ORIGINAL 

. ~\\~l TR~ 

~~~ RECF.!\'F.' no"': "¡i~ I!l.~;;' 

~ Ýt/23¿C?;
 UNITED STATES OF AMERICA OCT Î 5 2008 \ 

BEFORE THE FEDERAL TRAE COMMISSION s iiJT5-?5 J! si9!~ 

In the Matter of	 )

) 

Docket No. 9327 

) Polypore International, Inc. ) a corporation.	 ) PUBLIC DOCUMENT
 

)
 

)
 

RESPONDENT'S MOTION TO DISMISS
 

COUNTS II AND III OF THE COMPLAINT
 

FOR FAILURE TO STATE A CLAIM
 

Respondent Polypore International, Inc. ("Polypore"), pursuant to Rule 3.22(e) of 
 the 

Rules of Practice of 
 the Federal Trade Commission ("Commission" or "FTC"), 16 C.F.R. § 

3 .22( e), respectfully moves to dismiss for failure to state a claim, Counts II and III of the 

Complaint with respect to any monopolization and 
 attempted monopolization claims regarding 

the alleged automotive, uninterrptible power supply stationar ("UPS") and PE separator 

markets. Polypore also moves to dismiss, for failure to state a claim, Counts II and III to the 

extent that they purort to apply to the alleged deep-cycle and motive battery separator markets 

based upon an undefined monopolization or attempted monopolization offense under Section 5 

of the FTC Act. 

In support, Respondent Polypore respectfully refers the Cour to, and incorporates herein, 

the contemporaneously-fied memorandum. 

PPAB 1488233vI 
Dated: October 15,2008 Respectfully Submitted, 

¡J¡j¿~ y-pJi
 Wiliam L. Rikard, Jr. ()
 

Eric D. Welsh 

PARKR POE ADAMS & BERNSTEIN LLP 

Three Wachovia Center 

401 South Tryon Street, Suite 3000 

Charlotte, NC 28202 

Telephone: (704) 372-9000 

Facsimile: (704) 335-9689 

wiliamkardêparkerpoe.com 

ericwelshêparkerpoe.com 

John F. Graybeal 

PARKR POE ADAMS & BERNSTEIN LLP 

150 Fayettevile Street 

Raleigh, NC 27602 

Telephone: (919) 835-4599 

Facsimile: (919) 828-0564 

johngraybealêparkerpoe.com 

Attorneys for Respondent 

2 

PPAB 1488233vI 
UNITED STATES OF AMERICA
 

BEFORE THE FEDERAL TRAE COMMISSION
 

In the Matter of ) 

) Docket No. 9327 

) Polypore International, Inc. )
 a corporation ) PUBLIC DOCUMENT
 

)
 

PROPOSED ORDER 

Upon consideration of Respondent's Motion to Dismiss Counts II and III ofthe 

Complaint for Failure to State a Claim and complaint counsel's response thereto, and the Cour 

being fully informed, it is this _ day of , 2008, hereby 

ORDERED, that the Motion is GRANTED; and it is fuher 

ORDERED, that Counts II and III of 
 the complaint are dismissed with prejudice to the 

extent that they allege monopolization and/or attempted monopolization claims regarding the 

automotive, uninterrptible power supply stationar ("UPS") and PE separator markets and to
 

the extent that they alleged monopolization and/or attempted monopolization claims regarding 

the deep-cycle and motive battery separator markets based on Section 5 of the FTC Act. 

The Honorable D. Michael Chappell 

Chief Administrative Law Judge 

PPAB 1488233vl 
EllGI NAL 

. ~\. lR.A.DE COtv7ft/.'Y
 

UNITED STATES OF AMERICA 1~~~'?A:;!~;';~TSI.S/0lBEFORE THE FEDERA TRAE COMMISSI N OCT; :i zooe \539'575' /'

) In the Matter of ~~£R,~~

) Docket No. 9327 

)
 Polypore International, Inc.
