McSweeny takes on DOJ’s Delrahim over patent hold-up

4 April 2018 4:17pm

By Kirk Victor Originally published on FTCWatch™ on April 2, 2018

As she closes in on her final weeks as a member of the Federal Trade Commission, Terrell McSweeny apparently has decided to go out with a bang.

McSweeny, a Democrat whose term ended last September but will remain until her replacement is confirmed, has taken on Makan Delrahim, the Justice Department’s antitrust chief, who has repeatedly insisted that “patent hold-up” isn’t an antitrust problem.

McSweeny adamantly disagrees, contending that antitrust enforcement is required to combat patent hold-up, which she said in a statement released on March 21, is a real problem that has been recognized for years on a bipartisan basis.

The “simple and straightforward” theory of patent hold-up, she added, refers to the bargaining position of a patent holder, which she said “may increase considerably after a patent is included in the standard.” That is, as a 2007 report of the DOJ and FTC put it, the patent holder “can exploit its position if it is costly for users of the standard to switch to a different technology after the standard is set.”

But Delrahim argued in a March 16 keynote address at the University of Pennsylvania that the antitrust agencies shouldn’t occupy themselves with ensuring that patent holders keep their promise to license their technology on fair, reasonable and nondiscriminatory [FRAND] terms. Instead, he insisted contracts or common law remedies would be adequate.

He also said that those who favor antitrust enforcement to police FRAND commitments “principally rely on models devoid of economic or empirical evidence that hold-up is a real phenomenon, much less one that harms competition.”

“If an inventor participates in a standard-setting process and wins support for including a patented technology in a standard, that decision does not magically transform a lawful patent right into an unlawful monopoly,” Delrahim said.

McSweeny all but says that Delrahim’s approach is a dramatic shift in policy — and in the wrong direction. “It would be unfortunate if the antitrust agencies were to unlearn the lessons of over 15 years of scholarship and bipartisan study and question their longstanding support for combating hold-up based on vague concerns about over-deterrence,” she said in her statement.

Given the stark differences between McSweeny and Delrahim, some who closely follow this issue say that it will be difficult for attorneys to counsel clients. “It’s hard because there is such a difference between the two,” Michael Carrier, a professor at Rutgers Law School, said in an interview. “You need to be very careful given how all over the map these two positions are.”

“I think that Delrahim’s comments were out of the norm — not that I would disregard them completely,” David Newman, who leads the intellectual property group of Gould & Ratner, said in an interview. “I would counsel a client that hold-up can continue to be a problem, and parties need to be careful the way they manage their conduct. You don’t want to run afoul of either agency — the DOJ or the FTC.”

To buttress her case, McSweeny pointed to a series of hearings that the antitrust agencies held, starting in 2001, and she noted that “numerous panelists raised the issue of patent hold-up, including industry participants speaking from real-world experience.”

The agencies’ 2007 report on those hearings discussed the patent hold-up “problem” and concluded that it “threatens to harm consumers,” McSweeny wrote in her statement. A subsequent report in 2011, also found that “[h]old-up in the standard setting context can be particularly acute.” Both reports were adopted unanimously, 5-0, by the commission.

McSweeny also challenges Delrahim’s contention that there is no economic basis for using antitrust law to police FRAND commitments. “There is ample evidence that patent hold-up exists,” she said.

She pointed to the FTC’s record of bringing “a number of enforcement actions challenging opportunistic behavior by patent holders designed to hold up implementers of a standard.” McSweeny also cited “strong anecdotal evidence” that patent holders “are willing to seek considerably more than the FRAND value of their patents, consistent with added market power conferred by inclusion within a standard.”

The FTC commissioner cited two recent cases in which courts have found that patent holders have demanded far more than that to which they were entitled — a finding, she said, that is “consistent with hold-up.”

In those cases, she noted that the FRAND royalty rates offered by SEP holders “were orders of magnitude higher than what a neutral arbitrator found to be fair and reasonable.”

For example, in 2013 in Microsoft Corp v. Motorola, a federal court in Washington state, found that the cumulative FRAND royalty was about 1/150th of the royalty sought by Motorola. Motorola demanded $6-$8 per console for the use of certain patents while the court found the FRAND rate was less than four cents per unit for one standard and less than one cent per unit for another.

Similarly, in 2014, a federal court in Northern California found that the cumulative royalty rate to which LSI was entitled was less than 1/500th of the amount the company had demanded of Realtek Semiconductor.

McSweeny’s recommendation? The same approach that the agencies have followed “for the better part of two decades — we should recognize the potential for harm from hold-up and enforce on a case-by-case basis.”

But some practitioners take issue with McSweeny’s views and reliance on evidence that they see as insufficient. “I don’t think many economists would agree that a couple of litigated disputes provide empirical support for a theory of harm,” Lisa Kimmel, senior counsel at Crowell & Moring, wrote in an e-mail to FTCWatch.

Carrier countered that the examples that McSweeny cited are “helpful because we oftentimes hear from some folks that there has been no documented examples of hold-up. In the case law, when a patent holder is asking for thousands of times more than it actually gets, that is an example of hold-up.”

He also disagreed that just two citations provide weak support for McSweeny. “Some folks on the other side say there have been zero examples of hold-up. I would say two is more than zero.”

Kimmel wrote that it is “inaccurate” to say that there is a bipartisan consensus on the patent hold-up issue. For example, based on her reading of speeches and articles written by Maureen Ohlhausen, the acting chairman of the FTC and a Republican, Kimmel said that Ohlhausen “largely agrees with Makan that the agencies have focused too much on this issue without empirical evidence of a problem.”

Echoing Delrahim, Kimmel noted that “innovators invest for years to solve particular technical problems and there is very often one winning solution. That’s where you see the real lock-in. And SEP owners that have made a FRAND commitment are constrained, by both their own reputations and the shadow of the law.”

Like Delrahim, she finds contract remedies adequate to address “the theory of hold-up,” which she said is “about prices, not exclusion.” Antitrust laws, she wrote, “aren’t a tool for price regulation.”

But Carrier sees a role for antitrust in certain instances. He noted that “antitrust can play a part when a company gets monopoly power because its technology is incorporated into a standard and…it promised to reasonably license its patent. Then, once it finds itself in a monopoly position, all of a sudden it changes its tune. That is a concern, and in a particular set of facts, that could violate the antitrust laws.”

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