AntitrustWorldWiki - User contributions [en]

Afghanistan

2014-12-28T18:39:28Z

LMyhre:

'''Score = 0'''

''Governed by:'' There is currently no competition law that is enforced in Afghanistan. There is a law on the books from 2010, Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>, but it is officially not enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref> If the draft were adopted in the form available on the Ministry of Commerce and Industries website, its Antitrust World Reports score would be 26.

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| 0
|

|-
|
| Mandatory
| 3
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| 2
|

|-
|
| Post-merger
| 0
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-28T18:37:36Z

LMyhre:

'''Score = 0'''

''Governed by:'' There is currently no competition law that is enforced in Afghanistan. There is a law on the books from 2010, Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>, but it is officially not enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref> If the draft were adopted in the form available on the Ministry of Commerce and Industries website, its Antitrust World Reports score would be 26.

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| n/a
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-28T18:32:18Z

LMyhre:

'''Score = 0'''

''Governed by:'' There is currently no competition law that is enforced in Afghanistan. There is a law on the books from 2010, Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>, but it is officially not enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref> If the draft were adopted in the form available on the Ministry of Commerce and Industries website, its AntitrustWorldWiki score would be 26.

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| n/a
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-28T18:31:21Z

LMyhre:

'''Score = 0'''

''Governed by:'' There is currently no competition law that is enforced in Afghanistan. There is a law on the books from 2010, Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref> but it is officially not enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref> If the draft were adopted in the form available on the Ministry of Commerce and Industries website, its AntitrustWorldWiki score would be 26.

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| n/a
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-22T04:39:29Z

LMyhre:

'''Score = 26'''

''Governed by:'' Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>. The 2010 law is not currently being enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref>

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| n/a
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-22T04:38:04Z

LMyhre:

'''Score = ##'''

''Governed by:'' Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>. The 2010 law is not currently being enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref>

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| n/a
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-22T04:35:20Z

LMyhre:

'''Score = ##'''

''Governed by:'' Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>. The 2010 law is not currently being enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as ("DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref>

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| 5
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Afghanistan

2014-12-22T04:34:25Z

LMyhre: New page: '''Score = ##''' ''Governed by:'' Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>. The 2010 law is not cur...

'''Score = ##'''

''Governed by:'' Competition Law<ref>Competition Promotion and Consumer Protection Directorate(CPCPD), http://www.cpcpd.gov.af/the-law.html</ref>. The 2010 law is not currently being enforced.<ref>FAQ of the Competition Promotion and Consumer Protection Directorate, http://www.cpcpd.gov.af/faqs.html</ref> A consultation-ready DRAFT of legislation to replace the 2010 law has been under consideration since at least 2011, and is presented here (hereinafter referred to as (DRAFT Competition Law").<ref>Ministry of Commerce and Industries, http://moci.gov.af/Content/files/CL-DRAFT.pdf</ref>

{| class="wikitable"
|-
! Category !! Subcategory !! Score !! Comment

|- class="categorydivision"
| Scope
| Extraterritoriality
| 1
| § 41: "The provisions of this Act shall apply to all such agreements or business practices which have a direct, foreseeable and substantial effect in the relevant market in Afghanistan, irrespective of whether such agreement, business practice or combination is entered into or carried out outside of Afghanistan or any or all parties to the agreement, business practice or combination are located outside of Afghanistan."

|- class="categorydivision"
| Remedies
| Fines
| 1
| § 25: Fines may be imposed for anti-competitive agreements (§ 3), abuse of dominant position (§ 4), hoarding (§ 5), and prohibited mergers (§ 6).

|-
|
| Prison Sentences
| 0
|

|-
|
| Divestitures
| 1
| §§ 20 and 21 provide for directing parties in a merger, or dominant enterprises, to make such modifications to their enterprises or agreements as are needed to prevent abuse of dominant position.

|- class="categorydivision"
| Private Enforcement
| 3rd Party Initiation
| 1
| § 18 provides for initiation of an investigation by any person.

|-
|
| Remedies Available to 3rd Parties
| 1
| § 34.3: "Without prejudice to the provisions of this Act, any person [natural or legal] may make an application to the Competition Court to adjudicate on a claim for compensation that may arise from the findings of the Competition and Consumer Authority, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered as a result of any contravention of the provisions of Chapter II, having been committed by such enterprise."

|-
|
| 3rd Party Rights in Proceedings
| 0
|

|- class="categorydivision"
| Merger Notification
| Voluntary
| n/a
|

|-
|
| Mandatory
| 5
| §6(3)(b) requires that mergers meeting set criteria "shall be notified to the Competition and Consumer Authority for their approval, prior to their implementation and within thirty days of the approval of the proposal relating to the combination by the board of directors of the concerned enterprises or execution of a formal agreement, or announcement of public bid or the acquisition of a controlling interest."

|-
|
| Pre-merger
| 5
|

|-
|
| Post-merger
| n/a
|

|- class="categorydivision"
| Merger Assessment
| Dominance
| 1
| §6(3) requires prior approval of mergers that would result in worldwide turnover or worldwide assets that exceed amounts set in regulations, or by parties whose combined domestic market share is greater than 50%.

|-
|
| Restriction of Competition
| 1
| §6: "No person or enterprise shall enter into a combination which has the object or effect of preventing, restricting or distorting competition in the relevant market in Afghanistan and such combination shall be void."

|-
|
| Public Interest (Pro D)
| 0
|

|-
|
| Public Interest (Pro Authority)
| 0
|

|-
|
| Other
| 1
| §19(1)(j) allows the Competition and Consumer Authority to consider "possibility of a failing business" when determining whether to permit a merger.

|-
|
| Efficiency
| 1
| §19(1)(k) permits the Competition and Consumer Authority to consider "nature and extent of innovation" when deciding on whether to allow a merger.

|- class="categorydivision"
| Dominance
| Limits Access
| 1
| §4(2)(f) prohibits a dominant enterprise from "[indulging] in a practice or practices resulting in denial of market access."

|-
|
| Abusive Acts
| 1
| §4(1): "No enterprise shall abuse its dominant position by carrying out such business practices or entering into such agreements, which have as their object or effect prevention, restriction or distortion of competition in the relevant market."

|-
|
| Price Setting
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Discriminatory Pricing
| 1
| §4(2)(a) forbids an enterprise from using its dominant position to "directly or indirectly, [impose] unfair or discriminatory: (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale... of goods or services

|-
|
| Predatory Pricing
| 1
| §4(2)(a)(ii) forbids a dominant enterprise from engaging in predatory pricing.

|-
|
| Resale Price Maintenance
| 1
| §4(3) "Certain types of business practice(s) or agreement(s), when carried out or entered into by dominant enterprises, including... imposing the requirement of resale price maintenance, unless it is expressly stated that prices lower than those prices may be charged... shall be prohibited under sub-section (1) only if such practice(s) or agreement(s) has the effect of preventing, distorting or restricting competition in the relevant market in Afghanistan."

|-
|
| Obstacles to Entry
| 1
| §4(2) and §4(3)

|-
|
| Efficiency Defense
| 0
|

|- class="categorydivision"
| Restrictive Trade Practices
| Price Fixing
| 1
| §3(2)(i)

|-
|
| Tying
| 1
| §4(3)(a)

|-
|
| Market Division
| 1
| §3(2)(iii)

|-
|
| Output Restraint
| 1
| §3(2)(ii)

|-
|
| Market Sharing
| 1
| §3(2)(iii)

|-
|
| Eliminating Competitors
| 0
|

|-
|
| Collusive Tendering/Bid-Rigging
| 1
| §3(2)(iv)

|-
|
| Supply Refusal
| 1
| §3(2)(ii)

|-
|
| Efficiency Defense
| 0
|

|}

== References ==
<references />

Main Page

2014-11-24T05:08:49Z

LMyhre:

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports - Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Authors' Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]
* [[Industry Standard Setting and Antitrust]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Afghanistan]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]

|- align="center"
| [[Jordan]]
| [[Morocco]]
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

Main Page

2014-11-24T00:40:35Z

LMyhre: added Afghanistan

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports - Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Authors' Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]
* [[Industry Standard Setting and Antitrust]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Afghanistan]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]

|- align="center"
| [[Morocco]]
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

User:LMyhre

2013-12-08T13:41:33Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@alum.bu.edu email me]
:''Research Fellowship in Antitrust Law, June 2012''
:''Research Fellowship in Antitrust Law, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

User:LMyhre

2013-12-08T13:40:30Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellowship in Antitrust Law, June 2012''
:''Research Fellowship in Antitrust Law, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

User:LMyhre

2013-12-08T13:39:16Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellowship in Antitrust Law, January 2012 to June 2012''
:''Research Fellowship in Antitrust Law, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

User:LMyhre

2013-12-08T13:36:16Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellow to Prof. Hylton, June 2012''
:''Research Fellow to Prof. Hylton, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

User:LMyhre

2013-12-08T13:35:35Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellow to Prof. Hylton, June 2012 to June 2012''
:''Research Fellow to Prof. Hylton, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

Industry Standard Setting and Antitrust

2012-06-08T19:22:35Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust Law<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue: Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a Standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of Standards ===

==== ''De Jure'' Standards and ''De Facto'' Standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The Dilemma Between an SSO and Its Participants During the Standard Setting Process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:20:50Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust Law== <ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref>

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue: Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a Standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of Standards ===

==== ''De Jure'' Standards and ''De Facto'' Standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The Dilemma Between an SSO and Its Participants During the Standard Setting Process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:17:08Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust Law== <ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref>

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting === <ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref>

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue: Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a Standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of Standards ===

==== ''De Jure'' Standards and ''De Facto'' Standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The Dilemma Between an SSO and Its Participants During the Standard Setting Process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal) ===== <ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref>

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:14:30Z

LMyhre: /* Cases in the History */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust Law==<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref>

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting ===<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref>

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue: Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a Standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of Standards ===

==== ''De Jure'' Standards and ''De Facto'' Standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The Dilemma Between an SSO and Its Participants During the Standard Setting Process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal) =====<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref>

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:14:03Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust Law==<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref>

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting ===<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref>

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue: Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a Standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of Standards ===

==== ''De Jure'' Standards and ''De Facto'' Standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The Dilemma Between an SSO and Its Participants During the Standard Setting Process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal) =====<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref>

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:09:01Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of View from an SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The Points of View of Participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of Both Sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from Essential Patent Holders: Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the History ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)=====<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref>

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in the U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the Duty of Disclosure Transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:03:57Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1) there is always a public interest concern involved; and 2) the market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== D. How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T19:02:10Z

LMyhre:

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

“Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

“Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.”<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.

2. Preparatory stage: to prepare the best technical solution to the problem being addressed.

3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.

4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.

5. Approval stage: to distribute the proposal for the final yes/no vote.

6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.

(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?

(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

“To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.”</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== D. How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:53:00Z

LMyhre: /* ''Rambus'' */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

"To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096."</ref> [''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:50:04Z

LMyhre: /* ''Rambus'' */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>

2. Standard of Proof Should Be Commensurate With Proposed Remedy.

3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>

4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:48:10Z

LMyhre: /* IEEE */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>
2. Standard of Proof Should Be Commensurate With Proposed Remedy.
3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>
4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union ==

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:47:53Z

LMyhre: /* IEEE */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>
2. Standard of Proof Should Be Commensurate With Proposed Remedy.
3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>
4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.

(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.

(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.

(b) State that it does not have essential patent rights.

(c) Commit not to enforce its patent rights against members who practice the standard.

(d) Commit to license on RAND terms.

(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:46:50Z

LMyhre: /* D. How Related A Patent Must Be */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>
2. Standard of Proof Should Be Commensurate With Proposed Remedy.
3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>
4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.
(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.
(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.
(b) State that it does not have essential patent rights.
(c) Commit not to enforce its patent rights against members who practice the standard.
(d) Commit to license on RAND terms.
(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:46:35Z

LMyhre: /* F. Scope of Disclosure */

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>
2. Standard of Proof Should Be Commensurate With Proposed Remedy.
3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>
4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.
(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.
(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.
(b) State that it does not have essential patent rights.
(c) Commit not to enforce its patent rights against members who practice the standard.
(d) Commit to license on RAND terms.
(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== D. How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

Industry Standard Setting and Antitrust

2012-06-08T18:45:21Z

LMyhre: New page: Author: Tzu-Yuan Lin Date: 2009 == Abstract == Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between sta...

Author: Tzu-Yuan Lin

Date: 2009

== Abstract ==

Since the standard setting organizations (SSOs) began to permit patents to be incorporated into standards, the relationship between standards and intellectual property rights has become more intricate and controversial. Issues underlying patent rights have gradually shifted from acquisition or licensing of those rights, to controlling industry standards.

In the beginning of this paper, I will take the position that Antitrust Law and Intellectual Property Law are meant to complement each other rather than work against each other. The shifting of court opinions in the past decades will be cited to support my position.

Then, I will briefly introduce the standard setting process and the kinds of legal issues that arise from it. These will include, but not be limited to, failure to disclosure, patent hold-up and refusal to license, all of which could potentially trigger Antitrust Law enforcement. I will mainly use the Rambus case to address these issues and the attitude of the Federal Trade Committee (FTC) toward them.

In the end, I will combine the lessons learned from Rambus and the new standard setting trends of SSOs to propose a strategythat will hopefully can provide some guidance for those who want to get involved in the standard setting process.
== Introduction ==

We live in a world where technology evolves each and every single day, and where one of the main forces that lead toward such technological evolution is competition in the market. To survive in the face of rapidly-developing technology, each firm will employ every possible strategy to gain advantage over the others. This includes collaborating with others to knock out a dominant firm, merging with another firm in order to enter a new market, and obtaining temporary exclusive rights granted by the law – intellectual property rights (IPRs) – to limit the what its competitors can do.

To get temporary IPRs essentially means that a firm can increase the costs of its rivals by charging them royalties. This is the incentive provided by intellectual property law in order to promote innovation and increase competition. However, the fast development of technology and its complexity have intertwined with the intellectual property law system. When a firm is driven by its eagerness to dominate the market, there is high possibility that the firm will abuse its IPRs (“patent misuse”). Such IPR abuse can have substantial anticompetitive effects and trigger the enforcement of antitrust law. This can create a paradox in which antitrust law and intellectual property law actually work against each other’s legislative purpose.

In the following section, I will briefly discuss the relationship between antitrust law and intellectual property law and take the position that there should be a balance between these two legal systems instead of conflict.

== The Balance Between Intellectual Property Law and Antitrust<ref> In Part II-A, II-B, and II-C, I followed the analysis structure of a working paper written by Professor Lemley. See Mark A. Lemley, ''A New Balance between IP and Antitrust,'' Stanford Law and Economics Olin Working Paper No. 340 (April 2007), ''available at'' SSRN: http://ssrn.com/abstract=980045.</ref> ==

=== The Purpose of Intellectual Property Law ===

The nature of intellectual property rights is to grant the IPR owners the temporary rights to exclude others from using their ideas. The purpose of granting such exclusivity is to provide motivation and incentives to encourage inventors to keep innovating. In the U.S. Constitution, it expressly stated that the purpose of granting patents and copyrights is to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”<ref> U.S. CONST. art. I, § 8, cl. 8.</ref> In ''Mazer v. Stein,'' the Supreme Court pointed out that the economic philosophy behind the granting of patents and copyrights is the belief that “[i]t is the best way to advance public welfare through the talents of authors and inventors in science and useful arts.”<ref>347 U.S. 201, 219 (1954).</ref> With exclusive rights, IPR owners can recoup their R&D costs through licensing and also aggressively engage in economic activities. Old inventions are eventually eliminated through competition in the market. The combination of IP rights and the market ideally create a circle of innovation lead society to evolve again and again.

=== The Purpose of Antitrust Law ===

The intrinsic concept of modern antitrust law is that competition can bring about economic efficiency, so that a sound market filled with competition is generally more desirable. However, this relies on a basic principle of our economic system, i.e., that free competition will ensure an efficient allocation of resources in the absence of a market failure. What is hidden behind this concept is: 1. there is always a public interest concern involved; and 2. The market itself is not perfect and cannot maintain a competitive system all the time.<ref> Keith N. Hylton, ''Antitrust Law: Economic Theory & Common Law Evolution,'' 37-38 (Cambridge University Press 1st ed., 2003).</ref> As a result, in order to advance public interests, the government should intervene appropriately to restore the market after a failure and to maintain competition.<ref>''Id.''</ref>

So, what should antitrust law aim to do? Should it focus on maintaining a market where numerous small firms compete? Or aim to maximize consumer welfare (to increase public interests)?<ref> Professor Hylton raised these two different goals of antitrust law in his book, ''see id.'' at 40.</ref> In ''United States v. Trans-Missouri Freight Asso.,'' the Supreme Court suggested the answer should be the former and ruled that a uniform rate schedule fixed by 18 members in the freight association was unlawful even if previously allowed at common law.<ref>166 U.S. 290 (1897).</ref> Obviously, the Court indicated that competition among 18 smalls firms with 18 different price rates was more desirable. But, the Court later changed its position to aim at maximizing consumer welfare in ''Continental T.V. Inc. v. GTE Sylvania Inc.,'' ruling that the vertical restraints on intrabrand competition served a valid competitive purpose to increase interbrand competition, and were limited so as to accomplish only this permissible purpose.<ref>433 U.S. 36 (1977).</ref> So, even when a firm’s conduct is essentially a restraint on competition, as long as it increases consumer welfare, the Court will accept such an efficiency defense.

To sum up, the purpose of antitrust law now is to prevent firms in the market from acting anti-competitively and to increase consumer welfare.

=== The Interaction of Intellectual Property Law and Antitrust Law ===

In intellectual property law, in order to provide inventors with sufficient incentives to create and innovate, the law grants them some temporary exclusive power over price or competition, such as allowing inventors to charge a negotiated royalty or to refuse to license so that their competitors will have to design around or invent around to avoid infringement, all of which will increase their competitors’ cost. On the other hand, antitrust law wants to advance consumer welfare by making sure that the market works well and is not unfairly dominated by a single firm. In this narrow sense, IPRs seem to limit the goal that antitrust law wants to achieve – free competition – because IPR itself is essentially a monopoly right and can be used by its owners to limit rivals’ ability to compete in the market.<ref>''See supra'' note 1, at 10.</ref> For example, if a firm controls an essential patent in a widget, it will be able to charge any firm who wants to produce the widget a supracompetitive royalty in exchange for licensing,<ref>35 U.S.C. § 271(a) (2000) “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States…infringes the patent.”</ref> or it can refuse to license to anyone and limit the competition for widgets in the market.<ref> As long as refusal to licensing is not behind the scope of the granted IPRs, the FTC and the Court will not challenge it. ''See, e.g., Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP,'' 540 U.S. 398 (U.S. 2004)( the Court held that Verizon had no obligation under the antitrust laws to assist its rivals); ''Atari Games Corp. v. Nintendo of America, Inc.,'' 897 F.2d 1572, 1576 (Fed. Cir. 1990)( “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. ''beyond the limits of what Congress intended to give in the patent laws.'' The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws.)[ ''Emphasis added'']</ref> As a result, we can see that while the goal of intellectual property law is to “promote the progress of science and useful arts,” it also has negative effects that run counter to free market competition. So, the key argument about the economic efficiency of IPRs will lie in balancing the social benefits from the innovation and the cost of limitation on competition imposed by IPR owners. Indeed, such balance concern is also reflected in the legislation of Congress, and can explain why IPRs are limited in scope and duration, e.g. the patent expires 20 years after the patent application was filed.<ref>35 U.S.C. § 154 (a)(2) (2000).</ref>

The traditional (while oversimplified) theory for the conflict between intellectual property law and antitrust law was that: IPRs are monopoly rights, and the purpose of antitrust law is to avoid monopoly. So, these two laws conflict with each other.<ref>''Supra'' note 1, at 10, citing ''United States v. Westinghouse Elec. Corp.,'' 648 F.2d 642, 649 (9th Cir. 1981)(“[o]ne body of law creates and protects monopoly power while the other seeks to proscribe it.”)</ref> However, the modern U.S. courts and scholars have denied such theory of conflict, and instead adopted the theory that intellectual property law and antitrust law share a common goal. Some scholars have argued that IPRs themselves are not ''ipso facto'' monopoly rights because there is a huge difference between an exclusive right in the sense of intellectual property law and the economic monopoly concerned by the antitrust law.<ref>''See supra'' note 1, at 11.</ref> For example, all famous singers’ CD albums are copyrighted, yet no one will seriously challenge that Michael Jackson by his album “Thriller” held a monopoly in a relevant product market, even though the ''Guinness Book of World Records'' lists “Thriller” as having sold 65 million copies as of 2007.<ref> The record is ''available at'': http://www.guinnessworldrecords.com/mediazone/pdfs/entertainment/061114_michael_jackson.pdf.</ref>

On the other hand, to say antitrust law prohibits monopoly is an oversimplified misunderstanding. Although the purpose of antitrust law is to promote competition, the law has never stated that monopoly itself is illegal.<ref>''See supra'' note 1, at 11.</ref> Instead, antitrust law tends to focus on those anticompetitive conducts designed to dominate the market, which as a result, will decrease consumer welfare. That is to say, anticompetitive effects and decrease of consumer welfare are what the law cares about, not monopoly itself. Judge Hand in ''United States v. Aluminum Co. of America'' expressed the same concern that if a single firm survived from a group of competitors by its superior skill in the industry and business acumen, then the law does not tend to condemn the result of the force that it seeks to foster.<ref>''See'' 148 F.2d 416, 430 (2d Cir. N.Y. 1945).</ref> “The successful competitor, having been urged to compete, must not be turned upon when he wins.”<ref>''Id.''</ref>

In summary, the purpose of intellectual property law is to grant temporary exclusive rights to encourage innovation through competition while antitrust law aims at elimination of anticompetitive conducts and increasing consumer welfare. Given that any firm’s ultimate goal is to use their products to attract consumers’ attention, a common goal can be inferred behind these two laws - to earn the ultimate wealth by producing what consumers want with high quality but at a low price. Although IPRs grant the inventors temporary exclusive rights that limit competition, it provides inventors sufficient incentives to undertake efficient production to maximize consumer welfare in the long run.<ref>''See supra'' note 1, at 12. (Citing Ward Bowman, Jr., ''Patent and Antitrust Law: A Legal and Economic Appraisal'' (1973)).</ref> So, we can say the temporary exclusivity for IPRs is a trade-off in the middle of the way to achieve its goal. Based on this view, we can conclude that intellectual property law and antitrust law should be two complementary systems.<ref>''See Atari Games Corp. v. Nintendo of America, Inc.'' (“[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are ''actually complementary'', as both are aimed at encouraging innovation, industry and competition.”[''Emphasis added''], 897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> The question here is simple: “just ask yourself whether you’d rather pay monopoly price for an iPod or a competitive price for an eight-track tape player.”<ref>''Supra'' note 1, at 13. (The author was inspired by Judge John Wiley to come up with this analogy.)</ref> Most of us will choose the former without being aware that this is because we all know that through the grant of temporary monopoly power, it will create more competition and bring us more innovative products. In this sense, both intellectual property law and antitrust law serve the same goal - to encourage innovation and competition, and to eventually maximize consumer welfare.

