THE HOLD-UP TUG-OF-WAR—PARADIGM SHIFTS IN THE APPLICATION OF ANTITRUST TO INDUSTRY STANDARDS

By Benjamin Hendricks & Brian P. Quinn¹

I. INTRODUCTION

The oft-debated question of whether to apply competition law to the use and abuse of standard essential patents ("SEPs") has divided academics, private practitioners, and public officials along familiar battle lines: some are skeptical of the legal and factual underpinnings of antitrust enforcement in the context of SEP licensing negotiations, others view standard-setting and negotiations over fair, reasonable, and non-discriminatory ("FRAND") licenses as areas in which antitrust enforcement acts as a critical safeguard, and still others come down somewhere in the middle.² SEP-owners often view their FRAND commitments as contractual and beyond the reach of competition law, while those that must license SEPs to implement an industry standard often advocate for the robust application of the antitrust laws to safeguard against excessive royalties or the outright exclusion of competitors. The arguments for applying competition law to guard against the abuse of FRAND-encumbered SEPs are rooted in "hold-up"—the theory that SEP-owners may leverage their position and power to exclude competition in standardized markets in which compatibility, interconnection, and network effects play essential roles.

With the two camps at odds and seemingly far apart, the common law approach under the U.S. antitrust laws has yet to provide a bright line (or workable) rule to guide SEP-owners and implementers in standardized markets. The crux of the debate is whether hold-up is exclusionary market conduct cognizable under the antitrust laws, or whether the right to pick and choose licensees and royalty rates are sticks in the bundle of property rights that ownership of an SEP confers on its owner, any waiver of which is governed exclusively by private contract law. The answer to that riddle is beyond the scope of this article, which instead examines recent developments in the law with respect to the application of antitrust law to patent hold-up and provides a prospective look at the future of hold-up in the patent context and elsewhere. Given the rapid development of the Internet of Things ("IoT"), the onset of the 5G mobile standard, and the torrid pace of development in networked industries, it is more than likely that courts, antitrust enforcers, and policymakers will need to grapple with the practical, legal, and economic underpinnings of hold-up outside of the formal standard-setting context.

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II. THE ECONOMIC RATIONALE OF HOLD-UP

Industry standards are critical in a variety of contexts, given their general tendency to promote interoperability, more evenly distribute the costs of innovation, and engender vigorous price competition between implementers.³ Notwithstanding their salutary effects, standards necessarily require a trade-off: firms and consumers either explicitly or implicitly agree to be "locked-in" to (i) a particular technological or methodological framework and (ii) the network of products and services that comply with, and are therefore reliant on, the standard.⁴ Especially with respect to widely-adopted or industrywide standards, the fact that competitors and consumers must make standard-specific investments (or risk becoming locked-out or stranded on an inferior network) creates the conditions for opportunistic behavior that economists have termed "hold-up."⁵

In the words of former FTC Commissioner Terrell McSweeny: "the theory of patent ‘holdup’ is simple and straightforward," after a standard-setting organization ("SSO") incorporates patented technology into a standard and thereby commits all future implementers to practice the relevant SEPs, the "bargaining position of [the] patent-holder [in licensing negotiations] may increase considerably. . . ."⁶ These bargaining asymmetries—the product of "a gap between economic commitments and subsequent commercial negotiations"⁷—may enable SEP-owners to leverage their control over access to the standard to either seek monopoly rents from SEP licensors in the form of supracompetitive royalties or exclude prospective implementers from entering markets to provide products and services that adhere to the standard.⁸ This dynamic is not necessarily limited to the SEP-licensing context. As the ongoing dispute over Google’s use of Oracle’s copyrighted application programming interfaces ("APIs") enters its eighth year of litigation, copyrights that read on de facto or de jure industry standards may become an additional source of dispute.⁹

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The question of whether hold-up is cognizable under the antitrust laws is hotly debated: does hold-up injure competition such that it constitutes exclusionary conduct, or is it merely a potential breach of a private contract to the extent it exists at all? Critics question the existence of hold-up as an empirical matter, and advocate for narrowing the availability of a hold-up cause of action under Section 2 of the Sherman Act and Section 5 of the Federal Trade Commission Act.¹⁰ But another group of economists, antitrust scholars, intellectual property experts, and policymakers have expressed their disagreement; this group points to government reports, court decisions, and testimony from SSOs themselves in support of its position that hold-up exists and warrants continuing antitrust scrutiny under the Sherman and FTC Acts.¹¹ Broadly, this group argues that hold-up has the potential to harm the competitive process in two ways: First, rights holders who engage in hold-up may raise their rivals’ costs by extracting excessive and non-FRAND royalties in licensing negotiations, or even block their competitors from entering standardized markets at all.¹² Second, downstream consumers may pay higher prices that reflect supra-FRAND royalties, a diminished diversity of products and services, or a cumulative loss of upstream and downstream innovation in standardized technologies.¹³

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III. THE APPLICATION OF ANTITRUST LAW TO HOLD-UP IN THE STANDARD-SETTING CONTEXT

Many U.S. courts have been open to allowing hold-up-focused antitrust claims if the SEP-holder (1) possesses market power and (2) abuses that market power by leveraging control over access to the standard to exclude rivals or extract supra-FRAND royalties. Courts have grappled with both questions, and—with some nuances—have been willing to consider claims that seek to satisfy both requirements.