 )
 a corporation ) PUBLIC DOCUMENT
 

)
 

RESPONDENT'S MEMORANDUM IN SUPPORT OF MOTION
 

TO DISMISS COUNTS II AND III
 

OF THE COMPLAINT FOR FAILURE TO STATE A CLAIM
 

Respondent Polypore International, Inc. ("Polypore" or "Daramic"), pursuant to Rule 

3.22(e) of the Rules of Practice of 
 the Federal Trade Commission ("Commssion" or "FTC"), 16 

C.F.R. § 3.22(e), respectfully moves to dismiss for failure to state a claim, Counts II and III of 

the Complaint with respect to all monopolization and attempted monopolization claims regarding 

the alleged automotive, uninterrptible power supply stationar ("UPS") and PE separator 

markets. Polypore also moves to dismiss, for failure to state a claim, Counts II and III to the 

extent that they purort to apply to the alleged deep-cycle and motive battery separator markets
 

based upon an undefined monopolization or attempted monopolization claim under Section 5 of 

the FTC Act. 

INTRODUCTION 

The FTC seeks to assert monopolization and attempted monopolization claims under 

Section 5 of the FTC Act without making allegations that satisfy the standards for offenses under 

the Sherman Act. In their response to Polypore's Motion for a More Definite Statement, 

Complaint Counsel states that "(t)here is no claim under the Sherman Act in this complaint" and 

that Polypore "faces . . . monopolization and attempted monopolization claims under the FTC 

PPAB 1489020vI 
Act."i The Complaint, however, does not plead the elements of monopolization and attempted
 

monopolization claims that are required by Sherman Act authorities. 

A comparison of 
 the complaint here with the FTC's pleading in In the Matter ofRambui 

-- a case in which monopolization and attempted monopolization claims were based on Section 5 

-- shows the inadequacy of the pleading here. In Rambus, for the "First Violation," the FTC 

alleged that Rambus "engaged in a pattern of anticompetitive and exclusionar acts and 

practices" whereby it "obtained monopoly power.,,3 For the "Second Violation," the same 

"pattern" was alleged along with a claim that Rambus had "a specific intent to monopolize" and 

that there was a "dangerous probability of monopolization.',4 These are the well-known Sherman 

Act elements and their use in Rambus evidences an understanding by the FTC that it must meet 

these standards in a Section 5 case. 

In this case, however, the Complaint fails to make proper allegations of monopolization 

with respect to êach of the five alleged markets (see infra at 14-15), fails to allege maintenance 

of monopoly power for each of these alleged markets (see infa at 15-16), and fails to allege the 

elements of an attempt to monopolize, including the element of specific intent (see infa at 16). 

· Complaint Counsel alleges five product markets (see Complaint " 5, 6). Yet, while 

the Complaint alleges a monopoly with respect to two of the five alleged markets (see 

Complaint " 21, 22, 3 8 (b), (c)), the FTC fails to allege a monopoly with respect to 

the remainng three (the alleged automotive, UPS or PE separator markets). 

· In paragraphs 39-45, the FTC alleges "market/monopoly power" and maintenance of
 

"market power," terminology that falls short of the Sherman Act standard, and 

signficantly does not identify the product markets to which it refers. 

· Similarly, for the same three alleged markets, the Complaint fails to allege either that 

Polypore obtained or maintained monopoly power, but claims instead that it 

i Complaint Counsel's Response to Respondent's Motion for a More Definite Statement at 3 (No. 9327). 

2 File No. OIl-00I7, Compl. iiii 122-123 (June 18,2002), a copy of 
 which is attached hereto as Exhibit i. 

3 Id. at ii 122. 

4 Id. at ii 123. 

2 

PPAB I489020vI 
"attempted. . . to maintain monopoly power." Complaint' 39 (emphasis added). As 

for attempted monopolization, the complaint contains no allegation of specific intent, 

and alleges that only one of the alleged product markets (PE seperators) has a
 

"dangerous probability (of) lessen(ing) or destroy(ing) competition," not a 

"dangerous probability of achieving monopoly power." 

