Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, November 11, 2019

FRAND and Antitrust

Herb Hovenkamp, Penn addresses FRAND and Antitrust.

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.

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. In her Qualcomm decision Judge Koh devoted considerable space to standard essential patents and FRAND commitments, but she addressed the antitrust exclusion claims with little reference to standard setting or FRAND.

Breach of a FRAND commitment violates the antitrust laws when it causes competitive harm. For §1 of the Sherman Act, this requires an agreement that threatens to reduce market output. If the conduct is reasonably ancillary to other procompetitive activity, this requires an assessment of market power and anticompetitive effects. For tying and exclusive dealing the principal vehicle of competitive harm is foreclosure of competitors. In lengthy discussions, Judge Koh found foreclosure levels in the Qualcomm case to be significant. Perhaps because it was unnecessary, however, she did not consider whether antitrust policy should have heightened concerns about foreclosure in networked markets where interoperability is essential.

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 conduct – namely, 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. This makes antitrust refusal to deal rules particularly important for collaborative networked industries.

While the essential facility doctrine is conducive to competitor passivity, the Aspen rule facilitates competitor investment. The idea that a facility is “essential” indicates that rivals need not bother to develop their own alternatives. Instead, they should seek a right to connect into the dominant firm’s facility. By contrast, the Aspen rule is based on a premise of voluntary commitment to invest jointly. If one firm later reneges on that commitment in a way that threatens to undermine it, those investment backed expectations are lost. The Aspen rule thus serves to protect the integrity of investment when noncompetitive outcomes are threatened.

The debate over “holdup” or “holdout” in the FRAND setting has occasional antitrust relevance. While holdout is a real problem, there is little empirical evidence that it occurs frequently in FRAND settings. Holdout occurs when implementers conspire to exclude patentees or suppress royalties. But standard essential patents are largely self-declared and, as it appears, significantly over declared. Further, “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, while some object to using antitrust law to discipline firms for seeking injunctions on FRAND-encumbered patents, existing antitrust doctrine on the point is clear and sufficient: a firm has the right to seek relief in court unless its prospects are so poor that the lawsuit must be regarded as a “sham.” The antitrust question of injunctions on FRAND patents is thus quite fact-specific and depends on the extent to which the law is settled.

https://lawprofessors.typepad.com/antitrustprof_blog/2019/11/frand-and-antitrust.html

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