=== Policy Shifting<ref> In Part II-D, I followed the analysis structure of one paper written by former Deputy Assistant Attorney General of Antitrust Division, Makan Delrahim. See Makan Delrahim, ''Maintaining Flexibility in Antitrust Analysis: Meeting the Challenge of Innovation in the Media and Entertainment Industries,'' 28 Colum. J.L. & Arts 343.</ref> ===

It is settled that the market itself is imperfect, so when market failure occurs, the government must appropriately intervene in order to restore the market disorder and maintain competition. In intellectual property law, when IPR owners misuse their rights, it results in anti-competitive effects. The Federal Circuit stated in ''Atari Games Corp. v. Nintendo of America Inc.,'' “[a] patent owner may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”<ref>897 F.2d 1572, 1576 (Fed. Cir. 1990).</ref> When a patent owner does so, the government must intervene to limit the exercise of IPRs.

In recent decades, antitrust enforcement for IPR misuse has shifted from a rigid per se rule toward a more flexible rule of reason test. For example, the U.S. Supreme Court used to apply the per se rule to tying arrangements (the tying of patented goods to unpatented goods) because they thought patent owners could get a certain level of market power by tying.<ref>''See United States v. Loew's Inc''., 371 U.S. 38, 45-46 (1962) (“The requisite economic power is presumed when the tying product is patented or copyrighted.”)</ref> In ''Carbice Corporation of America v. American Patents Development Corp''., the Court stated that “[t]he attempt to limit the licensee to the use of unpatented materials purchased from the licensor is comparable to the attempt of a patentee to fix the price at which the patented article may be resold.”<ref>''Id''. at 32.</ref> Then, the Court went further and extended per se rule to mandatory package licensing in ''United States v. Paramount Pictures, Inc''., ruling that, “[l]icensing feature films only in ‘blocks’ was illegal ''per se'' because it unfairly bolstered the monopoly power granted by the Copyright Act” and did not serve any consumer welfare purpose.<ref>331 U.S.131, 158 (1948).</ref> Correspondingly, the Department of Justice (DOJ) Antitrust Division deemed all tying and package arrangements related to IPR licensing illegal ''per se'' without considering the economic effects of the agreement in the market. Here, it is clear that neither the Supreme Court nor the Antitrust Division took the potential economic efficiency of such arrangements into account.

More recently, however, the Antitrust Division has adopted an approach that is cognizant of the economic effects of these practices. In 1995, the Department of Justice and the Federal Trade Commission (FTC) issued the ''Antitrust Guidelines for the Licensing of Intellectual Property (Antitrust-IP guidelines)'', which recognized that, “although tying arrangements may result in anticompetitive effects, such arrangements can ... result in significant efficiencies and procompetitive benefits.”<ref> U.S. Dep't of Justice & Federal Trade Comm'n, ''Antitrust Guidelines for the Licensing of Intellectual Property'' 5.3, at 26 (Apr. 6, 1995), ''available at'' http://www.usdoj.gov/atr/public/guidelines/0558.pdf.</ref> Similarly, a package arrangement can also benefit the licensee by reducing overall transaction costs and eliminating licensing hold-up problems,<ref>''Id''. 5.5 at 28.</ref> e.g., from patent hold-up.<ref> A patent hold-up problem arises when a technology has been adopted by majority firms in the market, and the essential IPR owners refuse to license or threaten to license only with unreasonable conditions, such as an extremely high royalty. ''See'' e.g., ''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref> The Federal Circuit in ''U.S. Philips Corp. v. ITC'' also acknowledged such an economic efficiency defense, ruling that “[i]n light of the efficiencies of package patent licensing…, we reject the Commission's conclusion that Philips's conduct shows a ‘lack of any redeeming virtue’ and should be ‘conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. We therefore hold that …to apply the rule of per se illegality to Philips's package licensing agreements was legally flawed.’”<ref>''U.S. Philips Corp. v. ITC'', 424 F.3d 1179, 1193 (Fed. Cir. 2005) (citing ''N. Pac. Ry. Co. v. United States'', 356 U.S. 1, 5 (1958)).</ref>

After realizing that they could no longer ignore the importance of economic efficiency brought by IPR-related activities, DOJ and FTC co-released the ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (Antitrust-IP report)''.<ref> U.S. Dep't of Justice & Fed. Trade Comm'n, ''Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition'' (2007), Ch.2, ''available at'' http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.</ref> In this report, DOJ and FTC stated that IPR-related activities, such as tying, cross-licensing, patent pools and exclusive dealing, could potentially increase consumer welfare, and therefore, are not illegal ''per se''. Instead, antitrust enforcement agencies should use the rule of reason standard to balance procompetitive and anticompetitive effects. And when the former outweighs the later, that activity shall be justified.

== The Emerging Issue – Standard Setting ==

In the Antitrust-IP report, a whole chapter is used to express concern of the DOJ and the FTC about a new type of IPR-related activity - Standard Setting. Chapter 2 of the report explains:

Industry standards are widely acknowledged to be one of the engines of the modern economy. Standards can make products less costly for firms to produce and more valuable to consumers. They can increase innovation, efficiency, and consumer choice; foster public health and safety; and serve as a "fundamental building block for international trade." Standards make networks, such as the Internet and telecommunications, more valuable to consumers by allowing products to interoperate.

Businesses can collaborate to establish industry standards by working through standard-setting organizations ("SSOs"). During the standard-setting process, SSO members often jointly evaluate and choose between substitute technologies. This process can raise antitrust concerns, and indeed, some collaborative standard-setting activities have been challenged under the antitrust laws. Unique antitrust issues arise when the standards adopted involve, as they frequently do, intellectual property rights.<ref>''Id.''</ref>

Since an industry standard plays such an important role in modern economies, I will try to briefly introduce what a standard is, and the advantages and disadvantages that the standard setting process can bring. Next, I will focus on the antitrust issues that can arise from it and discuss how antitrust enforcement agencies and the courts deal with them.

=== What is a standard? ===

Interoperability (or compatibility) has always been a big concern in industry. It is settled that the best way to solve this difficulty is to establish an industry standard. Generally, a standard adopted for certain technology means a more efficient and fast development process because all firms will not have to spend extra time and money deciding which technology specification they should follow to do the relevant R&D. In addition, a standard has network effects that can facilitate interoperability among products produced by different firms, increasing the chances of market acceptance, making the products more valuable to consumers and stimulating output.<ref> Robert Patrick Merges & John Fitzgerald Duffy, ''Patent Law and Policy: Cases and Materials'', 1282-1283 (LexisNexis 4th ed. 2007).</ref> For example, the standardization of U.S. railway track in 1900 is the main reason there is a thriving railroad network in U.S. today.<ref> Because of the unified standard of railway track, the manufacturers in the railroad industry can decrease their average cost and benefit from economy of scale, http://www.psrm.org/history/timeline/.</ref>

In the 21st century, due to the rapid development and broad application of telecommunication and software technology, society has become a digitalized economic entity in which everything is interconnected. A standard has high value of network effects and is becoming a more prevalent practice in this digitalized marketplace. For example, standards for wireless data transmission, telecommunication, and personal computer technology are all becoming indispensable for a robust and interconnected digital economy.<ref> These standards include, but not limited to IEEE 802.11, 3G-WCDMA, and SD-RAM standards.</ref>

So, what is the definition of a standard? According to the International Standards Organization (ISO), a standard is, "a document established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.”<ref> International Standards Organizations, ''“Standardization and Related Activities--General Vocabulary”'', ISO/IEC Guide 2:1996, definition 3.2.</ref> The European Telecommunications Standards Institute (ETSI) defines a standard as, “A technical specification approved by a recognized standardization body for repeated or continuous application, with which compliance is not compulsory….”<ref> Directive 98/34/EC definitions, ''available at'' http://www.etsi.org/WebSite/Standards/WhatIsAStandard.aspx.</ref> The FTC, on the other hand, adopted a narrower concept: "Standards…establish a common mode of interaction, which enables users to understand each other’s communication."<ref> Volume 1, A Report by the Federal Trade Commission Staff (1996), ''“Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace”'', at 6, ''available at'' http://www.ftc.gov/opp/global/report/gc_v1.pdf.</ref> From these definitions, we can conclude that a standard is established for common and repeated use that is related to interaction, and that its value will rise accordingly when more users adopt it, just as the internet telephone system Skype becomes more valuable as new subscribers join because more existing users can be reached. Because interaction is an intrinsic feature of a standard, standard setting will be particularly important in the industries related to communication, such as the personal computer and telecommunication industries.

=== Classification of standards ===

==== ''De jure'' standards and ''de facto'' standards ====

One general classification of standards is based on how a technology is adopted as a standard, including ''de jure'' and ''de facto'' standards. ''De jure'' standards are published standards that have been ratified by the ISO and/or a range of national standards-setting bodies.<ref> European Standards Survey - Glossary of terms, ''available at'' http://www.emii.org/map/glossary.htm#dejure.%E5%B0%8DDe.</ref> Such standards are established out of concern for public interests and must be authorized by the government. In addition, they are mandatory standards, which all manufacturers in the industry must comply with. In the U.S., for example, the standards related to interstate and international communications by radio, television, wire, satellite and cable are ''de jure'' standards established and authorized by the Federal Communication Commission.<ref>''See'' Introduction on the official website of Federal Communication Commission, http://www.fcc.gov/aboutus.html.</ref> In Europe, the 3G-WCDMA cell phone system, as known as the Universal Mobile Telecommunication System (UMTS), is a ''de jure'' standard collaboration by the government of the European Union and leading companies in the industry. Similarly, in May 2003, the Standardization Administration of China (SAC) approved WLAN Authentication and Privacy Infrastructure (WAPI) as a national standard for all wireless devices, and decreed that by the end of 2003, all wireless devices sold in or imported into China much comply with the WAPI standard,<ref> Dispute on Chinese WLAN Standard Deepens SinoCast China IT Watch, February 4, 2004 Wednesday.</ref> saying that instead of the 802.11 wireless LAN standard of Institute of Electrical and Electronics Engineers (IEEE ),<ref>802.11 wireless LAN standard is a standard established by IEEE. It has various versions: 802.11a/b/g/i/n due to the modification in different locations, http://standards.ieee.org/getieee802/802.11.html.</ref> WAPI is much more preferable for the sack of national security concern.<ref>“Amid controversy, China strongly backs home-grown WLAN security technology in competition against Intel,” Xinhua Economic News Service, March 6, 2006, Monday, 8:00 PM EST.</ref>

On the other hand, ''de facto'' standards are widely used voluntary standards, generally published but not yet ratified by ISO or a national standards setting.<ref>''Supra'' note 5.</ref> A ''de facto'' standard is usually established through the operation of market mechanism, e.g by the business acumen of a company or a company’s dominant position in the market. In 1970's, for example, there were two video tape standards competing in the market: one was VHS developed by Victor Company of Japan (JVC), and the other was Sony’s Betamax. By the 1990's, VHS had become a ''de facto'' standard format for consumer recording and viewing purposes after competing in a fierce standard war with Sony's Betamax. Another example is Microsoft’s Windows Operation System and Intel’s Central Unit Processor technology (CPU), the so-called “WINTEL” ''de facto'' standard, which was establish by these two companies’ dominant market power and advance technologies.<ref>“Untangling ultrawideband,” The Economist, September 18, 2004.</ref>

=== Economic Efficiency of Standard Setting ===

Standard setting may decrease the choices available to consumers. The best examples of this are Microsoft Windows Operation System and Office Software. In fact, there are good alternative products out there in the market, such as the Apple Macintosh Operating System. In addition, a winner of the "standards war" could also manipulate its newly-acquired market power to prevent others from competing.<ref> See Makan Delrahim, supra note 22, at 354 (citing Maureen A. O'Rourke, “Striking a Delicate Balance: Intellectual Property, Antitrust, Contract and Standardization in the Computer Industry,” 12 Harv. J. L. & Tech. 1 (1998)).</ref> On the other hand, standards are often procompetitive because they are designed to curb problems associated with network markets and interoperability requirements.<ref>''See id''., at 353 (citing 2 Herbert Hovenkamp et al., ''IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law'' 35.1 (2d ed. 2000)).</ref> Standards can also facilitate competition among competitors who are vying to have their technology selected as the "winning" standard.<ref>''Id.''</ref> However, just like what the Antitrust-IP report mentioned, when standards incorporate technologies that are protected by IPRs, a potential "hold up" problem caused by IPR owners may arise.<ref>''See supra'' note 31.</ref> In the following, I will brief the efficiencies brought by standard setting, and focus on the “hold-up” problems.

==== Efficiencies for Consumers ====

A standard can decrease transaction costs for consumers and maximize the usefulness of the products they purchase. For example, in the VHS/Betamax scenario, at the beginning of the standard war, the market was split into two, in which around 50% market share was taken by each. Under such circumstances, unless a consumer could afford and was willing to buy both products, he would have to spend extra time and money searching for the information about which video system was the best for him. In addition, to purchase either one meant the consumer would lose the benefits provided by the other, i.e. a consumer who purchased Betamax would lose the chance to enjoy the films made for VHS. And history repeats itself. Exactly the same scenario happened 4 years ago between HD-DVD (led by TOSHIBA) and Blu-ray DVD (led by SONY),<ref>''See'' Sarah McBride & Phred Dvorak, “Studios Strike HD-DVD Deals for Holiday 2005,” Wall St. J., Nov. 29, 2004, at B1.</ref> and this time SONY learned from its previous experiences, and won the standard war.<ref>''See'' Sarah McBride & Yukari Iwatani Kane, “As Toshiba Surrenders, What's Next for DVDs?” Wall St. J., Feb. 19, 2008, at B1.</ref>

==== Efficiencies for Manufacturers ====

A standard can help manufacturers to achieve economies of scale and cost efficiency. For example, under the Blu-ray/HD-DVD scenario, unless a manufacturer had sufficient capital to license from both campaigns,<ref> At that time, only few manufacturers were able to license from both campaigns, such as HP and LG. See Sarah McBride & Evan Ramstad, “Business Technology: How Dual-Format DVD Players May Prolong Duel - Consumers Get Little Incentive To Pick a Standard,” Wall St. J., Jan 9, 2007, at B3.</ref> it could only choose to license from one and lost the opportunity to make profits out of the other. Therefore, manufacturers would not be able to achieve enough economies of scale to get cost efficiency, and therefore, would be unable to decrease its average cost to a desirable level.

=== The dilemma between an SSO and its participants during the standard setting process ===

Before establishing a standard, the participants of an SSO will gather to discuss the specification of the standard and run through a series of procedures. Take the International Standard Organization (ISO), for example. When the ISO is establishing a new international standard, it has to run through a six-step process:<ref> More details of the stages of the development of international standards in ISO are ''available at'' http://www.iso.org/iso/standards_development/processes_and_procedures/stages_description.htm.</ref>

1. Proposal stage: to confirm that a particular International Standard is needed.
2. Preparatory stage: to prepare the best technical solution to the problem being addressed.
3. Committee stage: to distribute the proposal standard for the comment of the committee and, if required, voting.
4. Enquiry stage: to distribute the proposal standard for the comment of all ISO members and, if required, voting.
5. Approval stage: to distribute the proposal for the final yes/no vote.
6. Publication: to send the final approved proposal to the ISO's Central Secretariat which publishes the International Standard.

This six-step process is a model procedure and is followed by most SSOs. After the proposal stage, each SSO establishes its own rule regulating what kinds of related technologies should be disclosed before they choose a standard. A problem can arise here: because such related technologies are very important for a firm to establish its IPR strategy to compete in the market, a firm will only be willing to reveal limited information to the SSO. Therefore, how much information a firm should disclose becomes a big concern in the standard setting process. In the following sections, I will take different points of view to explain why this is a big concern both for the SSO and its participants.

==== The Point of view form a SSO ====

In general, an SSO prefers a broader disclosure policy because this helps it to gather all necessary information and decide what are the most appropriate technologies that should be incorporated into a standard. Broader disclosure also avoids potential hold-up problems after the standard is established. As a result, an SSO wants the disclosure to be as complete as possible, including every possible technology related to the standard in progress, such as issued patents, pending patent applications, patent continuations, or even developing technology.

However, such a broad disclosure policy also has disadvantages because it may put the standard setting participants at great risk of revealing their valuable know-how to their competitors. With too broad a disclosure requirement, no firm would have an incentive to participate in standard setting. Instead, they would try to get their technology patented or copyrighted and create their own standard. Take the digital memory card market in 2000, for example, when Matsushita, SanDisk and Toshiba Corporation announced to formation of the “SD Association” in order to promote their Secure Digital Card (SD card) standard.<ref> Detail history of development of the Secure Digital Card (SD card) is ''available at'' http://www.sdcard.org/home.</ref> SONY chose not to participant in it, and instead established the Memory Stick (MS) standard to compete with the SD card.<ref> Detailed history of development of MEMORY STICK (MS) is ''available at'' https://www.memorystick.org/eng/aboutms/concept.html.</ref>

==== The points of view of participants ====

Generally, participants prefer a narrower disclosure policy because of uncertainty about whether their technologies (whether protected by IPRs or not) will be incorporated into a standard. Under such circumstances, a narrower disclosure policy can at least ensure that a firm does not have to join the standard setting process at the risk of unnecessarily revealing valuable know-how to their competitors. A participant must consider how much information to disclose without putting itself in a disadvantaged position while simultaneously accessing pioneer technologies through the standard setting process. For example, during the standard setting process of computer Digital Encryption Standard (DES) in late 2000, one of the leading participants, HITACHI Corporation, owned an array of patented technologies to DES standard and attempted aggressively to convince the National Institute of Standards and Technology (NIST; also a national SSO),<ref> The National Institute of Standards and Technology (NIST) is a non-regulatory federal agency within the U.S. Department of Commerce. NIST's mission is to promote U.S. innovation and industrial competitiveness. More details about NIST are ''available at'' http://www.nist.gov/public_affairs/general2.htm.</ref> to adopt the same. As a result, HITACHI Corporation broadly disclosed its technologies that were relevant to DES standard. Unfortunately, NIST eventually announced its selection of a new standard that would replace the prior DES standard.<ref>''See'' Janice M. Mueller, “Patenting Industry Standards,” 34 J. Marshall L. Rev. 897, 916-17 (citing Charles Seife & David Malakoff, “Science Scope,” 290 Science 25 (2000)).</ref> This was mainly because most SSOs would like to see that the technologies they have adopted do not infringe any existing patents, so that they could avoid the licensing and royalty rate issues in the post- standard setting stage.<ref>''Id''.</ref> HITACHI suffered a great loss because all of its investment in DES standard became worthless and it could not recoup all of the sunk cost it had already invested.

On the other hand, a narrower disclosure policy will lead to potential hold-up problems. After the standard is established, the manufacturers in the industry will begin to invest huge sunk costs to produce products that comply with the standard, such as purchasing fixed assets, hiring employees and making marketing expenditures. At that moment, the switching cost for the manufacturers becomes extremely high, and they find themselves “locked in” to the standard. If some participants who own essential IPRs for practicing the standard did not disclose their rights during the standard setting process, they will be entitled to sue anyone who wants to practice the standard, and may be able to hold-up the standard by charging supracompetitive royalties. Such exclusionary conduct is called “hold-up” and under such circumstances, the precompetitive effects of standard setting cannot be realized.

==== Summary of both sides ====

Nowadays, both SSOs and their participants have not decided whether to go for a broader disclosure policy or not.<ref> A research paper of Mark Lemley suggested that only 5 out of 10 famous SSOs adopted disclosure policy, in which only one required its participants to disclose all IPRs. ''See'' Mark Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” 90 Calif. L. Rev. 1889, 1973, App.</ref> If we recognize that the ultimate purpose of standard setting is all about cost-efficiency and economies of scale, a broader disclosure policy seems more desirable. On one hand, a broader policy can help SSOs to avoid hold-up problems. On the other hand, a participating firm will have access to the pioneer technologies of other participants. The reason many large firms join the standard setting process is because they want to make sure they can maintain a leading position in the industry. The potential benefits from being a leader in the industry can outweigh the potential business risk from disclosure. As a result, although a broader disclosure during the standard setting process may be somehow risky to a participant, it is still the worth trade-off for them to make.<ref> I am indebted to Professor Michael Meurer of Boston University School of Law for this point.</ref>

=== Threatening from essential patent holders – Hold-Up ===

After a standard has been adopted, the switching cost to an alternative standard is extremely high, and the holder of IPRs that cover technology needed to practice the standard can force existing users of the technology to choose between two unpleasant options: "You either don't make the standard or you accede to it.”<ref>''See supra'' note 31.</ref> Under such circumstances, an owner of IPRs incorporated into a standard may have incentives to abuse its position, such as charging unreasonable royalties or excluding others from competing, all depending on how much greater the cost of switching to an alternative standard is.

