Always a Monopoly, Never a Monopolist: Why Antitrust is the Wrong Regulatory Scheme for Protecting Competition in Technical Standards

by Randi Brown*

When patent holders gain standard-essential status, should antitrust law treat the monopoly conferred on them like every other monopoly? In this Contribution, Randi Brown (’19) argues that the best approach to such monopolies is not to expose them to antitrust scrutiny, but instead to allow contract and patent remedies to maintain the benefits to competition and innovation afforded by standardization.

When patent holders gain standard-essential status, should antitrust law treat the monopoly conferred on them like every other monopoly? At the intersection of intellectual property law and antitrust law, jurisdictions across the globe have taken varying positions on how to treat the dominant market position necessarily gained in each patent market through standardization. Because the standard-setting process is inherently anticompetitive in that it wipes out all other competition, intellectual property rights holders risk being exposed to increased antitrust scrutiny when they seek to enter a standard. Ultimately, this Contribution will argue that the best approach to such monopolies is not to expose them to antitrust scrutiny, but instead to allow contract and patent remedies to maintain the benefits to competition and innovation afforded by standardization.

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Technical standards are everywhere and constitute the building blocks of international trade and technological innovation. In order for consumers to reap the benefits these standards bring to the market, a standard-setting organization (“SSO”) must first evaluate what pieces of intellectual property will best serve the standard and those who will adopt it.² In doing so, the organization “crowns winners,”³ from among the competing patents, thereby rendering the losing patents effectively useless. The owner of the winning patent, which has been deemed “standard-essential,” makes commitments to license their technology and begins to reap the financial benefits of being essential to the standard and thus used by all standard implementers. Those patents are now considered Standard-Essential Patents, or SEPs.⁴ The losing patent holders effectively go home with their tails between their legs. As a result of this standard-setting, there is no competition in the market for the resulting patent. Standards generally confer at least some monopoly power.⁵ The question then is what to do about the monopolies this process creates.

Given that antitrust law is concerned with protecting the competitive process, not individual competitors, antitrust law should focus not on the patent, but on the downstream markets in which the patent is licensed.⁶ In the case of technical standards, the standard-setting process has effectively ended all competition, meaning that there is no competitive process to protect.⁷ This argument has not been successful in moving courts away from viewing the licensing of patents as the relevant market when analyzing competition, but it demonstrates the possible limits of antitrust law’s effectiveness in the market of patents itself.

On the other hand, while the standard-setting process does frequently have the effect of eliminating competition, competition may not stay down for long.⁸ Competing patents can seek standard-essential status even after a standard has been set, and there may also be competing standards addressing a single technological need. For example, 3G, 4G, and LTE are all standards used in providing cell service. Despite the pervasiveness of 3G, 4G still rose up, and LTE therefrom.⁹ While the individual patents within these standards were not directly competing to dispel market power in that limited market, the standards themselves were in direct competition, weakening the position of any individual SEP holder on the whole.

Regardless of whether one focuses narrowly on the competitive process in the standard or the broader picture of a standard within a larger tech market, each SEP is a monopoly on its respective technology and therefore is within the purview of some antitrust or unfair trade practice laws. Some jurisdictions treat SEP monopoly holders with increased scrutiny;¹⁰ others wisely recognize that these patent holders are not monopolists and are, in fact, more likely to be taken advantage of than be the ones doing the taking.¹¹ Since these monopolists have not engaged in any monopolizing to obtain their market dominance (their standard was selected by a third party), there is no reason to believe they will be likely to behave anticompetitively in the future.

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The best approach for looking at these SEP monopolies, is to look at them through the framework of the values behind patent law, rather than antitrust law or unfair trade practice law. Patent law is intended to reward innovation, to compensate for the research and development that leads to such innovation, and to allow such innovation to benefit the public at large.¹² These values are reflected in our systems for awarding patents, and in the fact that we recognize intellectual property at all. Private industry derives significant value in intellectual property, and that value comes about as a result of the competitive advantage gained from the right to exclude others from using the fruits of their intellectual labors.¹³ Standardization, however, largely diminishes these rights.

