The past few years have brought a significant realignment in US antitrust policy toward standard essential patent (SEP) licensing, as the Department of Justice’s Antitrust Division has argued with increasing success that disputes over fair, reasonable, and non-discriminatory (FRAND) patent licensing should be resolved under contract law rather than antitrust law. The Antitrust Division has pursued its policy goals through multiple channels, in part through the filing of amicus briefs and statements of interest in antitrust litigation—including a lawsuit filed by automotive component supplier Continental against Internet of Things (IoT) licensing platform Avanci, LLC and several licensing partners, which a Texas court has just dismissed after finding the DOJ’s arguments useful. Additionally, the DOJ has issued a series of policy statements on certain other FRAND licensing issues, reversing several prior agency policies in the process—most recently, through an “extraordinary” letter recently sent by Assistant Attorney General Makan Delrahim to the Institute of Electrical and Electronics Engineers (IEEE) that argued in favor of injunctive relief and flexibility in royalty determinations and urged the standard-setting organization (SSO) to revamp its patent licensing policy accordingly.

Continental’s Lawsuit: Component Supplier Unsuccessfully Challenges Avanci’s OEM-Only Licensing Policy

Continental filed the lawsuit just dismissed in May 2019 in the Northern District of California, naming Avanci and several patent owners participating in its licensing program as defendants: Conversant Intellectual Property Management, Inc. subsidiary Conversant Wireless Licensing S.à.r.l. (f/k/a Core Wireless Licensing S.a.r.l.), Nokia, and three subsidiaries of PanOptis Holdings, LLC (Optis Cellular Technology LLC; Optis Wireless Technology, LLC; and PanOptis Patent Management, LLC), subsequently adding Sharp via an amended complaint. Continental, a “Tier 1” supplier of telematics control units (TCUs) that include cellular connectivity features, alleges that it had been unsuccessful in its attempts to obtain a license to the defendants’ patents, either from the defendants individually or from Avanci as the licensing platform manager, and asserts that they have “collusively agreed to only offer licenses to the automotive industry at the OEM level in an attempt to obtain elevated royalties that far exceed any measure of FRAND”. Through that conduct, alleged Continental, the defendants committed various antitrust violations and breached their contractual FRAND obligations, further seeking equitable relief.

That June, Continental filed a motion for an anti-suit injunction, seeking to bar related litigation in Germany, but the following September, the company withdrew the motion as it pertained to certain German cases filed by Nokia after it was served with a German court’s “anti-anti-suit injunction” requiring it to do so. Shortly thereafter, Judge Koh denied the motion for an anti-suit injunction without prejudice to refiling because it was unclear if the motion applied to Sharp, which had been served with the complaint two days after the deadline for opposing the motion. In August, the defendants then moved to dismiss the complaint on various grounds, asserting in part that Continental lacked standing under Article III because it never sought a license, rendering its “allegations of injury . . . too speculative”; that it had failed to state a claim as to antitrust and promissory estoppel; that the court lacked personal jurisdiction over Nokia, Conversant, and Avanci; and that the plaintiff had not properly served Sharp.

That December, prior to ruling on the motion to dismiss, District Judge Lucy Koh granted the defendants’ motion to transfer the case to the Northern District of Texas on convenience grounds (3:19-cv-02933). In that order, Judge Koh declined to resolve the jurisdictional issues raised in the pending motion to dismiss (Article III standing, personal jurisdiction, and improper service), citing in part the complexity of their resolution. The defendants then filed an amended version of their motion to dismiss in the Texas action, updated to reflect Fifth Circuit law.

On February 27, less than a month after transfer, the DOJ sought leave to file a statement of interest in the case, raising three overarching arguments in its proposed statement: (1) Continental’s breach of FRAND claims do not allege that defendants engaged in any unlawful exclusionary conduct, in part because there exists no “antitrust duty” at all to license on FRAND terms; (2) the imposition of antitrust liability for violations of FRAND commitments in the standard-setting context risks “over-deterring conduct that is already adequately policed by contract and patent law”; and (3) a cause of action raised under Section 2 of the Sherman Act that is premised on alleged violations of a FRAND commitment is not “administrable” because it requires courts to act as “central planners”.

District Judge Barbara M.G. Lynn ruled on the motion to dismiss and the government’s request for leave to file in an order issued on September 10. Judge Lynn began by granting the government’s motion, holding that the request was timely—despite Continental’s arguments to the contrary—in light of the case’s then-recent transfer. While the court rejected the government’s cited interest in developing the limited body of Fifth Circuit caselaw concerning FRAND obligations in the context of Section 2 of the Sherman Act, it granted the motion and allowed the government to file its statement of interest because the statement “assists the Court in evaluating Plaintiff’s monopolization claims”.