In order to prevent hold-up problems from happening, SSOs have established some regulating rules that basically include disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose IPRs related to a standard under consideration.<ref> This could include only issued patents or pending patent applications or copyrights or tradesecrets or developing technology or any combination of them. ''See supra'' note 59.</ref> Some of them are mandatory while others are voluntary.<ref>''Id''.</ref> Licensing rules limit the terms that IPR owners can demand after the standard is established. These rules can govern ''ex ante'' licensing or ''ex post'' licensing. The most common licensing term is “Reasonable and Non-Discriminatory” (RAND), or “Fair, Reasonable and Non-Discriminatory” (FRAND). Some SSOs require that the incorporated IPRs be licensed on a royalty-free basis. All of these SSO rules could raise two types of antitrust concerns.

First, the ''ex ante'' negotiation of licensing terms among participants is essentially joint conduct, and therefore could constitute a violation of section 1 of the Sherman Act.<ref>15 U.S.C. §1.</ref> However, the DOJ and FTC expressed their positive attitude toward such conduct in the Antitrust-IP report, saying that joint ''ex ante'' negotiation of licensing terms by SSO participants can be procompetitive and is unlikely to constitute a ''per se'' antitrust violation.<ref>''See supra'' note 31.</ref> The DOJ and FTC will usually apply the rule of reason when evaluating joint activities that avoid hold-up problems by allowing potential licensees to negotiate licensing terms with IPR owners in order to practice the standard.<ref>''Id''.</ref> Such ''ex ante'' negotiations of licensing terms are most likely to be reasonable when the adoption of a standard will create or enhance market power for IPR owners.<ref>''Id''.</ref> In addition, if an IPR owner unilaterally announced licensing terms, he will not violate section 1 of the Sherman Act. Similarly, if he unilaterally announced price terms, without more, he will not violate section 2 of the Sherman Act, either.<ref>15 U.S.C. §2.</ref> Finally, bilateral ''ex ante'' negotiations about licensing terms between a SSO participant and an IPR owner outside the frame of SSO are unlikely, without more, to incur any special antitrust scrutiny because IPR owners are merely negotiating individual terms with individual buyers.<ref>''See supra'' note 31.</ref>

The second antitrust concern is related to violations of Section 5 of the FTC Act.<ref>15 U.S.C. § 5 (Sec. 5).</ref> These violations may arise when an SSO participant intentionally or unintentionally under-disclosed or engaged in fraud regarding the existence of its IPRs during the standard-setting process, then later alleged that any practice of the standard infringed its IPRs and required the payment of a royalty for a license. These happen because SSO rules are usually ambiguous, and because SSOs themselves do not have a powerful enforcement mechanism. As a result, this leaves some room for certain speculative participants to “play around” the rules. So far, the FTC has prosecuted three cases based on violations of Section 5 of the FTC Act, and I will introduce them in the following section.

==== Cases in the history ====

===== Dell Computer (1996) =====

The first case about standard setting that was prosecuted by the FTC under Section 5 of the FTC Act was ''in re Dell''. The FTC found that Dell participated in the Video Electronics Standards Association (VESA) and when asked twice, fraudulently concealed its pending patent application which, when issued, covered the established standard.<ref> Complaint, ''In re Dell'', 121 F.T.C. 616, 616-18 (1996) (No. C-3658) (resolved by consent order, 121 F.T.C. at 618-26), ''available at'' http://www.ftc.gov/os/decisions/vol121.htm.</ref> After VESA adopted the standard, Dell allegedly demanded royalties from those participants who used its technology to practice that standard. Although Dell reached a consent agreement with FTC not to enforce its patent for 10 years,<ref>''See'' Decision and Order, ''In re Dell'', 121 F.T.C. at 618-23.</ref> the case left some open questions:

(1) The representatives from Dell were engineers in the R&D department, so they were unlikely to fully understand Dell’s patent strategy and the status of its patent applications. Hence, they were not competent to answer the inquiries from VESA, and as a result, the denials were not sufficient to constitute a fraud.
(2) The disclosure rules of VESA were ambiguous. For example, “relevant to” practice standard was very indefinite. Does a patent which can poorly practice the standard count as “relevant”? Or must a patent be substantially sufficient to practice the standard?
(3) Were those engineer representatives authorized to promise and confirm the legal obligation to VESA, and if so, did such authority constitute equitable estoppel? These issues were all left unexamined.

===== Union Oil of California (Unocal)<ref> Complaint, ''In re Union Oil Co. of Cal''. (''Unocal'' Complaint), No. 9305 (F.T.C. Mar. 4, 2003), ''available at'' http://www.ftc.gov/os/2003/03/unocalcp.htm; In addition to the Antitrust-IP report, I also relied on the paper written by Ms. Angela Gomes and Mr. Scott H. Segal respectively to learn of all relevant decisions of the courts and FTC related to ''Unocal'' case. See Angela Gomes, “Note: Noerr-Pennington: Unocal's Savior -- Or Is It?” 11 B.U. J. Sci. & Tech. L. 102; Scott H. Segal, “Fuel for thought: Clean Gasoline and Dirty Patents,” 51 Am. U.L. Rev. 49, 66-7.</ref> =====

Unocal involved proposed low-emissions gasoline standards in state regulatory proceedings in California. During the state regulatory proceedings, Unocal presented its research results (a formula) as a non-proprietary technology, and the state regulating board used these results to establish its standards. The board itself did not established any disclosure rules. While the board was setting the standard, Unocal secretly filed patent applications to cover both its refining process and formula. In 1995, oil companies sued Unocal, seeking declaratory judgment of invalidity for Unocal’s patent.<ref>''See Union Oil Co. of Cal. v. Atl. Richfield Co''., 1998U.S. Dist. LEXIS 22847, at *1 (C.D. Cal. Mar. 6, 1998) (showing the plaintiffs in the case included Atlantic Richfield Company, Chevron U.S.A. Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company, and Texaco Refining and Marketing, Inc.)</ref> Unocal counterclaimed for willful patent infringement.<ref>''Id''.</ref> Oil companies claimed Unocal should be estopped from asserting patents because Unocal failed to disclose that, while participating in the standard setting, it secretly patented its refining process and formula (or did not even invent both of them) and amended pending patent applications in order to fully cover California standards. However, the district court turned the declaratory judgment action into an infringement case, and ruled that whether there was literal infringement was a matter of fact for the jury to decide.<ref>''Id''.</ref> The jury found for Unocal and assessed a reasonable royalty rate the plaintiffs should pay to Unocal.<ref>''Id''. (Determining that literal infringement is a question of fact for the jury to decide.)</ref> The oil company then moved for Judgment as a Matter of Law (JMOL) to overturn the jury’s verdict, but was denied by the court.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 1998 U.S. Dist.Lexis 22847, at *5 (C.D. Cal. Mar. 6, 1998) (“This court does not find any reason to overturn the jury’s factual finding on this issue, and cannot issue a contrary ruling of law.”)</ref> In a separate proceeding, oil companies argued that because of Unocal’s inequitable conduct during the standard setting process, its patents should be held unenforceable.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 34 F. Supp. 2d 1208. (citing ''Molins PLC v. Textron, Inc''., 48 F.3d 1172, 1178, 33 U.S.P.Q.2d (BNA) 1823, 1826 (Fed. Cir. 1999) (defining inequitable conduct as an “''affirmative misrepresentation of a material fact, failure to disclose material information, or a submission of false material information, coupled with an intent to deceive''.")) [''Emphasis added'']</ref> But the district court held that these oil companies did not meet their burden of showing inequitable conduct by clear and convincing evidence.<ref>''Id''. at 1222. (“[C]onsidering the evidence as a whole, including ''the ample evidence of good faith in contrast to the lack of evidence of intentional deception'', the Court finds the Defendants have not proved by ''clear and convincing evidence'' that any inequitable conduct occurred in the filing or prosecution of the patent application…”) [''Emphasis added'']</ref> Later on, the oil companies appealed the denial of JMOL and the inequitable conduct argument by the district court, but both were denied.<ref>''See Union Oil Co. v. Atl. Richfield Co''., 208 F.3d 989, 991. (“Because the appellant refiners did not show a reversible flaw in the jury's verdict, this court affirms the district court's denial of JMOL... Similarly, this court affirms the trial court's discretionary judgment of no inequitable conduct.”)</ref> Finally, the Attorneys' generals from 34 states and Washington, D.C. joined in the oil companies' petition for certiorari. The Supreme Court asked the DOJ whether it wished to take position on the petition, but the DOJ declined to do so. As a result, the petition was denied.<ref>''See Atl. Richfield Co. v. Union Oil Co''., 531 U.S. 1183 (U.S. 2001).</ref>

The result enabled Unocal to charge substantial royalties and cost consumers hundreds of millions of dollars per year. Therefore, the FTC decided to file an administrative complaint against Unocal in 2003.<ref>''See Unocal'' Complaint, ''supra'' note 73.</ref> The complaint was dismissed in an initial Administrative Law Judge (ALJ) decision based on ''Noerr-Pennington'' and jurisdictional grounds,<ref>''See'' Initial Decision at 1, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305, (Nov. 25, 2003), ''available at'' http://www.ftc.gov/os/2003/11/031126unionoil.pdf.</ref> but the FTC subsequently reversed and remanded this ALJ decision, holding that "as a matter of law misrepresentation may sometimes vitiate the ''Noerr-Pennington'' doctrine."<ref>''See'' Opinion of the Commission at 1, 10, ''In re Union Oil Co. of Cal''., FTC File No. 0110214, Docket No. 9305 (July 7, 2004) (“''Unocal'' Opinion”), ''available at'' http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.</ref> Eventually, the full commission held that Unocal's alleged misrepresentation to the state regulatory board was not protected as a matter of law by the ''Noerr-Pennington'' doctrine because there were ample policy grounds to support that position, and the Commission had jurisdiction over whether Unocal's actions caused anticompetitive effects.<ref>''See id''.</ref> Eventually, just like the ending of ''in re Dell'', the FTC and Unocal reached a consent agreement, allowing Chevron Corporation to acquire Unocal, provided that Chevron agreed not to enforce certain Unocal patents that potentially could have increased gasoline prices in California.<ref>''See'' Statement of the Federal Trade Commission: In the Matter of Union Oil Company of California, Dkt. No. 9305 and Chevron/Unocal, File No. 051-0125, Dkt. No. C-4144 (June 10, 2005), ''available at'' www.ftc.gov/os/adjpro/d9305/050802statement.pdf.</ref>

===== ''Rambus'' =====

The scenario in ''Rambus'' was very similar to ''Unocal'', but involved more legal issues that crossed borders.<ref>''See e.g. Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003), ''Samsung Elecs. Co. v. Rambus, Inc''., 439 F. Supp. 2d 524 (E.D. Va. 2006); ''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002); ''Infineon'', 164 F. Supp. 2d 743, rev'd in part, 318 F.3d 1081 (Fed. Cir. 2003).</ref> In 1992, Rambus participated in the Joint Electron Device Engineering Council (JEDEC) to co-establish the industry standard for computer SDRAM. Under the voluntary disclosure policy of JEDEC, participants were encouraged to disclose any IPRs that were relevant to practice the standard as much and as early as they could.<ref>''See'' The JEDEC Patent Policy, ''available at'' http://www.jedec.org/home/patent_related/NewsletterArticle.pdf.</ref> During the standard setting meetings, Rambus intentionally concealed all its patents and patent applications that could cover or be amended to cover the SDRAM standard. After JEDEC found Rambus’ conduct of concealment, Rambus withdrew JEDEC in 1996. The first SDRAM standard was published by JEDEC in 1993, and after Rambus withdrew JEDEC, the advanced DDR-SDRAM standard was also published. Firms in the market began to follow these two standards to manufacture SDRAM and DDR-SDRAM. In 1999, these two new standards were widely adopted in the market, and Rambus started to threaten to sue those firms who used Rambus’s patented technology to produce SDRAM or DDR-SDRAM. This resulted in two undesirable choices for firms: they could either ask for a license or litigate. Many companies who practiced the SDRAM or DDR-SDRAM standard chose to litigate in the beginning, such as Infineon, Samsung, Hynix, and Micro.<ref>''Supra'' note 89.</ref> Infineon was the one who made the most diligent effort to defend against Rambus.

In the trial court, Infineon tried to use fraud as a defense, and the court found that Rambus was liable for committing actual and constructive fraud in its conduct at JEDEC, with respect to the SDRAM standard.<ref>''See Rambus, Inc. v. Infineon Techs''. AG, 164 F. Supp. 2d 743, 747 (E.D. Va. 2001).</ref> For the DDR SDRAM standard, because it was established after Rambus withdrew JEDEC, the court found there was no fraud.<ref>''See id''.</ref> However, the appellate court found that Rambus did not have any conduct of fraud and reversed and remanded the decision of the trial court.<ref>''Rambus Inc. v. Infineon Techs''. Ag, 318 F.3d 1081 (Fed. Cir. 2003).</ref>

The appellate court first defined the scope of disclosure, ruling that “Rambus 's duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.”<ref>''Id''., at 1100.</ref> That is, there must have been some reasonable expectation that a license would have been needed to practice the standard, and an equivalent analysis was unnecessary. After defining the disclosure scope, the appellate court went on to decide whether Rambus misrepresented during the standard setting process and ruled that:

To prove fraud in Virginia, a party must show by ''clear and convincing evidence: 1. a false representation (or omission in the face of a duty to disclose), 2. of a material fact, 3. made intentionally and knowingly, 4. with the intent to mislead, 5. with reasonable reliance by the misled party, and 6. resulting in damages to the misled party''. A party's ''silence'' or ''withholding of information'' does ''not'' constitute fraud in the absence of a duty to disclose that information. Generally, “fraud must relate to a ''present'' or a ''pre-existing'' fact, and ''cannot'' ordinarily be ''predicated on unfulfilled promises'' or ''statements'' as to future events.” In some cases, however, misrepresentations about a party's present intentions also may give rise to fraud. Failure to prove even one of the elements of fraud - such as existence of a duty to disclose - defeats a fraud claim.<ref>''Id''., at 1096.</ref> [ ''Emphasis added'']

The appellate court found that Infineon did not prove with clear and convincing evidence that Rambus’s patents or patent applications actually covered JEDEC’s two standards; in addition, the appellate noted that the disclosure policy of JEDEC was overly broad and ambiguous.<ref>''Id''., at 1115. (“[h]owever, JEDEC was free to formulate whatever duty it desired and it is not this court's job to rewrite or reinterpret the duty”).</ref> Under such circumstances, the participants of JEDEC would not be able to know exactly how to follow the rules. As a result, it was difficult for JEDEC’s members to meet the clear and convincing evidence requirement.

In 2002, while Rambus and Infineon were still at trial, the FTC filed a complaint accusing Rambus of violating Section 5 of the FTC Act.<ref> Complaint, ''In re Rambus, Inc''., No. 9302 (F.T.C. 2002), ''available at'' http://www.ftc.gov/os/adjpro/d9302/020618admincmp.pdf.</ref> According to the FTC, Rambus acquired monopoly power through fraud and exclusionary conducts during the standard setting process in JEDEC.<ref>''Id''.</ref> In addition, because firms had invested huge sunk costs in order to practice the standard, their switching cost became extremely high. Such lock-in effects made Rambus’s monopoly power even more durable.<ref>''Id''.</ref> As a result, the FTC concluded that Rambus unlawfully monopolized the markets for patented technologies incorporated into JEDEC’s standards in violation of Section 5 of the FTC Act.<ref>''Id''.</ref> The initial ALJ decision was released in February 2004, in which Judge Stephen McGuire ruled that the Complaint Counsel had failed to sustain their burden of proof with respect all violations in the Complaint.<ref>''See'' Initial Decision at 6, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302, (Feb. 23, 2004), ''available at'' http://www.ftc.gov/os/adjpro/d9302/040223initialdecision.pdf.</ref> The result and reasoning were similar to the decision of the appellate court in ''Rambus, Inc. v. Infineon Techs. AG''.<ref>''See supra'' note 93.</ref> Both the ALJ and the appellate court found that Rambus did not intentionally conceal relevant patents or patent applications while participating in JEDEC. As a result, there were no grounds on which JEDEC and its participants could claim any damage from Rambus’s misrepresentation.

However, after the appellate court remanded the case to the district court, Infineon took another strategy to compel the production of various documents Rambus was withholding on the basis of the attorney-client and work product privileges.<ref>''See Rambus, Inc. v. Infineon Techs. AG'', 222 F.R.D. 280 (E.D. Va. 2004).</ref> The district court ordered that Rambus produce to Infineon any documents it produced in the ''Hynix'' or FTC litigations.<ref>''Id''. at 298-99.</ref> Rambus was also ordered to produce 27 documents that Rambus had never disclosed previously.<ref>''Id''. at 291.</ref> The collection of these newly-revealed documents enabled Infineon to raise a strong unclean hands defense because the documents demonstrated that Rambus engaged in unlawful spoliation of evidence about its patent applications and communications with its patent attorneys.<ref>''Id''. at 290.</ref> Later on, a bench trial was held on Infineon's defense of unclean hands and with respect to Rambus’s spoliation of evidence.<ref>''Samsung Elecs. Co. v. Rambus, Inc''., 398 F. Supp. 2d 470, 473 (E.D. Va. 2005).</ref> The Court ruled “[f]rom the bench that Infineon had proven, by clear and convincing evidence, that Rambus was liable for unclean hands, thus barring Rambus from enforcing the four patents-in-suit. Additionally, the Court ruled that Infineon had proven, by clear and convincing evidence, that Rambus had spoliated evidence…”<ref>''Id''.</ref> Following this ruling, Rambus and Infineon settled their litigation before the Court issued its written opinion.<ref>''Id''.</ref> In ''Samsung'', the Court also held the same.<ref>''Id''.</ref>

However, there were at least two courts that held that the conduct of Rambus did not constitute unlawful spoliation of evidence, such as in ''Hynix'' and ''Micron''.<ref>''Hynix Semiconductor Inc. v. Rambus Inc''., 441 F. Supp. 2d 1066 (N.D. Cal. 2006) (holding that “[R]ambus did not engage in unlawful spoliation of evidence); ''Micron Tech., Inc. v. Rambus Inc''., 189 F. Supp. 2d 201 (D. Del. 2002) (discussing there was no evidence of fraud).</ref> Because Rambus series cases had a huge impact on the SDRAM and DDR-SDRAM industry,<ref>''See infra'' note 113, at 107-14. (discussing the switching cost and impact on SDRAM and DDR-SDRAM industry).</ref> the FTC decided to take a further step to appeal the initial ALJ decision.<ref>''See'' Opinion of the Commission, In the Matter of RAMBUS INC., A CORPORATION, Docket No. 9302. [Hereinafter the ''Opinion of the Commission''], ''available at'' http://www.ftc.gov/os/adjpro/d9302/index.shtm.</ref> In the appeal process, in order to avoid the previous discrepancy of the courts’ opinions about spoliation of evidence, the FTC focused on how to establish the casual link between Rambus’s exclusionary conduct and its acquiring monopoly power under Section 5 of the FTC Act.<ref>''Id''. at 21.</ref> In deciding whether there was exclusionary conduct, the FTC used the following analyses:

1. Relationship between Patent and Antitrust Law in Cases Involving Fraud on the Patent Office or Patent Enforcement Initiated in Bad Faith.<ref> This is mainly a discussion about unclean hands principle.</ref>
2. Standard of Proof Should Be Commensurate With Proposed Remedy.
3. Chilling Participation in SSOs.<ref>''See supra'' Part III, C-2 (discussing chilling effects in standard setting process).</ref>
4. Reliance on Testimony Rather than Contemporaneous Written Evidence.<ref>''Id''. at 22-6.</ref>

In applying the analyses above, the FTC defined exclusionary conduct as, “conduct other than competition on the merits – or other than restraints reasonably ‘necessary’ to competition on the merits – that reasonably appear[s] capable of making a significant contribution to creating or maintaining monopoly power.”<ref>''Id''. at 28.</ref> The alleged exclusionary elements here were that Rambus engaged in a course of deceptive conduct in order to influence JEDEC to adopt certain standards.<ref>''Id''. at 28-9.</ref> For conduct to be found deceptive, “there must have been a ‘misrepresentation, omission or practice’ that was ‘material’ in that it was likely to mislead ‘others acting reasonably under the circumstances and thereby likely to affect their conduct or decision[s].’” Based on the finding that, when asked at two JEDEC meetings, Rambus’s intentional concealment misled JEDEC and its participants to believe that Rambus did not have any related patents or patent applications that covered the drafting standard, the FTC concluded that there was causation between Rambus’s conduct and its monopoly power.<ref>''Id''. at 38 and 73 (the FTC listed the chronology of events of Rambus’s concealment and relied on it to make the final conclusion).</ref> Therefore, Rambus was in violation of Section 5 of the FTC Act.

Although the FTC concluded that Rambus had violated Section 5 of the FTC Act, Rambus’s related patents to practice SDRAM and DDR-SDRAM standards were still valid and enforceable under patent law. To solve this problem, the FTC ordered both sides to submit reasonable royalty rates for the Commission to decide.<ref>''Id''. at 119-20 (addressing the factors the Commission would use to decide a reasonable royalty rate).</ref> The Commission reviewed rates from other comparable licenses in the industry and found that “a maximum royalty rate of [0].5% for DDR-SDRAM, for three years from the date of the Commission’s Order and then going to be zero, is reasonable and appropriate.”<ref> See Opinion of the Commission on Remedy, at 22,In the Matter of Rambus Inc., Docket No. 9302, ''available at'' http://www.ftc.gov/os/adjpro/d9302/070205opinion.</ref> It also found that “a corresponding [0].25% maximum rate for SDRAM is appropriate.”<ref>''Id''. at 23 (alternation in original).</ref> This eventually put an end to the issues arising from SDRAM and DDR-SDRAM standards. Some commentators suggested that these royalty rates (0.5% and 0.25%) indicated that at a certain level the FTC condemned the inequitable conduct of Rambus because in general practice, the average for a single-patent “reasonable royalty” damages case is around 13%.<ref>''See'', Mark Lemley, “Ten Things To Do About Patent Holdup Of Standards (And One Not To),” 47 B.C. L. Rev 149, 166.</ref> In the Information Technology (IT) industry, the average royalty rate is 7%.<ref>''Id''.</ref> Therefore, the below-average royalty rates determined by the FTC could be deemed as punishment for Rambus.

