Antitrust Implications of Industry Standards and Certification Programs
Antitrust Implications of Industry Standards and Certification Programs April 11, 2013 Laura A. Wilkinson Weil, Gotshal & Manges LLP Background Most trade associations, standard-setting organizations (SSOs) and other forums where competitors interact are procompetitive or at least competitively neutral. These organizations provide a substantially useful function to their members and society. (E.g., perform an industry-wide information-gathering function, establish legitimate industry standards, or represent their members before legislative or governmental bodies.) However, the very nature of such groups i.e., a gathering of competitors provides a forum that is ripe for anticompetitive activity.
Most trade associations, if managed carefully, can perform these functions without undue antitrust risks. When trade association members intentionally or unintentionally fail to take account of antitrust concerns, the activities have the potential to evolve into illegal conduct. 2 Central Antitrust Issue The central antitrust concern is, of course, that competitors will act in concert rather than as independent competitors. There are many things that a company on its own can do legally, such as setting its prices or refusing to deal with a certain customer or competitor. However, when such decisions are made together with other competitors, they become price fixing and horizontal group boycotts.
Coordinated conduct that directly impacts price or output is per se unlawful. Where there are some procompetitive, efficiency-enhancing aspects, the conduct may be analyzed under the rule of reason, a fact-specific analysis that considers whether the procompetitive aspects of the agreement outweigh any potential anticompetitive effects. 3 Informal Discussions Although business people today are less likely to get together in a smoke filled room and agree on prices, the informal discussions that precede and follow the formal trade association or SSO meeting create the biggest risk of antitrust exposure. Informal discussions can often involve anticompetitive overtones e.g., agreements as to price, customers, sales and marketing strategies, restrictions on advertising and the like.
They may gather around a table and commiserate because prices are lower than they would like, or their company would certainly make more profit if there were some order to the industry, or theres just too much capacity for any of us to make money. These same types of discussions easily could occur on the phone, in written correspondence, or in email messages or an industry online forum and the antitrust risk inherent in such discussions is just as real as if the members sat in the proverbial smoke filled room. Even when informal discussions are completely innocent, the fact that a discussion occurred may raise questions about what was discussed by the participants, why they met, etc., and adverse inferences could be drawn about the nature of the conversations that may be difficult to rebut. 4 Discussion Regarding Prices
All pricing decisions must be made independently price fixing is per se illegal. To avoid even the appearance of impropriety, competitors simply should never discuss prices. Be aware that the prohibition on discussing or coming to any type of agreement on price extends to price-related terms, such as costs, credit terms, discounts, etc. Keep in mind that illegal price fixing does not require setting a specific price. Similarly, competitors should never discuss stabilizing sales or allocating markets or customers. Cases have been brought against companies for allegedly fixing the prices of inputs (e.g., employee salaries, commodities) as well. Companies should never complain to a competitor that its prices constitute unfair trade practices or discuss refusing to deal with a company because of its pricing or distribution practices. Whenever possible, competitors simply should not discuss specific customers. 5 Information Exchanges A common antitrust issue for trade associations is the tension between the procompetitive aspects of legitimate statistical reporting programs and
information exchanges among members and the potential for anticompetitive mischief arising from such exchanges. Exchanges of competitively sensitive information, such as information about members prices, costs, output or capacity, could expose an association and its members to charges that the information exchange program is a device that facilitates collusion among members on competitively sensitive issues. Associations wishing to structure information exchanges or statistical reporting programs to avoid antitrust concerns may look to the guidelines and statements issued by the DOJ and FTC. 6 Codes of Conduct Collateral to the trade associations main purpose, trade associations sometimes develop and implement codes of conduct regarding issues of common interest such as safety. However, codes of conduct that restrain competition are unlawful.
E.g., refusing to supply distributors or customers that discount, setting standards that exclude certain competitors, limiting advertising of member services, or establishing rules regarding competitive bidding. The Supreme Court upheld the imposition of liability against a company and an SSO for conspiring to issue an "unofficial" finding that a competitor of the company failed to meet certain safety codes established by the SSO. The court held that the company had used the finding to maintain its dominant position in the marketplace, excluding competition. American Society of Mechanical Engineers v. Hydrolevel Corp., 456 U.S. 556 (1982). Restraints that directly impact price or output are per se unlawful. Where there are some procompetitive, efficiency-enhancing aspects, the restraint may be analyzed under the rule of reason, but it is a very detailed, factspecific analysis. 7 Exclusionary Conduct Association or SSO rules regarding membership or expulsion of members sometimes can amount to a group boycott.