The right to exclude others still exists for SEP holders, but is lessened by the commitments they make to license their patents on Fair, Reasonable, and Non-Discriminatory (“FRAND”) terms. This commitment is akin to a contractual obligation between the SEP holders and the SSOs, under which implementers of SEP technology are third-party beneficiaries. Because this is a contractual obligation, contract law, which does not police based on market power, is an adequate remedy when SEP holders engage in anticompetitive conduct.¹⁴ The Court in Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP noted that “when there exists a regulatory structure designed to deter and remedy anticompetitive harm, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny.”¹⁵ Here, contract obligations strike the right balance between protecting competition and avoiding overdeterrence.¹⁶ In particular, modification of FRAND commitments is workable under contract law as a matter of efficiency, unlike in antitrust where such efficient actions may be deemed patent holdup, a competition violation. Further, even a breach of FRAND commitments may be efficient and benefit competition, and such efficient breaches are deterred under added antitrust scrutiny.

Further, patent law rightly governs the actions of a SEP holder which fall outside of the FRAND commitments. Where there is no applicable FRAND commitment, a SEP holder has the right to refuse to license or deal, which protects intellectual property rights.¹⁷ This right of exclusion is the very right conferred through patent, and it is what gives patent holders the ability to extract profits from their innovations, encouraging such innovation in the first place. Patent law can protect SEP holders from abuses by would-be-licensees who infringe on their rights, and can protect SEP implementers by creating a discrete and coherent property right they can license at the value of the technology.

The use of contract and patent law to correctly balance competitive aims and our value of innovation is perfectly acceptable within antitrust law due to the net procompetitive effect of standardization. Looking to anticompetitive conduct alone fails to account for the economic benefits passed on to consumers.¹⁸ There will be remedies for breaches of FRAND under contract law which contemplate these economic efficiencies and sanction conduct to the degree which most benefits consumers.¹⁹ Even if there is some anticompetitive conduct which would not be addressed by contract law, it is best to err on the side of protecting patent rights, which promote innovation and participation in standards.      

Protecting SEP holders from increased scrutiny leads to benefits felt downstream by consumers. This is true because standards facilitate interoperability by establishing a uniform set of building blocks for a given technology. Customers feel the benefits of lowered costs, increased consumer choice, efficiency, and highly valued technology.²⁰ By protecting SEP holders from unneeded antitrust scrutiny, we recognize the value of the patent deemed standard-essential, and reward participation in the standard by patent holders who have innovated. Given the benefits conferred by standards, it is crucial that courts make participation in these standards profitable and elevate the values of patent protection, rather than imposing antitrust remedies. Patents are the right to exclude others from your technology.²¹ With FRAND commitments, we remove significant benefits to that right. Trying to protect competition through a conventional antitrust scheme has the potential to eliminate the remaining benefits, without adequately recognizing the importance of innovation.

In addition, looking to the market power held by SEP holders in the SEP fails to recognize the downstream competition benefiting consumers. For example, one standard in the tech world is JPEG. JPEG is a method of compressing digital images without losing picture quality. The JPEG standard defines how an image is compressed and decompressed, but not the file format itself.²² Despite standardization, multiple downstream file formats exist and can compete with one another. JPEG itself stands for Joint Photographic Experts Group, which is made up of a cross-section of members of two standard-setting organizations, ISO and ITU.²³ JPEG is a great example of both consumer benefits and encouraged innovation. Because of the uniformity of JPEG as a format, photos compressed in this way are able to be opened by hundreds if not thousands of types of software. Consumers can take and save JPEG images and open them with Photoshop, Windows Picture Viewer, Snapseed, and so forth. Further, innovation has not been stymied in the standard itself. One fear with standardization is that a lack of competition in the SEP will result in stagnation in that space. Instead, because technology progresses and innovation downstream can encourage or even require standards to innovate, JPEG has innovated on a number of occasions and is in the process of doing so today.²⁴