===== Summary =====

The ''Rambus'' case was a big step toward the FTC taking an aggressive attitude in emerging hold-up issues. Under the flexible standard adopted by the Commission to establish a casual link between Rambus’s misleading conduct and its monopoly market power, it will be easier for the FTC to bring a successful prosecutions in the future under Section 5 of the FTC Act. But the fundamental problem that led to the issues in ''Rambus'' has not been resolved – i.e., the ambiguity of disclosure and licensing rules of SSOs. And as long as the ambiguity exists, similar issues will arise again in the future. In light of this, the ''Opinion of the Commission'' noted that SSOs should try to eliminate ambiguity and establish a definite disclosure duty for their participants to follow.

== Worldwide Trends ==

=== Trends in U.S. ===

==== VMEbus International Trade Association (VITA) ====

Located in the U.S., VITA is a non-profit organization of vendors and users having a common market interest in real-time modular embedded computing systems.<ref> Detailed introduction about VITA is ''available at'' http://www.vita.com/about.php.</ref> VITA has devoted itself to creating open standards and was recognized by the American National Standardization Institute (ANSI) and the International Electrotechnical Commission (IEC).<ref>''Id''.</ref> After the ''Rambus'' case, VITA has been developing new disclosure policy and licensing terms, the most important of which is its radical “mandatory ''ex ante''” disclosure rule. According to VITA’s patent disclosure policy, any member whose patents or applications that are believed to contain claims that may become essential to the drafting standard of VITA in existence at the time, must disclose those patents or applications within 60 days after the formation of VITA’s working group or no later than 15 days from the date of publication of the drafting standard.<ref>''See'' VITA patent policy, Rule 10.2.3, ''available at'' http://www.vita.com/disclosure/VITA%20Patent%20Policy%20section%2010%20draft.pdf.</ref> That member also must license with FRAND terms<ref>''See id''., Rule 10.3.1.</ref> and declare the maximum royalty rate it may charge for all claims.<ref>''Id''., Rule 10.3.2.</ref> In addition, if any member fails in its duty of disclosure, that member must license all concealed patent claims to the extent that is essential to the drafting standard.<ref>''Id''., Rule 10.4.</ref> Finally, VITA also established an arbitration procedure to deal with issues arising from its disclosure policy.<ref>''Id''., Rule 10.5.</ref>

In October 2006, the Department of Justice, Antitrust Division (the DOJ Antitrust Division) rendered a business review letter, recognizing that the new disclosure policy and licensing terms of VITA could effectively prevent standard hold-up from happening, and did not have any anticompetitive intent.<ref> This business review letter is available at http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> After the business review letter from the DOJ Antitrust Division, ANSI also accredited VITA’s new policy in January 2008.<ref>“ANSI Upholds Reaccreditation of VITA/VSO,” VITA News Release, Jan. 24, 2008, ''available at'' http://www.vita.com/disclosure/DOJ%20Business%20Review%20Letter%20Oct%202006.pdf.</ref> These two decisions carried a very important message that both the DOJ and ANSI were not opposed to seeing an SSO adopt a clear and rigid patent policy to create a sound environment for standard setting. This might be a touchstone for other SSOs to follow in order to prevent standard hold-up issues in the future.

==== IEEE ====

IEEE has long been adopting an ''ex ante'' disclosure policy in its standard setting process. After the ''Rambus'' case, IEEE began its patent policy reform by establishing a clearer, voluntary, ''ex ante'' disclosure and licensing policy. One month after the DOJ Antitrust Division accredited VITA’s new patent policy, IEEE also asked for the same accreditation and got a business review letter recognizing its new voluntary ''ex ante'' disclosure policy as procompetitive.<ref>“IEEE Enhances Standards Patent Policy to Permit Fuller Disclosure on Licensing,” IEEE News Release, Apr. 30, 2007, ''available at'' http://standards.ieee.org/announcements/stdspatpol.html.</ref> The new IEEE policy has three key elements, according to its news release:

(a) It permits and encourages the optional and unilateral ex ante disclosure of royalty rates and other license terms - that is, disclosure before a patented technology is included in a standard. The disclosed terms may include, for example, the maximum royalty rate that the patent holder will seek to charge.
(b) It improves the mechanisms for making sure that a patent holder's assurance (which is irrevocable) fully and effectively binds subsequent owners of the patent by requiring the patent-holder to provide notice of the existence of the assurance.
(c) It strengthens provisions for binding the submitter's affiliates to the terms of the policy, making clear that affiliates are bound unless the submitter identifies affiliates it does not wish to bind.<ref>“IEEE Alerts Its Standards Patent Policy to Provide Fuller Disclosure on Licensing,” IEEE News Release, Dec. 4, 2006, ''available at'' http://standards.ieee.org/announcements/pr_043007discl.html.</ref>

Compared with VITA’s new patent policy, IEEE gave more options to its members. If the chair of an IEEE standard working group believes a patent potentially will be essential to the drafting standard, the chair may ask the patent holder to disclose its relevant patents rights and to provide a letter of assurance (LOA) about licensing terms, which includes five options:

(a) Provide no assurance.
(b) State that it does not have essential patent rights.
(c) Commit not to enforce its patent rights against members who practice the standard.
(d) Commit to license on RAND terms.
(e) Commit maximum royalty rates or the most restrictive non-price terms.<ref>''See'' The DOJ Antitrust Division, “Antitrust Enforcement and Standard Setting: The VITA and IEEE Letters and The ‘IP2’ Reports,” ''available at'' http://www.usdoj.gov/atr/public/speeches/223363.pdf.</ref>

If a member chooses to commit to the maximum royalty rates or the most restrictive non-price terms, the chair of the working group will provide relevant price information to all members to reconsider the possibility of an alternative standard.<ref>''See id''.</ref> Finally, IEEE itself does not provide any dispute settlement mechanism, so if there is any dispute arising in the middle of standard setting, that dispute will be left for the courts to decide.

== Trends in the European Union

=== European Telecommunication Standards Institute (ETSI) ===

Located in Europe, ETSI is has long devoted itself to standard setting in information and communication technology, including the standards for broadcast, mobile, radio, internet industry…etc, and was recognized by European Commission (EC) as an official SSO in Europe.<ref> Detailed introduction of ETSI is ''available at'' http://www.etsi.org/WebSite/AboutETSI/Introduction/introduction.aspx.</ref> After the ''Rambus'' case, ETSI changed its patent policy in order to clarify the ex ante disclosure and licensing issues. According to the “ETSI Guide in Intellectual Property Rights,” members are obligated to disclose the essential IPRs of theirs or others (if any) as early as possible, and to license their rights on FRAND terms.<ref>''See'' ETSI Guide on Intellectual Property Rights (IPRs)-Version adopted by Board #70 on 27 November 2008, Clause 4.1: Licensing terms and ''ex ante'' disclosure, ''available at'' http://www.etsi.org/WebSite/document/Legal/ETSI_Guide_on_IPRs.pdf.</ref> If any essential IPR holder refuses to license its rights, the chairman of ETSI must inform the Committee Secretariat to reconsider whether to suspend the drafting standard or specification.<ref>''See'' ETSI Rules of Procedure-Annex 6: ETSI Intellectual Property Rights Policy, Clause 6 (Availability of licenses), ''available at'' http://portal.etsi.org/directives/25_directives_jan_2009.pdf.</ref> Finally, for disputes arising from ETSI’s IPR policy during the standard setting process, members should first use a friendly manner to solve these disputes or ask ETSI for mediation.<ref>''See supra'' note 141, Clause 4.2.</ref>

== Summary ==

Many SSOs are now reforming their patent polices in order to prevent standard hold-up problems from happening in the future. Some of them have adopted mandatory ''ex ante'' disclosure policy while the others believe voluntary ''ex ante'' disclosure is more appropriate. So far, it is not yet settled which one is the best for standard setting. As former Deputy Assistant Attorney General of DOJ, Gerald F. Masoudi, commented in a DOJ Antitrust Division report, “no standard-setting process is perfectly efficient. No patent system has perfect patent quality. No disclosure or licensing policy can perfectly anticipate every future need of patent holders and licensees…we trust market forces to eventually, if imperfectly, reach efficient results.”<ref>''See supra'' note 137, at 11.</ref> Mr. Masoudi might be right because only time can tell whether an ex ante disclosure and licensing policy is the panacea for those issues during standard setting. So far, we can only count on the market mechanism and the experiences of SSOs and antitrust enforcement agencies to fix those issues.

== Suggestions For SSO Participants ==

Since no SSO has a perfectly efficient patent policy to manage the standard setting process and anticipate the expectations of all participants, discussion of a comprehensive patent policy is not practical. However, a firm, at least, can still try to clarify the ambiguities of an SSO’s patent policy before it participates in the SSO. In the following section, I will try to propose some suggestions based on the issues I have been dealing within this paper.

=== When the Duty of Disclosure Starts ===

If an SSO participant discloses relevant patents too early, it will put its business interests at risk. This is so because the disclosure will allow the SSO to have enough time to look for an alternative technology or try to invent/design around the patent. As a result, it will be hard for the participant to recoup its sunk cost. On the other hand, a late disclosure may cause a participant to violate its duty and end up in litigation.

=== When the Duty of Disclosure Ends ===

Before joining an SSO, a firm should clarify whether its duty of disclosure is a continuous duty (even after it quits) or a temporary duty while it is a member of that SSO. A continuous duty can have a great impact on a firm’s patent strategy in the future.

=== To Whom Should the Participant Disclose ===

After becoming a member of an SSO, the participant should make sure to whom it should disclose its relevant patents. Should it disclose only to the committee of the SSO or merely disclose to other participants who have enquiries?

=== D. How Related A Patent Must Be ===

Before disclosing one’s patents, a participant should ask how related a patent must be to the extent of setting the standard. Does an equivalent patent under doctrine of equivalent count as “related”? Or only patents that can read on the drafting standard? An over-disclosure can put a participant at great business risk by revealing too much information to its competitors in the market.

=== Level of Care ===

After becoming a member, a participant should make sure whether its level of care is only a reasonable expectation standard or a strict liability standard. This will determine how broadly a participant should conduct relevant patent research.

=== F. Scope of Disclosure ===

Sometimes a drafting standard may involve not only patents but also copyrights, trade secrets or other IPRs. Therefore, a participant must know to what extent it is supposed to disclose related IPRs: otherwise it may put itself at risk of litigation for failure to disclose.

=== Legal Effect of Disclosure ===

Before disclosing one’s IPRs, a participant must make sure what legal effects its disclosure will have. That is, will the disclosure connect to licensing with RAND, FRAND or free-licensing terms? If it is connected to RAND or FRAND licensing, what standard will be used to define “reasonable?”

In addition, does failure of disclosure indicate that the patent holder covenants to waive its right to claim patent infringement in the future? This is what actually happened in ''Qualcomm Inc. v. Broadcom Corp''. Qualcomm in this case intentionally hid its patents that were essential to the drafting standard during the standard setting process and later on sued Broadcom for patent infringement.<ref>''Qualcomm Inc. v. Broadcom Corp''., 548 F.3d 1004 (Fed. Cir. 2008).</ref> The federal circuit adopted the “implied waiver” theory and ruled that a firm’s participation in an SSO implicates a duty to disclose its patents. Similarly, a firm’s failure to disclose will imply its waiver to those patents that are necessary to practice the standard.<ref>''See id'' at 1019-22.</ref> Therefore, Qualcomm’s failure to disclose its patents during the standard setting process impliedly waived its patent rights to the extent of practicing that standard.<ref>''See id''.</ref>

=== Compensation for Disclosure ===

A participant should determine whether there would be any compensation for disclosure if the SSO eventually did not incorporate any of the participant’s technology into the drafting standard. This is so because when a participant discloses its patents, pending applications or any other unpatented technology, it will allow its competitors to predict its future patent strategy, and therefore put the participant in a great business hazard. In addition, if the participant discloses any new technology that is yet to be patented, it will have to be cautious due to the novelty requirement, which means it has to file patent application within one year in the U.S. and may lose on the issue of novelty in foreign countries.

=== Patent Pool Concern ===

If the participant is a licensee, it must make sure that some important companies in the industry are also included in the patent pool. Otherwise that patent pool may turn out to be worthless. For example, if a patent pool related to the standard setting for mobile phones does not include Nokia, Motorola and SonyEricsson, then that patent pool is probably worthless. On the other hand, if the participant is a licensor, then it must determine how to calculate the royalty rate. Generally, a big firm with a lot of patent rights would prefer a patent-number basis method. And a small starting firm with only a few patents would prefer a company-number basis method.

=== Is the duty of disclosure be transferrable? ===

Merger and acquisition are very common in today’s business world. Therefore, if the acquired company joined an SSO that has a duty of disclosure, the acquirer had better make sure whether that duty can be transferred while conducting due diligence.

== Conclusion ==

In ''Rambus'', the royalty rates under average determined by the FTC can be deemed as punishment for the conduct of Rambus. In ''Qualcomm'', the court ruled that, “[e]ven if implied waiver did not apply here, Qualcomm's conduct falls within another equitable doctrine – equitable estoppel” and would be barred from enforcing its patent rights to the same extent.<ref>''Id'', at 1022.</ref> So, we can see that not only ''Rambus'' but also ''Qualcomm'' tended to condemn conduct that was essentially inequitable. This is probably because the courts have a policy concern to avoid potential hold-up problems and promote competition. Since standard hold-up has so much negative impact on competition and will keep arising in the future, we can reasonably expect that the courts will be likely to follow the same rationale and impose punishment on any inequitable conduct that has anticompetitive effects during standard setting process in order to achieve the ultimate purpose of both Antitrust Law and Intellectual Property Law – to promote competition.

EU Competition Law Enforcement: The Pharma Sector Inquiry

2012-06-08T18:40:13Z

LMyhre:

Author: Lynne Myhre

Date: June 2009

== Introduction ==

While antitrust laws in the European Union and the United States are similar, the rationale for enforcement of those laws, and the mechanisms for their enforcement, can vary considerably. The recent European Union inquiry into the pharmaceutical sector’s business practices provides a lens for examining how competition law operates in the EU.

== Dawn Raids ==

Perhaps the starkest difference between EU and U.S. antitrust enforcement is the use in the EU of so-called “dawn raids” when competition violations are suspected, but evidence is lacking. On January 16, 2008, the headquarters of several pharmaceutical companies throughout Europe experienced surprise “dawn raids” by officials from the European Commission, the EU agency charged with enforcement of EU competition law.<ref> Gow, David and Marianne Barriaux. “EC stages dawn raids on Europe's pharmaceutical companies.” The Guardian, Jan 17, 2008. Available at http://www.guardian.co.uk/business/2008/jan/17
/pharmaceuticals.glaxosmithklinebusiness, 8 Jun 2009.</ref> The raids were not part of an official investigation, but rather an “inquiry” designed to ferret out information about business practices in the sector as a whole, and determine whether an actual investigation of individual firms was in order.<ref> Commission of the European Communities. “Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector pursuant to Article 17 of Council Regulation (EC) No 1/2003 (Case No COMP/D2/39.514). Available at http://ec.europa.eu/competition/sectors/pharmaceuticals
/inquiry/decision_en.pdf, 8 Jun 2009.</ref>

In a dawn raid, a company must permit EC officials to take copies of any files or documents that might be relevant to the EC’s inquiry.<ref> Judgment of the Court of First Instance in Joined Cases T-125/03 & T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. Commission of the European Communities, 17 September 2007.</ref> The information taken will help the EC decide if a full investigation should be opened. This is different from the U.S., where a search warrant must be granted by a court, and only when there is already evidence of wrong-doing. In the recent EU pharmaceutical sector inquiry, there was no evidence, only “indications that competition may not be working as it should be.”<ref> European Commission. Pharmaceuticals Sector Inquiry. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html, 8 Jun 2009.</ref> The raids were not conducted in order to find evidence of wrong-doing by individual entities, only to determine how business practices in general were being conducted in the sector.<ref> European Commission. Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector pursuant to Article 17 of the Council Regulation (EC) No 1/2003. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/decision_en.pdf, 8 Jun 2009.</ref> At the same time, however, any evidence of wrong-doing that is found during a dawn raid may be used to prosecute companies later.<ref> European Commission. Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector pursuant to Article 17 of the Council Regulation (EC) No 1/2003.</ref>

=== Defense Protections ===

While a search warrant is not required for an EU “dawn raid,” there are some limited protections for entities being investigated in this way. First, EC officials may not force their way into a company’s premises.<ref> Roe, E. “When the chips are down.” Engineering & Technology, Vol 3:8, May 10 2008, pp. 78-79.</ref> Typically, they wait until the business opens its doors in the morning, before entering.<ref> Roe, E. “When the chips are down.” Engineering & Technology, Vol 3:8, May 10 2008, pp. 78-79.</ref>

Second, while a court order is not necessary for a dawn raid at the EU level, searchers must still present documentation of the EC’s authorization for the raid, including information about its purpose and scope.<ref> Roe, E. “When the chips are down.” Engineering & Technology, Vol 3:8, May 10 2008, pp. 78-79.</ref> What is more, they must allow the company some time to contact legal counsel,<ref> Roe, E. “When the chips are down.” Engineering & Technology, Vol 3:8, May 10 2008, pp. 78-79.</ref> who will come during the raid to offer the company legal guidance, and even help to “shadow” the EC officials during their search, to prevent any improprieties.< Louis, Frédéric, et al. “EU Court Clarifies Limits on Legal Privilege in European Commission Investigations.” WilmerHale, Oct 9, 2007. Available at http://www.wilmerhale.com/publications/whPubsDetail.aspx
?publication=8046, 8 Jun 2009.</ref> Some law firms have developed specialized legal staff to assist clients during these investigations, and can respond in a comprehensive way at a moment’s notice.<ref>“Antitrust and EU Law: Dawn Raids.” Eversheds, 2009. Available at http://www.eversheds.com/uk
/home/services/antitrust_and_eu_law/dawn_raids.page, 8 Jun 2009.</ref>

Third, an entity may refuse to hand over some documents for copying by the EC officials if the documents are privileged in nature.<ref> Holmes, Simon and Gordon Christian. “United Kingdom: The Akzo Nobel Judgment - European Court Continues To Deny Legal Privilege To In-House Lawyers.” Mondaq, 13 Jan 2008. Available at http://www.mondaq.com/article.asp?articleid=55810, 8 Jun 2009.</ref> Such refusal requires an entity to file a request with the European Court of Justice to block the EC’s request as it applies to the specific documents in question; an unfavorable decision can be appealed to the Court of First Instance.<ref> Judgment of the Court of First Instance in Joined Cases T-125/03 & T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. Commission of the European Communities, 17 September 2007.</ref> The document is sealed in the interim, protecting it from both a breach of confidentiality by the EC, and from destruction or modification by the entity.<ref> Holmes, Simon and Gordon Christian. “United Kingdom: The Akzo Nobel Judgment - European Court Continues To Deny Legal Privilege To In-House Lawyers.” Mondaq, 13 Jan 2008. Available at http://www.mondaq.com/article.asp?articleid=55810, 8 Jun 2009.</ref> If the court decides that the document is not required to be kept confidential, however, the entity may be charged with obstructing the investigation.<ref> Summary of Commission Decision of 20 November 2007 relating to a proceeding under Article 81 of the EC Treaty and Article 53 of the EEA Agreement (Case COMP/38.432 — Professional videotapes). Available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:057:0010:0012:EN:PDF. 18 June 2011.</ref>

Some EU Member States, such as France, require that their own competition authorities obtain a court order before conducting a dawn raid.<ref> Choffel, Antoine & Yann Utzschneider. “Major Changes in French Competition Law.” Global Competition Review, 2009. Available at http://www.globalcompetitionreview.com/reviews/10/sections/42/chapters
/449/major-changes-french-competition-law/, 8 Jun 2009.</ref> During the EU’s recent pharmaceutical inquiry, French drug maker Sanofi Aventis refused to allow the EC to search its premises because the EC had not first obtained a court order from a French court.<ref> Sage, Adam. “French drug giant Sanofi-Aventis obstructed inquiry, say EU officials.” The Times, Jun 3, 2008. Available at http://business.timesonline.co.uk/tol/business/industry_sectors/health/article4053354.ece, 8 Jun 2009.</ref> The EC has since charged Sanofi Aventis with obstructing the investigation, and the matter is headed to an EU court.<ref> Sage, Adam. “French drug giant Sanofi-Aventis obstructed inquiry, say EU officials.” The Times, Jun 3, 2008. Available at http://business.timesonline.co.uk/tol/business/industry_sectors/health/article4053354.ece, 8 Jun 2009.</ref> It is not entirely clear whether EU or national law will prevail on this point.<ref> Sage, Adam. “French drug giant Sanofi-Aventis obstructed inquiry, say EU officials.” The Times, Jun 3, 2008. Available at http://business.timesonline.co.uk/tol/business/industry_sectors/health/article4053354.ece, 8 Jun 2009.</ref> If Sanofi Aventis loses, however, it faces fines of up to 1% of its 2007 annual sales.<ref> Sage, Adam. “French drug giant Sanofi-Aventis obstructed inquiry, say EU officials.” The Times, Jun 3, 2008. Available at http://business.timesonline.co.uk/tol/business/industry_sectors/health/article4053354.ece, 8 Jun 2009.</ref>

