The Federal Trade Commission announced on Monday a proposed consent decree in connection with Robert Bosch GmbH’s acquisition of a division of SPX Corporation. This action is notable for several reasons:

• The Commission made important statements about its enforcement intentions regarding alleged breaches of “FRAND” commitments for declared standards-essential patents (SEPs). Most importantly, the Commission said, in appropriate circumstances, it will use its authority under Section 5 of the Federal Trade Commission Act to challenge attempts by holders of FRAND-committed SEPs to obtain injunctions against implementers of standards.
• The FTC is using Section 5, which prohibits “unfair methods of competition” and “unfair or deceptive acts or practices,” to address conduct that the Commission acknowledged is not necessarily proscribed by the Sherman Act.
• The action is another example of an agency using the merger review process to uncover and take enforcement actions against conduct not directly related to the transaction.

Patent Holdup and Injunctions

Companies holding patents they claim are necessary to manufacture devices that comply with an industry standard may be able to “hold up” for exorbitant royalties other companies (including downstream competitors) that supply standard-compliant products. Although a technology supplier may face competition from rival technologies before standardization, once the standard-setting organization incorporates its technology into the standard, implementers are typically “locked in” to using that technology and cannot constrain licensing terms by turning to alternative technologies. To mitigate this hold up risk, standard-setting organizations typically require patent holders participating in standard-setting activities to license their standard-essential patents on “fair, reasonable and non-discriminatory” (FRAND) terms.¹

Scrutiny of patentees seeking to obtain injunctions based on FRAND-committed SEPs—along with attention to FRAND royalty bases and royalty rates—has been increasing in litigations, regulatory activities, and congressional investigations. The FTC’s action comes in the wake of court rulings examining the interplay between FRAND commitments and requests for injunctive relief.²

The FTC Action

The FTC challenged Bosch’s acquisition of SPX Service Solutions, a division of SPX Corporation, based on a relatively straightforward determination that the transaction would lead to a near-monopoly of “air conditioning recovery, recycling and recharging systems” (ACRRR), which automotive technicians use to remove refrigerant from vehicle air conditioning systems. To address those concerns, the Commission required Bosch to divest its own ACRRR business. The proposed consent decree also imposes remedies to address certain Bosch “restrictive agreements” with wholesale distributors and independent service technicians that the Commission found make entry and expansion difficult for competing ACRRR device suppliers.³

Regarding SEP abuse, the Commission alleged that before SPX was acquired by Bosch, it had violated Section 5 of the FTC Act by seeking injunctions based on two patents that SPX had declared essential to industry standards governing the operation of ACRRR devices. ACRRR devices are manufactured according to standards established by an industry standard-setting body, SAE International, which requires standard-setting participants to license potential SEPs either royalty free or on FRAND terms. SPX sued certain competitors for infringing its SEPs and sought injunctive relief. SPX later sent a “letter of assurance” to SAE committing to license these patents on FRAND terms, but continued its suit for injunctive relief, even though the defendants were willing to take licensees on FRAND terms.⁴

Three aspects of the FTC’s action are particularly notable:

• First, the Commission alleged that the act of seeking injunctive relief based on FRAND-committed patents, by itself, constituted an unfair method of competition under Section 5, notwithstanding that neither SAE’s rules nor SPX’s letter of assurance explicitly disclaimed seeking injunctive relief. The Commission observed that “[s]eeking injunctions against willing licensees of FRAND-encumbered standard essential patents . . . is a form of FRAND evasion and can reinstate the risk of patent hold-up that FRAND commitments are intended to ameliorate.”⁵ The Commission also warned in strong terms that “[p]atent holders that seek injunctive relief against willing licensees of their FRAND-encumbered SEPs should understand that in appropriate cases the Commission can and will challenge this conduct as an unfair method of competition under Section 5 of the FTC Act.”⁶
  
• Second, to remedy the alleged Section 5 violation the FTC is requiring Bosch “to offer a royalty-free license to all potential implementers” for purposes of manufacturing ACRRR devices in the United States.⁷ The Commission explained that “while a royalty-free license may not be an appropriate remedy in every case involving evasion of a FRAND commitment,” because Bosch chose to license these patents to the acquirer of its divested ACRRR business on a royalty-free basis, “a license to other market place participants on the same terms is necessary to ensure that the merger remedy is not inequitable in application.”⁸ Although the Commission is not explicit on this point, this statement may suggest that in future cases the Commission will carefully scrutinize the terms of licenses with similarly situated third parties to determine whether the patent owner has complied with its obligation to license on non-discriminatory terms (which can raise complex issues of proof, particularly when cross-licenses are involved).
• Third, the FTC is requiring Bosch to deliver a letter of assurance to SAE promising to license on FRAND terms any SEPs that Bosch may acquire in the future for the standards at issue.⁹ Notably, the Commission observed: “Pursuant to its FRAND obligations, Bosch has agreed not to seek injunctive relief against such third parties, unless the third party refuses in writing to license the patent consistent with the letter of assurance, or otherwise refuses to license the patent on terms that comply with the letter of assurance as determined by a process agreed upon by both parties (e.g., arbitration) or a court.”¹⁰ Here, the Commission seems to be taking a strong position regarding whether a standard implementer is an “unwilling licensee,” suggesting that it is not enough that a standard implementer rejects a licensee offer that the declared SEP holder claims is FRAND. Rather, the implementer must either expressly disclaim willingness to license on objectively FRAND terms or refuse to pay royalties after a court or arbitrator has determined that such royalties are FRAND.

Commissioner Ohlhausen issued a strongly worded statement disagreeing with the Commission’s position, in which she highlighted her concerns about the potentially far-reaching implications of the Commission’s action. First, she believes FTC action under Section 5 of the FTC Act in this hotly contested area “effectively ousts other institutions, including the federal courts and the International Trade Commission . . . from the important and complex area of SEPs," “lack[s] regulatory humility,” and “implies that our judgment on the availability of injunctive relief on FRAND-encumbered SEPs is superior to that of these other institutions.”¹¹ Second, she cautions that Section 5 is a poor vehicle for the type of conduct at issue in Bosch/SPX, contending that “[m]ere breaches of FRAND commitments . . . are better addressed by the relevant SSOs or by the affected parties via contract and/or patent claims resolved by the courts or through arbitration.”¹² Third, she faults the Commission for failing to make its views regarding Section 5 sufficiently clear before bringing actions based on the statute. By failing to do so, “the Commission runs a serious risk of failure in the courts and a possible hostile legislative reaction.”¹³

Implications of the FTC Action

In recent months, both the FTC¹⁴ and the Department of Justice¹⁵ have repeatedly stressed concerns about holders of declared SEPs seeking injunctions and other exclusionary remedies against standard implementers, among other concerns about potential SEP abuses. With its action this week, the FTC has now followed up on its statements by using its authority under Section 5 of the FTC Act against an SEP holder that sought injunctive relief. Firms should recognize that US (and foreign) competition authorities are watching their SEP licensing practices closely, especially with regard to attempts to enjoin suppliers of standards-compliant products.

Additionally, the Commission’s action highlights that merger investigations can bring scrutiny of practices not directly related to the merger, and the agencies will not hesitate to take enforcement actions based on conduct discovered in this way. Accordingly, merging parties are well advised to consider whether a merger investigation might raise questions about other aspects of their business conduct and be prepared to address such questions if they arise.