Notably, the United States recently moved to an approach that focuses on imposing antitrust liability on implementers and SSOs, rather than SEP holders. Current United States Assistant Attorney General for the Antitrust Division, Makan Delrahim, expressed the view in a speech this past November, that the risk of anticompetitive conduct is greater from implementers than from SEP holders.²⁵ This is because, as a result of the FRAND commitments, buyers are able to hold out for lower prices. Moreover, he noted that the SSOs would also be scrutinized more closely, as these organizations are made up of competitors who have the power to collude and devalue the intellectual property rights.²⁶ Perhaps most importantly, he noted that “patent holders can’t violate the antitrust laws by properly exercising the rights that patents confer.”²⁷ In this, he included the right to refuse to license, calling the FRAND commitments contractual in nature rather than an aspect of competition law.²⁸

Viewing the monopoly that exists in all SEPs as posing antitrust problems results in three negative consequences. First, it discourages standard participation, as antitrust scrutiny can be incredibly costly to innovators. This is especially true for startups and young companies who are able to get a foothold through standardization but may not be able to afford a fight against the weight of the FTC. In addition, standard participants will risk doubly losing value in their patents, as FRAND commitments represent a significant decrease in bargaining power on their own and potential for antitrust liability increases the costs for SEP holders meaningfully.²⁹ Second, antitrust scrutiny above and beyond a contract remedy is inefficient as it doesn’t recognize what may be an efficient denial of a license. Contract law recognizes what is known as “efficient breach,” whereby a participant may breach a contractual obligation so long as they pay for it because the overall net costs are less than the costs of the breach.³⁰ A breach of FRAND may be efficient, and thus should be allowed so long as a contract remedy exists. Third, by adding scrutiny for SEP holders, the value of the underlying technology and patent rights decreases. IP rights are founded on the basic view that creation should result in an ability to exclude.³¹ Calling the SEP holder a monopolist would diminish if not eliminate this right, as exclusion would be deemed anticompetitive.³² A system which rewards patent holders rather than sanctioning their basic rights reflects the value of innovation in society. Patents reward innovators by allowing them to profit from their inventions. Without profitability, companies will not invest the huge amounts of capital necessary to the research and development process.

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Standard-Essential Patents may be monopolies by default, but those who hold them should not be deemed monopolists without added anticompetitive effect downstream. Because standards result in more competition downstream, contract and patent law effectively prevent harm to competition without deterring innovation or failing to remunerate research and development. In order to protect the IP rights of innovators and encourage their participation in technical standards, courts should apply the doctrines of contract and patent law rather than antitrust law in evaluating SEPs and the FRAND commitments made to become standard-essential.

