United States: IP and Antitrust
Competition law and policy in the United States continues to shape, and under some circumstances limit, patent rights. This article examines three important developments at the intersection of intellectual property and antitrust law over the past year:
- the Depertment of Justice (DOJ) and Federal Trade Commission (FTC) updated their joint guidelines on licensing intellectual property;
- multiple federal district courts heard cases evaluating the scope of rights associated with standard essential patents (SEPs) subject to a voluntary commitment to license on fair, reasonable, and non-discriminatory (FRAND) terms, including the FTC's unfair competition case against Qualcomm; and
- the evolution of the federal courts' and government's understanding and treatment of patent assertion entities (PAEs), including:
- the FTC's release of a comprehensive study on PAE behaviour;
- litigation between Apple and Nokia involving the transfer of Nokia SEPs to a special purpose patent assertion vehicle; and
- a US Supreme Court decision significantly limiting where patent infringement suits may be filed, curtailing the ability of certain PAEs to forum shop.
2017 update to DOJ and FTC Antitrust Guidelines for the Licensing of Intellectual Property
On 12 January 2017, the DOJ and FTC released an updated version of their joint Antitrust Guidelines for the Licensing of Intellectual Property (the Guidelines).1 The Guidelines explain how the two agencies evaluate licensing and related activities involving patents, copyrights, trade secrets and know-how. Prior to this revision, the Guidelines had not been updated since they were first issued in 1995. The purpose of the updates was to modernise the Guidelines in view of developments in (i) statutory and case law, and (ii) reports the agencies had published since the Guidelines were issued, including their 2007 joint report Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition,2 and the FTC's 2011 Evolving IP Marketplace report.3
The revisions to the Guidelines were generally modest and do not appear to signal any major departures in the agencies' enforcement approach. The revised Guidelines specifically reaffirmed the agencies' longstanding commitment to three legal and economic principles:
- conduct involving intellectual property rights is subject to the same antitrust analysis as conduct involving other types of property, but accounting for the unique characteristics of the property rights;
- intellectual property does not, in and of itself, confer market power;4 and
- intellectual property licensing, as a general matter, is pro-competitive because it allows parties to combine complementary units of production and distribution.
The revised Guidelines emphasise a ‘flexible effects-based enforcement framework.'5 Notable revisions include the incorporation of the ‘sliding scale' approach to the rule of reason expressed in the Supreme Court's Actavis6 case as the framework for evaluating all licences involving intellectual property; express guidance that resale price maintenance is now subject to rule of reason analysis under federal law;7 and the acknowledgement of the creation of a federal cause of action for the misappropriation of trade secrets, established by the Defend Trade Secrets Act of 2016.
Perhaps what is most significant to observers about the revised Guidelines is what the 2017 update did not directly address: FRAND-encumbered SEPs and PAEs. By way of background, the FRAND commitment seeks to prevent SEP-holders from engaging in certain unfair or unreasonable behaviour, including ‘hold-up,' which can involve demanding exorbitant royalties for SEPs to capture value added from wide adoption of a standard by technology implementers and/or distort competition in downstream product markets. PAEs are entities that do not manufacture any products but own patents and monetise them, sometimes through threatened or actual litigation. Despite requests from many public comments that the agencies offer guidance on these two issues,8 the revised Guidelines do not explicitly address either topic. Although the revised Guidelines' statement that ‘[t]he antitrust laws generally do not impose liability upon a form for a unilateral refusal to assist its competitors'9 could be interpreted to carve out an exception for FRAND-encumbered SEPs, the agencies stopped short of expressly saying as much. The conspicuous absence of both topics is especially noteworthy considering the recent activity involving both FRAND-encumbered SEPs and PAEs at the agency level and in federal courts, discussed below.
While the DOJ and FTC declined to publicly express their views on FRAND-encumbered SEPs in the Guidelines, the FTC made its position known in its antitrust case against Qualcomm, which survived a motion to dismiss for failure to state a claim. The FTC's Qualcomm case, along with two other district court decisions involving SEPs, illustrate how competition law is defining the scope of patent rights.