Associations and SSOs also must be careful not to implement policies or set standards in an exclusionary way. Similarly, associations and SSOs should be careful not to develop standards that cover more than what is necessary to achieve the benefits of standardization. If the standard-selection process does not include adequate industry representation, or particularly if the SSO restricts certain companies from participating in the selection process, the SSO and its standard may be seen as tools for excluding competitors. If the standard is not narrowly tailored, it may signal anticompetitive intentions to either exclude competitors or fix downstream prices The antitrust analysis generally looks to whether:
the association or its members possess market power or exclusive access to an element essential to effective competition; the rules are being used to enforce a price fixing arrangement: and the rules are justified by plausible procompetitive efficiency arguments. 8 Industry Standards or Seals Industry standards and seals of approval can have significant procompetitive benefits, for example, by promoting product compatibility and interchangeability, expediting the implementation of new technologies, facilitating entry, and reducing costs. However, the collective nature of standard-setting activities can raise concerns that members of associations collectively may use the standardsetting process to exclude from the market or otherwise disadvantage competitors, fix the price or features of a product or service, or unreasonably restrict the grounds upon which members may compete. The antitrust agencies also have raised concerns about anticompetitive
effects resulting from individual companys role in the standard-setting process. For example, several enforcement actions and private suits have arisen where a company uses deceptive actions to skew the industrys standard to technology in which the company has patents. 9 SSOs and Patent Holdups It can be difficult or even impossible to change a standard once it has been adopted industry-wide. Therefore, a company that owns intellectual property rights in technology declared essential may possess significant market power, potentially fostering anticompetitive conduct such as demanding unreasonable royalties or exorbitant licensing terms from industry participants that adhere to the standard. These situations often are called patent holdups. It its important for SSOs to implement well-defined patent policy rules because clear rules allow for better implementation of the standard and can help prevent a patent holdup. To avoid patent holdups, SSOs may adopt disclosure and licensing policies requiring companies participating in the standard-setting process to:
Disclose their relevant IP rights to the members of the SSO prior to the adoption of technologies necessary to practice a particular standard. Commit to license those rights on reasonable and non-discriminatory (RAND) or fair, reasonable and non-discriminatory (FRAND) terms (collectively, F/RAND). 10 Patent Holdup Concerns FTC and DOJ have expressed concerns about owners of F/RANDencumbered declared-essenital patents using the threat of injunctive relief or an International Trade Commission (ITC) exclusion order to engage in patent holdup and circumvent their obligations to F/RAND licensees, thereby securing higher royalties than the patent owner otherwise would have been able to demand before its IP was included in the standard. Several recent FTC and DOJ investigations have focused on possible patent holdups:
DOJ- Investigated Rockstar Bidcos acquisition patents from Nortel; and (ii) Googles acquisition of Motorola Mobility, including its patents. DOJ analyzed whether the acquiring firms would have the incentive and ability to use any acquired declared-essential patents to foreclose, raise the costs of, or otherwise harm rivals in the downstream sale of smartphones, tablets and other mobile devices. DOJ ultimately determined that neither acquisition was likely to substantially lessen competition. FTC- Investigated Google/Motorola Mobilitys practice of pursuing injunctions and exclusion orders against willing licensees that needed access to F/RAND-encumbered declaredessential patents. The FTC alleged that this conduct violated Section 5 of the FTC Act. Google agreed to a consent order with the FTC that prohibits Google from seeking injunctions or exclusion orders against willing licensees. Earlier FTC enforcement regarding declared-essential patents included actions involving: N-Data, Unocal, and Rambus. 11 Enforcement / Litigation In any context that competitors convene, companies should bear in mind that they are potential targets for government antitrust enforcers and private treble damage suits. The civil and criminal penalties for violating the antitrust laws can be severe for both the company and the individual.
In addition, companies found in violation of the antitrust laws may also be subject to civil lawsuits by private parties. The fines for antitrust violations can be in the millions of dollars, and executives can be held individually responsible and required to serve time in prison. These lawsuits are very costly to defend and can result in significant treble damages awards. Trade associations, SSOs, and similar groups can protect themselves from charges of antitrust violations by conducting business openly and avoiding even the appearance that they are engaging in activity that may have an effect on competition or prices. 12 Agency Guidance
Through speeches, policy statements, reports, workshops and business review letters, the FTC and DOJ have sought to provide greater clarity to SSOs regarding the procompetitive benefits, and anticompetitive risks, associated with disclosure and licensing policies. When considering programs such as standard setting and information exchange programs, organizations also can look to the FTC and DOJ for guidance. The agencies increasingly will provide substantial antitrust, analytical, and advisory opinion review for innovative, procompetitive association programs. If an organizations policy is questioned, it may seek a business review letter or advisory opinion from the antitrust agencies for guidance on whether the policy would be considered anticompetitive. An SSO also may take advantage of provisions in the Standards Development Organization Advancement Act, which enables an SSOs to limit its exposure to treble damages in antitrust suits by filing a notification with the FTC and DOJ. Although advisory opinions will not provide a safe harbor from private antitrust litigants, taking advantage of these mechanisms may take the wind out of a private plaintiffs sails. 13
Conclusion The US antitrust agencies and courts recognize the potential procompetitive benefits of standards and certifications/seals of endorsement, and the organizations that set them. However, standard selection and certification/seal criteria processes can present antitrust risks because these processes often involve communication and coordination among competitors. Accordingly, companies that participate in these processes should be aware of the risk of potential litigation and be proactive about compliance with antitrust laws and trade association or SSO policies. 14 Weil, Gotshal & Manges LLP 1300 Eye Street NW, Suite 900 Washington, DC 20005-3314 [email protected] +1 202 682 7260 Direct Laura A. Wilkinson Laura Wilkinson is an antitrust partner in Weils Washington, DC office with a
practice focusing on mergers and acquisitions. Ms. Wilkinson has successfully obtained merger clearance from the Federal Trade Commission and Justice Department for clients in a variety of industries, as well as serving as lead antitrust counsel for numerous multi-billion dollar transactions. Prior to entering private practice, Ms. Wilkinson served as Deputy Assistant Director of the Bureau of Competition of the Federal Trade Commission, where she oversaw one of the Bureaus litigation divisions and was responsible for merger enforcement in industries such as defense and pharmaceuticals. She was also responsible for negotiating numerous consent orders, which preserved competition while allowing the mergers to proceed. 15 For ongoing, up-to-date analysis of developments in the Antitrust/Competition arena, including succinctly presented, sharp insights on important cases, enforcement initiatives, and trends, visit the Weil Antitrust/Competition Site http://antitrust.weil.com/ 16
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