Antitrust Alert: FTC Proposes Acquisition Consent Agreement to Resolve Unprecedented Allegations on Enforcement of Standards-Essential Patents
The U.S. Federal Trade Commission this week announced a highly unusual proposed consent agreement reached with Robert Bosch GmbH ("Bosch") that permits Bosch's acquisition of SPX Service Solutions U.S. LLC ("SPX Service Solutions") from SPX Corporation ("SPX") to proceed. More significantly, it also resolves unprecedented allegations that SPX had engaged in an unfair method of competition in violation of Section 5 of the FTC Act by pursuing injunctive relief with respect to patents that it had allegedly promised to license on fair, reasonable and non-discriminatory ("FRAND") terms. This consent agreement reflects the FTC's most aggressive position to date with respect to use of standards-essential patents; it also illustrates the potential for the FTC to hold a company's deal hostage pending resolution of unrelated competitive concerns.
The acquisition-related portion of the proposed consent agreement is fairly straight-forward. The FTC alleged that Bosch and SPX Service Solutions are the two leading suppliers of air conditioning recycling, recovery and recharge ("ACRRR") devices in the United States. ACRRR devices are used by automotive technicians to remove refrigerant from a motor vehicle's air conditioning system, store it while the system is being repaired, and recycle it back into the system when the repair work is complete. SPX Service Solutions' Robinair brand allegedly accounts for over 80% of sales of ACRRR devices in the United States, while Bosch's brands make up about 10% of sales. According to the FTC, four other producers have small sales of ACRRR devices. The proposed consent agreement requires Bosch to divest its own ACRRR business to Mahle Clevite, Inc. ("Mahle").
In the most surprising aspect of the proposed consent agreement, Bosch is required to offer royalty-free licenses to 37 listed patents and patent applications to any company to sell ACRRR products in the United States. In a separate portion of its complaint – unrelated to the acquisition – the FTC alleges that SPX Service Solutions had participated in a standards body, SAE International ("SAE"), when that organization drafted two industry standards. SPX Service Solutions allegedly submitted a letter to SAE stating that, "to the extent that a claim [of any of its patents] is essential to practicing" either of the two relevant industry standards, it would license the patents "on a claim-by-claim basis" on reasonable and non-discriminatory terms to practice the standards. The FTC alleges that SPX and SPX Service Solutions engaged in an unfair method of competition in violation of Section 5 of the FTC Act by seeking injunctive relief in a patent infringement suit against competitors. Because Bosch agreed to license these patents on a royalty-free basis to Mahle as part of the acquisition remedy, the proposed consent agreement also requires Bosch to license these patents royalty-free to third parties.
The patent-related provisions of the FTC's complaint and this proposed consent agreement are likely to generate controversy. Among the noteworthy points:
1. In its complaint, the FTC asserts that it is an unfair method competition and a violation of the FTC Act to prosecute a lawsuit for injunctive relief against "willing licensees" with respect to standards-essential patents after committing to license such patents on FRAND terms. The FTC has asserted previously that courts and the International Trade Commission should not award injunctive relief in lawsuits claiming infringement of standards-essential patents that the patent owner promised to license on FRAND terms. See Federal Trade Commission's Statement on the Public Interest, In re Certain Wireless Communications Devices, Portable Music and Data Processing Devices, Computers and Components Thereof, Inv. No. 337-TA-745 (Int'l Trade Comm'n, June 6, 2012). But this goes a lot further. It is one thing to argue that a court or agency should deny injunctive relief in such circumstances; it is quite another to allege that a party has violated the FTC Act by seeking such relief.
2. The FTC fails to provide meaningful limiting principles to Section 5 enforcement. The FTC's complaint asserts a standalone violation of Section 5 of the FTC Act, rather than the usual practice of asserting a violation in terms that would also constitute a violation of Section 1 or 2 of the Sherman Act. Section 5 of the FTC Act prohibits "unfair methods of competition." In contrast to Sections 1 and 2 of the Sherman Act, there is little guiding precedent applicable to Section 5 of the FTC Act. Standalone use of Section 5 of the FTC Act has long been controversial because, in the absence of clear limiting principles, "unfair" is in the eye of the beholder. Here the FTC provides little guidance on limiting principles, stating only that "the standard-setting context . . . [and] the presence of a willing licensee, appropriately limit the Commission's enforcement policy and provide guidance to standard-setting participants." The FTC asserted Section 5 of the FTC Act on a standalone basis in one previous matter involving a refusal to license standards-essential patents in accordance with a prior RAND commitment, and was criticized for failing to articulate appropriate limiting principles in that matter. See In re Negotiated Data Solutions LLC, FTC File No. 051-0094 (Sept. 23, 2008).
3. The remedy appears to go considerably further than merely enforcing SPX Service Solutions' commitment to the SAE to license essential claims on FRAND terms. Neither the FTC's statement nor its decision and order make any effort to identify which patents or claims are standards-essential. Indeed, the complaint alleges only that one of the four patents asserted in litigation is essential to the practice of one of the standards. The proposed consent order specifically states that 33 of the additional patents and applications that Bosch is required to license royalty-free "may be, but are not necessarily," standards-essential patents. Despite this, the consent agreement requires Bosch to license all 37 of these patents and applications on royalty-free terms. The FTC has been criticized on previous occasions for trying to resolve patent-related antitrust issues without engaging in any detailed review of the scope of the relevant patent claims. This consent agreement could also give rise to similar criticisms.
4. It appears the Commission may have used its review of Bosch's proposed acquisition to obtain the remedy with respect to the arguably unrelated conduct involving SPX Service Solutions' patents. It is unusual for the Commission to include a separate Section 5 violation in a consent agreement relating to an acquisition. Unless the acquisition is somehow related to the conduct, potential conduct violations of Section 5 of the FTC Act are usually investigated separately and if necessary resolved on a standalone basis. Here, the Commission made no attempt to explain any relationship between Bosch's proposed acquisition and SPX Service Solutions' patent-related conduct. Yet the Commission resolved issues relating to both the acquisition and the conduct in a single settlement. This raises the possibility that the Commission used its leverage with respect to Bosch's time-sensitive acquisition to obtain broader relief with respect to SPX Service Solutions' patent-related conduct than it likely would have obtained had it resolved the patent-related issues as a separate matter. The takeaway for companies is that the Commission may use the leverage it has in reviewing mergers to obtain remedies in unrelated matters.
The proposed consent agreement will remain open and subject to public comment until December 26, 2012. Following review of the public comments, the FTC will decide whether to make it final.
Lawyer Contacts
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Geoffrey D. Oliver
Washington
+1.202.879.5447
gdoliver@jonesday.com
Craig A. Waldman
San Francisco / Silicon Valley
+1.415.875.5765 / +1.650.739.3939
cwaldman@jonesday.com
David P. Wales
Washington
+1.202.879.5451
dpwales@jonesday.com
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