FTC v Qualcomm
On the eve of a change in administration and over a dissent from then-Commissioner (and current Acting Chairman) Ohlhausen, the FTC sued Qualcomm in a California federal court for its alleged anticompetitive behaviour in connection with Qualcomm's licensing programme covering many patents essential to various wireless communications standards. The FTC's case follows investigations by many other antitrust authorities around the world into potential anticompetitive effects arising from Qualcomm's licensing practices.10
The bulk of the FTC's allegations11 centred on what it referred to as Qualcomm's ‘no license-no chips policy.' Under that policy, Qualcomm allegedly conditioned customers' access to licences for SEPs on its chipsets upon acceptance of Qualcomm's preferred terms, including royalties above what a court would determine as FRAND. The FTC also alleged that Qualcomm violated FRAND by refusing to license its SEPs to chipset competitors and only licensing them to downstream original-equipment manufacturers. Finally, the FTC alleged that Qualcomm entered into a de facto exclusive dealing arrangement with Apple, in which Qualcomm conditioned partial relief from its excessive royalties on exclusive use of Qualcomm chips.12
Although the FTC brought its complaint under section 5 of the FTC Act,13 which prohibits ‘unfair methods of competition', Qualcomm responded in its motion to dismiss as if the FTC had alleged claims under sections 1 and 2 of the Sherman Act.14 Judge Lucy Koh, in denying Qualcomm's motion to dismiss, explicitly held that the FTC had stated a claim under both sections 1 and 2 and declined to rule on whether the FTC has stated a stand-alone section 5 violation.15 Judge Koh held that the FTC had adequately pleaded that Qualcomm's ‘no license-no chips policy' harms competition in the market for CDMA and premium LTE chipsets. Specifically, Judge Koh emphasised how this policy, combined with Qualcomm's practice of refusing to license to competing chipset manufacturers, effectively forecloses the possibility of any licensee challenging Qualcomm's royalties as not FRAND-compliant because those licensees cannot afford to lose access to Qualcomm's chipset supply.
In her ruling, Judge Koh also addressed Qualcomm's defence that there could not be a FRAND violation because the royalty percentage that Qualcomm charges has not changed over time. In rejecting that argument, she stated the fact that Qualcomm ‘collects the same 5 per cent royalty on the total value of a 2017 smartphone as Qualcomm collected on the total value of a 2006 phone, despite the fact that both handset technology and Qualcomm's SEP portfolio has changed dramatically over the past decade, support[ed] FTC's allegations that Qualcomm's SEP royally rates are above FRAND.'16 Judge Koh also rebuffed Qualcomm's argument that it was entitled to choose to license only at the handset level, holding that the FTC had adequately alleged that the FRAND commitment creates an exception to the general antitrust rule that there is no duty to deal with one's competitors.
Other district court decisions
In addition to the FTC's case against Qualcomm, two other district court decisions implicating SEPs are notable.
In Funai Electric v LSI,17 the Northern District of California held that plaintiff Funai stated a claim for monopolisation in violation of section 2 of the Sherman Act against defendants LSI and related entities based upon an overall anticompetitive scheme in which the defendants allegedly:
- made misrepresentations to two standard-setting organisations that if their patents were incorporated into the relevant standards, they would license them on FRAND terms;
- refused to offer Funai FRAND licences to cover several SEPs; and
- sued Funai seeking injunctive relief for patent infringement in both the United States International Trade Commission (ITC) and a related district court action.
LSI attempted to argue that Funai's antitrust claims were barred by the Noerr-Pennington doctrine because they were premised upon LSI's previous ITC and district court infringement actions. Noerr-Pennington is a First Amendment-based doctrine that immunises activities seeking to petition the government for redress, including filing complaints before the courts and administrative agencies, although there is an exception for activities constituting ‘sham litigation'.18
In rejecting LSI's motion to dismiss, the court in Funai Electric v LSI adopted the reasoning of an earlier case19 in concluding that because the ITC and separate district court action were alleged as part of a broader anticompetitive scheme, the conduct may be considered in evaluating a section 2 claim without implicating Noerr, regardless of whether the conduct meets the sham exception. The decision is noteworthy in that it appears to narrow a company's antitrust immunity for asserting its FRAND-encumbered SEPs when there are also allegations of other anticompetitive activity related to those same SEPs.