These allegations fall short of widely accepted Sherman Act standards and confrm that 

the FTC plans to present its "monopolization and attempted monopolization claims under the 

FTC Act"S using uncertain sub-Sherman Act standards. For the reasons stated below, Complaint 

Counsel's failure to plead the requisite elements of a Section 5 claim involving claims of 

monopolization or attempted monopolization renders Counts II and III deficient as a matter of 

law. 

ARGUMENT 

The standard used in Commission proceedings for motions to dismiss under Rule 3 .22( e ) 

of the Rules of Practice mirrors the standard used for evaluating motions to dismiss in federal 

district cours under Rule l2(b)(6) of the Federal Rules of Civil Procedure.6
 Under that 

standard, a motion to dismiss for failure to state a claim must be granted where the complaint 

reveals that the allegations, even if proved, are insuffcient to establish an antitrust claim.7 And 

while well-pled factual allegations of the complaint are to be presumed true and all reasonable 

inferences are to be made in favor of complaint counsel for puroses of this motion, "conclusions 

of law and uneasonable inferences or unwaranted deductions of fact are not admitted.',8 

5 Complaint Counsel, supra note 1, at 3. 

6 In the Matter o/Union Oil Co. o/Ca/., File No. 051-0125, Initial Decision 6 (Nov. 25, 2003), a copy of 


which is 

attached hereto as Exhibit 2, citing In re Times Mirror Co., 92 F.T.C. 203 (1978) and In re Fla. Citrus Mutual, 50 F.T.C. 959 

(1954). See also FTC Operating Manual § 10.7 (2004) ("(S)ince many adjudicative rules are derived from the Federal Rules of 

Civil Procedure, the latter may be consulted for guidance and interpretation of Commission rules where no other authority 

exists. "). 

7 Union Oil at 7; Cavalier Telephone, LLC v. Verizon Virginia Inc., 330 F.3d 176, 183 (4th Cir. 2003) ("Cavalier 

Telephone"). 

8 Union Oil at 8 (citations omitted); TV Comm 'ns Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022, 

1024 (1Oth Cir. 1992) ("(A) plaintiff must do more than cite relevant antitrst language to state a claim for relief. .. A plaitiff
 

must allege sufficient facts to support a cause of action under the antitrust laws."). 

3 

PPAB 1489020vl 
Moreover, the complaint's allegations must "advance a legal theory on which antitrst relief can 

be granted" to surive dismissal.9 Here, the Complaint, in Counts II and III, fails to plead the 

allegations required to effect cognzable claims of monopolization or attempted monopolization. 

1. Counts II and III of the Complaint fail to Meet the Required Pleading Standard as
 

to the Monopolization and Attempt to Monopolize Claims. 

In identical allegations in Counts II and III of its Complaint, Complaint Counsel purorts 

to bring claims under Section 5 of the FTC Act, 15 U.S.C. § 45. According to Complaint 

Counsel, the Complaint "follows traditional Section 5 and Section 7 law" and is grounded on 

alleged "monopolization, and attempted monopolization claims. . .',10 Whle Complaint Counsel 

disavows any express or implied attempt to create new law, II that is exactly what is attempted 

here. This Complaint fails to meet the standard long recognized by the Commission for a
 

monopolization or attempted monopolization claim under Section 5. As such, Counts II and in
 

of the Complaint must be dismissed as to claims of monopolization or attempted monopolization. 

(a) There is no respectable authority that supports application of Section 5 of 
 the 

FTC Act in this case without adherence to Sherman Act requirements. 

The required elements for pleading a proper claim of monopolization or attempted
 

monopolization are well known.12 Under Section 2 of the Sherman Act13 a plaintiff must allege 

(1) "possession of monopoly power in the relevant market" and (2) "wilful acquisition or 

maintenance of that power as distinguished from growth or development as a consequence of a 

superior product, business acumen, or historic accident.,,14 And, "to demonstrate attempted 

9 Cavalier Telephone, 330 F.3d at 183.
 

10 Complaint Counsel, supra note i, at 2-3.
 

II Complaint Counsel, supra note 1, at 3.
