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Digital TV blurred by patent 'holdup'

Marcia Coyle / Staff reporter
April 14, 2008

WASHINGTON With a series of recent high-stakes cases, the Federal Trade Commission has become increasingly aggressive in its pursuit of unfair or anti-competitive behavior by patent holders, according to patent litigators and others, who are now watching to see if the agency will step into a multibillion-dollar fight that could affect the nation's federally mandated conversion to digital television.

The American Antitrust Institute (AAI), a Washington-based advocacy group, recently filed a petition with the FTC asking it to investigate alleged antitrust patent "holdup" by Rembrandt Technology L.P., a patent holding and licensing company based in Bala Cynwyd, Pa.

Rembrandt has filed 14 patent infringement suits now consolidated as multidistrict litigation in Delaware against the four major television networks, the five major cable systems, and television and equipment manufacturers. It seeks licensing royalties for use of a patented technology that increases the performance of digital transmissions.

Rembrandt's royalty demand is exorbitant, according to AAI's counsel, David Balto of Washington and Richard Wolfram, a New York-based solo practitioner specializing in antitrust, and violates an obligation to make the technology available on reasonable and nondiscriminatory terms.

That obligation arose, they contend, when the patented technology originally owned by AT&T and later acquired by Rembrandt became part of the government-mandated standard for digital television broadcasting developed by the Advanced Television Systems Committee, a so-called standard-setting organization.

"The increased costs that these folks could impose on digital television if they are allowed to renege on their obligation would be in the millions of dollars," said Balto, an antitrust specialist and former policy director of the FTC. "The people who will have to pay more immediately are the networks, cable companies and manufacturers, but ultimately these costs will be born by consumers."

If the FTC opens an investigation, the agency once again will be drawn into the complex and controversial intersection of antitrust enforcement, intellectual property rights and standard-setting organizations.

"You will see more and more cases having to do with standard setting and that's because they are more and more important, more and more strategic, and more and more money rides on them," said Andrew Updegrove, a partner at Boston's Gesmer Updegrove who represents mature and emerging high technology companies.

Industry standards

Ever wonder why light bulb wattage comes as 40, 60 and 75, and not 35, 45 and 65, or why fire hydrants are interchangeable in major cities today? asked Updegrove. The answer is industry standards.

A year ago in a joint report on intellectual property, the FTC and the Department of Justice said: "Industry Standards are widely acknowledged to be one of the engines driving the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers."

The standard-setting process has been evolving during the past 100 years, according to Updegrove, who advises companies involved in the process. The government became involved after the Great Baltimore Fire in 1904. Fire companies that responded from surrounding cities found that their fire hoses did not fit the Baltimore fire hydrants. A national standard for fire hydrant connections later was developed by the National Fire Protection Association.

"This process evolved in a world of physical standards where you didn't have to worry about patents and copyrights," recalled Updegrove.

In the past 15 years, Updegrove and others said, there has been huge growth in the number and variety of standard-setting organizations. Hundreds of SSOs maintain hundreds of thousands of standards.

But standard setting becomes particularly tricky when intellectual property rights are involved.

"There's always the potential that, if you include a patented technology in a standard, the owner or someone assigned the patent will try to exploit that and hold up an entire industry by saying, 'You can't use the technology unless you pay me and I'll name my price,' " said M. Sean Royall, co-chairman of the antitrust and trade regulation practice group at Los Angeles-based Gibson, Dunn & Crutcher.

"That's the holdup problem. SSOs have imperfect ways of dealing with that," said Royall, who practices in Dallas.

One way is the patent policy of the American National Standards Institute, a parent organization to many SSOs. The policy allows a patented technology such as the one owned by Rembrandt to be included in industry standards as long as the different groups participating in the standard-setting process agree that inclusion of that technology is the best way to achieve their objective.

The participants are required to disclose all of their patents that potentially may be infringed by the standard being developed

To offset the potentially huge market power that including a patented technology into a standard would give the patent owner, the policy also requires the owner to agree to provide licenses to those implementing the standards such as the manufacturers, broadcast networks and cable companies at no cost or under reasonable and nondiscriminatory (RAND) terms.

"You check your intellectual property rights at the door when you walk into the standard-setting organization," said AAI's Wolfram. "You're giving up the right to charge whatever you want."