The court then turned to the issue of Article III standing—which requires an “injury in fact”, that the injury be sufficiently linked to the defendant’s conduct, and that the court’s decision would resolve the injury—and the related issue of ripeness. Here, the court noted that the parties dispute whether the plaintiff has suffered an injury in fact and whether this action is ripe, observing that these issues “often intersect because the question of whether a plaintiff has suffered an adequate harm is integral to both”. Judge Lynn held that while Continental had not sufficiently pleaded an injury in fact with respect to the potential that it might be required to indemnify OEMs, it had pleaded such an injury “based on its alleged inability to obtain from Defendants, on FRAND terms, SEP licenses needed for its TCUs”. As a result, Judge Lynn declined to dismiss the case for lack of Article III standing and ripeness.

The court also declined to dismiss the case for lack of subject matter jurisdiction under the Foreign Trade Antitrust Improvement Act (FTAIA), which limits such jurisdiction over antitrust claims involving commerce with foreign nations unless the conduct leading to such claims has a “direct, substantial, and reasonably foreseeable effect on U.S. domestic, import, or export trade or commerce”. Judge Lynn rejected the defendants’ assertion that “the Court lacks subject matter jurisdiction under the FTAIA over Plaintiff’s antitrust claims involving foreign patents”, holding instead that the court had jurisdiction because Continental was seeking SEP licenses for the manufacture of TCUs in the US and because the “global license and product markets” at issue included the US.

Judge Lynn next addressed whether Continental had standing to sue under antitrust law. While Judge Lynn found that the plaintiff had suffered an injury in fact for similar reasons that it did under Article III, she found that the company had not suffered an antitrust injury. Rather, the court found that Continental’s cited injury—its inability to obtain a FRAND license—“does not harm its competitive position or its position as a consumer of products used in its devices”. The reason, explained the court, is that Continental may still produce TCUs for OEMs because the OEMs are still being licensed, according to the company’s own allegations. While OEMs might be able to claim an antitrust injury should they be charged non-FRAND rates, the court found that Continental had failed to show that those increased prices would be passed onto it.

Moreover, the court held that “[d]ownstream anticompetitive conduct that adversely affects a relationship with an upstream entity rarely results in an antitrust injury for the upstream entity” and noted that Continental and the OEMs occupy “distinct” places in the automotive supply chain: “Plaintiff builds the TCUs that then go downstream to the OEMs, which install the TCUs in vehicles they manufacture”, characterizing these as “separate operations”. Citing the Ninth Circuit’s August decision in FTC v. Qualcomm, the court then held that “[t]he anticompetitive conduct allegedly directed at the downstream OEMs does not create an antitrust injury for the upstream TCU suppliers, like Plaintiff”—meaning that Continental has not suffered an antitrust injury, and therefore lacks antitrust standing. Additionally, the court held that even if had pleaded a sufficient antitrust injury, Continental would still have lacked antitrust standing because it failed to show that it was the best plaintiff to bring the action (which, in this case, would have been an OEM).

Judge Lynn further ruled that even if Continental had antitrust standing, it had failed to adequately establish that the defendants’ conduct amounted to the unlawful restraint of trade under Section 1 of the Sherman Act. Although noting that “[h]orizontal price fixing . . . is a restraint of trade that is typically per se unlawful”, the court explained that “[n]evertheless, a licensing pool that horizontally fixes prices by setting prices for each member’s licenses is generally evaluated under the rule of reason”, weighing “anticompetitive evils” against “procompetitive benefits or justifications” (citations omitted). Performing such an analysis, Judge Lynn found that Continental’s allegations “that Defendants pooled their SEPs through the Avanci platform to license, at agreed upon non-FRAND terms, only to OEMs”, thereby “reflect[ing] an agreement to establish prices to the OEM”, fell short in this regard. The reason, held Judge Lynn, is that the Avanci agreement allows the licensor defendants to “independently license the SEPs outside the platform”. “To the extent the Licensor Defendants refused to negotiate with Plaintiff or only agreed to do so at the same prices at which they license to the OEMs, this alleges at best parallel conduct and the possibility of concerted action, which are insufficient to state a claim of an unlawful agreement to restrain trade”.

