Select 'Print' in your browser menu to print this
National Law Journal Online
Page printed from: http://www.nlj.com/Back to
Digital TV blurred by patent 'holdup'
Marcia Coyle / Staff
April 14, 2008
WASHINGTON — With a series of recent
high-stakes cases, the Federal Trade Commission has become increasingly
aggressive in its pursuit of unfair or anti-competitive behavior by patent
holders, according to patent litigators and others, who are now watching to see
if the agency will step into a multibillion-dollar fight that could affect the
nation's federally mandated conversion to digital television.
American Antitrust Institute (AAI), a Washington-based advocacy group, recently
filed a petition with the FTC asking it to investigate alleged antitrust patent
"holdup" by Rembrandt Technology L.P., a patent holding and licensing company
based in Bala Cynwyd, Pa.
Rembrandt has filed 14 patent infringement
suits — now consolidated as multidistrict litigation in Delaware — against the
four major television networks, the five major cable systems, and television and
equipment manufacturers. It seeks licensing royalties for use of a patented
technology that increases the performance of digital transmissions.
Rembrandt's royalty demand is exorbitant, according to AAI's counsel,
David Balto of Washington and Richard Wolfram, a New York-based solo
practitioner specializing in antitrust, and violates an obligation to make the
technology available on reasonable and nondiscriminatory terms.
obligation arose, they contend, when the patented technology — originally owned
by AT&T and later acquired by Rembrandt — became part of the
government-mandated standard for digital television broadcasting developed by
the Advanced Television Systems Committee, a so-called standard-setting
"The increased costs that these folks could impose on
digital television if they are allowed to renege on their obligation would be in
the millions of dollars," said Balto, an antitrust specialist and former policy
director of the FTC. "The people who will have to pay more immediately are the
networks, cable companies and manufacturers, but ultimately these costs will be
born by consumers."
If the FTC opens an investigation, the agency once
again will be drawn into the complex and controversial intersection of antitrust
enforcement, intellectual property rights and standard-setting organizations.
"You will see more and more cases having to do with standard setting and
that's because they are more and more important, more and more strategic, and
more and more money rides on them," said Andrew Updegrove, a partner at Boston's
Gesmer Updegrove who represents mature and emerging high technology companies.
Ever wonder why light bulb wattage
comes as 40, 60 and 75, and not 35, 45 and 65, or why fire hydrants are
interchangeable in major cities today? asked Updegrove. The answer is industry
A year ago in a joint report on intellectual property, the
FTC and the Department of Justice said: "Industry Standards are widely
acknowledged to be one of the engines driving the modern economy. Standards can
make products less costly for firms to produce and more valuable to consumers."
The standard-setting process has been evolving during the past 100
years, according to Updegrove, who advises companies involved in the process.
The government became involved after the Great Baltimore Fire in 1904. Fire
companies that responded from surrounding cities found that their fire hoses did
not fit the Baltimore fire hydrants. A national standard for fire hydrant
connections later was developed by the National Fire Protection Association.
"This process evolved in a world of physical standards where you didn't
have to worry about patents and copyrights," recalled Updegrove.
past 15 years, Updegrove and others said, there has been huge growth in the
number and variety of standard-setting organizations. Hundreds of SSOs maintain
hundreds of thousands of standards.
But standard setting becomes
particularly tricky when intellectual property rights are involved.
"There's always the potential that, if you include a patented technology
in a standard, the owner or someone assigned the patent will try to exploit that
and hold up an entire industry by saying, 'You can't use the technology unless
you pay me and I'll name my price,' " said M. Sean Royall, co-chairman of the
antitrust and trade regulation practice group at Los Angeles-based Gibson, Dunn
"That's the holdup problem. SSOs have imperfect ways of
dealing with that," said Royall, who practices in Dallas.
One way is the
patent policy of the American National Standards Institute, a parent
organization to many SSOs. The policy allows a patented technology — such as the
one owned by Rembrandt — to be included in industry standards as long as the
different groups participating in the standard-setting process agree that
inclusion of that technology is the best way to achieve their objective.
The participants are required to disclose all of their patents that
potentially may be infringed by the standard being developed
the potentially huge market power that including a patented technology into a
standard would give the patent owner, the policy also requires the owner to
agree to provide licenses to those implementing the standards — such as the
manufacturers, broadcast networks and cable companies — at no cost or under
reasonable and nondiscriminatory (RAND) terms.
"You check your
intellectual property rights at the door when you walk into the standard-setting
organization," said AAI's Wolfram. "You're giving up the right to charge
whatever you want."