A. SEPs Can Confer Market Power

A patent, no matter how valuable, does not automatically endow its owner with monopoly power in the market for the patented technology and its applications.¹⁴ As the Third Circuit explained in Broadcom v. Qualcomm, Inc., 501 F.3d 297, 314 (3d Cir. 2007), non-essential patents do not invariably confer monopoly power upon their owners because the value of the patents "is limited when alternative technologies exist."¹⁵ But courts have shown willingness to hold that SEPs can (and often do) confer market power on their holders because they are essential to practicing a particular standard: as one district court summarized, "a number of courts have recognized a legal distinction between a normal patent—to which antitrust market power is generally not conferred on the patent owner, and a patent incorporated into a standard—to which antitrust market power may be conferred on the patent owner."¹⁶ The U.S. Court of Appeals for the Ninth Circuit, for example, concluded in Microsoft Corp. v. Motorola, Inc., 696 F.3d 872 (9th Cir. 2012), that "[t]he catch with standards is that it may be necessary to use patented technology in order to practice them. As a result, standards threaten to endow holders of standard-essential patents with disproportionate market power."¹⁷ Indeed, in its successful appeal to the U.S. Court of Appeals for the D.C. Circuit, one SEP-owner did not even dispute that "its patent rights in the . . . relevant technologies g[a]ve it monopoly power. . . ."¹⁸

Antitrust enforcers have recognized this possibility as well. Over twenty years ago, the U.S. Federal Trade Commission ("FTC") concluded that a standard that gains wide acceptance "effectively confer[s] market power upon . . . the patent holder[s]" whose technology holds the key to implementing it.¹⁹ The reasoning underpinning this conclusion is straightforward: standardization necessarily "eliminate[s] alternatives to [certain] patented technology,"²⁰ and when a consumer (or licensee) has little or no access to alternatives, the seller (or licensor) is well-positioned to exercise market power. This is not to say that ownership of an SEP invariably confers market power, especially if there are competing standards that enable the same functionality. But the authors are not aware of any claimant bringing SEP-based antitrust claims that omit an allegation of power in the market for standardized technology or its applications.²¹ Accordingly, while it may not be the case that all SEPs confer market power, courts at the very least recognize that "[e]ssential patents are very different from normal patents" and require more exacting treatment in any antitrust analysis.²²

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B. FRAND as the Competitive Safeguard for a Horizontal Agreement with Significant Procompetitive Justifications

To protect technology and related product markets from the exercise of market power that may flow from control over SEPs, SSOs have adopted protections aimed at constraining attempts to extract supra-FRAND royalties or exclude putative SEP implementers (as opposed to good-faith attempts to collect a reasonable royalty based on the merits of the invention embodied in the patent). These protections—embodied in FRAND commitments—are fundamental to standard setting, which at its root is an agreement among competitors to operate under a single technological framework. Typically, a horizontal agreement that has the potential to partially exclude competing technologies would raise competitive concerns. This is especially true given the "lock-in" effect that channels all implementations of the standard into a single technological configuration to the exclusion of all others.

An agreement to stifle competition among technologies could be construed as a violation of Section 1 of the Sherman Act. To that end, the Supreme Court once condemned concerted action within an SSO that resulted in the exclusion of polyvinyl chloride electrical conduits in favor of traditional steel conduits.²³ In that case, the Supreme Court noted that "private standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits."²⁴

In high-tech industries, the benefits of standard setting in downstream markets—including interoperability and network effects—are generally understood to outweigh the competitive harm from any upstream foreclosure. In other words, antitrust law should not condemn foreclosure of upstream competition for base technologies (e.g., standards like WiFi) so long as the agreement to standardize facilitates competition on downstream products (computers, smartphones, or any other product that uses the standard to connect to WiFi). With that bargain in mind, and to ensure that power in an upstream market cannot be leveraged into downstream markets, most SSOs have devised intellectual property policies designed to safeguard the industry from anticompetitive harm, including patent hold-up. A typical SSO’s intellectual property policy requires any owner of a patent that would be "essential" to practicing a standard to (1) disclose the patents and (2) license the patents on "fair, reasonable, and non-discriminatory," or "FRAND" terms. Any member of an SSO that wants the organization to adopt a standard that incorporates one or more of their patents must agree to these terms.

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FRAND commitments can serve as a continuing and "important safeguard against monopoly power."²⁵ While promises to license on FRAND terms are enforceable under contract law principles, their purpose is deeply intertwined with competition policy, and a violation of FRAND may—but not always—implicate the antitrust laws. Indeed, in one ongoing case litigated by the FTC, a court held that the "FTC has adequately alleged that [the Defendant] had an antitrust duty to license its FRAND-encumbered SEPs to its competitors."²⁶ In other words, the court held that a FRAND contract plausibly included an antitrust commitment not to snuff out the procompetitive benefits that flow from standard setting by excluding competition in markets for the standardized technology and its applications.