Moreover, Judge Lynn also held that Continental had failed to sufficiently plead unlawful monopolization or a conspiracy to monopolize under Section 2 of the Sherman Act—ruling instead that the “exclusion of competitors and maximizing of rates in the standard setting context” alleged by the plaintiff “does not  constitute . . . anticompetitive conduct actionable under” Section 2. In particular, Judge Lynn ruled that “[i]t is not anticompetitive for an SEP holder to violate its FRAND obligations” and that a “patent owner may use price discrimination to maximize the patent’s value without violating antitrust law. . . . An 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”. As a result, “Plaintiff’s allegations regarding Defendants’ ‘discriminat[ion] against suppliers,’ like Plaintiff, and Plaintiff’s pursuit of claims of ‘inflated and non-FRAND royalty rates’ do not state a violation” of Section 2. Additionally, Judge Lynn rejected Continental’s argument that the defendants “obtained unlawful monopolies by making fraudulent FRAND declarations to the SSOs that induced the SSOs to include Defendants’ SEPs in their standards”, stating that the court “does not agree with [certain cited] cases concluding that deception of an SSO constitutes the type of anticompetitive conduct required to support a” Section 2 claim.

Having thus dismissed all of Continental’s federal question claims, Judge Lynn declined to exercise supplemental jurisdiction over its “remaining declaratory judgment, breach of contract, promissory estoppel, and unfair competition claims” and dismissed the complaint.

The DOJ’s “New Madison Approach” to Antitrust Law: Prior Policy Advocacy

Judge Lynn’s ruling is the latest example of the DOJ Antitrust Division’s strategy to promote its policy agenda by inserting itself into antitrust litigation matters early and often, as part of a larger shift away from prior policies toward a more SEP-holder friendly approach. Another victory for the Antitrust Division came in August, when the Ninth Circuit overturned the Northern District of California’s landmark ruling in FTC v. Qualcomm and endorsed the DOJ’s view that disputes over SEP licensing are best resolved under contract law. The Antitrust Division was a highly active participant in that litigation: After it unsuccessfully urged the court to hold a separate hearing on remedies prior to the court’s ruling against the company, the DOJ backed the patent owner in an ultimately successful attempt to get the Ninth Circuit to delay the enforcement of the court’s judgment in that case pending appeal and was also granted permission to participate in oral arguments in support of Qualcomm. In addition, the Antitrust Division has filed a statement of interest in an ongoing lawsuit filed by Apple and Intel over the licensing practices of Fortress Investment Group LLC, also recently weighing in on an antitrust case filed by Lenovo and Motorola Mobility against InterDigital, Inc.; as well as in another case filed by those same plaintiffs against IPCom GmbH & Co KG; a dispute between chipmaker u-blox and InterDigital; and in litigation between HTC and Ericsson.

The policies that the Antitrust Division has advanced in those lawsuits form part of what Assistant Attorney General Delrahim, the head of the Antitrust Division, has termed his “New Madison approach”. That approach, which Delrahim introduced in a March 2018 speech, establishes four principles for SEP antitrust policy that are intended to encourage innovation: 1) that patent hold-up is not an antitrust problem; 2) that SSOs should not become a vehicle for collective action by market participants and should instead should focus on implementer hold-out to incentivize innovation; 3) that SSOs and courts should face a high burden before adopting rules limiting injunctions; and 4) that patent holders should be able to unilaterally and unconditionally refuse to license.

In addition to its judicial advocacy, the Antitrust Division has promoted those goals through a series of policy changes, including the withdrawal and replacement of a 2013 joint policy statement between the DOJ and USPTO. The 2013 statement focused more on the hold-up problem and the anticompetitive effects of injunctive relief as used to gain leverage in SEP licensing disputes. While the statement acknowledged that an injunction may be appropriate in some circumstances, it established that an injunction would be against the public interest where the accused infringer is “acting within the scope of the patent holder’s [FRAND commitment] and is able, and has not refused, to license on [FRAND] terms”. Delrahim announced the DOJ’s withdrawal from the 2013 policy statement in a December 2018 speech, stating that the prior policy—that it should be a violation of antitrust law for a SEP holder to seek injunctive relief—was “wrong as a matter of antitrust law and bad as a matter of innovation policy”. He also criticized what he deemed the abuse of standard-setting processes, stating that the Antitrust Division would be inclined to investigate collusion by SSO participants.

In December 2019, the DOJ issued a new joint policy statement with the USPTO and the National Institute of Standards and Technology (NIST) establishing that injunctions should be available in SEP disputes. In particular, the statement asserted that a SEP holder’s FRAND commitment is relevant for determining “appropriate remedies” but “need not act as a bar to any particular remedy”; that both injunctions and damages should be available as remedies for the infringement of SEPs subject to FRAND commitments; and that the framework for determining those remedies should be the same as other cases: “there are no special rules limiting” such remedies.

