FTC En Banc Petition Underscores the Need for FTC and Patent Law Reform

Posted with permission.

(6/17/08) Post revised to delete duplicative paragraphs)

FTC En Banc Petition Underscores the Need for FTC and Patent Law Reform
(New, revised & unpublished. In particular, see Footnote 3.)

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By John Danforth[1]

Last week the FTC filed a Petition for Rehearing En Banc seeking reversal of the DC Circuit opinion that rejected antitrust sanctions against Rambus Inc for its alleged non-disclosures in a standard setting organization (“SSO”) called ‘JEDEC.’ The FTC had itself previously reversed its own Chief Administrative Law Judge, who urged the dismissal of the case against Rambus. In the FTC rulings now vacated by the DC Circuit, the FTC had tried to limit Rambus patent rights with respect to two JEDEC standards that use Rambus technologies, SDRAM (a JEDEC standard issued in 1993) and DDR SDRAM (issued in 1999).

In a previous article, Law.Com or IV , I suggested several areas for reform of the FTC that the Rambus case identifies. Last week’s en banc petition by the FTC itself clearly and inherently evidences the need for reform. It does so in at least four ways, each of which merits analysis of the some of the details of the Rambus case:

1. The FTC continues to “aggressively” overstate its case.

Although the DC Circuit Court’s opinion against the FTC harshly criticized the FTC for its repeated “aggressive” use of weak evidence, the FTC is at it again with its en banc petition.

Litigators litigate. Zealotry is often regarded as a virtue. But when, as with the FTC, the prosecutor and the judge are one and the same, restraint and reassessment should be built into the process. This is even more true when, as in the Rambus matter, the FTC has interests in a case relating to its budget and the scope of its own agency mission. There needs to be accountability and some level of detachment. There cannot be reliance on the donated legal work of self-interested third parties. There need to be occasional checks and balances on cases as they progress through discovery. In the end, there ought to be a policy – or perhaps a new law passed by Congress -- that important FTC antitrust cases be litigated in Federal courts, just as important DOJ antitrust cases already are.

How aggressive has the FTC been? Some examples from the en banc petition show it has been very aggressive indeed.

First, the FTC’s en banc petition muddles the FTC’s own findings when it repeatedly uses the collective term “patent interests” to describe what the FTC asserts was a mandatory duty at JEDEC to disclose three very different things: (1) issued patents, (2) existing patent applications, and (3) mere plans to amend patent claims in the future.

As the Federal Circuit found in 2003, Rambus had none of the first or second types of “patent interests” that might be infringed by a JEDEC standard while it belonged to JEDEC. All Rambus had while at JEDEC was an intention to improve its patent protection in the future. As to this very limited sort of “patent interest” (if one can call it that) that Rambus actually had while attending JEDEC meetings (in the 1991-1995 time period) the evidence before the FTC was particularly strong (even stronger than as to patents and applications) that there was no JEDEC expectation or duty of disclosure. No JEDEC rule created any such duty as to mere future intentions. Key JEDEC witnesses rejected it.

So it is misleadingly aggressive to claim – as the FTC does in its en banc petition – that Rambus was aware of a need to disclose “patent interests” to JEDEC by pointing to a late-in-the-day (1995) Rambus employee email that described JEDEC’s “job” to “steer clear of patents.”

Second, the FTC overstates what limited evidence of causation it adduced. In its en banc petition, the FTC attempts to argue that it falls under the Microsoft standard for causation – i.e. that it adequately showed causation with what the FTC claims is proof that Rambus’ non-disclosure “contributed substantially” to an acquisition of monopoly power when JEDEC used Rambus technologies in its standards.

This is a non-starter for several reasons even beyond those already given by the DC Circuit.

Non-disclosures cannot contribute at all to an improper monopoly (much less contribute “substantially) if there was no reasonable expectation of disclosure. You can only reasonably rely on silence if you reasonably expect to be told something. That lynchpin to a causation claim in a non-disclosure case is absent here. Its absence (consistently ignored by conclusory FTC cries of “deception”) was found by the FTC’s own Chief Administrative Law Judge (after a four month trial in 2003), by the Court of Appeals for the Federal Circuit (in 2003), by the DC Circuit (in its recent reversal of the FTC), and by a recent, unanimous federal court jury.