AT&T was an original participant in the digital
television standard developed by the Advanced Television Standards Committee and
then adopted by the Federal Communications Commission as the national conversion
standard. AT&T agreed to license its patented technology — included in the
standard — on RAND terms.
AAI says Rembrandt in court litigation has
argued that it has no obligation to license on RAND terms. The antitrust group
in its FTC petition accuses Rembrandt of violating Section 2 of the Sherman Act
and Section 5 of the Federal Trade Commission Act. Rembrandt has "willfully
obtained — or at least has a dangerous probability of achieving — monopoly power
that it would not otherwise possess."
"The first legal argument is the
RAND commitment follows the assignment of the patent," said Wolfram. If a later
assignee can renege on a promise made by the original patent owner — a promise
relied on by other participants when including the patented technology in the
standard — then the very basis for including that technology has been
undermined, he said.
Gibson Dunn's Royall agreed: "That's a Sherman Act
problem, an antitrust violation. It would be a real serious problem if companies
were free to do that. Then you could never rely on patent assurances and if you
can't rely on that, standard setting will come to a screeching halt."
Barry E. Ungar, chief litigation counsel for Rembrandt, declined to
comment because the petition is pending at the FTC. Antitrust big
Whether the FTC should use antitrust law or the FTC act to
attack abuses, such as patent "holdup," of the standard-setting process is a hot
topic among antitrust and IP lawyers.
Antitrust law has always been
sensitive to any coming together of competitors, noted Christopher Kelly, a
partner in the Washington office of Chicago's Mayer Brown whose antitrust
litigation practice focuses on the application of antitrust law to the
acquisition and use of intellectual property rights.
But in the past 25
to 30 years especially, he added, there has been increased understanding, across
the board, that under the right circumstances, when competitors get together
some good things can happen. "Since 1995 or so, the focus of the agencies has
been not nearly so much on the idea standard setting may be a cartel in disguise
as on the idea that it is something really valuable, essential in many
industries," said Kelly.
"And, it requires protection from opportunistic
conduct by individual firms that might in some way take advantage of the
standard-setting process in order to grab monopoly power."
The FTC has
gone after abuses of the standard-setting process in a series of cases beginning
in 1996 with an action against computer maker Dell Inc. Dell had participated in
a proposed standard involving Ethernet technology, and had confirmed the
standard would not violate any Dell patents. But after the standard was adopted
and product manufactured, Dell claimed patent infringement.
brought an action under Section 5 of the FTC act alleging that Dell's conduct
was anti-competitive because it hindered industry acceptance of the standard.
Dell signed a consent order in 1996 in which it agreed not to enforce patent
The agency also has moved against Unocal for keeping its
clean-fuel patents and applications secret while helping set industry standards
for reformulated gas that required the use of its technology. And in 2006, the
FTC found that Rambus Inc., through a course of deceptive conduct, distorted a
critical standard-setting process and engaged in an anti-competitive "holdup" of
the computer memory industry. Rambus' deceptive acts constituted exclusionary
conduct under Section 2 of the Sherman Act. (Rambus has an appeal pending.)
In January, in a case very similar to the digital television petition,
the FTC in a split decision found that Negotiated Data Solutions LLC violated
Section 5 of the FTC act, which prohibits unfair methods of competition. Unlike
Dell and Unocal, N-Data did not conceal the existence of patents during the
Its patent-holder predecessor had fully
disclosed its patents and had agreed to license the technology for $1,000 per
license. Eight years later, after no one had sought the licenses, N-Data tried
to obtain licenses for more than the original commitment.
"The fact is
the FTC is very good at enforcing antitrust law and consumer protection law and
ordinarily never the twain shall meet," said Mayer Brown's Kelly. "But now
you've got this bleedthrough that's informing these cases and it's not clear
that's a good thing."
Businesses may be moving into a period in which
they find themselves vulnerable to being judged after the fact by the FTC, not
on the basis of the objective effect of what was done, but on some people's
notions of what's right and what isn't, he said.
Gibson Dunn's Royall,
the AAI's Balto and Wolfram and others believe these cases should be grounded in
"It's very important to give guidance to companies and
commercial actors," said Royall, a former deputy director of the FTC Bureau of
"When the FTC acts under Section 5, unfair methods of
competition, it signals they did not think or were not sure this was a violation
of the Sherman Act. Is the FTC now going to bring other cases attacking
companies for things they had no reason to believe were unlawful under antitrust
"My view is: Firmly root this in Sherman Act case law, make it
very well supported, and you will have clearer standards for