 

12 Cavalier Telephone, 330 F.3d at 183
 

13 15 U.S.c. § 2.
 

14 Verizon Commc 'n, Inc. v. Law Offces 0/ Curtis V Trinko, LLP, 540 U.S. 398, 407 (2004) (quoting United States v.
 

Grinnell Corp., 384 U.S. 563, 570-71 (1966)).
 

4 

PPAB 1489020vl 
monopolization a plaintiff must prove (1) that the defendant has engaged in predatory or 

anti competitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability 

of achieving monopoly power."IS 

In a major decision involving the issue of the standard to be applied under Section 5 of 

the FTC Act, the Commission, in affirmed the ALl's dismissal of 
 the complaint and rejected an 

attempt by complaint counsel to expand Section 5 to reach conduct that did not violate Section 2 

of the Sherman Act. In In the Matter of General Foods Corp.,16 the FTC alleged that General
 

Foods attempted to monopolize the packaged ground coffee market by engaging in predatory 

pricing and related practices. Affirming the dismissal of the complaint, including the attempted 

monopolization claim under Section 5, the Commission reviewed the claim under traditional 

Section 2 stadards. After carefully identifying and describing the three elements of the 

attempted monopolization offense,I7 the Commssion followed its earlier practice of looking first 

to the dangerous probability of success element.I8 Finding that element not supported by the 

evidence, it agreed with the ALl's dismissal of the case and held that no Section 2 Sherman Act 

19 violation had been proved. 


Having found no violation of Section 2 of the Sherman Act, the Commission then tued 

to complaint counsel's arguent that even if no violation of Section 2 had been found, General 

Foods had neverteless violated Section 5 of the FTC Act through the same conduct.20 The 

Commssion rejected ths argument, refusing "to expand the reach of the prohibition against 

attempted monopolization in the Sherman Act by condemning less offensive conduct under the 

15 Spectrum Sports, Inc. v. McQuilan, 506 U.S. 447, 456 (1984). 

16103 F.T.C. 204 (1984).
 

17id. at 341-46.
 

18id. at 346.
 

19id. at 364.
 

2oid. at 364-65.
 

5 

PPAB 1489020vl 
puriew of the (FTC) Act.,,21 The Commission rejected complaint counsel's attempt to expand 

Section 5 in an attempted monopolization case beyond Section 2 standards, saying, "(t)he record 

in this case does not offer a rationale for using the (FTC) Act to grant an extension onto Section 

2 of 
 the Sherman Act," and "(w)e do not believe this (Sherman Act Section 2) standard should be 

changed when a case is brought under Section 5.',2 Whle aware of earlier Supreme Cour 

decisions that allowed it "to supplement the more specific terms of 
 the antitrst laws,,,23 the FTC 

declined to expand Section 5 to areas proscribed by the Sherman Act, stating "we do not believe 

that power should be used to reshape those policies when they have been clearly expressed and 

circumscribed. ,,24 

Similarly, three appellate cours, in cases decided roughly contemporaneously with 

General Foods, "rejected Commission decisions challenging conduct as unair methods of
 

competition under Section 5,,25 where there was no underlying antitrust violation.i6 In both
 

Boise Cascade v. FTC and E.1 duPont Nemours & Co. v. FTC ("Ethyl") the Commission failed 

to show that the joint action resulted from actual collusion. In Boise Cascade, the court rejected 

the FTC's efforts to rely on the incipiency doctrne, ariculated in FTC v. Brown Shoe Co., 384 

U.S. 316, 322 (1966), and said that its decision would "blur the distinction between guilty and 

21 Id. at 365-66. 

22Id. at 366. 

23/d. at 353 (citing FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972); FTC v. Brown Shoe Co., 384 U.S. 316 

(1966)). 