=== Why Dawn Raids ===

The EC conducts dawn raids during inquiries in order to gather as much complete and accurate information as possible. By surprising entities with the inspections, the EC prevents them from destroying, hiding, or altering many documents and files that could shed light on the issues being investigated.<ref> Gow, David and Marianne Barriaux. “EC stages dawn raids on Europe's pharmaceutical companies.” The Guardian, Jan 17, 2008. Available at http://www.guardian.co.uk/business/2008/jan/17
/pharmaceuticals.glaxosmithklinebusiness, 8 Jun 2009.</ref> Even though they are a surprise, the raids have always taken place after inquiries were well under way.<ref> Gow, David and Marianne Barriaux. “EC stages dawn raids on Europe's pharmaceutical companies.” The Guardian, Jan 17, 2008. Available at http://www.guardian.co.uk/business/2008/jan/17
/pharmaceuticals.glaxosmithklinebusiness, 8 Jun 2009.</ref> This time, however, the dawn raids occurred right at the beginning of the inquiry.<ref> Gow, David and Marianne Barriaux. “EC stages dawn raids on Europe's pharmaceutical companies.” The Guardian, Jan 17, 2008. Available at http://www.guardian.co.uk/business/2008/jan/17
/pharmaceuticals.glaxosmithklinebusiness, 8 Jun 2009.</ref> The EC felt the timing was necessary in order to determine if there was reason for a full-blown EC investigation.<ref> Gow, David and Marianne Barriaux. “EC stages dawn raids on Europe's pharmaceutical companies.” The Guardian, Jan 17, 2008. Available at http://www.guardian.co.uk/business/2008/jan/17
/pharmaceuticals.glaxosmithklinebusiness, 8 Jun 2009.</ref>

Inquiries are conducted when the EC has “indications” – but no solid evidence – “that competition may not be working as it should be in the sector concerned.”<ref> European Commission. Press Release: Antitrust - sector inquiry into pharmaceuticals – frequently asked questions. Europa. MEMO/08/20, Brussels, 16th January 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/20&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> The EC was careful to explain that the pharma inquiry, and dawn raids in particular, were not meant to search for evidence of wrong-doing.<ref> Neelie Kroes, European Commissioner for Competition Policy Commission launches sector inquiry into pharmaceuticals: Introductory remarks at press conference. Brussels, 16th January 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/18&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> However, if such evidence happened to be found, it could be used against any entities that the EC went on to investigate.<ref> Neelie Kroes, European Commissioner for Competition Policy Commission launches sector inquiry into pharmaceuticals: Introductory remarks at press conference. Brussels, 16th January 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/18&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> Regarding the inquiry into pharmaceutical sector, EC Commissioner Neelie Kroes cited a decline in new drugs, apparent delays in getting generic drugs to market, and patent litigation that seemed excessive, as indications that competition violations might be occurring in the sector.<ref> Neelie Kroes, European Commissioner for Competition Policy Commission launches sector inquiry into pharmaceuticals: Introductory remarks at press conference. Brussels, 16th January 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/18&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> The inquiry was begun in order to determine if the decline, delays and litigation were due to violations or to other reasons.<ref> Neelie Kroes, European Commissioner for Competition Policy Commission launches sector inquiry into pharmaceuticals: Introductory remarks at press conference. Brussels, 16th January 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/18&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

During a dawn raid, the EC can take copies of documents and computer files, and can interview people at the company.<ref>“Application of Articles 81 and 82 of the EC Treaty.” Europa, Feb 21, 2007. Available at http://europa.eu/scadplus/leg/en/lvb/l26092.htm, 8 Jun 2009.</ref> Company officials must assist the search through their files.<ref>“Application of Articles 81 and 82 of the EC Treaty.” Europa, Feb 21, 2007. Available at http://europa.eu/scadplus/leg/en/lvb/l26092.htm, 8 Jun 2009.</ref> Any attempts to block access to the requested information, that cannot be sustained later in court, can be cause for charges of obstructing the inquiry.<ref> Summary of Commission Decision of 20 November 2007 relating to a proceeding under Article 81 of the EC Treaty and Article 53 of the EEA Agreement (Case COMP/38.432 — Professional videotapes). Available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:057:0010:0012:EN:PDF. 18 June 2011.</ref>

=== Next Steps ===

After the dawn raids on the pharma sector, the EC consulted with stakeholders in an effort to gain a better understanding of the situation.<ref> European Commission. Press Release: Antitrust: preliminary report of sector inquiry into pharmaceuticals – frequently asked questions. Europa, MEMO/08/746, Brussels, 28th November 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/746&format=PDF&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> Stakeholders included “industry associations at the European level: e.g. the European Federation of Pharmaceutical Industries and Associations (EFPIA) representing the originator companies and the European Generic Medicines Association (EGA) representing the generic companies,” as well as “representatives of consumer and patients associations, insurance companies, doctors, pharmacies, wholesalers, hospitals, parallel traders, patent offices and competition authorities.” The EC also sent questionnaires to many of the stakeholders, and solicited consultations from the public. At least 70 different agencies, businesses, law firms, individuals and organizations responded to the invitation to supply more information that would clarify their perspectives of the business practices of the pharmaceutical sector.<ref> The consultation contributions they submitted to the EC may be viewed by the public and are linked from this EC web page: http://ec.europa.eu/competition/consultations/2009_pharma/index.html, 8 Jun 2009.</ref>

After reviewing these initial documents, the EC issued a 426-page preliminary report that revealed that the dawn raids found solid evidence of anti-competitive actions taken by the companies that had been searched.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> One company’s document declared that the “sole purpose” of at least some of its patents was to “[limit] the freedom of operation of our competitors.”<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> The EC also discovered that one drug maker had applied for up to 1300 patents on a single medicine, creating a significant burden for any firm to sift through in order to avoid violating any patents.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> In addition, “originator” companies who developed new drugs had filed about 700 lawsuits against generic companies, delaying generic drugs’ entry in the market by an average of three years.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> The originator companies had continued to file such lawsuits despite losing most of them, raising suspicions that the lawsuits were simply an abuse of the originator companies dominant position.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> Brand-name drug makers and generic manufacturers had also engaged in anti-competitive patent settlements, documents showed.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> The EC estimated that the various delays in getting generics to consumers had cost consumers and Member States at least €3 billion between 2000 and 2007.<ref> European Commission. Press release, “Antitrust: preliminary report on pharmaceutical sector inquiry highlights cost of pharma companies' delaying tactics.” Europa. Nov 28, 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1829&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> The excessive litigation likely contributed to increased costs for drugs, and the decline in innovative drugs as originator companies focused on blocking competition rather than developing new medications may have harmed consumers as well.<ref> European Commission. Press release, “Antitrust: preliminary report on pharmaceutical sector inquiry highlights cost of pharma companies' delaying tactics.” Europa. Nov 28, 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1829&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

The initial inquiry and dawn raids provided a strong foundation for continuing the investigation. The EC next sought further public input and consults with stakeholders, and conducted even more dawn raids on November 24, 2008.<ref>“Raids leave pharma sector baffled.” EurActiv, Nov 26, 2009. Available at http://www.euractiv.com/en/health/raids-leave-pharma-sector-baffled/article-177516, 8 Jun 2009.</ref> The EC planned to release a final report on the state of competition in the pharmaceutical sector in the summer of 2009.<ref> European Commission. Pharmaceuticals Sector Inquiry, Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/
pharmaceuticals/inquiry/index.html, 8 Jun 2009.</ref> The final report would likely provide recommendations on what actions should be taken next, such as opening investigations against firms who have engaged in anti-competitive behavior, or possibly changing some aspects of EU law to better support the needs of consumers, Member States, and the pharma industry.<ref> European Commission. Press release, “Antitrust: preliminary report on pharmaceutical sector inquiry highlights cost of pharma companies' delaying tactics.” Europa. Nov 28, 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?
reference=IP/08/1829&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref> Investigations may lead to injunctions to stop the violations, steep fines, or some combination of the two.<ref> European Commission. Press release, “Antitrust: preliminary report on pharmaceutical sector inquiry highlights cost of pharma companies' delaying tactics.” Europa. Nov 28, 2008. Available at http://europa.eu/rapid/pressReleasesAction.do?
reference=IP/08/1829&format=HTML&aged=0&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

== Patents and Competition Law ==

One of the important findings of the EC’s preliminary report on the pharmaceutical sector was that dominant firms were abusing their positions in order to block the entry of generic drugs and other new drugs from market.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> This abuse took several forms, including excessive patents on each medication, paying generic manufacturers to delay bringing their products to market, and excessive lawsuits designed to create delays in generic products.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> Taken together, the behaviors of the dominant firms appear to have created a chilling effect on the development and introduction of new medications onto the market.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref>

Currently, each Member State in the EU has its own patent system. Both originator and generic drug companies agree that a single EU patent process, with a dedicated patent court, would help to improve the patent situation for all concerned.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref> Based on its findings so far, which also support a simpler, dedicated, single patent system, it appears likely that the EU may try to move in this direction.<ref> European Commission. “Pharmaceutical Sector Inquiry Preliminary Report.” Nov 28, 2008. Available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf, 8 Jun 2009.</ref>

== Public versus Private Enforcement ==

Generally speaking, competition complaints are filed with the EC or with Member States' Competition Authorities.<ref> European Commission. “Competing Fairly.” Europa, Dec 14, 2008. Available at http://ec.europa.eu/youreurope/business/profiting-from-eu-market/competing-fairly/index_en.htm, 8 Jun 2009.</ref> The relevant competition authorities then conduct inquiries or investigations, and may prosecute any companies found to be engaging in anti-competitive behaviors.<ref> European Commission. “Competing Fairly.” Europa, Dec 14, 2008. Available at http://ec.europa.eu/youreurope/business/profiting-from-eu-market/competing-fairly/index_en.htm, 8 Jun 2009.</ref> Depending on the country, suspected antitrust violators go to trial through courts or competition authorities, which then mete out fines or injunctions to those convicted. This is public enforcement of the criminal law, which is carried on and funded by the government, with the goal of protecting competitors and consumers.

While the system stops the behaviors through injunctions and penalties imposed on violators, competitors and others who were harmed by an anti-competitive behavior are not compensated for their losses through this system. The situation is made better going forward, but there is no public mechanism to reimburse victims for the damage that was already done.

Private enforcement plays a unique role in compensating victims for past harms because it allows victims to recoup their losses.<ref> Antitrust: Actions for Damages. Europa, Aug 11, 2008. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/index.html, 8 Jun 2009.</ref> In the U.S., competitors who were harmed by anti-competitive behavior can sue for treble damages.<ref> Jacobson, Jonathan. ABA Section of Antitrust Law, Antitrust law developments (6th ed. 2007), p. 989.</ref> In the EU, however, when damages are available, they are generally only available for actual losses.<ref> Antitrust: Actions for Damages. Europa, Aug 11, 2008. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/index.html, 8 Jun 2009.</ref>

Another difference between the two systems lies in who pays for the court costs. In the EU, it is customary for the losing side to pay the court costs of the winner. This means that if the plaintiff entity loses the case, it must still pay its attorney fees, PLUS those of the defendant.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> This is designed to discourage frivolous lawsuits.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> This introduces a real risk for potential plaintiffs, who also bear the burden of proof in each case<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> – and proof of anti-competitive behavior can be extremely difficult for plaintiffs to obtain on their own.<ref>“EU system of compensation possible by year end.” The Irish Times, Apr 4, 2008.</ref> It is difficult for plaintiffs to compel the production of documents by defendants in most EU Member States.<ref> Kroes, Neelie, Member of the European Commission in charge of Competition Policy.“Damages Actions for Breaches of EU Competition Rules: Realities and Potentials.” SPEECH/05/613. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/05/613&format=PDF&aged=1&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

Plaintiff entities in competition law cases tend to be smaller and less-well-funded than the defendants.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/
vol15_2/Grace.pdf. 18 June 2011.</ref> A smaller firm’s financial position may have been further worsened by anti-competitive behavior by the defendant, such that the plaintiff has been prevented from earning the size of profit or market share it might otherwise have generated. The victim’s comparative lack of resources may add to the difficulty of presenting a strong case against a better-funded defendant. As a result, many genuine victims are deterred from seeking redress and private actions for competition violations are the exception, rather than the rule.<ref> Kroes, Neelie, Member of the European Commission in charge of Competition Policy.“Damages Actions for Breaches of EU Competition Rules: Realities and Potentials.” SPEECH/05/613. Available at http://europa.eu/rapid/pressReleasesAction.do?
reference=SPEECH/05/613&format=PDF&aged=1&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

To address this issue, the EU has encouraged the creation of more viable mechanisms for private actions in competition cases and has taken one step in this direction by allowing private plaintiffs to rely upon EU criminal findings as evidence in their cases.<ref> Commission of the European Communities. “White Paper on Damages actions for breach of the EC antitrust rules.” Apr 2, 2008. Available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0165:FIN:EN:PDF, 8 Jun 2009.</ref> It has also begun pushing member states to modify legislation in order to create civil causes of action where none now exist, and to increase access to civil litigation in all Member States for victims of anti-competitive practices. One way to make private actions more accessible is to expand or create pathways for collective actions, which the EU has also urged Member States to do.<ref> Kroes, Neelie, Member of the European Commission in charge of Competition Policy.“Damages Actions for Breaches of EU Competition Rules: Realities and Potentials.” SPEECH/05/613. Available at http://europa.eu/rapid/pressReleasesAction.do?
reference=SPEECH/05/613&format=PDF&aged=1&language=EN&guiLanguage=en, 8 Jun 2009.</ref>

In the U.S., the defendant must pay the plaintiff’s reasonable fees and costs if the plaintiff wins the case.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> Even if the plaintiff loses, however, the risks of litigation are relatively small because of the availability of contingency fees, where the plaintiff’s attorney is only paid if the plaintiff wins the case.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> The attorney fees are then a certain percentage of the damages awarded to the plaintiff, generally ranging from 20-50 percent.<ref> Georgia Civil Justice Foundation. “How can the average American afford to pursue civil justice?” Available at http://www.fairplay.org/fees/whitepaper.html. 18 June 2011.</ref>

Attorneys may make more money from individual contingency fee cases, when they win, than they might if they were paid on an hourly basis. This potential for a higher payment helps to offset the risks they shoulder by handling contingency fee cases, since they only get paid for the cases they win.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> The risk of not getting paid if the case is lost encourages attorneys to carefully filter out cases that are unlikely to win, which serves to prevent some frivolous cases.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> At the same time, however, because plaintiffs’ attorneys collect a percentage of any settlement, not just court judgments, they may be motivated to file cases in the hopes that a large entity will find it cheaper to settle than to fight the case in court.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> It is sometimes in the defendant’s interest to settle a case quickly – and avoid the costs of a lengthy trial and negative publicity – even when a case has little merit.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref>

U.S.-style contingency fees are typically not permitted in the EU, although there are some mechanisms that are similar.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2, p. 286. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> The United Kingdom, for instance, permits no-win-no-pay, which is similar to a contingency fee. In this system, attorneys may collect a percentage of the damages won, but are capped at double what they would have been paid for their time spent.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2, p. 286. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref>

Collective actions can facilitate private lawsuits by reducing costs, time and the burden on courts in situations where many plaintiffs are suing based upon the same set of facts. In the U.S., a class-action lawsuit covers everyone who fits into those facts, unless an individual opts out. Potential plaintiffs might want to opt out if they felt they could do a better job of pursuing their own case. When a case is certified as a class-action lawsuit, the plaintiffs’ attorneys stand to reap 20-50% of the entire award,<ref> Georgia Civil Justice Foundation. “How can the average American afford to pursue civil justice?” Available at http://www.fairplay.org/fees/whitepaper.html. 18 June 2011.</ref> which can be huge when large numbers of plaintiffs are automatically included.

An opt-out collective action regime provides a strong incentive for attorneys to push for class-action certification whenever possible. The benefits are that court time and expenses are reduced for everyone involved, and the defendant needn’t worry about future lawsuits on the same issues. An opt-out class action can harm someone who did not opt out of the lawsuit, however, if the class of plaintiffs loses on a point that an individual plaintiff might have successfully proven.

In the EU, most countries do not have collective actions of any kind, much less for antitrust cases.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> The few that do permit collective actions usually have set them up in a way that requires plaintiffs to opt in.<ref> Grace, Stefano. “Strengthening investor confidence in europe: U.S. style securities class actions and the acquis communautaire.” J. of Transnational Law & Policy, Vol 15:2. Available at http://www.law.fsu.edu/journals/transnational/vol15_2/Grace.pdf. 18 June 2011.</ref> This prevents people from being involved in a case without their permission, and also eases concerns of encouraging too much litigation, as many Europeans believe has occurred in the U.S.<ref> Veysey, Sarah. “Europe considers class action law; Proposal for antitrust breaches seeks to avoid ‘excesses of U.S. system.” Business Insurance, Brussels, Belgium, Apr 21, 2008.</ref>

Two other options that have been gaining some ground in the EU are representative actions, “which are brought by qualified entities, such as consumer or trade associations,”<ref> Kroes, Neelie, Member of the European Commission in charge of Competition Policy.“Damages Actions for Breaches of EU Competition Rules: Realities and Potentials.” SPEECH/05/613. Available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/05/613&format=PDF&aged=1&language=EN&guiLanguage=en, 8 Jun 2009.</ref> and third party funding of civil litigation, where a third party pays the plaintiff’s cost of litigation in exchange for a percentage of the money recovered by the plaintiff.<ref>“CJC proposals not the final word on Euro class action debate.” Legal Week, Jan 22, 2009.</ref><ref>“The Crisis – Litigation – Legal Gold – The US Still looks like the preferred jurisdiction for those claiming damages over subprime-related losses, but the growth of litigation funding could create new opportunities in Europe.” The Banker, Sept 1, 2008.</ref>

In addition to compensating victims, private actions also have the potential to increase the amount of anti-competitive practices that are brought to light, and to produce more of certain kinds of evidence required to successfully prosecute or correct violations.<ref>“Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios.” Report For The European Commission, Contract DG COMP/2006/A3/012, Dec 21, 2007, p. 75. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/impact_study.pdf, 8 Jun 2009.</ref> According to an impact report prepared for the EC, victims often have more accurate and detailed information that the competition authorities.<ref>“Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios.” Report For The European Commission, Contract DG COMP/2006/A3/012, Dec 21, 2007, p. 75. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/impact_study.pdf, 8 Jun 2009.</ref> Studies have also shown that when private enforcement increased enormously in the U.S., public enforcement remained stable and did not decrease.<ref>“Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios.” Report For The European Commission, Contract DG COMP/2006/A3/012, Dec 21, 2007, p. 75. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/impact_study.pdf, 8 Jun 2009.</ref> Instead, a significantly more violations were caught after private enforcement became more common.<ref>“Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios.” Report For The European Commission, Contract DG COMP/2006/A3/012, Dec 21, 2007, p. 75. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/impact_study.pdf, 8 Jun 2009.</ref> Better enforcement leads to a better business environment for competitors, and lower prices for consumers.

== Leniency Programs ==

Leniency programs often produce the best evidence for an antitrust case, because the parties who take part in them have been personally involved in the illegal behavior.<ref> Directorate-General for Competition of the European Commission. “EU competition policy and the consumer: Making sure companies play fair.” Available at http://www.master.fu-berlin.de/mbl/media/eu_flyer.pdf. 18 June 2011.</ref> However, to date, no company in the pharmaceutical sector inquiry has stepped forward to take advantage of a leniency program.<ref> Directorate-General for Competition of the European Commission. “EU competition policy and the consumer: Making sure companies play fair.” Available at http://www.master.fu-berlin.de/mbl/media/eu_flyer.pdf. 18 June 2011.</ref>

== Conclusion ==

Gathering thorough and accurate information is the first step in when the EC suspects an entity has enaged in anti-competitve behavior.<ref>“Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios.” Report For The European Commission, Contract DG COMP/2006/A3/012, Dec 21, 2007, p. 75. Available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/impact_study.pdf, 8 Jun 2009.</ref> Dawn raids, while hard on entities, greatly increase the odds that the EC will be able to collect as much information as possible before it can be destroyed, hidden, or modified. Thorough information can inform further investigations against individual companies, but can also provide a basis for modifying laws to improve business climates and consumer welfare. For example, information uncovered in the pharma sector inquiry has led to serious discussions about creating a single patent system with a dedicated court might help to streamline the introduction of new drugs onto the market.

Private actions can compensate victims, and in doing so, can create an incentive for enhanced enforcement of antitrust law, which further serves to deter potential competition violations. While currently still rare in the EU, many Member States are beginning to remove barriers and create pathways for more effective civil litigation.

With the economic downturn, enforcing competition that keeps prices down may become a higher EU priority. Pharmaceutical companies, while accounting for only seventeen percent of health care costs, are an “easy target” for cost reduction measures and their business practices have been closely analyzed in recent EC inquiries. The desire to reduce costs while keeping a strong, innovative pharmaceutical sector may hasten much-needed changes in the EU’s patent and competition laws and its civil litigation mechanisms. These moves will benefit consumers in many areas beyond access to affordable medications.