AT&T was an original participant in the digital television standard developed by the Advanced Television Standards Committee and then adopted by the Federal Communications Commission as the national conversion standard. AT&T agreed to license its patented technology included in the standard on RAND terms.

AAI says Rembrandt in court litigation has argued that it has no obligation to license on RAND terms. The antitrust group in its FTC petition accuses Rembrandt of violating Section 2 of the Sherman Act and Section 5 of the Federal Trade Commission Act. Rembrandt has "willfully obtained or at least has a dangerous probability of achieving monopoly power that it would not otherwise possess."

"The first legal argument is the RAND commitment follows the assignment of the patent," said Wolfram. If a later assignee can renege on a promise made by the original patent owner a promise relied on by other participants when including the patented technology in the standard then the very basis for including that technology has been undermined, he said.

Gibson Dunn's Royall agreed: "That's a Sherman Act problem, an antitrust violation. It would be a real serious problem if companies were free to do that. Then you could never rely on patent assurances and if you can't rely on that, standard setting will come to a screeching halt."

Barry E. Ungar, chief litigation counsel for Rembrandt, declined to comment because the petition is pending at the FTC.

Antitrust big gun

Whether the FTC should use antitrust law or the FTC act to attack abuses, such as patent "holdup," of the standard-setting process is a hot topic among antitrust and IP lawyers.

Antitrust law has always been sensitive to any coming together of competitors, noted Christopher Kelly, a partner in the Washington office of Chicago's Mayer Brown whose antitrust litigation practice focuses on the application of antitrust law to the acquisition and use of intellectual property rights.

But in the past 25 to 30 years especially, he added, there has been increased understanding, across the board, that under the right circumstances, when competitors get together some good things can happen. "Since 1995 or so, the focus of the agencies has been not nearly so much on the idea standard setting may be a cartel in disguise as on the idea that it is something really valuable, essential in many industries," said Kelly.

"And, it requires protection from opportunistic conduct by individual firms that might in some way take advantage of the standard-setting process in order to grab monopoly power."

The FTC has gone after abuses of the standard-setting process in a series of cases beginning in 1996 with an action against computer maker Dell Inc. Dell had participated in a proposed standard involving Ethernet technology, and had confirmed the standard would not violate any Dell patents. But after the standard was adopted and product manufactured, Dell claimed patent infringement.

The FTC brought an action under Section 5 of the FTC act alleging that Dell's conduct was anti-competitive because it hindered industry acceptance of the standard. Dell signed a consent order in 1996 in which it agreed not to enforce patent rights.

The agency also has moved against Unocal for keeping its clean-fuel patents and applications secret while helping set industry standards for reformulated gas that required the use of its technology. And in 2006, the FTC found that Rambus Inc., through a course of deceptive conduct, distorted a critical standard-setting process and engaged in an anti-competitive "holdup" of the computer memory industry. Rambus' deceptive acts constituted exclusionary conduct under Section 2 of the Sherman Act. (Rambus has an appeal pending.)

In January, in a case very similar to the digital television petition, the FTC in a split decision found that Negotiated Data Solutions LLC violated Section 5 of the FTC act, which prohibits unfair methods of competition. Unlike Dell and Unocal, N-Data did not conceal the existence of patents during the standard-setting process.

Its patent-holder predecessor had fully disclosed its patents and had agreed to license the technology for $1,000 per license. Eight years later, after no one had sought the licenses, N-Data tried to obtain licenses for more than the original commitment.

"The fact is the FTC is very good at enforcing antitrust law and consumer protection law and ordinarily never the twain shall meet," said Mayer Brown's Kelly. "But now you've got this bleedthrough that's informing these cases and it's not clear that's a good thing."

Businesses may be moving into a period in which they find themselves vulnerable to being judged after the fact by the FTC, not on the basis of the objective effect of what was done, but on some people's notions of what's right and what isn't, he said.

Gibson Dunn's Royall, the AAI's Balto and Wolfram and others believe these cases should be grounded in antitrust law.

"It's very important to give guidance to companies and commercial actors," said Royall, a former deputy director of the FTC Bureau of Competition.

"When the FTC acts under Section 5, unfair methods of competition, it signals they did not think or were not sure this was a violation of the Sherman Act. Is the FTC now going to bring other cases attacking companies for things they had no reason to believe were unlawful under antitrust laws?

"My view is: Firmly root this in Sherman Act case law, make it very well supported, and you will have clearer standards for everyone."