24 General Foods, 103 F.T.C. at 365.
 

25 Commissioner J. Thomas Rosch, Perspectives on Three Recent Votes: The Closing o/the Adelphia Communications 

Investigation, the Issuance of the Valassis Complaint & the Weyerhaeuser Amicus Brief("Rosch Valassis Speech"), Address at 

the National Economic Research Associates 2006 Antitrust & Trade Regulation Seminar (July 6, 2006), a copy of which is 

attached hereto as Exhibit 3 and available at http://ww.ftc.gov/speeches/rosch/osch-NERA-Speech-Julv6-2006.pdt: at 8. The 

three cases are Boise Cascade v. FTC, 637 F.2d 573 (9th Cir. 1980); Offcial Airline Guides v. FTC ("OAG"), 630 F.2d 920 (2d 

Cir. 1980); E.I. duPont de Nemours & Co. v. FTC (the "Ethyl" case), 729 F.2d 128 (2d Cir. 1984). 

26 Referrng to these cases in its 1989 report, the ABA Antitrst Section committee to study the FTC pointed out that 

"recent court decisions have rebuffed the FTC when it interpreted Section 5 expansively." Report 0/ the American Bar 

Association Section 0/ Antitrst Law Special Committee to Study the Role of the Federal Trade Commission, 58 Antitrst L. 1. 43, 

lI5 (1989).
 

6 

PPAB 1489020vl 
innocent commercial behavior.,,27 In Ethyl, the cour expressed concern about "arbitrar or
 

capricious administration of § 5" by the FTC and said that its standard did not "discriminate 

between normally acceptable business behavior and conduct that is uneasonable or
 

unacceptable. ,,28 

In Offcial Airline Guides v. FTC ("OAG"), the respondent was the monopolist publisher 

of the "Official Airline Guide," the "bible" of the industry.29 By not publishing certain
 

commuter airline flght information in the Guide, OAG's action hared the ability of those 

commuter airlines to compete; however, OAG's actions were not directed at an OAG competitor 

and it did not enhance OAG's market position or power.30 The cour there said that "enforcement 

of the FTC's order here would give the FTC too much power to substitute its own business 

judgment for that of the monopolist in any decision that arguably affects competition in another 

industry.,,31 

The circumstances in this case are the same as those found in General Foods and in the 

appellate decisions of Boise Cascade, Ethyl and OAG appellate decisions. According to 

Complaint Counsel here, the Complaint presents "monopolization and attempted monopolization 

claims under the FTC Act.',32 For these alleged offenses, however, the Commission's reach, in 

the words of the Commission itself in General Foods, has "been clearly expressed and 

circumscribed" by Sherman Act law. Having no better or subsequent authority as a guide, the 

Commission here should follow the sound precedent of 
 its General Foods decision and, based on 

Complaint Counsel's admission of having failed to plead a viable Section 2 claim ("There is no 

27637 F.2d at 581-82.
 

28739 F.2d at 138-39.
 

29630 F.2d at 921-22.
 

30id. at 921. 

31 Id. at 927.
 

32 Complaint Counsel, supra note i, at 3. 

7 

PP AB 1 489020v i 
claim under the Sherman Act in this complaint,,33), dismiss the monopolization and attempted 

monopolization claims that are the subject ofthis motion. 

Whle it can be expected that Complaint Counsel will tr to save Counts II and III by 

using the FTC v. Sperry & Hutchinson Co. and Brown Shoe decisions, this effort would be 

misguided. Neither opinion addresses the specific situation involved here: where Complaint 

Counsel attempts to bring antitrst claims of monopolization and attempted monopolization
 

(although even that, as discussed below, is not pled) under Section 5 of the FTC Act without 

pleading the requisite elements of a claim under Section 2 of the Sherman Act. This. 

