The Federal Trade Commission vs. Cutting Edge Innovation
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In the Biden administration’s continued effort to reshape the entire American economy, Federal Trade Commission (FTC) chairwoman Lina Khan is treading where her more knowledgeable, prudent predecessors feared to trod—or at least trod only when they had some facts and law they could argue with a straight face.

The Federal Trade Commission under Lina Khan has thrown reams of dubious paper around Washington the past three years, racking up a mixed antitrust record. Khan’s FTC has demonstrated that its leadership has an extreme ideological agenda to drive, unbounded until now by Republican commissioners and unmoored from the principles of the rule of law and due process.

One particular area that enchants the Khan FTC is the nexus of antitrust and intellectual property. There are numerous examples of this, including comments filed in favor of improperly injecting product price in the Bayh-Dole Act’s statutorily narrow “march-in rights” and threatening heightened scrutiny of pharmaceutical patents for “improper Orange Book listings to determine whether these constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act.”

But here, the focus is on an FTC filing with the U.S. International Trade Commission (ITC) involving standard-essential patents (SEPs) on cellular communication technology. SEPs are patents on foundational inventions, such as microchips that enable smartphones to connect to the Internet wirelessly and to interoperate with phones and servers made by any manufacturer who incorporates applicable technical standards.

In this case, petitioners Philips and Thales were engaged in a dispute in the ITC and other forums arising from ongoing licensing negotiations over Philips’s patents, which Philips argued are essential to 3G and 4G wireless standards. 

SEP owners, including Philips, which was asserting its patents against Thales, only make money off their SEPs if licensing agreements are in place. These innovators invest heavily on the front end without guarantee that any of their patents will read on a standard.

Licensing revenue recoups investments as well as funds pioneering research that moves the state of the art forward. Thus, innovators have the incentive to move with dispatch rather than hold up licensing deals, whereas implementers more readily can hold out on licensing terms.  When implementers infringe SEPs while holding out on licensing terms, that anticompetitive conduct certainly warrants exclusion order, injunction, or both.

In 2022, FTC Chairwoman Khan and Commissioner Rebecca Slaughter filed a public interest statement in the ITC action, suggesting that SEP owners who seek exclusion orders at the ITC to bar importation of SEP-infringing goods do so in order to gain leverage over licensees in negotiations. In this filing, the FTC took some big swings and misses. Arguing that SEP owners should be denied exclusion orders, the commissioners claim that courts considering the same patents should determine licensing fees and injunctions, rather than the ITC exclude infringing imports. They asserted this was in the public interest as a general rule.

Presumably, the commissioners know that the ITC has only one remedy: exclusion orders. ITC proceedings are highly fact-based. They conclude much sooner than do judicial proceedings.  Allowing patent-infringing items into the U.S. market for years before courts make a decision allows infringers vast ill-gotten gains.

Participants in standards-development organizations contractually pledge to license their patents deemed essential to a standard on fair, reasonable, and nondiscriminatory (FRAND) terms. But a FRAND commitment is not a compulsory licensing clause. Only after standards are set are the related patents and other particulars known and parties can negotiate licenses.

The FTC ignored this reality when claiming that FRAND commitments should nullify SEP owners from import exclusion because a court would decide FRAND license terms in the case.  And according to the FTC, benefiting from both remedies would give SEP owners too much leverage. Khan and Slaughter asserted that an ITC order excluding “standardized products from the United States will harm consumers and other market participants.” To the contrary, exclusion would benefit consumers by expediting innovation.

The commissioners raised the hobgoblin of SEP owners’ “hold-up” and ignored implementer “hold-out.” While focusing on leverage afforded the SEP owner due to the inclusion of its technology in the standard–-a problem they admit is addressed by FRAND commitments–-their vision of the correct policy failed utterly to acknowledge the leverage available to an implementer not subject to an exclusion order. In their approach, an implementer can continue to sell a SEP-infringing product while dragging out negotiations and litigation, pressuring SEP holders by starving them of funds and gaining a competitive advantage over other implementers who did license the SEPs.

The two officials dangled in the first footnote, “We take no position on the facts … [nor] address whether seeking an exclusion order for FRAND-encumbered SEPs would violate Section 5 of the Federal Trade Commission Act . . . .”  In other words, they imply a threat of throwing the antitrust book at the SEP owner and insult the ITC for doing its duty.

As a former ITC commissioner explains, public interest statements were not in order here because no violation of Section 337 of the Trade Act was found. That makes the FTC statement hypothetical and “irrelevant.” Furthermore, the FTC footnote and discussion lack evidentiary and factual substance, amounting to “nothing more than unfounded speculation.”

Chairwoman Khan and her colleagues should learn from the FTC’s complete loss in its lawsuit against Qualcomm in 2020. The Ninth Circuit handed down a unanimous ruling on de novo review of the FTC’s finding of an antitrust violation where innovation and market competition involving SEPs and FRAND thrived. 

Substantial sums of taxpayer money were wasted in that case and have been similarly wasted over the past three years of the FTC’s poor judgment in all areas due to bureaucratic myopia, ideology over law, and poor leadership. Unfortunately, Lina Khan, her fellow Democratic commissioners, and the FTC are likely to continue seeing antitrust violations where intellectual property rights are involved—like the three blind mice, only with real-world adverse consequences.

James Edwards, Ph.D., is Senior Advisor for Federal Affairs for The Committee for Justice. 

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