Antitrust Implications of Industry
Standards and Certification Programs
April 11, 2013
Laura A. Wilkinson
Weil, Gotshal & Manges LLP
Background
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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.
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Central Antitrust Issue
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The central antitrust concern is, of course, that competitors will act in
concert — rather than as independent competitors.
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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.
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However, when such decisions are made together with other competitors,
they become price fixing and horizontal group boycotts.
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Coordinated conduct that directly impacts price or output is per se unlawful.
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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.
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Informal Discussions
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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.
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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 “there’s 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 e-mail 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.
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Discussion Regarding Prices
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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.
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Information Exchanges
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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.
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Exchanges of competitively sensitive information, such as information about
member’s 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.
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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.
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Codes of Conduct
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Collateral to the trade association’s 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.
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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.
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Exclusionary Conduct
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Association or SSO rules regarding membership or expulsion of members
sometimes can amount to a group boycott.
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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.
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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:
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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.
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Industry Standards or Seals
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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.
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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.
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The antitrust agencies also have raised concerns about anticompetitive
effects resulting from individual company’s 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 industry’s
standard to technology in which the company has patents.
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SSOs and Patent Holdups
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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:
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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).
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Patent Holdup Concerns
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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:
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DOJ- Investigated Rockstar Bidco’s acquisition patents from Nortel; and (ii) Google’s
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 Mobility’s 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 declaredessential patents included actions involving: N-Data, Unocal, and Rambus.
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Enforcement / Litigation
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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.
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In addition, companies found in violation of the antitrust laws may also be
subject to civil lawsuits by private parties.
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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.
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Agency Guidance
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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.
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If an organization’s 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 plaintiff’s sails.
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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.
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Laura A.
Wilkinson
Weil, Gotshal & Manges LLP
1300 Eye Street NW, Suite 900
Washington, DC 20005-3314
laura.wilkinson@weil.com
+1 202 682 7260 Direct
Laura Wilkinson is an antitrust partner in Weil’s 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 Bureau’s 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.
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