] shall be deemed guilty. [...]'
2 382 U.S. 172 (1965).
3 382 U.S. at 178-179.
4 Rambus Inc, 2006-2 Trade Cas. paragraph 75,364 (F.T.C. 2006); Rambus Inc, 2007 WL 431524 (F.T.C. 2007); Rambus Inc, 2007 WL 431525 (F.T.C. 2007); Rambus Inc, 2007 WL 2086203 (F.T.C. 2007); Rambus Inc, 2007 WL 431523 (F.T.C. 2007); Rambus Inc v FTC, 522 F.3d 456 (D.C. Cir. 2008).
5 Hynix Semiconductor Inc v. Rambus Inc, 2008 WL 2951341 (N.D. Cal. 2008).
6 It should be noted that the JEDEC participated in the Rambus proceedings and submitted a brief on appeal that argued that its policies clearly did require Rambus to disclose both its existing patents and its patent applications and that such disclosures were necessary for SSOs to operate effectively. See Brief of Amici Curiae JEDEC Solid State Technology Association and Samsung Electronics Co., Ltd. in Support of Respondent and Affirmance, dated January 11, 2008.
7 Rambus Inc, 2006 WL 2330117 at 28-29 (F.T.C. 2006).
8 Id. at 47.
9 2007 WL 431524 at 14.
10 In Townsend v Rockwell Int'l Corp, et al, (20001 Trade Cas. Paragraph 72,890 (N.D. Cal. 2000), allegations of deception-based attempted monopolisation were rejected on the grounds that there was no deception. The defendants had disclosed the pendency of relevant patent applications and proposed licensing terms, if the patents were granted, in advance of the SSO's adoption of the relevant standard. In addition, the court found that, in any event, there were no other alternative standards under consideration, eliminating the potential for competitive impact.
11 Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 540 U.S. 398 (2004).
12 See 540 U.S. 407.
13 522 F.3d 464.
16 Id. at 466-467. Private litigation regarding Rambus's conduct as a JEDEC member has also resulted in holdings favourable to Rambus. In Rambus Inc v Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2003), which involved fraud claims, not monopolisation, the court held that there was no basis for fraud because Rambus had disclosed any patents that it had a duty to disclose under the JEDEC policies. In Hynix Semiconductor, a motion for a new trial was rejected after a jury verdict that Rambus had not engaged in monopolistic conduct or fraud.
17 United States v Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001).
18 Id. at 35-36.
19 Broadcom Corp v Qualcomm Inc, 501 F.3d 297 (3d Cir. 2007).
20 501 F.3d 304, 318.
21 Aspen Skiing Co v Aspen Highlands, 472 U.S. 585 (1985).
22 540 U.S. 398; see 501 F.3d 308.
23 501 F.3d 314.
24 290 F.3d 768 (6th Cir. 2002).
25 290 F.3d 782-783.
26 290 F.3d 768, 783-784.
27 290 F.3d 768, 795.
28 623 F.2d 1255 (8th Cir. 1980).
29 623 F.2d 1264.
30 623 F.2d 1267.
31 623 F.2d 1267, 1272
32 148 F.3d 1080 (D.C. Cir. 1998).
33 148 F.3d 1087.
35 525 U.S. 128 (1998).
36 525 U.S. 137.
37 114 F.3d 1467 (9th Cir. 1997).
38 114 F.3d 1477-1478.