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US antitrust law dubbed wrong tool for FRAND breaches

Holders of standard-essential patents (SEPs) should not automatically be considered to be in breach of US competition laws if they fail to licence their patents to others on fair, reasonable and non-discriminatory (FRAND) terms, a senior US official at the Department of Justice (DoJ) has said.20 Sep 2018

Assistant attorney general Makan Delrahim used a speech at a patent licensing conference in San Francisco earlier this week to highlight why he believes contract law is a more appropriate tool for considering breaches of FRAND commitments than antitrust provisions set out in Section 2 of the US' Sherman Act.

"A unilateral violation of a FRAND commitment should not give rise to a cause of action under Section 2 of the Sherman Act, even if a patent holder is alleged to have misled or deceived a standard-setting organization with respect to its licensing intentions," Delrahim said. "Applying Section 2 to this sort of unilateral conduct would contravene the underlying policies of the antitrust laws."

"This conduct may warrant remedies under contract law, but the important difference is that contract remedies do not involve the threat of treble damages that can deter lawful, pro-competitive conduct," he said.

"Where contract law remedies exist to remedy and deter breaches of a FRAND commitment, the additional deterrence that Sherman Act remedies offer could deter lawful, pro-competitive conduct – that is, research and development by innovators who make careful cost-benefit calculations as to how much to invest in technologies that may not pay off. Demanding a high price for one’s patented technology is permissible, and expected, conduct in a free market negotiation. A Section 2 cause of action would skew the patent licensing bargain away from the bargaining outcome that a free market dictates."

A SEP is a patent for technology that has been developed as industry standard and where it is impossible for other businesses to make products that adhere to that standard without using the patented technology.

Because of the lack of availability of alternative technology, there are restrictions on the way in which owners of SEPs who have contributed to development of the standard can exercise and enforce their rights in those patents. SEP owners are obliged to licence their technology on FRAND, or RAND, terms. However, what is considered to be 'FRAND' will change from case to case, varying depending on circumstances. SEP owners and licensees often disagree over whether proposed licensing terms conform to the FRAND requirement.

Disagreement can occur over a multitude of issues, including the value of royalties to paid for use of the underlying patent, as well as over the length and geographic scope of licensing agreements. Claims are often focused on whether the licensing terms are not fair or reasonable, but they can also raise issue that terms are discriminatory when compared with licensing terms that SEP owners agree with other licensees.

Disputes over FRAND licenses can sometimes involve complaints by licensees that the actions of SEP owners breach competition laws.

In the EU, competition rules prohibit businesses in a dominant market position from abusing that position of dominance. Competition rules also prohibit concerted action between businesses to prevent or distort competition, which can for example be relevant to patent pools licensing SEPs. The US has its own antitrust framework.

Under Section 2 of the Sherman Act unreasonable contracts, combinations or conspiracy in restraint of trade are prohibited, in addition to activity that amounts to "monopolisation, attempted monopolisation, or conspiracy or combination to monopolise".

In his speech, Delrahim focused on the provisions concerning unlawful monopolisation. He explained that for unlawful monopolisation claims to succeed, it must be shown that a SEP owner "acquired, enhanced, or maintained monopoly power in the relevant market through anticompetitive conduct that is 'exclusionary' or 'predatory' in nature". He said it is the 'exclusionary' conduct point which SEP licensees often rely upon when raising claims under Section 2 of the Sherman Act.

However, he said it would be a "serious mistake" for a court to consider a claim alleging that a SEP holders' "breach of a FRAND commitment, by itself" might constitute unlawful monopolisation or attempted monopolisation.

He further said it would be wrong for courts to consider monopolisation claims in cases where licensees of SEPs allege that SEP owners have "deceived the standard setting body by making a commitment to license on FRAND terms when it purportedly never had any intention of granting such a license".

"In the context of legitimate standard setting, the collective decision to incorporate a patented technology into a standard necessarily involves the 'exclusion' of rival technologies," Delrahim said. "Moreover, as a result of having its technology incorporated into a standard, a patent holder may gain incremental market power beyond any power that holding a patent would already convey.  By voluntarily participating in the standard setting process, however, owners of rival technologies and prospective licensees assume the risk that the outcome of that process may have an exclusionary effect where there are patents covering the 'winning' technology."

"Simply winning selection by a standard setting process does not constitute unlawful exclusionary conduct under the antitrust laws. This is because that selection, regardless the reason for it, contributes to unification around a single standard, which creates interoperability benefits for consumers that could not be achieved without unification," he said.

"This form of lawful and pro-competitive exclusionary conduct should not be condemned as unlawful under the Sherman Act when a licensee believes that a patent-holder opportunistically has reneged on its commitment to license on 'FRAND' terms and engaged in so-called 'hold-up'. That is also true even where a patent holder never allegedly intended to license on the terms that a court ultimately determines are 'FRAND'," the assistant attorney general said.