C. Hold-Up as Anticompetitive Harm

Just as a patent does not automatically confer market power on its holder, the mere possession of market power does not necessarily implicate the antitrust laws. To be actionable under the antitrust laws, market power must be coupled with exclusionary conduct. Enter hold-up. As explained in Part I above, hold-up is the exercise of market power in standardized technology (most often embodied in a significant portfolio of SEPs) to exclude licensees or extract supracompetitive royalties from licensees that are locked into a specific technology due to the standardization process.

Again, a number of courts have recognized that this conduct can be actionable under the antitrust laws. For example, in Research In Motion Ltd. v. Motorola, Inc., RIM alleged that "Motorola refused to negotiate reasonably and w[ould] not re-license the patents at a FRAND price."²⁷ The district court denied Motorola’s motion to dismiss because it found that RIM sufficiently alleged that Motorola’s SEPs made it a "gatekeeper" to competition under the relevant standard, and that "[i]f Motorola licenses only at exorbitant rates, it will force its competitors to increase prices in the downstream market in order to make a profit. This increase in prices for all products except Motorola’s will harm competition."²⁸ Other courts have agreed that "monopoly power can lead standard-essential patent owners to overvalue their patents. . . ."²⁹

But the U.S. Court of Appeals for the D.C. Circuit has raised significant questions about the showing that an antitrust plaintiff must make to demonstrate actionable conduct and antitrust injury under a hold-up theory. Without specifically addressing patent hold-up, Judge Williams in Rambus, Inc. v. FTC, held that the mere danger of "avoiding limits on its patent licensing fees" only "enable[d] a monopolist to charge higher prices than it otherwise could have charged," conduct that "would not in itself constitute monopolization."³⁰ Rambus appears to stand for the proposition that hold-up that results in exclusion, as opposed to merely higher-than-preferred royalties, is necessary to create antitrust liability, and that antitrust enforcers and civil plaintiffs must prove exclusion under Section 2 of the Sherman Act by establishing that a different standard or technology could have existed but for the hold-up.³¹ After Rambus, the boundaries of hold-up, the charging of supra-FRAND royalties, the exclusion of competitors, and actionable antitrust conduct is less clear.

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D. Competition Enforcers Have Also Recognized Hold-Up as an Anticompetitive Harm

Notwithstanding the lack of clarity in the case law, government enforcers have recognized the need for protections against patent hold-up as a means of exclusion. These entities range from the DOJ and FTC in the United States to antitrust enforcers in other jurisdictions with a significant stake in technology markets, such as the Korean Free Trade Commission and the Directorate General for Competition in the European Union.³²

In the United States, the most explicit recognition of the hold-up problem in the standard-setting context manifests itself in a DOJ Business Review Letter that analyzed pending changes to the intellectual property licensing policy for SEPs of a prominent SSO, the Institute of Electrical and Electronics Engineers or "IEEE." The IEEE proposed a revision of its intellectual property policy that prohibited SEP-owners from seeking injunctions or "prohibitive orders" during good faith negotiations with putative licensors.³³ In stating that the IEEE’s proposed revisions did not likely violate U.S. antitrust laws, the DOJ letter explained:

The threat of exclusion from a market is a powerful weapon that can enable a patent owner to hold up implementers of a standard. Limiting this threat reduces the possibility that a patent holder will take advantage of the inclusion of its patents in a standard to engage in hold up, and provides comfort to implementers in developing their products.³⁴

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Critically, the DOJ grounded its concern about hold-up in the "threat of exclusion from a market" that can become a "powerful weapon" for SEP-owners.³⁵ This policy formulation is consistent with the both the view that an abuse of FRAND can be anticompetitive conduct and the narrower application of hold-up articulated in Rambus.

The FTC has also recognized hold-up as an antitrust concern in the context of SEP-holders seeking injunctions against putative licensees. For example, the FTC has enjoined SEP-owners from seeking injunctions excluding alleged infringers from national markets, a policy that reflects the agency’s concern that the threat of an injunction and exclusion will cause putative licensees to pay supra-FRAND royalties.³⁶ This bipartisan focus on injunctive relief addresses a less controversial form of patent hold-up, given that injunctions preclude a party from practicing an SEP and therefore exclude the party from implementing the standard.³⁷

More recently, the FTC explicitly recognized that hold-up can extend beyond the injunction context to "opportunistic patent holders" that "insist on patent licensing terms that capture not just the value of the underlying technology, but also the value of standardization itself."³⁸ The FTC recognized that "[t]o address this ‘hold-up’ risk, SSOs often require patent holders to disclose their patents and commit to license standard-essential patents on fair, reasonable, and non-discriminatory (‘FRAND’) terms."³⁹ The FTC explained that the FRAND commitment was an agreement "not to exercise any market power resulting from its patents’ incorporation into that standard."⁴⁰ The FTC is litigating these issues in the Northern District of California, in a case that may shape the law in this area for years to come.⁴¹