distinguishing fact was noted by the Commission itself in the General Foods case.34 

Although the Cour in S&H said, in oft cited language, that the Commission could use 

Section 5 to challenge conduct that does "not infringe either the letter or the spirt of the antitrust 

laws,'i3s that statement has no relevance to the pending case since it related to non-antitrust tye 

conduct and ultimately served to refute the Fifth Circuit's holding that Section 5 only covered 

antitrust violations but not conduct harful to consumer interests.36 The Cour, nevertheless, 

affirmed the Fifth Circuit's refusal to enforce the FTC's order on the ground that the FTC did not 

argue that S&H engaged in any conduct harful to consumer interests and failed to show that 

S&H's conduct violated either the letter or the spirit of 
 the antitrust laws.37 As a result, the S&H 

33 Complaint Counsel, supra note 1, at 3. 

34 See note 17 supra.
 

35405 U.S. at 239.
 

36id. at 245.
 

37 The Court was forced to affrm the Fift Circuit to this extent since the FTC failed to argue the Fifth Circuit erred in
 

ruling that S&H's conduct did not violate the letter or spirit of the antitrst laws. 405 U.S. at 249. As a result, the Supreme 

Court declared that the Fifth Circuit's ruling on the antitrust point "remains undisturbed here." S&H, 405 U.S. at 250. Of the 

view that Section 5 applied only to anititrust-tye conduct (and not conduct merely threatening har to consumers) the Fifth 

Circuit made no determination whether the FTC's findings showed consumer har. The Supreme Court held that the FTC order 

was not supported by findings relating to consumer har but remanded the case for further proceedings relating to that issue. /d. 

at 249-50. 

8 

PP AB i 489020v i 
case did not uphold an order applying Section 5 to antitrust-type conduct that would not have 

been reached by the Sherman or Clayton Acts.38 

In Brown Shoe, an opinion wrtten by Justice Black over forty two years ago, the Cour 

articulated the "incipiency doctrinè," a concept that the Commission itself rejected in General 

Foods and that has not fared well in subsequent cases.39 Justice Black, moreover, appears to 

have improperly lifted the doctrine from his earlier opinion in FTC v. Motion Picture Adver. 

Servo Co.40 -- improperly because the Cour in that case did not deal with an incipient violation 

but found that the exclusive dealing arangements there ran afoul of Section 5 because they 

violated the Sherman Act.41 In any event, the "incipiency" concept is inherently inapplicable in 

this consumated merger case. And while the Court there rejected Brown's arguent that the 

FTC needed to have found Section 3's substantial lessening of competition or tendency to 

monopoly, saying that the FTC may "arest trade restraints in their incipiency," it proceeded to 

characterize the facts as showing that a ShermanClayton violation had occured, concluding that 

the arangement produced an adverse effect on competition ("anti 
 competitive practice") and that 

it "effectively foreclosed Brown's competitors from selling to a substantial number of 
 retail shoe 

38 The Court in S&H first dealt with four earlier decisions that had refused to support FTC orders. FTC v. Gratz, 253 

U.S. 421 (1920); FTC v. Curtis Publg Co., 260 U.S. 568 (1923); FTC v. Sinclair Ref Co., 261 U.S. 463 (1923); and FTC v. 

Raladam Co., 283 U.S. 643 (1931). S&H, 405 U.S. at 24i. The Court then turned to FTC v. R. F. Keppel & Bros., Inc., 291 U.S. 

304 (1934) and Brown Shoe. S&H, 405 U.S. at 242. Keppel, however, is not relevant here since it was a consumer protection, 

non-antitrust case.
 

39 In rejecting the FTC's claims of a Section 5 violation involving an industry-wide pricing practice but with no 

evidence of collusion, the Ninth Circuit said: "In this setting at least, where the paries agree that the practice was a natual and 

competitive development in the emergence of the southern plywood industry, and where there is a complete absence of evidence 

implying overt conspiracy, to allow a finding of a section 5 violation on the theory that the mere widespread use of the practice 

makes it an incipient theat to competition would be to blur the distinction between guilty and innocent commercial behavior." 

Boise Cascade, 637 F.2d at 582. 

40344 U.S. 392 (1953) 

41 "The vice of 
 the exclusive contract in this paricular field is in its tendency to restrain competition and to develop a 

monopoly in violation ofthe Sherman Act." 344 U.S. at 397. 