Nor can non-disclosure have any significant causal impact (much less a “substantial” causal impact) if, as in this case, there was already knowledge of the key fact that fuller disclosure would have revealed – i.e. if DRAM manufactures and other JEDEC members knew they were taking an IP risk by using Rambus technologies. They did know here. One proof of this is in their admitted efforts in the mid 1990s to create “prior art” defenses to possible future Rambus patents if they were to issue.

Nor can non-disclosure have a “substantial” impact if, as in this case (unlike in the Microsoft case as quoted by the FTC) there are no “uncertain consequences” of the allegedly undesirable conduct. Here, JEDEC members would have used Rambus technology anyway. We know this because they did so repeatedly – even after warnings among JEDEC members about potential Rambus patents, even outside the standard setting context (in a number of memory designs that did not derive from JEDEC) and even after the harshest possible disclosure by Rambus (in a number of memory designs created after Rambus brought suit on its patents).

2. The FTC takes an aggressive approach to other parts of the record.

Three other remarkable passages in the FTC’s en banc petition further show the need for greater oversight of the FTC’s antitrust enforcement efforts, both internally (difficult to do given the multi-headed nature of a commission) and by Congress.

FTC continues to argue that early disclosure would have led to early, ex ante price negotiations between JEDEC members and Rambus. No evidence in the record supports that such negotiations would have taken place. Pricing discussions were barred at the time within many SSOs, and within JEDEC itself, even following disclosures of actual issued patents. There is no evidence that such discussions occurred (or would have occurred) following disclosures (as now insisted upon by the FTC here of Rambus) of mere future intentions to amend un-issued patent claims.

Second, the FTC greatly distorts the scope and efficacy of JEDEC patent policies by claming that “JEDEC’s practices and policies. . . ensur[e] that industry standards are based on full information about the benefits and costs (including potential patent royalties) or competing technologies . . .” Even the Commission’s own findings do not support this statement. They admit JEDEC rules were unclear and incomplete. And this statement in the en banc petition is also directly contradicted by the Federal Circuit’s 2003 analysis of the JEDEC rules (“a staggering lack of defining details”).

Third, the FTC now asserts that the DC Circuit panel “did not reach the question whether the Commission’s factual findings as to deception were supported by substantial evidence.” This essentially ignores a critical portion of the panel decision – its criticism of the FTC’s “aggressive interpretation of rather weak evidence.’

The DC Circuit panel did not in this regard merely (as the FTC now asserts) “raise[ ] concerns about some of the Commission’s factual findings relating to deception.” Instead, the DC Circuit panel went much further. It lambasted the Commission’s fact finding. It demolished the assumed duty that was the core factual assumption underlying the economically most significant part of the FTC remedy (covering DDR DRAM, a standard created and adopted by JEDEC years after Rambus resigned).

Specifically, what the DC Circuit panel rejected was the notion that JEDEC members would have imposed upon themselves an early duty to disclose mere intentions to amend patents with respect to technologies over two years away from standardization. The DC Circuit panel correctly noted that such a duty was illogical as well as unsupported. There was, therefore, a critical failure of evidence with respect to DDR DRAM.

3. The FTC’s en banc petition is merely the latest example of the FTC’s inability to acknowledge that its theory against Rambus did not hold up -- and has been overwhelmed by new developments and more recently discovered facts.

What is most troubling about the FTC’s action against Rambus, perhaps, is the confluence of two things, an ongoing, apparently extensive flow of “donated” legal help from self-interested outside parties (including, it would appear, witness preparation, case outlines, demonstrative materials, and closing argument outlines) and a remarkable, concurrent ability by the FTC itself to ignore the steady deterioration of its case.

Thus, last week’s en banc petition to the DC Circuit follows a series of reversals for the FTC theory against Rambus, each one apparently ignored in turn. These included:

* The original Rambus v. Infineon District Court decisions against Rambus in 2001 that helped motivate the FTC case against Rambus were riddled with errors, some obvious from the papers on appeal, some made clear by the judges’ comments during oral argument at the Court of Appeals for the Federal Circuit. Many senior FTC staff attorneys attended that argument, which occurred well before they filed their June, 2002 complaint. They filed the FTC complaint without waiting for a formal ruling.

* The CAFC Infineon ruling eviscerated the District Court opinions upon with the FTC staff had been relying, and made clear that Rambus had no relevant patents or patent applications to disclose while at JEDEC, that the JEDEC disclosure rules were, in any event, hopelessly incomplete and vague, and that those rules were therefore (as the CAFC expressly warned) susceptible to being “morphed” after-the-fact by interested parties. A day or two after that CAFC ruling, its ink barely dry, senior FTC lawyers issued a press release that they would nevertheless press on with their case against Rambus.