United States antitrust enforcers are not the only antitrust agencies concerned with hold-up. In a recent finding against Qualcomm, the Korean Fair Trade Commission recognized hold-up as an antitrust issue in the context of an investigation into the market for modem chipsets. The KFTC ultimately recognized that hold-up "led to the effect of exclusion in the modem chipset market and innovation market."⁴²

The European Union has similarly recognized the competitive consequences of patent hold-up in a "Competition Policy Brief," stating:

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SEPs . . . can confer significant market power on their holders. Once a standard has been agreed and industry players have invested heavily in standard-compliant products, the market is de facto locked into both the standard and the relevant SEPs. This gives companies the potential to behave in anti-competitive ways, for example by ‘holding up’ users after the adoption of the standard by excluding competitors from the market, extracting excessive royalty fees, setting cross-licence terms which the licensee would not otherwise agree to, or forcing the licensee to give up their invalidity or non-infringement claims against SEPs.⁴³

More recently, the European Commission recognized the threat of patent hold-up when SEP-owners seek injunctions against companies seeking to implement a standard when it concluded that "safeguards are needed against the risk that good faith technology users threatened with an injunction accept licensing terms that are not FRAND, or in the worst case, are unable to market their products (hold-ups)."⁴⁴ Notably, the European Commission did not discuss hold-up beyond the injunction context, in contrast to the more expansive view expressed in the prior Competition Policy Brief quoted above. Accordingly, there is ambiguity with respect to the European Commission’s treatment of hold-up as an anticompetitive danger independent of the injunction context.⁴⁵

Given the developments in the case law and enforcement policy statements, there was some feeling in recent years that a global convergence of some basic ideas regarding SEPs, hold-up, and antitrust enforcement was underway. But that has changed.

IV. THE DOJ’S RECENT SHIFT ON STANDARDS HOLD-UP

While hold-up has been recognized as a competitive concern by courts and antitrust enforcers around the world, the U.S. DOJ—and Assistant Attorney General for Antitrust Makan Delrahim in particular—has recently called this erstwhile consensus into question. In a recent speech, AAG Delrahim commented that "advocates of reducing the power of intellectual property rights cite the so-called ‘hold-up’ problem in the context of SSOs. As many of you know, I believe these concerns are largely misplaced."⁴⁶ Delrahim went on to argue that "hold-up is fundamentally not an antitrust problem, and therefore antitrust law should not be used as a tool to police FRAND commitments that patent-holders make to standard setting organizations."⁴⁷ Instead, AAG Delrahim argued that higher royalty fees "through hold-up simply reflect[] basic commercial realities," and that "ignoring equal incentives of implementers to ‘hold-out[]’ risks creating ‘false-positive’ errors of over-enforcement that would discourage valuable innovation."⁴⁸ As for the FRAND promise, Delrahim contended that these commitments are "enforceable by contract laws" and that "contract or common law remedies would be adequate" to prevent harm from hold-up.⁴⁹

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As such, the DOJ has shifted focus to what it calls "collective hold-out." Delrahim has advised "enforcers [to] carefully examine and recognize the risk that SSO participants might engage in a form of buyer’s cartel, what economists call a monopsony effect. When implementers act together within a standard-setting organization as the gatekeeper to sales or products including a new technology, they have both the motive and means to impose anticompetitive licensing terms. At the extreme, they can shut down a potential new technology in favor of the status quo, all to the detriment of consumers."⁵⁰ While this theory of anticompetitive harm is not particularly controversial from a legal standpoint, it is unclear whether Delrahim’s concerns are rooted in factual support for the proposition that "hold-out" is a significant concern.⁵¹ Although the DOJ has recently launched multiple investigations into possible collusive behavior by members of SSOs,⁵² the authors are not aware of any judicial finding of hold-out, and it is unclear why concerns over "collective hold-out" should predominate over concerns about hold-up.

AAG Delrahim’s policy positions and statements from other antitrust officials have prompted speculation about a split between the FTC and DOJ on the proper treatment of hold-up under the antitrust laws. Indeed, after AAG Delrahim made these remarks, former FTC Commissioner Terrell McSweeny delivered a speech urging the U.S. antitrust agencies to "hold[] the line on patent hold-up" and laying out U.S. antitrust enforcers’ "record of challenging holdup on antitrust grounds [that] stretches back over two decades."⁵³ Recently confirmed FTC Chairman Joseph Simons has tried to reconcile the FTC’s position with the DOJ’s recent statements on SEP’s, stating that "[w]e agree with the [DOJ] leadership that a breach of a FRAND commitment standing alone is not sufficient to support a Sherman Act violation," and adding that "[w]hether hold-up or hold-out is more likely to occur in the real world is not something that we are focusing on. If either one occurs, they can be problematic."⁵⁴ When pressed, Chairman Simons seemed to invoke the D.C. Circuit’s Rambus decision, stating "[t]he way I think about it is to compare the but-for world with the actual world. If the but-for world and the actual world are the same, then there’s no antitrust problem."⁵⁵

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In short, it appears that Chairman Simons is attempting to forge a middle-path, preserving the FTC’s ability to investigate and sanction hold-up but also recognizing some of the limitations of the antitrust laws as applied to breaches of FRAND commitments and SEP licensing.

