Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Hesse Looks Back at First Term’s Antitrust Enforcement, Discusses Intellectual Property Concerns , (Feb 8, 2013)

By Tobias J. Gillett, J.D., LLM.

In a speech presented today in Miami, Deputy Assistant Attorney General Renata B. Hesse of the Department of Justice Antitrust Division discussed the last four years of antitrust law enforcement and the intersection between antitrust and intellectual property law.

Past Four Years

Hesse began her prepared remarks (“IP, Antitrust and Looking Back on the Last Four Years”) by reviewing the agency’s antitrust policy and enforcement during the first four years of the Obama administration. Hesse highlighted four key themes—“vigorous enforcement,” “enhanced cooperation,” “thought leadership on competition policy,” and “good governance.”

Vigorous enforcement. Hesse identified a range of examples of the agency’s “vigorous enforcement” during the previous four years, including the creation of litigating Deputy and career Director of Litigation positions. She pointed to two cases as specific examples of the agency’s approach, the H&R Block/Tax Act merger and the AU Optronics criminal trials.

She regarded the Division’s action against H&R Block’s proposed acquisition of fellow tax preparation software provider TaxAct as demonstrating both the quality of the division’s litigation and its willingness to bring cases to trial, and noted that it could serve as “helpful precedent” for future merger challenges. Similarly, the Division’s criminal case against AU Optronics and three top executives, which resulted in a $500 million fine and convictions for all three executives, proved the Division’s readiness to bring criminal cases to trial.

Cooperation. Hesse referred to three kinds of cooperation: international, with other federal government components, and with the state attorneys general. International case cooperation included the Division’s action with the European Commission (EC) against Apple and five book publishers over allegations that they had conspired to raise the prices consumers would pay for e-books; the Division’s investigation of and settlement with the parties involved in a merger between aircraft component manufacturers United Technologies and Goodrich Corporation, in coordination with the EC and the Canadian Competition Bureau; and the Division’s auto parts criminal investigation, with the Australian Competition and Consumer Commission, the EC, the New Zealand Commerce Commission, the U.K. Office of Fair Trading, and other agencies. Hesse also noted the Division’s memorandums of understanding with Chinese and Indian antitrust authorities.

Domestic cooperation included the Division’s work with the FTC in formulating the 2010 revisions to the Horizontal Merger Guidelines, and its cooperation with sector regulators, such as the Federal Communications Commission, the Federal Reserve, and the Department of Transportation, in reviewing certain kinds of mergers. Hesse also highlighted the Division’s work with the state attorneys general on a wide variety of matters.

Thought leadership. The Division’s thought leadership included competition advocacy and advancing competition policy, focusing on three goals: revising or updating the Division’s guidance, providing a forum to address cutting-edge issues, and promoting open dialogue and visibility concerning the Division’s priorities and policy direction. In Hesse’s view, examples of the Division’s thought leadership that conformed to these goals included the 2010 revision of the Horizontal Merger Guidelines, the Division’s updates to its Policy Guide to Merger Remedies, and the joint DOJ/FTC Accountable Care Organizations policy statement. Hesse also noted the agencies’ workshops on most favored nation clauses and patent assertion entity activities as examples of the Division’s thought leadership.

Good governance. The Division’s commitment to good governance included increased openness and efforts to become more efficient and effective, according to Hesse. She identified the Division’s guidelines as methods of ensuring deals are not unduly delayed by the Division’s review process. She also referred to the Division’s decision to allow parties to employ predictive coding in their document production as another effort to streamline the process.

Antitrust and Intellectual Property

Following her review of the Division’s previous four years, Hesse proceeded to discuss the cutting-edge issue of the relationship between intellectual property and the antitrust laws. She emphasized that the Division has applied, and will continue to apply, “the same general antitrust principles to mergers and conduct matters involving intellectual property that it applies to any other type of property.”

Advocacy efforts. Hesse identified several efforts the Division had made to promote competition in intellectual property-enabled industries, including the Division’s workshop with the FTC on patent assertion entity activities, and its participation in a Patent and Trademark Office roundtable on proposed regulations that would require periodic and timely recordation of the real-party-in-interest of patents. After participating in the roundtable, the Division submitted comments to the PTO on the regulations. She suggested that the regulations would improve efficiency, reduce risk, increase transparency, and facilitate bilateral licensing.

Section 2 and FRAND Commitments. Hesse also addressed the continuing controversy posed by patent hold-up by owners of standard-essential patents (SEP). Patents become “standard-essential” through their inclusion in standards established by standard-setting organizations (SSOs) in various technology industries that apply to products produced by companies in those industries. As part of this process, technology companies agree to license certain patents on fair, reasonable, and non-discriminatory (FRAND) terms, and the SSOs take into consideration which patents are able to be licensed on FRAND terms in deciding which technologies should be incorporated into the standards. In some cases, companies have violated their FRAND commitments by seeking to obtain unreasonably high royalties, or to prevent or delay competitors from introducing new products.

Hesse identified several competition concerns posed by patent hold-up, including the exclusion of alternate technologies that were not included in the standard, postponement or avoidance of incorporation of standardized technology, reduction in royalties earned by other SEP owners due to such avoidance, and increased costs to consumers from the manufacturers’ higher royalty costs.

Hesse proposed several recommendations for reducing the risk of patent hold-up, including “clarifying FRAND commitments; making FRAND encumbrances convey to subsequent owners; permitting cash-only licensing options; limiting injunction actions for FRAND-encumbered SEP infringement claims; creating guidelines or arbitrations provisions to determine FRAND rates; and attempting to determine which patents are truly essential to the standard among the patents that owners claim are essential.”

Finally, Hesse brought up the question whether it is “potentially a violation of Section 2 when a FRAND-encumbered SEP owner exercises the monopoly power that he or she acquired through participation in the standard-setting process in breach of the SEP owner’s FRAND commitment?”

Hesse noted that some commentators had rejected the idea of applying Section 2 to FRAND commitments, rather than contract law, and that the FTC had based its actions against patent hold-up on its Section 5 authority. She observed that some commentators had relied on the Third Circuit’s 2007 decision in Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, to support their argument that Section 2 was not applicable to certain instances of patent hold-up. That case had held that “a patent holder’s intentionally false promise to license the SEPs on FRAND terms coupled with the SSO’s reliance on the FRAND promise when selecting the patented technology over other available options runs afoul of Section 2,” finding that such deception “harm[ed] the competitive process.”

Hesse noted that other commentators had argued that Section 2 should “retain vitality” even when the patent holder did not intentionally deceive the SSO during the stand setting process. She observed that the commentators had argued that a patent holder could still disrupt the competitive process by later intentionally violating its FRAND commitments, if the SSO could have included other technologies in the standard but did not in reliance on the patent holder’s FRAND commitment.

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