Delrahim’s Letter to IEEE

The DOJ’s latest statement on SEP antitrust policy saw the Antitrust Division revisit a Business Review Letter (BRL) sent by Acting Attorney Renata Hesse that cleared the way for a controversial set of updates that one SSO, the Institute of Electrical and Electronics Engineers (IEEE), made to its patent policy in February 2015. Those changes included a requirement that licensors seeking inclusion of their patents in a standard agree to offer licenses to all applicants, rather than picking and choosing; a prohibition on seeking or threatening to seek injunctive relief for infringement of the owner’s SEPs; and the principle that a reasonable royalty should be based on the smallest salable component, or smallest saleable patent practicing unit (SSPPU), that practices a given claim. The BRL, also issued in February 2015, concluded that “that the Update has the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards”, though the letter stated that it was not intended as an outright endorsement of that policy (a position subsequently repeated by the DOJ in public statements).

On September 10, Delrahim sent a letter to the IEEE to “supplement, update, and append” the prior BRL, acknowledging that doing so was an “extraordinary step” but stating that the BRL has been “cited, frequently and incorrectly, as an endorsement of the IEEE Policy, which was not our purpose or intent”. Delrahim explained that certain “foreign competition authorities have misapplied the 2015 Letter in support of enforcement actions against essential patent holders that have no basis under US law”, including actions taken by the Korea Fair Trade Commission against Qualcomm, and warned the IEEE against pursuing any policy advocacy that contributes to such misconceptions.

The Antitrust Division’s concerns are amplified, continued Delrahim, by recent changes to US law that, he argues, render the BRL out of date. In particular, he stated that the BRL had been “proven incorrect . . . in anticipating that ‘hold-up’ would be a competitive problem”. To the contrary, asserted Delrahim, “concerns over hold-up as a real-world competition problem have largely dissipated”. Rather, argued Delrahim, courts have increasingly adopted the viewpoint espoused by the DOJ that SEP licensing disputes are better handled under contract law, citing the Ninth Circuit’s decision in FTC v. Qualcomm—in particular, the weight it placed on “the persuasive policy arguments of several academics and practitioners with significant experience in SSOs, FRAND, and antitrust enforcement, who have expressed caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation”.

Moreover, Delrahim argued that the BRL was incorrect in endorsing the DOJ’s prior view that the availability of SEP injunctions should be limited, as based in part on the since-withdrawn 2013 USPTO-DOJ joint policy statement. Instead, Delrahim asserted that the current US consensus reflects “policy and jurisprudential positions declining to infer diminished rights for essential patent holders as part of a FRAND commitment”, consistent with the 2019 USPTO-DOJ-NIST policy statement. “Denying essential patent holders access to injunctive relief has the potential to lessen returns for inventors and thereby to harm incentives for future innovation”.

Additionally, Delrahim took issue with the BRL’s treatment of IEEE’s recommendation that the SSPPU be used as the basis for a reasonable royalty, arguing that the BRL’s assessment that this reflected the “direction” of US law “was not well-supported and has not proven accurate”. “Since the 2015 Letter”, explained Delrahim, “the case law on FRAND and patent damages has developed to include various means of determining royalties and damages”, including Federal Circuit and Ninth Circuit jurisprudence treating the use of the SSPPU and the end product as a royalty base as equally viable options. While acknowledging that the 2015 IEEE policy does not require the use of the SSPPU, the fact that it is the policy’s sole recommended royalty base “increases the likelihood that SSPPU will play an important—and potentially outsized—role in [royalty] negotiations”, Delrahim underscored. Overall, Delrahim argued, “there is no single correct way to calculate a reasonable royalty in the FRAND context. The Department believes parties should be given flexibility to fashion licenses that reward and encourage innovation”.

Furthermore, Delrahim briefly faulted the BRL for not dedicating “attention to potentially harmful implementer conduct seeking to undermine the bargaining position of patent owners in the standards development process”, or hold-out. This statement is the latest in a series of Delrahim pronouncements calling for a balance of interests in SEP antitrust policy enforcement, as he has previously argued that prior policies placed too much weight on hold-up.

Delrahim then concluded his letter by arguing that the IEEE’s current patent policy has “dampened enthusiasm for the IEEE process”, rather than promoting competition as originally intended, and recommended that the organization consider amending that policy.

For details on how certain stakeholders have reacted to the DOJ’s posture toward SEP antitrust issues, see “DOJ Antitrust Policy Change Favoring SEP Injunctions Sparks Debate with Tech and Auto Industries” (May 2019).