Main Page

2012-06-07T19:19:48Z

LMyhre: /* Authors */

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports - Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Authors' Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]
* [[Industry Standard Setting and Antitrust]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
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|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
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|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
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|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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|-
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
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{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

Main Page

2012-06-07T17:49:33Z

LMyhre: /* Special Reports */

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Authors' Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]
* [[Industry Standard Setting and Antitrust]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

Main Page

2012-06-07T17:48:47Z

LMyhre: /* Databases Notes */

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Authors' Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

Main Page

2012-06-07T17:47:35Z

LMyhre: /* Authors */

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, some of the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Author's Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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| '''Asia'''
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
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| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
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| [[Vietnam]]
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{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
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| [[Benin]]
| [[Botswana]]
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| [[Cameroon]]
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| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
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| [[Senegal]]

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| [[Tanzania]]
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{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
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| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
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{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

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| [[Australia]]
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{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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| '''North America'''
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
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{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
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| [[Barbados]]
| [[Jamaica]]
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{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
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| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
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| [[Panama]]
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{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
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| '''South America'''
|-
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
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|}

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__NOTOC__

User:LMyhre

2012-01-28T21:15:38Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellow to Prof. Hylton, January 2012 to Present''
:''Research Fellow to Prof. Hylton, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
:''[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]''

User:LMyhre

2012-01-28T21:15:01Z

LMyhre:

'''Lynne Myhre''' [mailto:lmyhre@bu.edu email me]
:''Research Fellow to Prof. Hylton, January 2012 to Present''
:''Research Fellow to Prof. Hylton, Summer 2011''
:''Research Assistant to Prof. Hylton, June 2008 to June 2009''
:*J.D., [http://www.bu.edu/law/ Boston University School of Law], 2010
:*B.A. in Mass Communication with Public Relations emphasis, [http://www.utah.edu University of Utah], 2007
[http://www.linkedin.com/profile/view?id=43031969&authType=NAME_SEARCH&authToken=xtLe&locale=en_US&srchid=93fb091d-3390-4fa8-a58a-62e3482d2ab7-0&srchindex=1&srchtotal=1&goback=.fps_PBCK_lynne+myhre_*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link LinkedIn Profile]

User:LMyhre

2012-01-28T21:12:35Z

LMyhre:

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-28T00:26:56Z

LMyhre:

Author: Mick Bordonaro

Date: May 25, 2011

== Introduction ==

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

== Summary of the Decisions ==

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

== Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger ==

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

== Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger ==

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

== Overview of HHI’s Role in American competition law ==

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

== Applying American merger analytics to InBev-Anheuser-Busch merger ==

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)'''<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| China Resources Snow
| 16 %
| 256
|

|- align="left"
| Tsingtao
| 16%
| 256
|

|- align="left"
| InBev
| 10%
| 100
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 33%
| 144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>
|

|}

|}

Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

=== Local Concerns ===

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

=== Minority Stakes ===

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008'''<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| Anheuser-Busch / InBev / Tsingtao
| Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref>
| 900
|

|- align="left"
| China Resources Snow
| 16%
| 256
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref>
| ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
|

|- align="left"
| '''Total HHI Score:'''
|
| '''1407'''
|

|}

|}

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

== Applying American merger analytics to proposed Coca-Cola-Huiyuan merger ==

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

== Conclusion ==

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-28T00:25:59Z

LMyhre:

Author: Mick Bordonaro
Date: May 25, 2011

== Introduction ==

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

== Summary of the Decisions ==

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

== Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger ==

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

== Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger ==

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

== Overview of HHI’s Role in American competition law ==

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

== Applying American merger analytics to InBev-Anheuser-Busch merger ==

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)'''<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| China Resources Snow
| 16 %
| 256
|

|- align="left"
| Tsingtao
| 16%
| 256
|

|- align="left"
| InBev
| 10%
| 100
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 33%
| 144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>
|

|}

|}

Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

=== Local Concerns ===

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

=== Minority Stakes ===

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008'''<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| Anheuser-Busch / InBev / Tsingtao
| Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref>
| 900
|

|- align="left"
| China Resources Snow
| 16%
| 256
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref>
| ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
|

|- align="left"
| '''Total HHI Score:'''
|
| '''1407'''
|

|}

|}

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

== Applying American merger analytics to proposed Coca-Cola-Huiyuan merger ==

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

== Conclusion ==

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-28T00:23:55Z

LMyhre:

Author: Mick Bordonaro
Date: May 25, 2011

== Introduction ==

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

== Summary of the Decisions ==

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

== Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger ==

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

== Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger ==

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

== Overview of HHI’s Role in American competition law ==

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

== Applying American merger analytics to InBev-Anheuser-Busch merger ==

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)'''<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| China Resources Snow
| 16 %
| 256
|

|- align="left"
| Tsingtao
| 16%
| 256
|

|- align="left"
| InBev
| 10%
| 100
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 33%
| 144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>
|

|}

|}

Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

== Local Concerns ==

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

== Minority Stakes ==

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008'''<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| Anheuser-Busch / InBev / Tsingtao
| Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref>
| 900
|

|- align="left"
| China Resources Snow
| 16%
| 256
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref>
| ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
|

|- align="left"
| '''Total HHI Score:'''
|
| '''1407'''
|

|}

|}

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

== Applying American merger analytics to proposed Coca-Cola-Huiyuan merger ==

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

== Conclusion ==

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-27T20:14:20Z

LMyhre:

Author: Mick Bordonaro
Date: May 25, 2011

Introduction

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

Summary of the Decisions

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

Overview of HHI’s Role in American competition law

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

Applying American merger analytics to InBev-Anheuser-Busch merger

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)'''<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| China Resources Snow
| 16 %
| 256
|

|- align="left"
| Tsingtao
| 16%
| 256
|

|- align="left"
| InBev
| 10%
| 100
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 33%
| 144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>
|

|}

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Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

Local Concerns

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

Minority Stakes

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008'''<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="left"
| '''Company Name'''
| '''Market Share'''
| '''HHI Score'''
|

|- align="left"
| Anheuser-Busch / InBev / Tsingtao
| Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref>
| 900
|

|- align="left"
| China Resources Snow
| 16%
| 256
|

|- align="left"
| Carlsberg
| 8%
| 64
|

|- align="left"
| Heineken
| 5%
| 25
|

|- align="left"
| Beijing Yanjing Brewery
| 5%
| 25
|

|- align="left"
| Chongqing Brewery
| 4%
| 16
|

|- align="left"
| Asahi
| 3%
| 9
|

|- align="left"
| Other
| 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref>
| ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
|

|- align="left"
| '''Total HHI Score:'''
|
| '''1407'''
|

|}

|}

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

Applying American merger analytics to proposed Coca-Cola-Huiyuan merger

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

Conclusion

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-27T19:56:57Z

LMyhre: Removing all content from page

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-27T19:56:06Z

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Author: Mick Bordonaro
Date: May 25, 2011

Introduction

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

Summary of the Decisions

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

Overview of HHI’s Role in American competition law

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

Applying American merger analytics to InBev-Anheuser-Busch merger

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)'''<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
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{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
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|[[European Commission]]
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| [[<h2 style="margin:0; background:white; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Company Name</h2>]]
| [[<h2 style="margin:0; background:white; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Market Share</h2>]]
| [[<h2 style="margin:0; background:white; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">HHI Score</h2>]]
| [[China Resources Snow]]
| [[16 %]]
| [[256]]
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| [[Tsingtao]]
| [[16%]]
| [[256]]
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| [[InBev]]
| [[10%]]
| [[100]]
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|- align="left"
| [[Carlsberg]]
| [[8%]]
| [[64]]
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|- align="left"
| [[Heineken]]
| [[5%]]
| [[25]]
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| [[144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>]]
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Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

Local Concerns

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

Minority Stakes

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
Company Name Market Share HHI Score
Anheuser-Busch / InBev / Tsingtao Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref> 900
China Resources Snow 16 256
Carlsberg 8 64
Heineken 5 25
Beijing Yanjing 5 25
Chongqing 4 16
Asahi 3 9
Other 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref> ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
Total HHI Score: 1407

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

Applying American merger analytics to proposed Coca-Cola-Huiyuan merger

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

Conclusion

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

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2011-06-27T19:41:21Z

LMyhre:

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! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
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| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
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== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
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:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

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[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Author's Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]]
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

Main Page

2011-06-27T19:40:47Z

LMyhre:

{|style="border-spacing:8px; margin:0px -8px;"
|border:1px solid #cef2e0; background:#f5fffa; vertical-align:top; color:#000;"|
{|width="100%" cellpadding="2" cellspacing="5" style="vertical-align:top; background:#f5fffa;"
! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
|-
| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
|}
|}

== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Author's Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
|[[European Commission]]
|}

<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Austria]]
| [[Belgium]]
| [[Bulgaria]]
| [[Cyprus]]
| [[Czech Republic]]
| [[Denmark]]
|

|- align="center"
| [[Estonia]]
| [[Finland]]
| [[France]]
| [[Germany]]
| [[Greece]]
| [[Hungary]]
|

|- align="center"
| [[Ireland]]
| [[Italy]]
| [[Latvia]]
| [[Lithuania]]
| [[Luxembourg]]
| [[Malta]]
|

|- align="center"
| [[Netherlands]]
| [[Poland]]
| [[Portugal]]
| [[Romania]]
| [[Slovak Republic]]
| [[Slovenia]]
|

|- align="center"
| [[Spain]]
| [[Sweden]]
| [[United Kingdom]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Europe: Non-European Union'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Albania]] |
| [[Armenia]]
| [[Belarus]]
| [[Bosnia-Herzegovina]]
| [[Croatia]]
| [[Faroe Island]]

|- align="center"
| [[Georgia]]
| [[Greenland]]
| [[Iceland]]
| [[Jersey, Channel Islands]]
| [[Macedonia]]
| [[Moldova]]

|- align="center"

| [[Norway]]
| [[Russia]]
| [[Serbia]]
| [[Switzerland]]
| [[Turkey]]
| [[Ukraine]]

|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Asia'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Azerbaijan]]
| [[Bangladesh]]
| [[Brunei Darussalam]]
| [[China]]
| [[Hong Kong]]
| [[India]]
| [[Indonesia]]

|- align="center"
| [[Japan]]
| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-27T19:34:41Z

LMyhre: Removing all content from page

American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings

2011-06-27T19:34:17Z

LMyhre: New page: Author: Mick Bordonaro Date: May 25, 2011 Introduction In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingb...

Author: Mick Bordonaro
Date: May 25, 2011

Introduction

In late 2008 and early 2009, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau released two landmark decisions.<ref> Yingbo Jituan Gongsi Shougou AB Gongsi (英博集团公司收购AB公司) [In the Matter of InBev N.V. / S.A. Acquisition’s of Anheuser-Busch Companies Inc.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Nov. 18, 2008) [hereinafter In the Matter of InBev] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html (last visited May 17, 2011); Meiguo Kekou Kele Gongsi yu Zhongguo Huiyuan Guozhi Jituan Youxian Gongsi de Jingyingzhe Jizhong ( 美国可口可乐公司与中国汇源果汁集团有限公司的经营者集中) [In the Matter of Coca-Cola Co.] (decided by the Ministry of Commerce, Anti-Monopoly Bureau, Mar. 18, 2009) [hereinafter In the Matter of Coca-Cola] available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html (last visited May 17, 2011).</ref> The decisions reviewed two major deals: the Anheuser-Busch / InBev merger and Coca-Cola’s proposed acquisition of the Chinese juice producer Huiyuan.<ref> ‘’Id.’’</ref> The Anti-Monopoly Bureau granted approval to the Anheuser-Busch / InBev deal provided that the combined company refrain from acquiring shares in four named Chinese beer producers.<ref> In the Matter of InBev, ‘’supra’’ note 1.</ref> Regulators blocked Coca-Cola’s proposed acquisition of Huiyuan.<ref> In the matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The Chinese and international legal and business communities reacted with ambivalence to the Anheuser-Busch / InBev decision.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> Some analysts were pleased that regulators had not imposed stricter provisions on the transaction; others voiced general displeasure with the restrictions, did not perceive the restrictions to serve clear competition law goals, and speculated that national protectionism motivate the restrictions.<ref>’’See infra’’ note 17, 30, 35, 45 and accompanying text.</ref> On the other hand, the international legal and business communities reacted with greater uniformity in denouncing regulators’ rejection of the Coca-Cola / Huiyuan transaction.<ref>‘‘Id.’’</ref> The terseness of both decisions obfuscates the reasons which motivated regulators to decide as they did and impedes straightforward analysis of the manner in which Chinese regulators may apply competition law in the future.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

This paper reanalyzes the two decisions and the collateral legal debate by applying American competition law.<ref>U.S. Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter DOJ & FTC] (providing agency standards for reviewing mergers for anticompetitive risks).</ref> Based on this evaluation, this paper concludes that the Anheuser-Busch / InBev merger did not pose a threat to competition within the Chinese nationwide beer market. The paper hypothesizes that the restrictions on the beer merger may be rooted in the goal of maintaining competition within local or regional beer markets. On the other hand, Huiyuan’s market share of China’s pure juice market likely would have triggered American regulators to review the Coca-Cola / Huiyuan merger.<ref>‘‘Id.’’ at 15 – 19; ’’See Also infra’’ notes 145, 147.</ref> Qualitative aspects of Coca-Cola’s market power plausibly could have led American regulators to reject Coca-Cola’s purchase of Huiyuan.<ref>‘‘Id.’’</ref> This paper evaluates competitive harms posed to China’s nationwide beer and pure juice markets based on the Herfindahl-Hirschman Index (HHI) of market concentration. American agencies often use this tool to evaluate market concentration and anticompetitive risks that mergers within such markets may pose.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> By applying the quantitative and qualitative tools of American regulators to Chinese competition law cases, this paper provides a level of rigor and detail to the analysis of the Anheuser-Busch and Coca-Cola decisions which is absent from the agency decisions.<ref> In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref>

Summary of the Decisions

In 2008, InBev and Anheuser-Busch agreed to a merger that, ultimately, created the largest beer producer in the world.<ref> Michael J. de la Merced, “Anheuser-Busch Agrees to be Sold to InBev,” N.Y. Times, July 14, 2008.</ref> In September 2008, the companies submitted the deal proposal to China’s Anti-Monopoly Bureau, which is a subdivision of the Ministry of Commerce (MOFCOM)<ref> Note on pronunciation. In English, this abbreviated for of the Ministry is pronounced as two syllables. “MOF” rhymes with cough. “COM” is pronounced the same way the first syllable of “commerce” is pronounced.</ref> for review of the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> MOFCOM released its conditional approval of the deal on November 18, 2008. The decision sparked great interest among lawyers and business people both inside and outside of China because the ruling marked the first time the Chinese government had published an opinion approving a merger under China’s 2007 Anti-Monopoly Law.<ref> Legal Alert, Dechert, Major Acquisition Approval Offers Procedural Insights on China’s New Antimonopoly Law, Dec. 2008 available at http://www.dechert.com/library/M&A_Antitrust_12-08_Major_Acquisition_Approval_Offers.pdf; Zhonghua Renmin Gonheguo Fan Longduan Fa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China] (promulgated by the Standing Comm. of the Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1, 2008), ‘’translated in’’ LawInfoChina (last visited May 15, 2011) [hereinafter Anti-Monopoly Law], ‘’available at’’ http://www.lawinfochina.com/ (China).</ref> The Chinese authorities did not stand in the way of the merger; however, they did attach four key conditions to the beer tie up.<ref> In the Matter of InBev N.V., ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of the Chinese beer producer, Tsingtao Beer.<ref>‘‘Id.’’</ref> Following the merger, the combined firm may not increase its holdings in Tsingtao.<ref>‘‘Id.’’</ref> Second, if InBev’s controlling shareholders were to change, InBev must promptly inform MOFCOM. .<ref>‘‘Id.’’</ref> Third, prior to the merger, InBev owned 28.56 percent of Pearl River Beer. Following the merger, the combined company may not increase its holdings in Pearl River. .<ref>‘‘Id.’’</ref> The combined Anheuser-Busch / InBev may not hold any shares in China Resources Snow Beer or Beijing Yanjing Beer. .<ref>‘‘Id.’’</ref>

In the fall of 2008, Coca-Cola filed an application with MOFCOM to acquire the Chinese Huiyuan Juice Corporation.<ref> In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> In March 2009, MOFCOM handed down its opinion and rejected Coca-Cola’s acquisition plan. MOFCOM citied its authority under the Anti-Monopoly Law to review mergers based on their effects on market concentration within relevant markets and to reject deals which may effectively eliminate or restrict competition.<ref> See Anti-Monopoly Law, ‘‘supra’’ note 17, §§27-28.</ref> The decision struck the death knell for Coca-Cola’s plans to acquire the Chinese juice maker.<ref> Tucker, Smith & Anderlini, infra note 45.</ref>

Summary of Legal Bulletins analyzing InBev-Anheuser-Busch merger

In November 2008, MOFCOM published its first decision under the new Anti-Monopoly Law.<ref> Legal Alert, Freshfields Bruckhaus Deringer, China’s MOFCOM Imposes Conditions on InBev’s Acquisition of Anheuser-Busch, Nov. 2008.</ref> Chinese regulators investigated the impact that the merger of the two international beer goliaths would have on the domestic Chinese beer market.<ref>‘‘Id.’’ </ref> The international legal community reacted with ambivalence and minor suspicion regarding the soundness of the legal reasoning in the Anheuser-Busch decision and regarding the degree to which competition law concerns actually motivated the regulatory holding.<ref>‘‘Id.’’ </ref> A review of legal bulletins produced by major international law firms provides evidence regarding the nature and depth of the interpretations and criticisms of the Anheuser-Bush ruling.

Legal analyses met the Anheuser-Busch ruling with some cautious optimism and muted praise.<ref> Legal Alert, Mayer Brown, Lessons to be Learned from China’s Latest High Profile Merger Review, Dec. 2008 ‘’available at’’ http://www.mayerbrown.com/publications/article.asp?id=5861&nid=6; Dechert Legal Alert, ‘‘supra’’ note 17 (providing muted praise and muted criticism to regulators’ approach in the Anheuser-Busch decision).</ref> Mayer Brown recognized that many international businesspeople and lawyers had feared that the Anti-Monopoly Law would be a tool that government regulators would use blatantly to further national industrial policy.<ref> Mayer Brown Legal Alert, ‘‘supra’’ note 30.</ref> The fact that the government had approved the beer merger, albeit subject to several restrictions, indicated that Chinese regulators were willing to act with a degree of self-restraint in applying the Anti-Monopoly Law as a tool to promote industrial policies favoring China firms over foreign competitors.<ref>‘‘Id.’’<ref> Further, the Mayer Brown report stated, without providing examples, that the Anheuser-Busch decision paralleled similar antitrust decisions in the United States and the United Kingdom. Quite likely, some of the cautious optimism stemmed from the fact that international antitrust lawyers were finally able to read a legal decision applying the hitherto unapplied Anti-Monopoly Statute. Prior to the decision, lawyers could not analyze the Anti-Monopoly law in light of the statute’s application to an actual case.

Several law firms proffered muted criticism of the Anheuser-Busch opinion as they point to the restrictions government regulators place on the deal as evidence that industrial policy motivated the conditions of the approval.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> The Dechert LLP legal alert drew attention to the “protectionist flavor” of the Anheuser-Busch holding’s requirements.<ref>‘‘Id.’’</ref> Despite this negativity, the Dechert legal alert muted its criticism by, in the same paragraph, also praising the rapid speed with which MOFCOM issued its decision on this merger.<ref> Legal Alert, Akin Gump, First Impressions of China’s New Anti-Monopoly Law – Caution Ahead, Nov. 21, 2008 ‘’available at’’ http://www.akingump.com/communicationcenter/newsalertdetail.aspx?pub=2023.</ref> Akin Gump’s analysis of the holding emphasized that the decision provided little clarity on the manner in which regulators would apply antitrust law going forward.<ref>‘‘Id.’’</ref> The alert argued that the Anheuser-Busch holding represented an “unclear doctrinal approach” and that the operative nature of Chinese antitrust law remained on an “unclear trajectory.”<ref>‘‘Id.’’</ref>

Hypotheses that policies favoring Chinese firms guided the Anheuser-Busch / InBev decision remain poorly substantiated or peripheral to the legal alerts’ central arguments.
Notably, these legal alerts do not fully develop the arguments regarding the role that industrial policy or protectionism played in generating the outcome in the Anheuser decision. A report from the British firm Freshfields argues that the restrictions regulators placed on the deal signal that “’pure’ competition law” is not the only factor which led to the holding in the Anheuser-Busch case.<ref> Freshfields Legal Alert, ‘‘supra’’ note 27.</ref> Freshfields states that the decision raises the “suggestions” that “industrial policy” played a role in producing the decision.<ref>‘‘Id.’’</ref> The Dechert legal alert indicated that that firm believed that protectionism played some role in producing holding.<ref> Dechert Legal Alert, ‘‘supra’’ note 17.</ref> Dechert avoided fully endorsing the conclusion that industrial policy motivated the Anheuser-Busch decision by referring to a “protectionist flavor” which suffused the decision.<ref>‘‘Id.’’</ref> Finally, Akin Gump’s focuses most of its report on the implications the decision has on the procedural aspects of complying with Chinese competition law.<ref> Akin Gump Legal Alert, ‘‘supra’’ note 35.</ref> The report then states that the restrictions placed on the deal indicate that industrial policy and protectionism played some role in guiding the decision.<ref>‘‘Id.’’</ref> Crucially for the purposes of this paper, the Anheuser-Busch decision’s analyses do not endorse fully the conclusion that Chinese industrial policy guided the Anheuser holding.<ref>‘‘Id.’’</ref> This approach contrasts significantly with the legal community’s analysis of the Coca-Cola / Huiyuan decision. Those analyses, as discussed below, repeatedly argue that it the Chinese desire to protect a domestic champion firm guided that decision.