* JEDEC Board minutes posted on the JEDEC website (along with contemporaneous internal JEDEC emails) were flatly inconsistent with the broad theory of disclosure posited by the FTC. Those minutes remained on the JEDEC website for two years without significant (or perhaps any) protest from any JEDEC member. They were removed and altered only when an FTC staff lawyer called JEDEC to express concern about an apparent inconsistency between the minutes and the FTC theory of liability.

* Discovery showed (and he FTC’s Chief ALJ found) that many prominent JEDEC members, including IBM, which supplied the chairman for the JEDEC memory sub-committee, failed to make patent disclosures in the manner posited by the FTC theory and indeed – without rebuke from anyone at JEDEC – some key JEDEC members (including IBM and Hewlett Packard) expressly refused to make any disclosures at all.

* Discovery showed (and the FTC’s Chief ALJ found) that, again without any rebuke from JEDEC, Rambus too alerted JEDEC that it did not care to comment on its patent positions and that nothing should be inferred from its silence during standardization meetings.

* An internal 1992 Rambus email submitted to the full Commission post trial showed that early on in its JEDEC meetings (in 1992, fairly shortly before SDRAM was standardized) Rambus had inquired about patent disclosure duties or expectations and had been assured by JEDEC officials that such duties and expectations were highly limited.

* A 1997 document submitted to the full Commission post trial showed that JEDEC’s senior leadership council told JEDEC members that, because the memory subcommittee work was running too slow for industry needs, JEDEC had been required to “take the work of others [expressly naming Rambus]” and issue that work as JEDEC’s “own” standards.

* Discovery showed (and he FTC’s Chief ALJ found) repeated instances of notice to JEDEC members of potential future Rambus patent claims covering the work of JEDEC, causing some members to argue that the claims would never be issued by the PTO and that, in any event, prior art defenses could be asserted.

* Discovery showed (and the FTC’s Chief ALJ found) repeated instances of JEDEC and JEDEC members using Rambus technologies, even outside of the JEDEC standardization process, even when on notice of Rambus patent claims, and even when they expressly acknowledged they were not “locked into” continuing use of the technologies.

* Industry witness recollections – increasingly central to the FTC’s theory as to “shared expectations of disclosure” given that contemporaneous documents conflicted with that theory -- contradicted each other and themselves at the FTC’s four month trial in 2003. They were not credited by the ALJ who presided over that trial.

* Some of those same industry witnesses came from DRAM manufacturing companies that confessed to one of the largest criminal price fixing conspiracies ever, one aim of which (according to at least one DRAM company document) was to push Rambus out of the market. The FTC testimony of some of those witnesses as to strong competition in the DRAM industry was inconsistent with the price fixing to which they later confessed. Industry witnesses were also disbelieved when they supported the government in the one trial the DOJ brought in the criminal price fixing cases; the jury foreperson was later quoted by the local press as calling one such witness “a lying sack of shit.”

* A civil jury in a federal court in California recently echoed the findings of the FTC’s Chief ALJ and returned a unanimous verdict that fully exonerated Rambus from antitrust and fraud allegations related to JEDEC, with many of the same industry witnesses again apparently not credited by those who saw them testify live.

This is a long list of red flags ignored by the FTC. Separately and together they should have shown the FTC – early and often -- that their theories and witnesses were flawed and that they had picked (or had been misled into picking) the wrong side in a massive industry battle.

The Commission’s willingness to look past these facts – many found by its own Chief ALJ after a grueling four month trial– is a problem. It cannot be excused by any claim that the Commission adhered to contemporaneous documents. They agreed with the ALJ’s conclusions and largely contradicted the industry witnesses that (sight unseen) the Commission elected to trust.

This mode of Commission “fact-finding” comes across as cherry picking, sifting through a huge and detailed record for scraps of useful documents and testimony. It should be read in the context of similarly worrisome “fact-finding” by the Commission that similarly ignored an ALJ’s findings and was harshly criticized by the Eleventh Circuit in Schering-Plough v. FTC, 402 F.3d 1056 (11th Cir. 2005), (“Substantial evidence requires a review of the entire record at trial, and that most certainly includes the ALJ’s credibility determinations and the overwhelming evidence that contradicts the Commission’s conclusion.”)