V. THE LIMITS OF HOLD-UP AS AN ANTITRUST THEORY OF HARM

While most of the battles over hold-up have played out against the backdrop of formal standard-setting processes and negotiations over licenses to SEPs, a recently settled antitrust case with the potential to test the limits of the theory in the copyright context unfolded in the Northern District of California. That action, Arista Networks, Inc. v. Cisco Systems Inc.,⁵⁶ shared many factual similarities with Oracle’s longstanding copyright battle with Google. Cisco and Arista—the parties to that action—are competitors in the market to manufacture Ethernet switches, and each company has developed an operating system that enables engineers to configure and manage hardware products via a software-based command-line interface ("CLI").⁵⁷ By typing "text commands into the CLI," engineers "can instruct the Ethernet switches to perform specific functions."⁵⁸

Documents adduced in discovery tended to show that (i) some of Cisco’s competitors (including Arista) "began to use ‘Cisco-like’ CLI[s]" during the early 2000s, (ii) Cisco realized that the popularity of its CLIs had spawned the creation of copycats, and (iii) Cisco embraced and touted the fact that its CLI had become "the [] de-facto standard" for the industry.⁵⁹ After Cisco sued Arista for infringing its patents and copyrights in the CLIs in 2014,⁶⁰ Arista filed a separate antitrust action accusing Cisco of "carr[ying] out a longtime policy that encouraged customers and competitors to use Cisco’s CLI but reversed its policy and engaged in tactics to hinder competition to monopolize the Ethernet switches market," a course of conduct Arista dubbed the "’open early, closed late’ scheme."⁶¹

After holding that there was a genuine issue of material fact as to Cisco’s monopoly power in the relevant markets,⁶² Judge Beth Labson Freeman answered the key questions—whether Arista’s "open early, closed late" theory of monopolistic conduct had a sufficient basis in antitrust law to warrant a trial,⁶³ and whether Arista had sufficiently demonstrated that Cisco’s conduct "harmed competition in the alleged market" to create a genuine issue for trial—in the affirmative, sending the case on a path to trial.⁶⁴

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Critically, Judge Freeman held that the anticompetitive conduct typically associated with hold-up theory is not tethered to the "’hold-up’ or ‘lock-in’ of standards set by an SSO" in a de jure standard-setting process.⁶⁵ To the contrary, she explained that hold-up or the analogous "open early, closed late" conduct was also cognizable in the context of de facto standards, at least where the rights holder voluntarily engaged in a "prior course of dealing . . . with its competitors."⁶⁶ Analogizing to the Supreme Court’s decision in Eastman Kodak, the court rejected Cisco’s argument that Arista’s Section 2 claims were without any legal basis because "there was [no] formal contractual relationship" between the two competitors,⁶⁷ and instead held that "a formal contractual relationship" laying out the terms of the voluntary course of Cisco’s dealing with its competitors was not a prerequisite to an "open early, closed late"-style of antitrust claim.⁶⁸

With respect to the other major hurdle to a hold-up-based Section 2 claim—the requirement that a plaintiff demonstrate causal antitrust injury to competition and not merely harm to the plaintiff⁶⁹—the Court held that Arista had done enough to create a triable issue as to whether Cisco’s "’open early, closed late’ scheme harmed [Arista] and the competition by slowing down Arista’s acquisition of new switch customers and the spread of innovative products."⁷⁰ Drawing all reasonable inferences in Arista’s favor, the court held that a jury could infer that Cisco’s purported scheme excluded Arista from the de facto CLI standard, thereby "restricting] . . . customers from making free choices between different products" and "stymie[ing] innovation in the alleged markets," both antitrust injuries.⁷¹

That Cisco’s purported "open early, closed late" approach to enforcing its copyrighted CLIs was novel would not necessarily suffice to shield it from condemnation under the antitrust laws, had the case gone to trial.⁷² In United States v. Microsoft, for example, the U.S. Court of Appeals for the D.C. Circuit held that Microsoft’s conduct—which did not fit neatly within any of the conceptual boxes that courts generally use to characterize anticompetitive behavior—nevertheless injured competition and resulted in the exclusion of rivals without countervailing procompetitive justifications.⁷³ Courts addressing similar claims, albeit in the SEP context, have been especially sensitive when market-share leaders use intellectual property rights "not only as a shield to protect [their] invention, but as a sword to eviscerate competition unfairly. . . ."⁷⁴ Given that the parties settled in Cisco, it remains to be seen whether a jury, the U.S. District Court for the Northern District of California, and appellate courts will arrive at similar conclusions when addressing forms of hold-up that transpire outside of the formal de jure standard-setting context.

