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IP Implementers Beware: Assistant Attorney General Delrahim Stakes Out New Balance in Intersection of Innovation and Antitrust Policy

In the few short weeks since his Senate confirmation in late September, new DOJ Antitrust Division boss Makan Delrahim has wasted no time staking out the Division’s position regarding certain key areas of antitrust enforcement and regulation. One of those areas is innovation policy and, specifically, the intersection of antitrust law and intellectual property in the context of standard-setting organizations (“SSOs”) and policies regarding the licensing of standard-essential patents (“SEPs”). Assistant Attorney General Delrahim’s comments on this subject are especially interesting given that he is the first registered patent lawyer to helm the DOJ Antitrust Division. In a speech at the University of Southern California’s Gould School of Law earlier this month, Assistant Attorney General Delrahim made clear his belief that the application of competition policy and enforcement has been too heavy-handed in the SSO and SEP arena and that the scale has been tipped for too long in favor of implementers.

Companies operating in the technology sphere should take note of AAG Delrahim’s thoughts regarding the role that antitrust law should, or, more accurately – should not – play in regulating unilateral conduct by SSO members, particularly patent holders. Noting an increased role of SSOs and standards in general in the economy and the increasingly central role standards play in business decisions, Delrahim expressed concern that “enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standard setting bodies, and perhaps risk undermining incentives for IP creators, who are entitled to an appropriate reward for developing break-through technologies.” Going forward, Delrahim intends to allow freer rein for licensing negotiations, including the resolution of FRAND disputes, and to give more deference to patent holders than has been afforded under previous Division practice and multiple recent court decisions.

Delrahim’s general view is that implementers (patent users), rather than patent holders, may enjoy too much power in the current landscape, thus undermining incentives for innovators. Consistent with this school of thought, Delrahim considers patent “hold-out” (in which an implementer threatens to under-invest in the implementation of a standard, or not to take a license at all, unless its royalty demands are met) to be a more serious problem than patent “hold up” (patent owner threatens to delay licensing until its royalty demands are met). In his words, innovators “make an investment before they know whether that investment will ever pay off.” This is a bigger risk than that assumed by an implementer – who has some buffer against the possibility of hold-up because at least some of the implementer’s investment occurs after royalty rates for the new technology have been determined. Accordingly, Delrahim believes that under-investment by the innovator is a bigger concern than under-investment by the implementer.

Based on his position that antitrust enforcers have placed too much emphasis on hold-up, rather than hold-out, AAG Delrahim seeks to shift the balance away from using competition law to “police private commitments that IP holders make in order to be considered for inclusion in a standard.” He proposes that violations of commitments made to an SSO should be handled primarily by the SSO and its participants and secondarily by contract laws, rather than via the nation’s antitrust laws. Indeed, he goes so far as to “humbly submit that a unilateral refusal to license a valid patent should be per se legal.”

AAG Delrahim proposes to refocus the Division’s enforcement efforts with respect to SSOs on identifying and addressing the potential for coordinated conduct, whether among implementers or patentholders. In his comments, and citing recent court decisions, he noted coordinated efforts to fix downstream prices, boycott new entrants, and exclude particular products as risks inherent in the SSO environment. He also called out the potential for illegal coordination by technology implementers seeking to establish “a form of buyer’s cartel” or “monopsony” and used the example of implementers banding together to push the SSO’s definition of “reasonable and non-discriminatory” in the direction of lower licensing rates to illustrate the risk of coordinated behavior that the Division will be wary of in the SSO setting.

Overall, a significant take-away from the remarks is that “[t]he Antitrust Division will carefully scrutinize what appears to be cartel-like anticompetitive behavior among SSO participants, either on the innovator or implementer side.” This position represents an implicit departure from “the old notion that ‘openness’ alone suffices to prevent cartel-like behavior within SSOs.” AAG Delrahim “urge[d] SSOs to be proactive in evaluating their own rules” on an ongoing basis. Accordingly, in the wake of the remarks and in anticipation that SSOs may soon find themselves subject to heightened scrutiny, companies that participate in SSOs (on both the patentholder and licensor sides) should consider reviewing their SSO commitments and the rules of those organizations to ensure compliance with antitrust regulations.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.