Standard-Essential Patents Are Being Reintroduced to Antitrust Standards With the Welcome Demise of the “New Madison” Approach

The U.S. Department of Justice’s (“DOJ”) hands-off approach to antitrust enforcement involving standard-essential patent (“SEP”) licensing may soon be relegated to the dustbin of history, where it belongs.

DOJ’s Antitrust Division is currently re-evaluating the Department’s December 2019 Policy Statement on Remedies for SEPs, which largely removed SEPs from antitrust scrutiny under former Assistant Attorney General Makan Delrahim’s ill-conceived “New Madison” approach to antitrust and intellectual property.  To understand the importance of using antitrust law to challenge the market power wielded by SEP owners, a little background is necessary.

SEPs are patents that are supposedly essential to global technology standards that are critical to virtually all high tech products sold today, especially those products that connect to and interoperate with telecommunications networks.  Mobile phones—which depend on standards to ensure that different companies’ products work well together—are the classic example, but any device that connects to the Internet is affected, from watches to automobiles to household appliances.  These standards—which guarantee the compatibility of competing products—are created by standard-setting organizations (“SSOs”), which are typically dominated by large telecommunication hardware competitors which, in turn, also own expansive patent portfolios.  Once their patents are incorporated into a standard, the SEP owners’ market power is multiplied far beyond the scope of the underlying patents because the standardization process has effectively removed competing substitute technologies from the market.

To counterbalance that immense market power, some SSOs created fair, reasonable, and non-discriminatory (“FRAND”) commitments, meaning that SEP owners voluntarily agree to license their patents on fair and reasonable terms in exchange for their patented technologies being incorporated into the standard.  But in reality, SEP owners routinely flout their FRAND commitments by demanding excessive royalty rates from any company that seeks to build and sell a product that relies on those standards, and by seeking injunctions or similar remedies to exclude those products all together from the market.  This abusive practice is commonly referred to as patent “hold up.”

Recognizing that SEPs confer market power, and that patent hold up by SEP owners can stifle competition and lead to higher prices, the DOJ and the United States Patent and Trademark Office issued its first SEP Remedies Policy Statement on Remedies for SEPs in 2013 that made the common-sense observation that an SEP owner who seeks to enjoin or exclude on the basis of licensing terms that are “incompatible” with its voluntary FRAND commitments may “harm competition and consumers.”  The 2013 Statement was nothing new; the DOJ and the FTC had previously noted in 2007—under the administration of President George W. Bush—that SEP owners “may have the power to extract higher royalties or other licensing terms that result the absence of competitive alternatives,” which could result in consumer harm “if those higher royalties were passed on in the form of higher prices.”

But under the Trump administration, the Antitrust Division rescinded the 2013 Statement and rejected the long-held view—which powerful SEP owners had opposed—that antitrust law could apply to patent hold-up in certain circumstances.  Instead, former AAG Delrahim’s “New Madison” approach dictated that only contract law applies to disputes over FRAND-encumbered SEPs, and special scrutiny is unwarranted when an SEP owner seeks an injunction that conflicts with its FRAND commitments, regardless of potential anticompetitive effects or consumer harm.  The DOJ did not stop there.  Sua sponte, the agency issued a new Business Review Letter in 2020 to withdraw the Division’s 2015 support for the Institute of Electrical and Electronics Engineers’ (IEEE) policy of calculating royalties on the smallest saleable patent practicing unit—a  limitation on the market power of SEP owners.  Perhaps even more egregious, under Mr. Delrahim’s leadership, the Division also engaged in a vigorous amicus brief campaign to oppose antitrust enforcement against SEP-related disputes, including taking the extraordinary step of opposing its sister agency’s arguments in the FTC v. Qualcomm suit.

There are hopeful signs that the current administration will rebalance the scale between SEP owners and licensees.  President Biden has ordered Attorney General Merrick Garland and Commerce Secretary Gina Raimondo to consider revisions to “their position on the intersection of intellectual property and antitrust laws,” which spurred the ongoing review of the 2019 Policy Statement on Remedies for SEPs.  The Antitrust Division has also defanged the 2020 supplemental IEEE Business Review Letter by reclassifying it as “advocacy.”  And on May 17, 2021, the Division offered to file a letter in the appeal of Continental Automotive Systems v. Avanci in the U.S. Court of Appeals for the Fifth Circuit to provide “its current views of the antitrust views of the antitrust issues raised by the case.”  Under the previous administration, the DOJ had argued that the private plaintiff’s claims against the Avanci patent pool sounded in contract law, not antitrust, and the complaint was dismissed.

To be sure, the intersection of antitrust and intellectual property involves a fundamental tension between vigorous antitrust enforcement against anticompetitive conduct and a recognition that the grant of a patent allows the owner to exclude others from using the product or process protected by the patent  Nevertheless, antitrust law should and must be enforced when FRAND-encumbered SEPs are used by their owners to exclude competition beyond the rights granted by the underlying patents and charge supracompetitive royalty rates that harm consumers through higher prices.

The mere involvement of intellectual property in anticompetitive conduct should not change the government’s calculus, nor deter private plaintiffs, in deciding whether or not to enforce, or seek relief under, the antitrust laws.

Edited by Gary J. Malone

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