Court Affirms Dismissal of Claim for Denial of SEP Licenses Subject to FRAND Commitments for Lack of Antitrust Injury and Failure to State an Antitrust Claim

To use the cellular telephone networks, automobile manufacturers install telematic control units containing a baseboard processor that relies on 2G, 3G, and 4G cellular telephony technology patented by Nokia, Conversant, Optis, and Sharp. This technology was adopted as the industry standard by various voluntary Standards Development Organizations (“SDOs”) on the condition that each of the patentees commit to licensing the technology on fair, reasonable, and non-discriminatory (“FRAND”) terms. Requiring such an ex ante FRAND commitment is a common strategy for SDOs intended to limit the monopoly power acquired by a patentee when its patented technology is incorporated into a standard, rendering them “Standard Essential Patents” (“SEPs”).

Despite the anti-monopolization rationale underlying an SDO’s policy requiring an ex ante FRAND commitment from a patentee before its patented technology can be adopted in a standard, the courts have shown excessive reluctance to treat the breach of a FRAND commitment as a violation of the antitrust laws, in particular Section 2 of the Sherman Act, which prohibits monopolization. We previously blogged about the Fifth Circuit’s decision in Continental Automotive Systems v. Avanci, LLC  (5th Cir., Feb. 28, 2022), in which the court never reached the question of whether the alleged breach of the FRAND commitments by the cellular telephony patentees and their licensing agent, Avanci, could support an antitrust claim; the court found that the plaintiffs had no standing to bring any kind of a case because they had not suffered a concrete, cognizable injury as required to bring a case to an Article III court.

When the Fifth Circuit panel on June 13 withdrew its original opinion, we noted the mixed outcomes in cases in which the breach of a FRAND commitment was alleged to be an antitrust violation.  We expressed the hope that the substitute opinion of the panel in Continental would address “the competitive effects of the defendants’ licensing practices, the terms of the commitments made by defendants to the SSOs, and the other circumstances that could establish the elements of a Section 2 claim.”

Instead, on June 21, the panel issued a brief substitute opinion, practically devoid of substantive discussion, affirming the judgment of the district court “that Continental failed to state claims under Sections 1 and 2 of the Sherman Act,” therewith reinstating the decision and reasoning of the district court in Cont’l Auto. Sys., Inc. v. Avanci, LLC, 485 F.Supp.3d 712 (N.D. Tex. 2020). This leaves as the last word in the Continental saga (absent the grant of certiorari by the Supreme Court) an overly broad district court decision openly hostile to the notion that the breach of FRAND commitments implicates the antitrust laws.

The district court’s views may have been shaped by the Statement of Interest of the United States filed in the case by the Trump Administration’s Antitrust Division of the Department of Justice. The Division’s submission presented arguments such as, “A Patent Holder’s Alleged ‘Deception’ Regarding the Rates It Intends to Charge After Making a FRAND Commitment Does Not Constitute Unlawful Exclusionary Conduct,” “A Section 2 Cause of Action Premised on Alleged Violations of a FRAND Commitment Is Not Administrable Because It Would Require Courts to Act as Central Planners,” and “Imposing Antitrust Liability for Violations of FRAND Commitments in the Standard Setting Context Risks Over-Deterring Conduct That Is Already Adequately Policed by Contract and Patent Law.”

Despite the debatable correctness of these arguments, the district court was no doubt encouraged by the DOJ’s hostility to applying the antitrust laws to FRAND commitment disputes when it dismissed Continental’s claim both because the complaint failed to allege an antitrust injury—and therefore the plaintiffs lacked antitrust standing—and because the complaint failed to allege anticompetitive conduct that the court believed could be the basis for a monopolization claim under Section 2. The second ruling was wholly gratuitous, because the court could have dismissed for lack of antitrust standing alone, which rendered the motion to dismiss for failure to state a cause of action moot.

As a consequence, the decision erects multiple roadblocks for plaintiffs seeking an antitrust remedy for a breach of the non-discrimination prong of a FRAND commitment. In Continental, the SEP owners refused to negotiate a FRAND license with a telematics control unit manufacturer on the grounds that automobile manufacturers already had obtained the necessary licenses. The plaintiff alleged that refusing to offer licenses to component manufacturers enabled the SEP owners to hold up automobile manufacturers for non-FRAND royalties. The case highlights the importance of the non-discrimination prong of the FRAND commitment in effecting the anticompetitive prophylaxis of the ex ante FRAND commitment.

The Continental case represents an unfortunate setback for litigants in the Fifth Circuit seeking to take advantage of the anti-monopoly purposes of FRAND commitments through private antitrust litigation, particularly in cases of rank discrimination against would-be practitioners of a standard encumbered by valid patents. In an area that could have benefitted greatly from clarifying guidance from the appellate court, the panel simply shirked their responsibility and let stand an overly broad and, thus, overly erroneous district court opinion.