Summary of Legal Bulletins analyzing proposed Coca-Cola-Huiyuan merger

Soon after the Chinese regulators rejected the proposed Coca-Cola / Huiyuan merger, the international legal community and media lit up with criticism of the decision.<ref> Legal Alert, Jones Day, Peter Wang & Yizhe Yang, Coca-Cola / Huiyuan Deal is First Acquisition Blocked by China Antitrust Review (Mar. 2009) ‘’available at’’ http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication=6026; Legal Alert, Cleary Gottlieb, Coca-Cola / Huiyuan: First Chinese Prohibition Decision under New Merger Control Rules (Mar. 29, 2009); English Edition Staff, ‘’Anti-Monopoly Law Cases Surge’’, ECONOMIC OBSERVER, Feb. 10, 2011 ‘’available at’’ http://www.eeo.com.cn/ens/Today_Media/review_print/2011/02/10/192902.shtml; Wang Biqiang, ‘’China’s Anti-monopoly Law: One Year On’’, ECONOMIC OBSERVER, Nov. 10, 2009 ‘’available at’’ http://www.eeo.com.cn/ens/Politics/2009/11/10/155247.shtm; Sundeep Tucker, Peter Smith & Jamil Anderlini, ‘’China Blocks Coca-Cola bid for Huiyuan’’, FIN. TIMES, Mar. 18, 2009.</ref> These skeptics condemned the decision as thinly reasoned and not motivated by the desire to protect competition within the Chinese market.<ref>‘‘Id.’’</ref> Rather, as the commentators argued, protectionism of the Chinese market and a desire to nurture Chinese brands and corporations motive the regulatory rejection of the Coca-Cola / Huiyuan deal.<ref>‘‘Id.’’</ref> Critiques came from prominent American law firms, international businesspeople Chinese government officials, the Chinese media, and the international press.<ref>‘‘Id.’’</ref> The response to the Coca-Cola / Huiyuan holding contrasts with the response to the Anheuser-Busch decision in that the latter opinion received less vociferous rebuke than the former.<ref>‘‘Id.’’; See Also ‘‘supra’’ note 45 (providing references to the legal community’s response to Coca-Cola decision).</ref>

Antitrust experts working for Jones Day and Cleary Gottlieb published independent analyzes of the Coca-Cola decision articulating that regulators did not sufficiently explain why the proposed merger posed dangers to market competition and articulating that economic policy reasons likely motivated the blocking of the merger.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> The Cleary report notes the brevity of the opinion and then offers the critique that “the decision does not articulate a clear theory of harm that would justify prohibition of the transaction.”<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45.</ref> In postulating that economic policy motivated the decision, the Cleary report points to the decision’s references to the proposed merger’s potentially harmful effects on domestic small and medium –sized manufacturers and the development of the Chinese fruit juice industry.<ref>‘‘Id.’’ </ref> The Cleary report explains that the Coca-Cola decision must be understood in the context of protecting the Chinese economy and not in the context of preventing anti-completive mergers.<ref>‘‘Id.’’ </ref> The Cleary report concludes with the warning that the “decision may give pause to Western companies considering acquisitions of high-profile Chinese companies, particularly companies with prominent local brands.”<ref>‘‘Id.’’</ref>

Jones Day’s report echoes many of the opinions and conjectures put forward in the Cleary Gottlieb report.<ref> Jones Day Legal Alert, ‘‘supra’’ note 45.</ref> Jones Day criticizes the one-page decision for being overly compendious.<ref>‘‘Id.’’</ref> The Jones Day report reacts to the Coca-Cola’s decision’s goal of protecting Chinese small and medium-sized juice producers.<ref>‘‘Id.’’</ref> By pursuing this aim, the report critiques, China’s antimonopoly regulators base their reasoning on arguments not based in competition law and economics.<ref>‘‘Id.’’</ref> Finally, the report concludes that the “decision may also indicate that MOFCOM intends to closely scrutinize all sizable foreign acquisitions of Chinese companies.”<ref>‘‘Id.’’</ref>

Both the Chinese and international press have argued, at times with pointed rebuke of China’s antimonopoly regulators, that the Coca-Cola decision lacked a basis in competition law.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> ’’The Economic Observer’’, a well-respected Chinese newspaper,<ref> The reputation of the Economic Observer is attested, in part, by the fact that established American news sources cite to the Economic Observer. ‘’See Gome Founder Huang Guangyu Appeals Graft Sentence, Economic Observer Says’’, BLOOMBERG, May 20, 2010; ‘’See Also’’ Howard W. French, “The Next Empire,” THE ATLANTIC, May 2010.</ref> cited generally the opinions of business analysts explaining that China uses the Anti-Monopoly Law for the purpose of domestic protectionism.<ref>’’Anti-Monopoly Law Cases Surge’’, ‘‘supra’’, note 45.</ref> ’’The Financial Times’’ reported on reactions to the Coca-Cola decision in March of 2009. Interviews with prominent western and Chinese business people and lawyers convey broad-based suspicion of the motives of Chinese regulators and regulators’ desire to further protectionism and Chinese industrial policy though the competition law.<ref> Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> The article reports that the decision stoked fears of protectionism.<ref>‘‘Id.’’</ref> Further, the decision has the potential to have a long-term deleterious effect on portions of the Chinese economy.<ref>‘‘Id.’’</ref> For instance, Huiyuan’s Hong Kong shares tumbled 50 percent after the announcement of the decision. The following day, the shares fell an additional 40 percent.<ref>‘‘Id.’’</ref> A senior dealmaker in Hong Kong states “the antitrust laws have been stretched in order to appease the sentiment of populist Chinese websites.”<ref>‘‘Id.’’</ref>

Overview of HHI’s Role in American competition law

The following section provides a general overview of horizontal merger law in the United States and pays specific attention to the role the HHI plays in the American regulatory scheme.<ref> DOJ & FTC, ‘‘supra’’ note 9.</ref> In August 2010, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a document titled: “Horizontal Mergers Guidelines.”<ref>‘‘Id.’’ </ref> “The Guidelines outline the principal analytical techniques, practices, and the enforcement policy of …[the DOJ and FTC]… with respect to mergers and acquisitions involving actual or potential competitors.”<ref>‘‘Id.’’ at 1.</ref> The United States’ approach to reviewing horizontal mergers combines both concrete and flexible analytic tools which agency regulators may use in evaluating merging companies.<ref>‘’Id’’ at 2.</ref> The FTC’s and DOJ’s approach to HHI provides a quantitative and straightforward set of numerical criteria which agency reviewers apply when reviewing mergers.<ref>‘‘Id.’’ at 16 – 19.</ref> However, HHI is merely one tool at regulators’ disposal in evaluating and predicting the impact that proposed mergers will have on markets and competition.<ref>‘‘Id.’’ at 1.</ref> The law imbues regulators with a great deal of discretion in merger review.<ref>‘‘Id.’’</ref>

U.S. agencies quantitative evaluation of horizontal mergers measures market concentration using the Hirshman-Herfindal Index.<ref> DOJ & FTC, ‘‘supra’’ note 9; KEITH HYLTON ANTITRUST LAW: ECONOMIC THEORY & COMMON LAW EVOLUTION 328-330 (2003) (providing general overview and background on the role of HHI analysis in American antitrust law).</ref> HHI analysis of the impact a proposed merger will have on market concentration requires first identifying the companies which compete in the given market and then determining the companies’ respective market shares.<ref> Horizontal Merger Guidelines at 18.</ref> The agency records the market share as a percentage and then squares each market participant’s share.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18.</ref> The regulators then sum the squares of the market shares to generate the HHI.<ref>‘‘Id.’’</ref> Thus, if four firms compete in a given market with shares of 30 percent, 30 percent, 20 percent, and 20 percent, the market has an HHI of 2600. One arrives at this number through the following calculation: (302 + 302 + 202 + 202 = 2600).<ref>‘‘Id.’’ at n. 9.</ref>

An elegant feature of HHI analysis is to greatly reduce the need to calculate with accuracy the precise market shares of firms which occupy the competitive fringe of a given market. The nature of HHI analysis is such that the index places greater weight on large firms. All firms have their market power increased geometrically. Converting market shares into HHI scores through a geometric conversion means that firms with larger market shares contribute geometrically more to the final index relative to small market participants. To illustrate this point, consider a market with three firms each with 20 percent market share, 10 firms with two percent market share each, and 20 firms with one percent market share each. The HHI for this hypothetical market is 1260. The three large firms contribute a total of 1200 point to the HHI score; therefore, the large firms account for over 95 percent of the overall HHI. Further, the geometric conversion does not affect the one-percent firms when converting market shares to HHI because one squared is still only one. As a result, when conducting HHI analysis, it is most important to calculate the market shares of firms with large or medium market shares. It is less important to calculate accurately the market shares for firms in the competitive fringe, because these firms have a disproportionately smaller affect on the final HHI.

Once American regulators have calculated an HHI score, they evaluate the data against a benchmark which classifies a market according to its level of concentration and recommends whether regulators should intervene in a proposed merger.<ref>‘‘Id.’’ at 19.</ref> Three categories exist. Markets with an HHI under 1500 are unconcentrated.<ref>‘‘Id.’’</ref> Markets with an HHI between 1500 and 2500 are moderately concentrated. Markets with an HHI over 2500 are highly concentrated.<ref>‘‘Id.’’</ref> Mergers which result in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.<ref>‘‘Id.’’</ref> Mergers which result in moderately concentrated markets that involve an increase in the HHI of the market of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers which result in highly concentrated markets and involve an HHI increase between 100 and 200 points potentially raise significant competitive concerns and often warrant scrutiny.<ref>‘‘Id.’’</ref> Mergers which result in highly concentrated markets and cause an HHI increase of more than 200 points will be presumed to be likely to enhance market power.<ref>‘‘Id.’’</ref>

In summation, there are two crucial analytic steps which American regulators perform when evaluating mergers. The first step requires a quantitative analysis of market concentration using the HHI. Horizontal mergers occurring in markets with HHI’s below 1500 are presumed not to pose anticompetitive threats. The second step of the analysis looks at mergers occurring in markets with an HHI score of 1500 or greater. In these markets, regulators have broad leeway to use qualitative and other quantitative tools to review horizontal mergers for anticompetitive threats.

Applying American merger analytics to InBev-Anheuser-Busch merger

This section analyzes the conditional approval of the Anheuser-Busch merger in light of American antitrust guidelines. American regulators perform initial analysis of market concentration relevant to mergers by generating an HHI score based on the squares of the market shares of market participants.<ref>‘‘Id.’’ at 15 – 19.</ref> Based on data of market shares of beer producers in China at the time of the proposed merger, the national beer market was unconcentrated at the time of the proposed merger.<ref>‘‘Id.’’</ref> As the merger guidelines states, unconcentrated markets normally do not warrant regulatory action.<ref>‘‘Id.’’ at 19.</ref> In light of the American legal and policy approach that unconcentrated markets do not warrant regulatory action, it is unlikely that concerns regarding competition in China’s nationwide beer market motivated regulators to place restriction on the Anheuser-Busch / InBev deal. Alternatively, MOFCOM may have acted out of a concern to protect local markets, which local and regional producers often dominate, in placing restrictions on the beer merger.<ref> Steger, ‘’infra’’ note 9, and accompanying text.</ref> However, data reflecting local beer market concentrations does not exist with robustness comparable to the data on the national beer markets. Alternatively, protectionism of Chinese firms, as postulated by legal and business analysts, may have played a role in shaping the restrictions.<ref>‘’See’’ Freshfields Legal Alert, ‘‘supra’’ note 27; Mayer Brown Legal Alert, ‘‘supra’’ note 30; Dechert Legal Alert, ‘‘supra’’ note 17.</ref>

The distinction between the national and local beer markets deserves brief but dedicated explication. The most robust data on the Chinese beer market, as represented in Table A below, reflects shares of the national market for beer.<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53.</ref> This data does not account for what market share any beer producer has in given city, province, or region. China is a vast nation with a land mass almost the same as the United States and great variation exists across the country. Tsingtao Beer’s market position exemplifies regional variation in beer consumption.<ref> Steger, ‘’infra’’ note 109.</ref> While Tsingtao holds 16 percent of the national beer market, it holds approximately 55 percent of the beer market in its home province of Shandong.<ref>‘‘Id.’’</ref> Examining only nationwide market shares may obscure, for certain beer producers, market concentration and market dynamics at the regional level.

Table A: Chinese Beer Market Overview by Manufacturer (2008 Estimates)<ref> Bus. Monitor Int’l Report, ‘’infra’’ note 97, at 52 – 53 (providing data on which this chart is based).</ref>
Company Name Market Share HHI Score
China Resources Snow 16 % 256
Tsingtao 16% 256
InBev 10% 100
Carlsberg 8% 64
Heineken 5 % 25
Beijing Yanjing Brewery 5% 25
Chongqing Brewery 4% 16
Asahi 3% 9
Other 33% 144<ref> I have calculated the maximum HHI for the competitive fringe based on the following assumptions. First, I have assumed that the players in the competitive fringe are at least as big as the smallest market participant, Asahi. Since it is not clear if how fractions of a percentage play into the calculations, it is possible that Asahi has a market share of 3.9 percent and that a participant in the competitive fringe has a market share of 3.5 percent or greater. Thus, I rounded up all members of the competitive fringe to 4 percent. By doing this I erred on the side of over inflating the HHI score. Since HHI scoring is based on squaring firms’ market shares, by rounding up, I raise the possibility of geometrically inflating the HHI score. I then assumed that there were nine firms each with 4 percent market share. This number is impossible because the competitive fringe comprises only 33 percent of the overall beer market. By erring on the side of an overinflated HHI score and arriving at an HHI well within the bounds of HHI for an unconcentrated market, I demonstrate that the Chinese national beer market is truly unconcentrated even though there is slightly imperfect data available.</ref>

Applying HHI analysis to the nationwide Chinese beer market, as American regulators do for mergers within their jurisdictions, indicates that the Chinese nationwide beer market did not face anticompetitive threats prior to the merger. As discussed above, HHI analysis requires determining the shares firms have in a relevant market, squaring these market shares, summing these squares, and then evaluating the scaled score against the guidelines.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 18 – 19.</ref> Table A’s calculations of the competitive fringe makes an assumption about the fringe which errs on the side of producing a large HHI.<ref> Bus. Monitor Int’l, ‘’China Food & Drink Q.1 2010’’, BUS. MONITOR INT’L’S INDUS. REPORT & FORECASTS SERIES, Nov. 2009, at 52 – 53; ‘’See Also’’ Gale Group, ‘’Top Beer Makers in China, 2008’’, in MARKET SHARE REPORTER 39, 39 (2011).</ ref> Calculating China’s nationwide beer market prior to the merger based on available data and the assumption regarding the competitive fringe, the market had an HHI score of no more than 895. According to American rules governing merger evaluation, “mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> The DOJ and FTC define unconcentrated markets as those with HHI scores less than 1500.<ref>‘‘Id.’’</ref> The pre-merger nationwide beer market avoids the HHI score threshold for moderately concentrated markets by a wide margin. Further, Anheuser-Busch occupied such a small portion of the Chinese beer market that it did not rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> The eighth largest beer producer had a market share of only 3 percent.<ref>‘‘Id.’’</ref> Small producers have a geometrically smaller effect on HHI scores. Thus, first impressions of the Chinese nationwide beer market prior to the merger suggest that the Anheuser-Busch / InBev deal would not present significant anticompetitive threats to competition.

To accurately probe how American regulators would have evaluated the Anheuser-Busch / InBev merger, it is necessary to determine whether or not the post-merger beer market would have crossed the HHI threshold of 1500 at which point a market qualifies as moderately concentrated. The preceding HHI estimate of 895 assumes that Anheuser-Busch did not have any statistically significant share of the Chinese beer market as of 2008; even if Anheuser-Busch were the largest player in the competitive fringe, the Chinese national beer market would have remained unconcentrated even if the Anheuser-Busch / InBev merger had occurred. We know that prior to the proposed merger InBev controlled 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> To make a projection regarding Anheuser-Busch’s market share, we have to extrapolate from the data presented. The data indicates that the eighth largest beer producer had market share of 3 percent.<ref>‘‘Id.’’</ref> Anheuser-Busch did not rank among the China’s eight largest beer producers.<ref>‘‘Id.’’</ref> Thus, it is logical to assume that Anheuser-Busch held no more than 4 percent of the nationwide beer market. Because the data does not reflect fractions or percentage points, rounding Anheuser-Busch’s projected maximum market share to 4 percent ensures that the market share projections do not underestimate Anheuser-Busch’s market share or their impact on the HHI score. Under these assumptions, the combined Anheuser-Busch / InBev would have a post-merger market share of 14 percent. Based on these assumptions, the nationwide beer market, following the merger, would have an HHI of 975.<ref> To arrive at this number, begin with the same market share numbers as reflected in Table A, ‘‘supra’’. Increase the InBev market share to 14 percent. Decrease the competitive fringe HHI by 16 to reflect that Anheuser-Busch would no longer be operating in the competitive fringe. The sum of the altered data equals 975.</ref> Put differently, even if Anheuser-Busch had as large as possible of a market share within the competitive fringe at the point of the proposed merger, the Chinese nationwide beer market’s HHI would not exceed 975 after the merger. As stated above, the American agency rules state markets which have HHI scores below 1500 are presumed to be unconcentrated and mergers can usually occur within such markets without further regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even erring on the side of generating a large projected HHI score as a result of the Anheuser-Busch / InBev merger, the nationwide beer market HHI score falls well within the boundaries for unconcentrated markets.<ref>‘‘Id.’’</ref>

Local Concerns

The preceding analysis on China’s beer market does not take into account the fact that Chinese regulators may have issued the restrictions on the Anheuser-Busch / InBev tie up because of perceived anticompetitive risks to local beer markets. The terseness of the agency decision makes it impossible to know for certain why Chinese regulators ruled the way in which they did.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> However, a brief overview of the importance of local and regional breweries to China’s beer market followed by a discussion of American antitrust law’s evaluation of regional markets demonstrate that it is conceivable that a desire to ensure healthy competition in regional beer markets motivated the restrictions placed on the Anheuser-Busch / InBev merger.

Evidence suggests that the Chinese beer market was and is regionally fragmented with various firms holding greater sway over certain local areas.<ref>‘’See’’ Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Isabella Steger, ‘’Tsingtao Purchase: No Small Beer’’, WALL ST. J., Dec. 8, 2010; ‘’See Also’’ Michael Mackey, ‘’Foreign Brewers Tap Thirsty China Market’’, Asia Times Online, Mar. 3, 2004.</ref> Local and regional breweries often control a market share advantage vis-à-vis national and global brands in their home markets, and these local beers may not be available outside of their home areas.<ref>Mackey, ‘‘supra’’ note 109.</ref> Distribution channels remain a substantial stumbling block to those brands which do attempt to expand their geographic footprints.<ref>‘‘Id.’’; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53.</ref> The experience of Tsingtao is illustrative of the role that local and regional producers play in their home markets.<ref> Steger, ‘‘supra’’ note 109.</ref> As of 2008, Tsingtao enjoyed 16 percent of the national beer market.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> However, within its home province of Shandong, Tsingtao held 55 percent of the market.<ref> Steger, ‘‘supra’’ note 109 (reporting data from 2010).</ref> Finally, the names of the top Chinese companies producing beer for the Chinese market reveal the traditional local identity of the nation’s beer. Of the four Chinese companies which rank among the nation’s top beer producers (China Resources Snow, Tsingtao, Beijing Yanjing, and Chongqing),<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> only China Resources Snow does not derive its name from the name of a city. The evidence presented here regarding the local and regional power dynamics in the Chinese beer market is not intended to be dispositive on the issue. Rather, it is significant because it suggests that it is plausible that Chinese regulators contemplated that the Anheuser-Busch deal posed anticompetitive risks to regional and local beers markets.

American law states that regulators may consider mergers’ competitive effects on geographically bounded markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 13.</ref> A market qualifies as geographically bounded if geography limits some customers’ ability or willingness to substitute some products, or some suppliers’ willingness or ability to serve some customers.<ref>‘‘Id.’’</ref> For instance, if two merging firms both have plants in City X, and rival plants only exist in a distant City Y, than the merger of the two City X plants may pose anticompetitive risks which manifest only in a particular metropolitan region.<ref>‘‘Id.’’ at 14.</ref> Under these conditions, regulators may be able to appropriately bar a merger despite the fact that it does not pose dangers to competition in broader regions or the entire nation.<ref>‘‘Id.’’ at 1-2, 13-14.</ref>

It is not clear, however, how the merger by Anheuser-Busch and InBev would negatively impact competition in local markets. Firstly, no evidence exists to suggest that Anheuser-Busch or InBev dominate any local markets. If the combined firm does not dominate a local market, than the merger should not raise competition law concerns. Presumably, the anticompetitive problem emanates from the fact that local breweries have the power to dominate local markets without healthy, disruptive competition from firms from other localities. Allowing Anheuser-Busch and InBev to combine their domestic Chinese operations, consolidate distribution channels, and enhance business efficiency could promote productive competition within China. The positive business efficiencies could permit the combined beer conglomerate to enter markets that have traditionally been inaccessible to competitors from other regions.

Ultimately, the brevity of the agency decision placing restrictions on the Anheuser-Busch / InBev merger leaves much of the regulators’ reasoning veiled and shrouded. Nevertheless, by raising the issue that local market dynamics, under American law, warrant distinct treatment from a competition law perspective, this paper points the way for analysis and study based on forthcoming Chinese antitrust decisions. Perhaps, future decisions will provide at least some clarity on how regulators weigh nationwide market competition and local market competition.

Minority Stakes

A final point to query is whether the share-acquisition restrictions that the regulators placed on the merger make sense from a competition law perspective. Regulators placed three relevant restrictions on the merger.<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref> First, prior to the merger, Anheuser-Busch owned 27 percent of Tsingtao, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Second, prior to the merger, InBev owned 28.56 percent of Pearl River Beer, and the combined company may not increase this stake.<ref>‘‘Id.’’</ref> Third, the combined company may not seek to acquire any stock in China Resources Snow Beer or Beijing Yanjing Beer.<ref>‘‘Id.’’</ref> The decision explains its implementation of these restrictions in a brief and conclusory state.<ref>‘‘Id.’’</ref> The following paragraphs evaluate the holding and conclude that the restrictions placed on future purchases of Tsingtao and Pearl River Beer shares were not necessary to prevent anticompetitive threats to the nationwide beer market.

