FRAND and Antitrust

64 Pages Posted: 17 Jul 2019 Last revised: 24 Aug 2020

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: August 22, 2020

Abstract

This paper considers when a patentee’s violation of a FRAND commitment also violates the antitrust laws. It warns against two extremes. First is thinking that any violation of a FRAND obligation is an antitrust violation as well. FRAND obligations are contractual, and most breaches of contract do not violate antitrust law. The other extreme is thinking that, because a FRAND violation is a breach of contract, it cannot also be an antitrust violation.

As the Supreme Court has made clear many times, every antitrust case must consider the market environment in which conduct is evaluated. SSOs operated by multiple firms are joint ventures. Antitrust’s role is to evaluate how challenged restraints operate within the venture and condemn unreasonably anticompetitive practices. The district court and Ninth Circuit’s approaches in the Qualcomm litigation illustrate one court that did that and one that did not.

The Ninth Circuit also held that conduct should be tested by its harm to rivals, not to consumers. That conclusion conflicts with decades of antitrust jurisprudence. Section 1 of the Sherman Act requires an agreement that threatens to reduce market output, thereby raising prices. For exclusionary practices the immediate target of anticompetitive conduct is rivals, but the ultimate harm is suffered by consumers.

The antitrust issue of unilateral refusals to deal is too often confused with the essential facility doctrine. The essential facility doctrine is based on the idea that some assets are so essential to commerce that the owner has a duty to share them. By contrast, the refusal to deal rule is rooted in a specific prior contractual obligation, reliance and path dependence, and subsequent repudiation. Many joint ventures involve a significant sunk investment in assets that are dedicated to the venture. If one firm can later extract itself and commandeer the relevant technology, it can leave the remaining firms at a significant competitive disadvantage, with the effect of transferring market share, reducing output, raising prices, and ultimately undermining the competitive promise of such ventures. While the essential facility doctrine is conducive to competitor passivity, the Aspen refusal to deal rule facilitates competitor investment.

The debate over “holdup” or “holdout” in standard setting organizations has occasional antitrust relevance. Holdout occurs when implementers conspire to exclude patentees or suppress royalties. But the structure and membership of the SSOs that employ FRAND make that explanation highly unlikely. Standard essential patents are largely self-declared and significantly over declared, so the holdout story posits victims flocking to a cartel rather than seeking to avoid it. In addition, “holdout” hypothesizes agreements to force patentees to accept infra-market royalties, but FRAND royalties are determined post-commitment by independent tribunals, and there is no evidence of systematic undercompensation.

Finally, entitlement to an injunction on a FRAND-encumbered patent depends on two factors. First, the plaintiff must show its own “clean hands,” which is undermined by its violation of FRAND agreements or the antitrust laws. Second, entitlement to an injunction is limited by the patentee’s own contractual commitment to license out a patent to one who is willing to pay a FRAND royalty.

Keywords: Antitrust, Standard Setting, Patents, FRAND, Standards, Refusal to Deal, Aspen, Tying, Exclusive Dealing, Walker Process, Qualcomm, Rambus

Suggested Citation

Hovenkamp, Herbert, FRAND and Antitrust (August 22, 2020). Cornell Law Review, 2020, Available at SSRN: https://ssrn.com/abstract=3420925 or http://dx.doi.org/10.2139/ssrn.3420925

Herbert Hovenkamp (Contact Author)

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University of Pennsylvania - The Wharton School ( email )

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University College London ( email )

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