In Core Wireless Licensing v LG Electronics,20 the Eastern District of Texas denied defendant LG Electronics' pretrial motion for summary judgment to preclude a finding of wilful infringement on two alleged SEPs. 35 USC section 284 grants district courts discretion to enhance damages for wilful patent infringement up to three times. In litigation brought by Core Wireless, LG attempted to argue that enhanced damages for wilful infringement are never appropriate when dealing with SEPs because infringement is anticipated in the standard-setting context. The court rejected this argument as ‘premature' because there had not yet been a verdict on infringement, wilful or otherwise. The court suggested that it would be willing to entertain LG's argument at a later stage, but after a jury found that LG wilfully infringed the patents at issue, the court exercised its discretion under 35 USC section 284 to enhance damages by 20 per cent.21
Although there were no antitrust claims in the Core Wireless case, the decision is consistent with competition law policy that injunctions should be rare on SEPs. In other words, if courts should only issue injunctions on FRAND-encumbered SEPs under rare circumstances such as where monetary damages will not suffice to fully compensate the patent-owner, district courts should be free to use other tools, such as enhanced damages for wilful infringement, in situations where there may be ‘hold-out' on the part of infringing would-be licensees.22
Three developments are noteworthy concerning PAEs: the FTC's release of a comprehensive study on PAEs; litigation involving Apple and Nokia premised upon ‘portfolio unbundling'; and the Supreme Court's 2017 Heartland v Kraft23 decision, which effectively limits forum-shopping by PAEs (and other patent holders).
FTC PAE study
In October 2016, the FTC released its comprehensive Patent Assertion Entity Activity Study.24 The study analysed PAE acquisitions, litigation, and licensing practices, based on sample of 22 PAEs and more than 2,500 PAE affiliates and related entities over a six-year period.
The study identified two types of PAE business models: Portfolio PAEs and Litigation PAEs. Portfolio PAEs first attempt to assert their patent rights through negotiations and usually include many patents, while Litigation PAEs usually use litigation as a first attempt, and usually execute licensing agreements for single patents or smaller portfolios. The study referred to suits brought by many Litigation PAEs as ‘nuisance litigation' because defendants choose to settle despite their belief that the PAE's case is weak, and the value of settlements in those cases is often lower than a public industry association benchmark set for the ‘nuisance cost' of litigation.
The study also expressed concern over the litigation risk asymmetry between PAEs and companies that manufacture products that practise patents. PAEs are uniquely positioned to bring patent enforcement actions at lower costs than manufacturing companies because they are not subject to infringement counterclaims or the significant costs associated with discovery in litigation. Although not noted in the study, this discrepancy between PAEs and manufacturing companies can be wielded in a manner that violates the antitrust laws because PAEs (i) can act as privateers and use lawsuits to raise the costs of their sponsor's competitors, and (ii) can be used as vehicles to circumvent FRAND licensing obligations.
To address the litigation risk asymmetry and other issues, the study proposed four recommendations for legislative and judicial reform. First, the study proposed amending Federal Rule of Civil Procedure (FRCP) 26, which governs discovery plans, to effectuate ‘[e]arly disclosure of asserts claims and infringement invalidity contentions.' Second, the study recommended expanding the scope of FRCP 7.1, which requires that corporate parties identify certain affiliates, to capture the sort of complex multi-affiliate structures that PAEs sometimes use to organise. Third, to address concerns over PAEs filing suit against end-users, the study recommended new legislation to encourage district courts to stay suits involving end-users if there is a concurrent suit against the manufacturer. Fourth, in light of recent amendments to the FRCPs requiring that patent infringement plaintiffs plead factual allegations that make infringement ‘plausible,' the study encouraged courts to provide sufficient notice to alleged infringers.