* Randi Brown is a 2L at New York University School of Law. This piece is a commentary on the 2018 problem at the Global Antitrust Invitational Moot Court Competition in Washington, D.C., hosted by Antonin Scalia Law School, George Mason University. The issue in the problem dealt with whether or not there was sufficient market power and a breach of a FRAND commitment by a Standard-Essential Patent holder to result in antitrust or unfair trade practice liability. Competitors were asked to cite to the laws and policies of multiple nations worldwide, as the problem was situated in a non-existent nation, and to argue the benefits and detriments of the schemes advanced in these countries. The views expressed in this piece do not necessarily reflect the views of the author. Rather, this article is a distillation of one side of the arguments made by the team at the Global Antitrust Invitational Moot Court Competition.
2. See generally Anne Layne-Farrar & Koren W. Wong-Ervin, Standard-Essential Patents and Market Power (George Mason Law & Economics Research Paper No. 16-47, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2872172.
3. Id. at 1.
4. See Competition Directorate–General of the European Commission, Standard-Essential Patents (June 2014), http://ec.europa.eu/competition/publications/cpb/2014/008_en.pdf.
5. See Ruben Schellingerhout, Standard Setting from a Competition Law Perspective, Competition Policy Newsletter 4 (2011), http://ec.europa.eu/competition/publications/cpn/2011_1_1_en.pdf.
6. See United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (“[T]o be condemned as exclusionary, a monopolist’s act must have an ‘anticompetitive effect.’ That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.”)
7. See generally Layne-Farrar, supra note 2. See also Joshua Wright, SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts, 21 Geo. Mason. L. Rev. 791, 794 (2014).
8. See generally Layne-Farrar, supra note 2.
9. See generally The Evolution of Mobile Technologies, Qualcomm (2014), https://www.qualcomm.com/media/documents/files/the-evolution-of-mobile-technologies-1g-to-2g-to-3g-to-4g-lte.pdf (last visited Mar. 16, 2018).
10. See, e.g., In re Alleged Abuse of Market Dominance of Qualcomm Incorporated., KFTC Decision No. 2017-0-25, Jan. 20, 2017 (S. Kor.); Huawei v. InterDigital (Yue Gaofa Minsan Zhougzi), No. 305, 306 (Guangdong Interm. People’s Ct. 2013) (China).
11. See, e.g., Assistant Attorney General Makan Delrahim, Remarks at the USC Gould School of Law’s Center for Transnational Law and Business Conference (Nov. 10, 2017) (transcript available at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-usc-gould-school-laws-center).
12. See Christopher R. Leslie, Patent Tying, Price Discrimination, and Innovation, 77 Antitrust L.J. 811, 811 (2011).
13. See id. at 811-12.
14. See Benjamin M. Miller, FRAND-encumbered SEPs and Injunctions: Why Section 5 of the FTC Act is an Inappropriate Remedy, 16 Colum. Sci. & Tech. L. Rev. 452, 458 (2015); Joshua D. Wright & Douglas H. Ginsburg, Comment on the Canadian Competition Bureau’s Draft Updated Intellectual Property Enforcement Guidelines 8 (George Mason Law & Economics Research Paper No. LS 15-14, 2015), https://ssrn.com/abstract=2655754 (noting that when a “SEP holder attempts to renegotiate or deviate from the original FRAND commitment made in gocod faith,” that conduct “is properly analyzed under contract, not antitrust law.”).
15. 540 U.S. 398, 399 (2004).
16. See Bruce H. Kobayashi & Joshua D. Wright, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup, 5(3) J. Competition L. & Econ. 469, 509 (2009) (noting the comparative advantage of contract law in regulating SEP holders’ FRAND commitments over antitrust).
17. See Jorge Padilla & Koren Wong-Elvin, Portfolio Licensing at the End-User Device Level: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level 2 (Oct. 16, 2016), https://ssrn.com/abstract=2806688.
18. See id.
19. See id.
20. See Consumers and Standards: Partnership for a Better World, ISO, http://www.iso.org/sites/ConsumersStandards/2_benefits.html (last visited Mar. 16, 2018).
21. 35 U.S.C § 154.
22. About JPEG, JPEG, https://jpeg.org/about.html (last visited Mar. 5, 2018)
23. Id. ISO and ITU are two standard setting organizations.
24. Id.
25. Assistant Attorney General Makan Delrahim, Remarks at the USC Gould School of Law’s Center for Transnational Law and Business Conference (Nov. 10, 2017) (transcript available at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-usc-gould-school-laws-center).
26. Id.
27. Id.
28. Id.
29. See Miller, supra note 14.
30. Gregory Klass, Efficient Breach, in The Philosophical Foundations Of Contract Law 362-387 (Gregory Klass, George Letsas & Prince Saprai eds., Oxford: Oxford University Press 2014).
31. 35 U.S.C § 154.
32. See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007); Huawei v. InterDigital (Yue Gaofa Minsan Zhougzi), No. 305, 306 (Guangdong Interm. People’s Ct. 2013) (China).