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VI. CONCLUSION

While the Arista court may be among the first to recognize copyright-based "open early, closed late" conduct as another "variant of the classical ‘hold-up problem,’"⁷⁵ the general debate about whether hold-up can qualify as actionable antitrust conduct rages on without a clear rule defining the reach of the antitrust laws. Whereas the DOJ’s enforcement focus has shifted toward concerted conduct and the threat of "hold-out" and away from unilateral SEP-based hold-up, many federal courts and the FTC do not appear to have embraced that shift in thinking and have been willing to apply antitrust scrutiny to hold-up issues, especially when there is evidence of exclusion. Moreover, at least one court has applied the economic concepts underpinning hold-up outside of the formal standard-setting framework, to conduct that does not necessarily map on to a traditional category of anticompetitive behavior. As the global economy becomes more reliant on interconnection, standardization, SEPs, and FRAND licensing to facilitate the creation of networked infrastructure, hold-up and its proper place under the antitrust laws will assume even greater importance.

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Notes:

^1. The authors are attorneys at O’Melveny & Myers LLP. Ben Hendricks is counsel and Brian Quinn is an associate in the Washington, D.C. office. Any opinions expressed herein are the authors’ alone and do not necessarily reflect those of O’Melveny & Myers LLP or any of its clients. The authors offer a special thanks to Ian Simmons, who has guided them through many of these issues.

^2. The diversity of viewpoints on this issue is at least partly attributable to the fact that many, if not most, technology firms are both "innovators" and "implementers," to use the parlance of Assistant Attorney General for Antitrust Makan Delrahim. See generally Makan Delrahim, Take It to the Limit: Respecting Innovation Incentives in the Application of Antitrust Law, Remarks as Prepared for Delivery at USC Gould School of Law at 3 (Nov. 10, 2017), available at https://www.justice.gov/opa/speech/file/1010746/download. These firms own and license SEPs, a trend that is likely to accelerate as technological standards touch on more and more consumer goods.

^3. See Carl Shapiro & Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy 230 (1999); Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 308 (3d Cir. 2007) (explaining that standards "ensure the interoperability of products" and "facilitate the sharing of information among purchasers of products from competing manufacturers").

^4. See Joseph Farrell & Garth Saloner, Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation, 76 Am. Econ. Rev. 940, 940 (1986) (describing the high switching costs and network effects that cause standards implementers to become "locked-in").

^5. See Shapiro & Varian, supra note 2, at 230; Joseph Farrell et al., Standard Setting, Patents, and HoldUp: A Troublesome Mix, 74 Antitrust L.J. 603, 603-04 (2007) ("Hold-up can arise, in particular, when one party makes investments specific to a relationship before all the terms and conditions of the relationship are agreed.").

^6. Terrell McSweeny, Holding the Line on Patent Holdup: Why Antitrust Enforcement Matters at 2 (Mar. 21, 2018), available at https://www.ftc.gov/system/files/documents/public_statements/1350033/mcsweeny_-_the_reality_of_patent_hold-up_3-21-18.pdf.

^7. Farrell et al., supra note 4, at 603.

^8. See A. Douglas Melamed & Carl Shapiro, How Antitrust Law Can Make FRAND Commitments More Effective, 127 Yale. L.J. 2110, 2115 (2018) (noting that FRAND commitments address the possibility that SEP holders will use their bargaining leverage to "extract[] monopoly premiums by selective licensing or, more important, migrat[e] their monopoly power from the FRAND-regulated market to unregulated standard-implementing product markets by licensing to only one or a few implementers or licensing to selected implementers on discriminatorily favorable terms"); Shapiro & Varian, supra note 2, at 231, 257 (explaining that standards can be "’hijacked’ by companies seeking to extend [them] in proprietary directions," one of "the worst outcomes for consumers").

^9. See Oracle Am., Inc. v. Google LLC, 886 F.3d 1179, 1185 (Fed. Cir. 2018) (holding that Google’s incorporation of APIs from the Java Standard Edition coding platform into its Android mobile coding platform was not fair use, and infringed Oracle’s copyrights); see also Farrell et al., supra note 4, at 608 n.26 (noting that a rights-holder can acquire "market power beyond that intended by copyright policy" when copyrighted coding interfaces become a de facto standard); Andrea Pacelli, Note, Who Owns the Key to the Vault? Hold-up, Lock-out, and Other Copyright Strategies, 18 Fordham Intell. Prop., Media & Ent. L.J. 1229, 1239-40 (2008) (describing the possibility of copyright hold-up).

^10. See Makan Delrahim, The "New Madison" Approach to Antitrust and Intellectual Property Law, Remarks as Prepared for Delivery at the University of Pennsylvania Law School at 9 (Mar. 16, 2018), available at https://www.justice.gov/opa/speech/file/1044316/download ("Since hold-up theories gained traction in the early 2000s, it is striking that they still remain an empirical enigma in the academic literature."); David J. Teece, Pivoting Toward Schumpeter: Makan Delrahim and the Recasting of U.S. Antitrust Towards Innovation, Competitiveness, and Growth, 32 Antitrust 32, 37 (2018) ("The lack of empirical support for the proposition that hold-up is anything more than a theoretical possibility is striking."); see also Maureen K. Ohlhausen, The Elusive Role of Competition in the Standard-Setting Antitrust Debate, 20 Stan. Tech. L. Rev. 93, 128 (2017) ("[T]o the extent that a RAND-licensing assurance limits ex post royalties, its evasion or violation does not in itself implicate antitrust law without additional conduct, such as deception of an SSO."); id. at 136—42 (advocating for the exclusion of most forms of hold-up from the ambit of enforcement under § 5 of the FTC Act).