These recommendations have not yet been implemented, although legislation has been introduced in Congress to limit the ability of PAEs to seek exclusion orders in the ITC.25 The study sends a strong signal that the FTC takes PAEs - and the potential anticompetitive effects they may produce - seriously.
Apple/Nokia PAE litigation
Another interesting development involving PAEs is Apple's antitrust lawsuit against Nokia and PAEs to which Nokia had transferred patents. Apple's primary theory was based on portfolio unbundling (ie, that Nokia transferred its SEPs to the PAEs to evade FRAND licensing obligations). Specifically, Apple alleged that Nokia carried out a ‘patent transfer scheme,' spreading out its SEP portfolio among different PAEs, while retaining an interest in revenues generated by those PAEs in litigation asserting the SEPs. The transfer enabled the PAEs to demand above-FRAND royalties that Nokia could not have obtained but for unbundling because what would have been a single transaction was turned into multiple transactions, combined with the litigation risk asymmetry discussed above.
Shortly after filing the lawsuit, Apple and Nokia settled, entering into a licensing agreement.26 Nonetheless, the case demonstrates one of the first attempts to establish antitrust liability based on portfolio unbundling in the United States, a theory that has been pushed by various academics and antitrust law practitioners.27
Heartland v Kraft
The patent venue statute, 28 USC section 1400(b), provides that ‘[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.' In Heartland v Kraft, a unanimous Supreme Court held that, with respect to domestic corporations, ‘residence' within the meaning of section 1400(b) ‘refers only to the State of incorporation.'28 This decision overruled over two decades of Federal Circuit precedent, which had held that amendments to the general venue statute, 28 USC section 1391(c), modified section 1400(b), allowing patent holders to sue in any district where personal jurisdiction could be asserted over the defendant.
The full impact of Heartland is still being assessed, but it may change the patent litigation landscape in the United States by precluding PAE forum-shopping in plaintiff-friendly jurisdictions. If that happens, and there is a corresponding decrease in PAE litigation more broadly, it may resolve some of the competition policy concerns raised concerning PAEs without needing to turn to antitrust law. Prior to the decision, the Eastern District of Texas was the preferred venue for PAEs because of its wide reputation as a favourable venue to patent holders.29 Over 40 per cent of patent lawsuits were filed in there. Thus, to the extent that PAE litigation was facilitated by the lax venue rules that Heartland did away with, PAEs may decide that the costs of litigating in less-friendly venues exceed the potential recovery. A greater diversity of courts deciding matters involving patent rights and PAEs may also bring about differing, and potentially conflicting, approaches to controversial issues involving PAEs.
- DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (12 January 2017), available at www.justice.gov/atr/IPguidelines/download.
- DOJ and FTC, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation And Competition (April 2007), available at www.justice.gov/atr/antitrust-enforcement-and-intellectual-property-rights-promoting-innovation-and-competition.
- FTC, The Evolving Ip Marketplace: Aligning Patent Notice and Remedies With Competition (March 2011), available at www.ftc.gov/sites/default/files/documents/reports/evolving-ip-marketplace-aligning-patent-notice-and-remedies-competition-report-federal-trade/110307patentreport.pdf.
- A principle that follows and is consistent with the Supreme Court's decision, Illinois Tool Works v Independent Ink, 547 U.S. 28 (2006).
- Press Release, FTC and DOJ Issue Updated Antitrust Guidelines for the Licensing of Intellectual Property (13 January 2017), available at www.ftc.gov/news-events/press-releases/2017/01/ftc-doj-issue-updated-antitrust-guidelines-licensing-intellectual.
- 133 S. Ct. 2223 (2013).
- Leegin v PSKS, 551 U.S. 877 (2007).
- Of the 24 public comments received, 16 referenced SEPs and/or FRAND, and five referenced PAEs. ‘FTC and DOJ Issue Revised Guidelines for Licensing of Intellectual Property,' National Law Journal (31 January 2017), available at www.natlawreview.com/article/ftc-and-doj-issue-revised-guidelines-licensing-intellectual-property.
