Exclusionary Conduct in the Context of Standard Setting William E. Cohen Deputy General Counsel for Policy Studies U.S. Federal Trade Commission Views expressed are those of the speaker and are not necessarily the views of the FTC or any individual Commissioner

Collaborative Standard Setting Long favored by antitrust because of the potential for substantial procompetitive benefits Long favored by antitrust because of the potential for substantial procompetitive benefits Potential benefits include facilitating interoperability among complementary components Potential benefits include facilitating interoperability among complementary components Yet, standard setting displaces the normal process of selection through competition Yet, standard setting displaces the normal process of selection through competition

Concern: Conduct that Distorts the Cooperative Standard-Setting Process Allied Tube v. Indian Head (1988)– rigging the vote Allied Tube v. Indian Head (1988)– rigging the vote American Society of Mechanical Engineers v. Hydrolevel (1982) – misrepresenting non-compliance American Society of Mechanical Engineers v. Hydrolevel (1982) – misrepresenting non-compliance Recent years – concern with exclusionary conduct involving patents Recent years – concern with exclusionary conduct involving patents

Patent Hold-Up Standard confers value beyond the patent Standard confers value beyond the patent Failure to disclose may allow patent holder to extract higher royalties later Failure to disclose may allow patent holder to extract higher royalties later Possible limitations on exercise Possible limitations on exercise

Disclosure Requirements Disclosure before standardization decisions (“ex ante”) permits SSO participants to make their choices with full awareness of consequences. Disclosure before standardization decisions (“ex ante”) permits SSO participants to make their choices with full awareness of consequences. Disclosure may also facilitate protection against hold-up through ex ante licensing commitments. Disclosure may also facilitate protection against hold-up through ex ante licensing commitments.

Disclosure Requirements A matter for choice by the SSO. A matter for choice by the SSO. U.S. enforcement agencies have not advocated that SSOs adopt any specific disclosure or licensing policy. U.S. enforcement agencies have not advocated that SSOs adopt any specific disclosure or licensing policy.

FTC Enforcement Actions Dell Computer – certification requirement allegedly breached; Dell Computer – certification requirement allegedly breached; “not inadvertent”“not inadvertent” Unocal Unocal Alleged misrepresentation to a state standard-setting board that research was non-proprietaryAlleged misrepresentation to a state standard-setting board that research was non-proprietary

Rambus FTC found liability under monopolization principles – under appeal FTC found liability under monopolization principles – under appeal Basic Theory – A Course of Deceptive Conduct Basic Theory – A Course of Deceptive Conduct An expectation of disclosureAn expectation of disclosure Omissions and misstatementsOmissions and misstatements

Deception as Exclusionary Conduct Advertising Cases – frosty reception and rebuttable presumption of de minimis effect Advertising Cases – frosty reception and rebuttable presumption of de minimis effect Microsoft – misrepresenting the ability of Java tools to function outside Windows environment Microsoft – misrepresenting the ability of Java tools to function outside Windows environment Rambus – allegedly hiding the price and thwarting ability to make informed choice Rambus – allegedly hiding the price and thwarting ability to make informed choice

Deception as Exclusionary Conduct Profit-Sacrifice/No Economic Sense Tests Profit-Sacrifice/No Economic Sense Tests May miss welfare-reducing conduct that is inexpensive to execute – “cheap exclusion”May miss welfare-reducing conduct that is inexpensive to execute – “cheap exclusion” The wrong focusThe wrong focus FTC opinion applied the rule-of-reason balancing test FTC opinion applied the rule-of-reason balancing test Focus on whether “whether the monopolist’s conduct on balance harms competition”Focus on whether “whether the monopolist’s conduct on balance harms competition”

Deception as Exclusionary Conduct Misrepresentation or omission Misrepresentation or omission Misrepresentation must be material – likely to mislead others acting reasonably under the circumstances Misrepresentation must be material – likely to mislead others acting reasonably under the circumstances Misrepresentation must be intentional Misrepresentation must be intentional

Causation Contributed significantly to SSO’s selection of the technology Contributed significantly to SSO’s selection of the technology SSO’s selection contributed significantly to acquisition of monopoly power SSO’s selection contributed significantly to acquisition of monopoly power

Durability of the Market Power Lock-in effects Lock-in effects Expense and delay from revising a standardExpense and delay from revising a standard Switching costs of direct manufacturersSwitching costs of direct manufacturers Switching costs of producers of complementsSwitching costs of producers of complements

Breach of Contract Violation of a Duty to Disclose Violation of a Duty to Disclose Violation of a Licensing Commitment Violation of a Licensing Commitment FRAND (fair, reasonable and non- discriminatory) termsFRAND (fair, reasonable and non- discriminatory) terms Broadcom v. QualcommBroadcom v. Qualcomm A tough issue: promise given in good faith and later repudiatedA tough issue: promise given in good faith and later repudiated

Need to Proceed with Caution Concern – every commercial dispute over accuracy and completeness of disclosures or over fulfillment of a contract could become an antitrust suit Concern – every commercial dispute over accuracy and completeness of disclosures or over fulfillment of a contract could become an antitrust suit Concern – firms might hold back from participating in standard-setting organizations if they become concerned with unwarranted antitrust liability Concern – firms might hold back from participating in standard-setting organizations if they become concerned with unwarranted antitrust liability

Standard Setting Qualities Often May Support Antitrust Intervention Harm to competition Harm to competition Cooperative Environment Cooperative Environment Invisibility of the Misconduct Invisibility of the Misconduct Clarity of the Misconduct Clarity of the Misconduct Inadequacy of Remedies under Other Laws Inadequacy of Remedies under Other Laws

An Evolving Area of the Law The Rambus appeal The Rambus appeal Movement into licensing terms Movement into licensing terms Issues with ex ante bargaining – the possibility of collusion Issues with ex ante bargaining – the possibility of collusion