Danforth: FTC Patent Reform Is Needed

Last month, John Danforth, former general counsel of Rambus and legal adviser published an article in the Legal Times that was highly critical of the FTC's "much ballyhooed but misguided antitrust case against Rambus Inc." that was recently overturned by the DC Circuit (see earlier 271 coverage here).

Last week, the FTC filed a Petition for Rehearing En Banc seeking reversal of the DC Circuit opinion that rejected antitrust sanctions against Rambus for its alleged non-disclosures in a standard setting organization (“SSO”) called ‘JEDEC.’ This move by the FTC set off another response from Danforth who states that the petition "clearly and inherently evidences the need for reform," citing four ways in which the FTC is overstepping its bounds against Rambus in the petition:

(1) The FTC continues to “aggressively” overstate its case,
(2) The FTC takes an aggressive approach to other parts of the record in the case,
(3) The FTC’s en banc petition is merely the latest example of the FTC’s inability to acknowledge that its theory against Rambus did not hold up -- and has been overwhelmed by new developments and more recently discovered facts, and
(4) The FTC has added the potential for yet further delay in its six year old, now-very-stale case.

Notes Danforth:

Litigators litigate. Zealotry is often regarded as a virtue. But when, as with the FTC, the prosecutor and the judge are one and the same, restraint and reassessment should be built into the process. This is even more true when, as in the Rambus matter, the FTC has interests in a case relating to its budget and the scope of its own agency mission. There needs to be accountability and some level of detachment. There cannot be reliance on the donated legal work of self-interested third parties. There need to be occasional checks and balances on cases as they progress through discovery. In the end, there ought to be a policy – or perhaps a new law passed by Congress -- that important FTC antitrust cases be litigated in Federal courts, just as important DOJ antitrust cases already are.

Read Danforth's draft paper here.

Read the FTC's petition here.

See HP, Cisco & Sun Microsystems Motion for Leave and Invitation to file Amicus Curiae Brief In Support of the FTC (link).

See also S.M. Oliva's recently-filed Amicus brief opposing Rehearing En Banc (link). From the brief:

The FTC is not protecting the competitive process, but rather forcing the market to reach particular outcomes, namely the avoidance of patented technologies by SSOs or, alternatively, licensing of patents on terms that the Commission deems “reasonable.” The “but for” analysis that the Commission relies upon for its remedy is nothing more than an attempt to re-write market outcomes to satisfy the personal preferences of the commissioners. This far exceeds the constitutionally permissible scope of Commission conduct.

Appeals Court Throws Out FTC Ruling Against Rambus

Earlier, the Federal Trade Commission determined that Rambus, while participating in a standard-setting process on DRAM memory, deceptively failed to disclose to the standard setting organization (JEDEC) the patent interests it held in four technologies that were standardized.

On appeal, Rambus argued that the Commission erred in finding that it violated any JEDEC patent disclosure rules and thus that it breached any antitrust duty to provide information to its rivals. Second, it asserted that even if its nondisclosure contravened JEDEC’s policies, the Commission found the consequences of such nondisclosure only in the alternative: that it prevented JEDEC either from adopting a non-proprietary standard, or from extracting a RAND commitment from Rambus when standardizing its technology. As the latter would not involve an antitrust violation, there would be insufficient basis for liability.

The Appeals Court agreed with Rambus, noting that they had "serious concerns about the breadth the Commission ascribed to JEDEC’s disclosure policies and their relation to what Rambus did or did not disclose." Noted the court:

Here, the Commission expressly left open the likelihood that JEDEC would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property. Under this hypothesis, JEDEC lost only an opportunity to secure a RAND commitment from Rambus. But loss of such a commitment is not a harm to competition from alternative technologies in the relevant markets. . . . Indeed, had JEDEC limited Rambus to reasonable royalties and required it to provide licenses on a nondiscriminatory basis, we would expect less competition from alternative technologies, not more; high prices and constrained output tend to attract competitors, not to repel them.

The court pinged the FTC for stretching a very thin evidentiary record to establish anticompetitive behavior. The parties stipulated earlier that, as of Rambus’s last JEDEC meeting, it held no patents that were essential to the manufacture or use of devices complying with any JEDEC standard, and that when JEDEC issued the SDRAM standard Rambus had no pending patent claims that would necessarily have been infringed by a device compliant with that standard.

As such, the only apparent grounds for supporting the FTC's opinion was that Rambus failed to fully disclose pending applications, as well as disclose progress on unfiled amendments at the PTO. However, the Appeals court found that the JEDEC policies did not explicitly address such situations, and, after looking at the trial record, concluded that "[w]e don’t see how a few strands of trial testimony would persuade the Commission to read this language more broadly."

Also, the Court had some words to share on the JEDEC patent policy:

As the Federal Circuit has said, JEDEC’s patent disclosure policies suffered from “a staggering lack of defining details.” . . . Even assuming that any evidence of unwritten disclosure expectations would survive a possible narrowing effect based upon the written directive of Manual 21-I, the vagueness of any such expectations would nonetheless remain an obstacle. One would expect that disclosure expectations ostensibly requiring competitors to share information that they would otherwise vigorously protect as trade secrets would provide “clear guidance” and “define clearly what, when, how, and to whom the members must disclose.”. . . This need for clarity seems especially acute where disclosure of those trade secrets itself implicates antitrust concerns; JEDEC involved, after all, collaboration by competitors. . . . In any event, the more vague and muddled a particular expectation of disclosure, the more difficult it should be for the Commission to ascribe competitive harm to its breach.

The D.C. Circuit's decision does not end the Rambus litigation, but merely returns the case to the FTC for possible retrial consistent with the court's opinion.

Download the opinion here (link)

SIDE NOTES: From CNNMoney.com: "Michael Cohen, an analyst at Pacific American Securities, has estimated that Rambus could realize as much as $11.7 billion in total royalties from all makers of DRAMs, assuming the company was able to clear all of its legal hurdles."

Rambus currently has patent-infringement cases against many DRAM makers, including Samsung Electronics Co., Micron Technology Inc., Hynix Semiconductor Inc., and Nanya Technology Corp.