^11. See generally Letter from 77 former government officials and professors of law, economics, and business to Makan Delrahim, Assistant Attorney General, (May 17, 2018), available at https://law.rutgers.edu/f/mc-05-18-2018.pdf; McSweeny, supra note 5; Melamed & Shapiro, supra note 7.

^12. See Janusz Ordover & Allan Shampine, Implementing the FRAND Commitment, The Antitrust Source 1—11 (Oct. 2014), available at https://www.americanbar.org/content/dam/aba/publishing/antitrust_source/oct14_full_source.authcheckdam.pdf.

^13. See Farrell et al., supra note 4, at 607—10; Carl Shapiro, Setting Compatibility Standards: Cooperation or Collusion, in Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society 81, 91 (Rochelle Cooper Dreyfuss et al. eds., 2001) (explaining that hold-up that "block[s] others from adhering to the standard" generates anticompetitive effects).

^14. See, e.g., Ill. Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28, 45-46 (2006); DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property (Jan. 12, 2017), available at https://www.justice.gov/atr/IPguidelines/download (noting that one of their three basic principles is that "the Agencies do not presume that intellectual property creates market power in the antitrust context").

^15. Broadcom v. Qualcomm, Inc., 501 F.3d 297, 314 (3rd Cir. 2007).

^16. Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846, 2012 WL 1672493, at *6 (N.D. Cal. May 14, 2012).

^17. Id. at 876 (internal citations and quotations omitted).

^18. Rambus Inc. v. FTC, 522 F.3d. 456, 463 (D.C. Cir. 2008).

^19. In the Matter of Dell Computer Corp., 121 F.T.C. 616, 618 (May 20, 1996).

^20. Broadcom Corp., 503 F.3d at 317.

^21. How to properly define the relevant market is less clear. Plaintiffs have both asserted market power in related product markets, FTC v. Qualcomm Inc., No. 17-CV-00220, 2017 WL 2774406, at *23—24 (N.D. Cal. June 26, 2017), and technology markets, see Rambus, 522 F.3d at 463.

^22. Research In Motion Ltd. v. Motorola, Inc., 644 F. Supp. 2d 788, 793 (N.D. Tex. 2008).

^23. Allied Tube Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988) (emphasis added).

^24. Id. at 506—07.

^25. Broadcom, 501 F.3d at 314; see also RIM, 644 F. Supp. 2d at 791 ("’FRAND commitments’ are intended to prevent owners of essential patents from acquiring too much of the market power that would otherwise be inherent in owning an essential patent.").

^26. Qualcomm, 2017 WL 2774406, at *20 (emphasis added).

^27. RIM, 644 F. Supp. 2d at 791.

^28. Id. at 794.

^29. TCL Comm. Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, Case No. 14-cv-0341, 2017 WL 6611635 at *54 (C.D. Cal. Dec. 21, 2017).

^30. 522 F.3d 456, 459 (D.C. Cir. 2008).

^31. Id. at 463-64.

^32. See European Commission, Public Consultation on patents and standards – a modern framework for standardisation involving intellectual property rights, Summary Report (Oct. 27, 2015), available at, http://ec.europa.eu/DocsRoom/documents/14482/attachments/17translations/en/renditions/native; Korea Fair Trade Commission, In re Alleged Abuse of Market Dominance of Qualcomm Inc., Decision No. 2017-0-25 at 130 (Jan. 20, 2017), available at http://www.theamericanconsumer.org/wp-content/uploads/2017/03/2017-01-20_KFTC-Decision_2017-0-25.pdf.

^33. Letter from Renata B. Hesse, Acting Assistant Attorney General to Michael Lindsay, Dorsey & Whitney LLP (Feb. 9, 2015), available at https://www.justice.gov/atr/response-institute-electrical-and-electronics-engineers-incorporated. The force of the IEEE Business Review Letter is uncertain under the new administration, see infra Section IV.

^34. Id. at 9.

^35. Id.

^36. Decision and Order, In the Matter of Motorola Mobility LLC and Google Inc., Case No. C-4410 (July 23, 2013); Consent Order, In the Matter of Dell Comp. Corp., Case No. C-3658 (May 20, 1996).

^37. See Timothy Muris, Chairman, Fed. Trade Comm’n, Speech at the Milton Handler Annual Antitrust Review, Looking Forward: The Federal Trade Commission and the Future Development of U.S. Competition Policy (Dec. 10, 2002), available at https://www.ftc.gov/public-statements/2002/12/looking-forward-federal-trade-commission-and-future-development-us; DOJ Business Review Letter, supra note 33.

^38. Complaint, FTC v. Qualcomm, Inc., Dkt. 5:17-cv-00220, ECF No. 1 (Jan. 17, 2017).

^39. Id. ¶ 48.

^40. Id. ¶ 50.

^41. Id.