9 

PPAB 1489020vl 
dealers.',42 In short, Brown Shoe, a case from a bygone era with its discredited incipiency 

doctrine, is certainy not persuasive authority here.43
 

Rather than straying from Sherman Act standards, cours generally have affirmed FTC 

findings of Section 5 violations only after finding Sherman Act violations. E.g., FTC v. Ind 

Fedn of Dentists, 476 U.S. 447 (1986); FTC v. Nat/ Lead Co., 352 U.S. 419 (1957); FTC v. 

Cement Inst., 333 U.S. 683 (1948); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457 

(1941); FTC v. Beech-Nut Packing Co., 257 U.S. 441 (1922).44 

As a result, there is no authority authorizing Complaint Counsel to press Section 5 

charges while failing to comply with Sherman Act standards, in a case like this where the FTC 

Complaint brandishes a "monopolization" claim. The proper standards for challenging unlateral 

conduct are now the subject of great debate, both nationally and internationally.4s But that 

debate is keyed at the level of familiar Sherman Act standards and concepts. There has been no 

suggestion in this debate that sub-Sherman Act standards should apply in this situation. 

Scholarly comment has strongly supported the proposition that the FTC should not use Section 5 

to bring antitrust cases that do not violate the Sherman and Clayton Acts. E.g., 2 Areeda & 

Hovenkamp , 302(h) (3d ed. 2007) ("Apar from possible historical anachronisms in the 

application of 
 those statutes, the Sherman and Clayton Acts are broad enough to cover any anti42384 u.s. at 320, 32i. 

43 As one commentator has noted, "(t)he real problem with the Brown Shoe reasoning (was) that the Supreme Court 

was wiling to condemn exclusive dealing when no injury to competition was apparent." 2 Philip Areeda & Herbert 

Hovenkamp, Antitrust Law ("Areeda & Hovenkamp") ii 302h3 (3d ed. 2007). Surely it is not a rush of excessive optimism to say 

that the FTC would never today bring an exclusive dealing case in which it would tr to cheat on established Sherman or Clayton 

standards. Accordingly, Brown Shoe is no authority for any attempt by the FTC to use sub-Sherman Act standards in the instant 

case. 

44 In both Atlantic Ref Co v. FTC, 381 U.S. 357 (1965) and FTC v. Texaco, Inc., 393 U.S. 223 (1968) the Court again 

effectively applied Sherman Act standards in approving the FTC's findings of adverse effects on market competition resulting 

from the arangements. The Fifth Circuit made a similar decision in Shell Oil Co. v. FTC, 360 F.2d 470 (5th Cir. 1966). 

45 E.g., U.S. Dep't of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of 
 the Sherman Act 

(2008), available at ww.usdoi.gov/atr/oublic/reoorts/23668i.htm. and Statement of Commissioners Harbour, Leibowitz and
 

Rosch on the Issuance of the Section 2 Report by the Deparment of Justice (September 8, 2008), a copy of which is attached 

hereto as Exhibit 4 and available at htto://ww.ftc.gov/os/2008/09/080908section2stmt.odf. 

10 

PPAB 1489020vl 
competitive agreement or monopolistic situation that ought to be attacked whether 'completely 

full blown or not.'" Areeda and Hovenkamp also state that: "(A) substantive antitrust rule that 

governs direct enforcement of the Sherman and Clayton Acts should also govern the 

Commission under § 5 as well."); Richard A. Posner, The Federal Trade Commission: A 

Retrospective, 72 Antitrust L.J. 761, 766 (2005) ("It used to be thought that 'unfair methods of 

competition' swept fuher than the practices forbidden by the Sherman and Clayton Acts, and 

you find this point repeated occasionally even today, but it is no longer tenable. The Sherman 

and Clayton Acts have been interpreted so broadly that they no longer contain gaps that a broad 

interpretation of Section 5 of 
 the FTC Act might be needed to filL"); Bob Pitofsky, More Than 

Law Enforcement: The FTC's Many Tools-A Conversation with Tim Muris and Bob Pitofsky, 

72 Antitrust L. J. 773, 847-48 (2005) ("I have never been comfortable with the idea that practices 

that are legal under the Sherman and Clayton Acts become ilegal under Section 5 of the FTC 

Act because they fall in the 'penumbra' of some competition policy. Among other problems, it 

means that certain behavior would be legal or ilegal depending on whether the suit was brought 

by the DOJ Antitrust Division under the Sherman Act or the FTC under Section 5. I have 

therefore believed that the unairness jurisdiction, especially in antitrust matters, should be used 

very cautiously."). 