HHI analysis of a hypothetical nationwide Chinese beer market in which the combined Anheuser-Busch / InBev purchases Tsingtao Beer indicates that such a beer market would not be concentrated under American merger law. If the combined Anheuser-Busch / InBev had purchased all of Tsingtao in 2008, the Chinese beer market would have had an HHI score of only 1407<ref> Bus. Monitor Int’l Report, surpa note 97, at 52 – 53.</ref>, which indicates an unconcentrated beer market and gives rise to a presumption that the government need not intervene to prevent anticompetitive harms.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> This calculation relies on the market data reflecting that Tsingtao occupied 16 percent of the Chinese beer market in 2008 and that InBev occupied 10 percent of the market.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> The calculation then assumes that Anheuser-Busch had a market share of 4 percent.<ref>‘’See supra’’ note 95 (discussing the reasons for making this assumption).</ref> The calculation then assumes that all other market shares remain as represented in Table A.<ref> Bus. Monitor Int’l Report, ‘’surpa’’ note 97, at 52 – 53.</ref> Even though a putatively combined Anheuser-Busch / InBev / Tsingtao would occupy 30 percent of the nationwide beer market, the nationwide market’s overall HHI score would be on 1407. This HHI score reflects that the rest of the beer remains relatively fragmented. American law treats markets with HHI scores of 1500 or less as indicate that a given market is unconcentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Mergers resulting in markets with HHI scores of 1500 or less normally no not warrant regulatory action from agencies seeking to prevent anticompetitive threats to markets.<ref>‘‘Id.’’</ref> Thus, an HHI analysis indicates that MOFCOM’s limiting of Anheuser-Busch / InBev future acquisitions of Tsingtao shares was unnecessary.<ref> Naturally, further data and nuanced analysis of regional and local market dynamics could rebut this presumption.</ref>

Projected Beer Market if Combined Anheuser-Busch / InBev were to Purchase Tsingtao as of 2008<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53 (providing underlying data upon which I based projections and calculations used in this chart).</ref>
Company Name Market Share HHI Score
Anheuser-Busch / InBev / Tsingtao Maximum 30<ref> As discussed above, ‘‘supra’’ note 95, this projection assumes that Anheuser-Busch has a market share of 4 percent. This is the maximum possible market share based on the data regarding the competitive fringe. The maximum possible market share for this putative combination reflects: Tsingtao (16 percent) + InBev (10 percent) + Anheuser-Busch (4 percent maximum) = 30 percent.</ref> 900
China Resources Snow 16 256
Carlsberg 8 64
Heineken 5 25
Beijing Yanjing 5 25
Chongqing 4 16
Asahi 3 9
Other 29%<ref> This projected competitive fringe is based on the 33% statistic contained in Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52-53. As discussed in that note, I have assumed that Anheuser-Busch has a 4 percent market share in order to produce the largest HHI score possible. Thus, the adjustment to the competitive fringe.</ref> ~112<ref> I have continued the presumption that the members of the competitive fringe have market shares of about 4 percent. This produces seven market participants. I have rounded off the final percentage point for the convenience of calculation. This rounding, almost certainly, does not produce an HHI score which is too low. Choosing the maximum possible market share for each market participant already produces an HHI score which is very likely over inflated. See ‘‘supra’’ note 95. Thus, by over inflating the HHI score for the competitive fringe, there is virtually no risk that rounding off this last 1 percent causes any statistical inaccuracies.
In the Matter of InBev, ‘‘supra’’ note 1.</ref>
Total HHI Score: 1407

An HHI analysis of the second restriction on the Anheuser-Busch / InBev deal also cuts against an argument that a desire to promote competition in China’s national beer market motivated the second restriction.<ref>In the Matter of InBev, ‘‘supra’’ note 1.</ref> Prior to the merger, InBev owned 28.56 percent of this Chinese brewery.<ref>‘‘Id.’’</ref> A desire to protect competition within China’s nationwide beer market does not seem to have motivated this restriction. At the time of the merger proposal, Pearl River Beer did not even rank among the top eight beer producers in China.<ref> Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 52 – 53.</ref> Based on available data, the beer maker most likely did not have more than 3 percent of the nationwide beer market.<ref>‘‘Id.’’ (providing data for the top eight beer producers in China and stating that the eighth largest beer producers has a 3 percent share of the nationwide beer market. Thus, all other beer makers must have a market share not in excess of 3 percent).</ref> Even if Anheuser-Busch / InBev were to have acquired all the shares of Pearl River Beer, the combined company would not pose anticompetitive risks to the nationwide beer market. As discussed above, even if Anheuser-Busch / InBev would have acquired all of Tsingtao, the combination of the three companies would most likely not pose anticompetitive dangers under American law.<ref>‘’See’’ DOJ & FTC at 19.</ref> Pearl River has a far smaller market share than Tsingtao; therefore, a fortiori, Anheuser-Busch / InBev’s potential acquisition of Pearl River poses even smaller anticompetitive risks to the nationwide beer market.

The Anheuser-Busch / InBev decision raises the possibility that the restrictions on consolidation in the beer industry may actually impede increased competition in the Chinese beer market. As discussed above, some local Chinese beer markets are dominated by individual beer companies with distribution channel shortcomings contributing to the low level of competition in these markets.<ref> Steger, ‘‘supra’’ note 109; Bus. Monitor Int’l Report, ‘‘supra’’ note 97, at 53; Mackey, ‘‘supra’’ note 109.</ref> By preventing Anheuser-Busch / InBev from gaining controlling stakes in four Chinese beer companies—and any stake at all in two companies<ref> In the Matter of InBev, ‘‘supra’’ note 1.</ref>—government regulators foreclose one avenue for bringing increased competition to regional markets within China which are dominated by individual brewers. If Anheuser-Busch / InBev were to purchase a controlling stake in one of the four Chinese beer companies named in the regulatory decision, it is possible that the global firm would bring its distribution power and skills to bear on the Chinese market. Such an outcome could quite plausibly have a positive effect on local beer markets currently mired in inefficiencies.

Of course, allowing Anheuser-Busch / InBev greater latitude to acquire local beer companies enhances its power within the Chinese markets and permits the combined firm to compete more vibrantly against domestic Chinese firms. If Anheuser-Busch / InBev were to force out many weak, regional beer companies it could, in theory, diminish competition in regional beer markets. Whether or not Anheuser-Busch / InBev’s pro-competitive effects in China’s regional beer markets would outweigh anticompetitive effects must be probed by another study. Suffice it to say for the purposes of this paper, HHI analysis of the acquisition restrictions presented in the Anheuser-Busch / InBev decision suggest that American antitrust rules would not generate the set of restrictions Chinese regulators placed on the merger.

Applying American merger analytics to proposed Coca-Cola-Huiyuan merger

This section advances two claims regarding Chinese regulators rejection of the Coca-Cola / Huiyuan merger. First, application of American law to the facts of the merger reveal that it is plausible that American regulators would have blocked the merger had they had jurisdiction over the deal. Second, legal analysts, the news media, and business people’s pointed critiques of Chinese regulators’ rejection of the deal are insufficiently rigorous. These commentators have failed to account for and evaluate the implication that American law would have on the merger. American law, naturally, embodies a set of policy choices and political compromises distinct from those which operate in China. However, American law is probative of the legitimacy of Chinese regulators actions insofar as American law represents a legal rubric aimed at protecting markets from anticompetitive behaviors. Thus, if American framework detects anticompetitive risks in the Coca-Cola / Huiyuan proposed merger, it is reasonable that Chinese regulators—applying their own legal framework—would also detect these dangers.

As a threshold matter, it necessary to evaluate the market positions that Huiyuan and Coca-Cola occupied prior to the proposed merger. Business analysis of the juice market requires examining different products which common parlance refers to simply as juice. The overall juice market is comprised of diluted juice, pure juice, and nectar.<ref> Jeremiach Marquez, ‘’Coca-Cola Offers $2.5b to buy China Juice Maker’’, USA TODAY, Sept. 3, 2008 (differentiating the various products referred to as juice).</ref> At the time of the proposed merger Huiyuan had between 40 and 43 percent market share in the pure juice market.<ref> Marquez, ‘‘supra’’ note 144; Alison Leung, ‘’Coca-Cola Bid for Huiyuan to Test China Antitrust Law’’, REUTERS, Sept. 10, 2008; Frederik Balfour, ‘’Huiyuan Juice: China Says Coke Isn’t It’’, BLOOMBERG BUSINESSWEEK, Mar. 18, 2009.</ref> The overall juice market was less concentrated than the pure juice and nectars markets. In 2008, Coca-Cola’s Minute Maid brand controlled over 21 percent of the overall juice market, and Huiyuan controlled over 11 percent of the overall juice market.<ref> Olivia Chung, ‘’Huiyuan Juice Boss Declares Brand’s Freedom’’, ASIA TIMES, Sept. 9, 2009 ‘’available at’’ http://www.atimes.com/atimes/China_Business/JI09Cb01.html.</ref>

Under U.S. law, the pure juice market’s market concentration would likely trigger regulatory review.<ref> DOJ & FTC, ‘‘supra’’ note 109, at 15 – 19.</ref> As discussed above, regulators first apply HHI quantitative analysis to a market under review.<ref>‘‘Id.’’</ref> If the HHI is over a certain limit, regulators have broad discretion to apply qualitative review of the given market and proposed merger.<ref>‘‘Id.’’ </ref> There exist several different ways through which to analyze the Coca-Cola / Huiyuan transaction. It is possible to evaluate the deal from the impact it would have on the overall soft drinks market, the overall juice market, or the pure juice market. Based solely on Huiyuan’s share of the pure juice market, the HHI of this market was between 1600 and 1849, depending on varying estimates of Huiyuan’s pre-transaction market share in pure juice. Markets with HHI’s between 1500 and 2500 qualify as Moderately Concentrated Markets.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Even without evaluating any pure juice holding’s the Coca-Cola had prior to the proposed merger, the Huiyuan data alone reveals that prior to the merger pure juice was a moderately concentrated market.

The Horizontal Merger Guidelines do not establish a series of bright line rules whereby an HHI of a given level trigger a certain regulatory response; rather, HHI is a tool that guides agencies in identifying potentially anticompetitive mergers and may be probative of deals which raise anticompetitive concerns.<ref>‘‘Id.’’ </ref> Other factors which may indicate that a proposed merger poses anticompetitive risks are whether or not the deal involves a particularly powerful firm that has the potential “to expand output rapidly.”<ref>‘‘Id.’’ </ref> Agencies may look at both the firm’s market concentration in relevant markets<ref>‘‘Id.’’ at 15.</ref> and the firm’s power to rapidly expand production.<ref>‘‘Id.’’ at 18 – 19.</ref> Agency review seeks to ensure that mergers do not create companies which harm market competition.<ref>‘‘Id.’’ at 1.</ref> The overall policy of the law allows American regulators to use their analytic discretion to block mergers which risk harming market competition.<ref>‘‘Id.’’ at 1 – 3.</ref>

It is plausible that Coca-Cola, once in control of Huiyuan, could leverage Coca-Cola’s massive bottling, distribution, and marketing infrastructure to dominate the Chinese pure juice market and force smaller market participants out of the market. Data regarding Coca-Cola’s operations in China evidence the beverage giant’s strength in China.<ref> Press Release, The Coca-Cola Company, Coca-Cola Accelerates Expansion in China, June 24, 2009 ‘’available at’’ http://www.thecoca-colacompany.com/presscenter/nr_20090624_two_plant_openings_in_china.html; ‘’See Also’’ Bloomberg News, ‘’Coca-Cola May Boost China Investment, Chief Executive Says’’, BLOOMBERG NEWS, Oct. 31, 2010 (providing general data on Coca-Cola in China as of 2010 which corroborates some data presented in the Coca-Cola press release of 2009).</ref> As of mid-2009, Coca-Cola operated 38 bottling plants in greater China and counted China as its third largest global market. The corporation was involved in a three-year $2 billion investment plan for China alone.<ref> Coca-Cola Press Release, ‘‘supra.’’</ref> 30,000 employees in China worked directly for Coca-Cola.<ref>‘‘Id.’’</ref> Coca-Cola’s global power enhances its strength in any individual national market. As the world’s largest beverage producer,<ref>‘‘Id.’’ </ref> Coca-Cola can draw on resources in neighboring countries as it seeks to compete in another national market. The size of Chinese operations, the magnitude of Coca-Cola’s 2009 investment plan for China, and Coca-Cola’s global might are all probative of the corporation’s ability to rapidly expand output—a factor which American regulators consider as probative on whether or not a given firms poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref>

The facts of the Coca-Cola case present reasons to believe that American regulators could have rejected the merger with Huiyuan based on risks posed to competition in the pure juice market. As stated above, first, had American regulators reviewed the Coca-Cola / Huiyuan deal, they likely would have first examined the HHI of the pure juice market and concluded that this market was moderately concentrated.<ref> DOJ & FTC, ‘‘supra’’ note 9, at 19.</ref> Once American regulators have made this determination, they are within their discretion to evaluate other facts and circumstances regarding the parties proposing to merge in order to determine if the transaction poses anticompetitive risks.<ref>‘‘Id.’’ at 15.</ref> Had American regulators examined these factors, they likely would have considered Coca-Cola’s power in China, Coca-Cola’s global power, and the likelihood that Coca-Cola can increase production quickly.<ref>‘‘Id.’’</ref>

By understanding that American agencies have several regulatory tools with which they could used to potentially block the Coca-Cola / Huiyuan combination, new light falls on the international legal and business community’s critique of the rejection of the proposed merger. As discussed above, legal and business analysts argued that the Chinese government blocked the deal on protectionist and industrial policy grounds.<ref> Cleary Gottlieb Legal Alert, ‘‘supra’’ note 45; Jones Day Legal Alert, ‘‘supra’’ note 45; Anti-Monopoly Law Cases Surge, ‘‘supra’’, note 45; Wang Biqiang, ‘‘supra’’, note 45; Tucker, Smith & Anderlini, ‘‘supra’’ note 45.</ref> However, these reports do not account for American standards of horizontal merger review as discussed in this paper. As argued in this paper, American regulators have legal tools which they could have used against the Coca-Cola / Huiyuan deal. This is not to say that it is certain that American regulators would have blocked the Coca-Cola / Huiyuan deal. Rather, the argument in this paper demonstrates that the proposed Coca-Cola / Huiyuan merger does raise serious questions regarding anticompetitive harms. As such, the Chinese regulators’ reaction to the Coca-Cola / Huiyuan proposed merger does not definitively demonstrate—as legal and business analysts argued—that protectionism and industrial policy generated the merger rejection. Rather, as the American competition rules show, the proposed merger actual did raise anticompetitive risks. Thus, it is possible that the Chinese government was acting with the intention of protecting market vibrancy in rejecting the proposed deal.

Conclusion

The reanalysis of the Anheuser-Busch / InBev and Coca-Cola decisions in light of American law should prove useful to several different constituencies. Practicing attorneys may find the discussion useful as they attempt to understand more fully the policy choices behind the rules.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> The brevity of the agency opinions makes understanding the reasoning behind the holdings very difficult. Chinese regulators may find it useful to have a model which applies American competition law to the facts of cases they have decided. These two rulings contain outcomes for the individual cases, but the rulings do not establish a set of rules or legal principles which companies and attorneys may apply to potential future mergers.<ref>‘’See’’ In the Matter of InBev, ‘‘supra’’ note 1; In the Matter of Coca-Cola, ‘‘supra’’ note 1.</ref> American law may serve as a template from which Chinese regulators may use to craft their own set of competition law rules. Conversely, Chinese regulators may not wish to constrain themselves by establishing competition rules with precedential effect.

In sum, this paper applies American competition law standards to the holdings Chinese regulators reached regarding the Anheuser-Busch / InBev merger and the proposed Coca-Cola purchase of Huiyuan. By using HHI score analysis, the paper concludes that concerns regarding competition within China’s nationwide beer market likely did not guide that decision. The body of data currently available suggests that concerns regarding competition in local markets may have guided the decision. HHI score and qualitative analysis of the proposed Coca-Cola / Huiyuan merger indicates that, had American regulators reviewed the deal, it is possible that they would have rejected the proposed merger based on fears of the effects that the merger would have on competition within the pure juice market. These conclusions contrast with analysis from the legal and business communities. Legal analysts responded to the Anheuser-Busch / InBev conditional approval with ambivalence and muted critique phrased in generalities. Legal analysts responded to the rejection of the Coca-Cola / Huiyuan merger with pointed rebuke and speculation that China’s regulators had acted out of a desire to fend off a foreign firm attempting to purchase a Chinese company. However, previous analyses of these two merger holdings did not consider how American law and competition policy would have interpreted the mergers.

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2011-06-27T19:33:34Z

LMyhre:

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! <h1 style="margin:0; background:#cef2e0; font-size:120%; font-weight:bold; border:1px solid #a3bfb1; text-align:left; color:#000; padding:0.2em 0.4em;">Antitrust World Reports by Professor Keith N. Hylton</h1>
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| AntitrustWorldWiki.com is a collaborative database covering antitrust laws around the world. Its purpose is to provide information on the key provisions of antitrust laws in a manner that enables users of this wiki to compare antitrust enforcement regimes around the world. We will expand the site to include new information and to enable users to post comments and observations.
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== Authors ==
'''Keith N. Hylton''', a professor of law at Boston University, has published numerous articles in American law journals and peer-reviewed law and economics journals. His antitrust textbook, [http://www.amazon.com/Antitrust-Law-Economic-Theory-Evolution/dp/0521793785/ref=sr_1_1/002-8545403-9069605?ie=UTF8&s=books&qid=1185315361&sr=8-1 ''Antitrust Law: Economic Theory and Common Law Evolution''], was published by Cambridge University Press in 2003. [http://www.bu.edu/law/faculty/profiles/bios/full-time/hylton_k.html View full faculty profile.]

'''Research Assistants'''
:*[[Sean Miller]]
:*Nicola Leiter
:*[[User:AchalOza|Achal Oza]]
:*[[User:Kajrozga|Kaj Rozga]]
:*[[User:JWSchneider|Jacob Schneider]]
:*[[User:HCargill|Helen Hostetter]]
:*[[User:LMyhre|Lynne Myhre]]
:*Katerina Novak
:*Marc Shapiro
:*[[User:JLee|Jacqueline Lee]]

In addition to their own research, the authors have relied on translations and additional research by Boston University graduate and law students, especially Dena Milligan and Andrea Tkacikova.

Special thanks to Matt Grayson for designing the site logo.

== Suggested Citation Format ==

[Signal] Keith N. Hylton et al., [article/page/report name], Antitrust World Reports, ''available at'' [URL location] [(optional other parenthetical)] (as of [date], [time] GMT).

'''Examples'''
* Keith N. Hylton et al., Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com</nowiki> (as of October 10, 2007, 05:30 PM GMT).
* Keith N. Hylton et al., Country Report: Romania (December 10, 2003), Antitrust World Reports, ''available at'' <nowiki>http://antitrustworldwiki.com/antitrustwiki/index.php/Romania_%28December_10%2C_2003%29</nowiki> (noting Romania's ban on tying) (as of October 10, 2007, 05:30 PM GMT).

== Notice on Accuracy of Data ==

'''AntitrustWorldWiki.com''' is a unique research tool. It is designed not for formal publication, but as a means to methodically draw-out factual information regarding the ever-changing body of international competition law. The authors assert only that the data on these pages is accurate to the best of their knowledge. The authors readily welcome and encourage any outside expertise on a particular jurisdiction's formal law or the extent of its enforcement.

== Research Support ==

The authors thank [http://www.bu.edu/law/ Boston University School of Law] and [http://www.microsoft.com Microsoft Corporation] for research support.

== Publications Based on this Database ==
* Keith N. Hylton and Fei Deng, Antitrust Around the World: An Empirical Analysis of the Scope of Competition Laws and Their Effects, 74 Antitrust L.J. 2 (2007). This article is available at http://www.nera.com/extImage/PUB_AntitrustLawJournal.pdf.

== Databases Notes ==
* [[Author's Notes]]
* [[Index Definitions]]
* [[Notes on Scoring]]

== Special Reports ==
* [[Predatory Pricing Report]]
* [[Competition Enforcement Budgets]]
* [[Penalties Report]]
* [[EU Competition Law Enforcement: The Pharma Sector Inquiry]]
* [[American Legal Perspectives on China’s Landmark Anti-Monopoly Rulings]]

== Country Reports ==
The following data represents a comprehensive survey of current antitrust regimes throughout the world. The original texts of individual statutes in each country were examined for the presence of various elements. Each included country receives an individual report here that indicates the presence or absence of these various elements in the country’s statutes. The presence of an element is accompanied by a short explanation and/or citation to the applicable statute. The elements themselves are defined [[Index Definitions|here]]. Some definitions are broad and could be divided into subcategories, in these cases, detailed comments are provided. Each report also includes a numerical score for comparison across countries and regions, or for empirical analysis.

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<h2 style="margin:0; background:#99CCCC; font-size:100%; font-weight:bold; border:1px solid #a3bfb1; text-align:center; color:#000; padding:0.2em 0.4em;">Member Countries</h2>
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| [[Kazakhstan]]
| [[Kyrgyzstan]]
| [[Lao PDR]]
| [[Mongolia]]
| [[Pakistan]]

|- align="center"
| [[Singapore]]
| [[South Korea]]
| [[Sri Lanka]]
| [[Taiwan]]
| [[Tajikistan]]
| [[Thailand]]

|- align="center"

| [[Uzbekistan]]
| [[Vietnam]]
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central and Southern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Angola]]
| [[Benin]]
| [[Botswana]]
| [[Burkina Faso]]
| [[Cameroon]]
| [[Cote d'Ivoire]]
| [[Kenya]]

|- align="center"
| [[Malawi]]
| [[Mali]]
| [[Mauritius]]
| [[Namibia]]
| [[Nigeria]]
| [[Senegal]]

|- align="center"
| [[South Africa]]
| [[Tanzania]]
| [[Zambia]]
| [[Zimbabwe]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Middle East and Northern Africa'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Algeria]]
| [[Bahrain]]
| [[Egypt]]
| [[Iran]]
| [[Israel]]
| [[Jordan]]
| [[Morocco]]

|- align="center"
| [[Qatar]]
| [[Saudi Arabia]]
| [[Syria]]
| [[Tunisia]]
| [[United Arab Emirates]]
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Oceania'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"

|- align="center"
| [[Australia]]
| [[Fiji]]
| [[New Zealand]]
| [[Papua New Guinea]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''North America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Canada]]
| [[United States]]
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Caribbean'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Barbados]]
| [[Jamaica]]
| [[Trinidad and Tobago]]
|
|

|}

|}

{| style="background:#99CCCC; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''Central America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Costa Rica]]
| [[El Salvador]]
| [[Guatemala]]
| [[Honduras]]
| [[Mexico]]
| [[Nicaragua]]

|- align="center"
| [[Panama]]
|
|
|
|
|

|}

|}

{| style="background:#99CC99; color=white" border="0" cellpadding="0" cellspacing="1" align="center" width="100%"
|- style="color=white" align="center"
| '''South America'''
|-
|

{| style="background:white" border="0" cellpadding="5" cellspacing="0" align="left" width="100%"
|- align="center"
| [[Argentina]]
| [[Bolivia]]
| [[Brazil]]
| [[Chile]]
| [[Colombia]]
| [[Guyana]]

|- align="center"
| [[Peru]]
| [[Uruguay]]
| [[Venezuela]]
|
|

|}

|}

__NOTOC__

EU Competition Law Enforcement: The Pharma Sector Inquiry

2011-06-27T19:33:05Z

LMyhre: New page: Author: Lynne Myhre Date: June 2009 == Introduction == While antitrust laws in the European Union and the United States are similar, the rationale for enforcement of those laws, a...