^42. Korea Fair Trade Commission, In re Alleged Abuse of Market Dominance of Qualcomm Inc., Decision No. 2017-0-25 at 130 (Jan. 20, 2017), available at http://www.theamericanconsumer.org/wp-content/uploads/2017/03/2017-01-20_KFTC-Decision_2017-0-25.pdf.

^43. Standard Essential Patents, Competition Policy Brief (June 2014) at 1, available at http://ec.europa.eu/competition/publications/cpb/2014/008_en.pdf.

^44. European Commission, Communication From The Commission to the European Parliament, the Council and the European Economic and Social Committee, Setting out the EU Approach to Standard Essential Patents, COM(2017) 712 (Nov. 29, 2017), available at https://ec.europa.eu/docsroom/documents/26583.

^45. For additional analysis of the European Commission’s communication setting out the EU Approach to SEPs see Ian Simmons, Benjamin Hendricks, and Philippe Nogues, The EC Communication on SEPs: Convergence, Divergence, or Silence?, 32 Antitrust 41 (2018).

^46. Delrahim, supra note 9.

^47. Id. (emphasis in original).

^48. Id.

^49. Id.

^50. Makan Delrahim, Assistant Attorney General Makan Delrahim Delivers Remarks at the USC Gould School of Law’s Center for Transnational Law and Business Conference (Nov. 10, 2017), available at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-usc-gould-school-laws-center.

^51. Melamed & Shapiro, supra note 47, at 2120 ("[W]e know of no instance in which the feared ‘collective hold-out’ has happened in the context of modern communications and information industries.").

^52. Cecilia Kang, U.S. Investigating AT&T and Verizon Over Wireless Collusion Claim, N.Y. Times (Apr. 20, 2018), available at https://www.nytimes.com/2018/04/20/technology/att-verizon-investigate-esim.html; Joshua Sisco & Leah Nylen, DOJ Probes Role Of Special Interest Group in New WiFi Standard, MLEX Market Insight (Jan. 26, 2018), available at https://mlexmarketinsight.com/insights-center/editors-picks/antitrust/north-america/doj-probes-role-of-special-interest-group-in-new-wifi-standard.

^53. See McSweeny, supra note 5, at 6.

^54. Leah Nylen, FTC, DOJ agree that breach of Frand commitments aren’t antitrust violations, Simmons says, MLex (Sept. 25, 2018).

^55. Id.

^56. No. 16-cv-00923-BLF (N.D. Cal.) (filed 2/24/2016).

^57. Arista Networks, Inc. v. Cisco Sys. Inc., No. 16-cv-00923-BLF, Order (1) Denying Plaintiff’s Motion for Partial Summary Judgment and (2) Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment, ECF No. 281, slip op. at 1 (N.D. Cal. May 9, 2018). [hereinafter Arista SJ Opinion].

^58. Id.

^59. Id. at 2.

^60. Cisco Sys., Inc. v. Arista Networks, Inc., No. 14-cv-05344-BLF (filed 12/5/2014).

^61. Arista SJ Opinion at 4—5.

^62. Id. at 14.

^63. Id. at 26-28.

^64. Id. at 35-36.

^65. Id. at 26-27.

^66. Judge Freeman pointed to Cisco’s statements acknowledging and touting its CLI as the "current de-facto standard" as sufficient to create a genuine issue of material fact on the question whether it had entered into a voluntary course of dealing with its competitors. Id. at 26 (citing Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451 (1992) and discussing a similar "open early, closed late" strategy that Kodak used to exclude competitors from the aftermarkets for photocopier parts and services).

^67. Id. at 27 ("Kodak does not indicate that a contractual relationship between Kodak and the ISOs was a prerequisite to Kodak’s liability. In fact, some ISOs purchased replacement parts from OEMs and thus would not have had a formal relationship with Kodak.") (citing Kodak, 504 U.S. at 458).

^68. See id.; cf. Qualcomm, 2017 WL 2774406, at *21 ("FTC’s allegations that Qualcomm voluntarily participated in the standards setting process and voluntarily committed to license its SEPs to its . . . competitors are sufficient to allege that Qualcomm altered a voluntary and profitable course of dealing.").

^69. See Arista SJ Opinion at 35.

^70. Id. at 35.

^71. Id. at 35-36.

^72. See United States v. Microsoft Corp. , 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc) (per curiam) ("[T]he means of illicit exclusion, like the means of legitimate competition, are myriad.").

^73. Id. at 65-67.

^74. Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); see, e.g., Broadcom, 501 F.3d at 314 (deception of an SSO with respect to FRAND licensing is cognizable under Sherman Act Section 2); Qualcomm, 2017 WL 2774406, at *21-*22 (repudiation of a FRAND promise as part of a broader scheme to raise rivals’ costs is cognizable under Section 2); Apple, 2012 WL 1672493, at *4—*8 (declining to dismiss Section 2 counterclaims alleging false FRAND promises and failure to disclose patents to an SSO).

^75. See DOJ-FTC Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition at 35 n.11 (April 2007), available at https://www.ftc.gov/reports/antitrust-enforcement-intellectual-property-rights-promoting-innovation-competition-report.