- Guidelines for the Licensing of Intellectual Property, supra note 1 at section 2.1.
- Both China's National Development and Reform Commission and the Korea Fair Trade Commission issued fines of US$975 million and US$854 million, respectively against Qualcomm. Investigations by the Taiwan Fair Trade Commission and the European Union's Directorate-General for Competition are pending.
- Complaint, FTC v Qualcomm, No. 5:17-cv-00220 (N.D. Cal., 17 January 2017), available at www.ftc.gov/system/files/documents/cases/170117qualcomm_redacted_complaint.pdf.
- 12 Days after the FTC brought its suit, Apple sued Qualcomm separately in the Southern District of California, largely repeating the FTC's factual allegations. In July 2017, Qualcomm announced that it was filing a complaint against Apple in the United States International Trade Commission, seeking an exclusion order on Apple products that allegedly infringe on patents that Qualcomm alleges are not essential to any industry standard. The fact that Qualcomm elected to seek an exclusionary order at the ITC on patents it claims are non-SEPs reinforces the extent to which competition policy is limiting the scope of patent rights in the United States.
- 15 U.S.C. § 45(a).
- In contrast, Apple's lawsuit against Qualcomm alleges violations of, among other things, section 2 of the Sherman Act. Complaint, Apple v Qualcomm, No. 3:17-cv-00108-GPC-NLS (S.D. Cal. 20 January 2017).
- No. 17-CV-00220-LHK, 2017 WL 2774406, at *9 (N.D. Cal. 26 June 2017).
- Id. at *14.
- No. 16-cv-01210-BLF, 2017 WL 1133513 (N.D. Cal. 27 March 2017).
- See, eg, Professional Real Estate Investors, Inc. v Columbia Pictures Industries, Inc., 508 U.S. 49, 60 (1993).
- Hynix Semiconductor Inc. v Rambus, Inc., 527 F. Supp. 2d 1084 (N.D. Cal. 2007).
- Nos. 2:14-cv-911, 2:14-cv-912, 2016 WL 4596118 (E.D. Tex. 2 September 2016). Note that Core Wireless is a PAE, whose preference for filing suit in the Eastern District of Texas is discussed below.
- Final Judgment, No. 2:14-cv-912-JRG (E.D. Tex. 1 November 2016), available at www.essentialpatentblog.com/wp-content/uploads/sites/64/2016/11/2016.11.02-Final-Judgment.-Signed-by-Judge-Rodney-Gilstrap.-This-docket-entry-was-only-filed-in-the-lead-case.-txed-2-14-cv-00912.pdf.
- ‘Hold-out' or ‘reverse hold-up' occurs when a prospective licensee delays taking a licence until the SEP holder agrees to a royalty well below FRAND.
- 137 S.Ct. 1514 (2017).
- FTC, Patent Assertion Entity Activity Study (October 2016), available at www.ftc.gov/system/files/documents/reports/patent-assertion-entity-activity-ftc-study/p131203_patent_assertion_entity_activity_an_ftc_study_0.pdf.
- H.R. 2189 - Trade Protection Not Troll Protection Act (introduced 27 April 2017), available at www.congress.gov/bill/115th-congress/house-bill/2189.
- 26 Mark Scott, ‘Apple Settles Legal Dispute with Nokia', New York Times (23 May 2017), available at www.nytimes.com/2017/05/23/business/apple-nokia-patents.html.
- Fiona M Scott Morton & Carl Shapiro, Strategic Patent Acquisitions, 79 ANTITRUST L.J. 463, 478 (2014); John ‘Jay' Jurata & Amisha Patel, Taming the Trolls: Why Antitrust Law is Not a Viable Solution for Stopping Patent Assertion Entities, GEO. MASON L. REV. 1251, 1277 (2014).
- Id. at 1520.
- Adam Liptak, ‘Supreme Court Considers Why Patent Trolls Love Texas', New York Times (27 March 2017), available at www.nytimes.com/2017/03/27/business/supreme-court-patent-trolls-tc-heartland-kraft.html.