To be sure, the FTC staff and full Commission could not have known all of the above when they first brought or tried their case. But they have the Schering- Plough decision now. And they know – or should know – the above list of red flags now. Such knowledge ought, in a rational system with reasonable oversight and reliable checks and balances, to have yielded no en banc petition. It is simply inexcusable that the FTC did not drop this case years ago.

4. The FTC has added the potential for yet further delay in its six year old, now-very-stale case.

As the above list of red flags shows, this is a case that ought never to have been brought. At the very least, it ought to have been settled or dropped promptly after the CAFC ruled, or – certainly -- after discovery was completed in 2003. The FTC’s en banc petition filed last week threatens still more delay – thus underscoring the damage the FTC can do (and does do) simply by placing a protracted shadow over intellectual property rights that are, by definition, of finite duration.

Congress – which has oversight responsibility for the FTC -- should ask questions about why this is case was brought and, critically, why the remedy sought was so aggressively overbroad (including nullification of Rambus patent rights covering, for example, DDR DRAM, the JEDEC standard created over two years after Rambus’ time at JEDEC,). Congress should also ask why it was not resolved long ago, and, again critically, why so much donated legal help was accepted and why the above red flags were systematically ignored.

And there is another appropriate task for Congress. Assuming current law does not allow it, the patent laws should be reformed. When a government agency helps nullify the rights a patent owner should have had for some period of time – as the FTC has done effectively from 2002 to date with respect to Rambus’ DRAM and DRAM controller patents – the patent holder should be given the ability to extend the life of its affected patents. Such a remedy is particularly apropos as against those industry members who encouraged the FTC to bring this case or urged that it be continued long past the point of reasonably viability.

[1] John Danforth was the general counsel of Rambus from October 2001 to early June 2006. From June 2006 to October 2007, he served as Rambus’ senior legal adviser. The opinions—and any errors—are solely those of the author, who retains a significant financial interest in Rambus. This commentary has not been approved or reviewed by Rambus or its counsel

[2] The later two “patent interests” are, in fact, inchoate and highly tentative and were, especially in the early and mid-1990s, carefully guarded trade secrets. Issued patents are, in contrast, actual, concrete property rights and are fully public. In the US, patent applications are not typically made public, at least not in the 1990s. Many still are not. And ideas for future patent applications or future claim amendments are even more closely guarded trade secrets. There are good, pro-competitive reasons to guard these two “patent interests” as trade secrets. Early disclosure of these “interests” could trigger patent interferences in the PTO by rivals. Early disclosure of such inchoate “interests” to an SSO – required (to my knowledge) by the written rules of no SSOs in the early and mid 1990s -- could thus be highly anti-competitive and counter-productive, not simply to the “patent interest” owner (whose potential future rights might be lost or compromised), but also to the SSO (deterring broad industry participation and/or causing the SSO needless concern about IP that might never be sought, might never issue, or might ultimately issue in a form irrelevant to a proposed standard).

[3] Would one reasonably take the time and effort to examine prior art defenses regarding possible future patent claims that one has allegedly been led to believe will never be sought or asserted? I think not. This is work one undertakes if one is on notice of an IP risk. This mid-1990s analysis by industry of their possible prior art defenses to future Rambus patents is thus fatal to their claims of “deception” (i.e. their claims that Rambus’ silence made them think Rambus would not in the future assert future patent claims over standardized DRAMs and DRAM controllers). It shows that the industry studied the existing Rambus patent specifications as they became available (e.g. though non-confidential European applications and through US patents as they issued) and knew that those specifications could well be used to try to assert claims over a broad range of DRAM types, including those standardized by JEDEC.

Because of this issue’s importance, one aspect of the legal help “donated” to the FTC in the Rambus matter ought to be scrutinized with particular care. That “donated” legal help was the apparent pre-trial preparation of a witness in the FTC’s 2003 Rambus trial who, in the mid-1990s, had a key role in reviewing the Rambus patent specification and considering prior art defenses to possible future claims. Should the FTC have allowed that witness to be prepped before trial by the lawyers for a DRAM manufacturer? I think not. The witness was not – to my understanding -- an employee or former employee of that DRAM manufacturer. There is at least the appearance of impropriety here. Congress and the FTC should look closely at the Rambus case to prevent similarly “donated” legal help in the future.