In accord with this authority, Commissioner Rosch in July 2006 took the position that 

Section 5 should not be used to challenge conduct that is "plainly governed by the Sherman 

Act. ,,46 Unlike the monopolization and attempted monopolization claims in the instant 

proceeding, Commissioner Rosch pointed out that the conduct in Valassis was not "squarely 

46 Rosch Valassis Speech, supra note 25, at 1 i. 

11 

PPAB 1489020vl 
covered by the Sherman Act," because it involved an invitation to collude. That statement 

canot be made about the conduct in the instant case.47 

Unilateral conduct canot and should not be subject to low-grade and uncertain antitrst 

standards lest vigorous competitive effort be inibited or penalized. As the Supreme Cour said 

in Spectrum Sports: 

Congress authorized Sherman Act scrutiny of single firms only when they pose a 

danger of monopolization. Judging unilateral conduct in this matter reduces the 

risk that the antitrst laws wil dampen the competitive zeal of a single aggressive 

entrepreneur.48 

Several years earlier, the Cour had made the same point in its Copperweld decision.49 

There the Cour observed that the Sherman Act leaves a "gap" since a single firm will not be 

liable for conduct "in restraint of trade" even though it accomplishes the same effect on 

competition that two firms acting together could accomplish for which they could be in 

violation. so But the Cour said: 

Congress left this "gap" for eminently sound reasons. Subjecting a single firm's 

every action to judicial scrutiny for reasonableness would threaten to discourage 5 i the competitive enthusiasm that the antitrust laws seek to promote. 


It may be one thing for the FTC to challenge "invitations to collude" under Section 5 

where the action is but one small step away from creating serious criminal exposure and
 

efficiency claims are elusive or non-existent. 52 But it is indeed difficult to understand how the 

47 Id
 

48 Spectrum Sports, 506 U.S. at 456 (quoting Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 768 (1984)).
 

49 Copperweld, 467 U.S. 752 (1984).
 

50id. at 774-75.
 

51 Id. at 775.
 

52 Even so it should be noted that the FTC's recent consent decree program with "invitations to collude" has yet to be
 

blessed by any reviewing judicial authority. Historical attempts to use Section 5 to challenge "conscious parallelism" were
 

rebuked and caused the FTC to back down. The FTC adventure in Triangle Conduit & Cable Co. v. FTC is described in Boise 

12 

PPAB 1489020vI 
FTC could justify the application of sub-Sherman Act standards in a monopolization claim in a 

merger case, given the common wisdom that mergers have the capacity to achieve substantial 

efficiencies. Policy considerations and precedent both demonstrate that the Commission lacks 

the legal authority to make such expanded Section 5 claims. 

(b) Under the standard set by Section 2 of the Sherman Act, Counts II and III 

fail to Allege a Valid Claim under Section 5 of the FTC Act. 

Section 2 of the Sherman Act condemns monopolization and attempts to monopolize. 15 

U.S.C. § 2. As stated supra at pp. 5-6, monopolization requires a showing of (1) "possession of 

monopoly power in the relevant market" and (2) a "wilful acquisition or maintenance of that 

power as distinguished from growth or development as a consequence of a superior product, 

business acumen, or historic accident. ,,53 Moreover, to demonstrate an attempt to monopolize, a 

plaintiff must prove, among other things, a specific intent to monopolize and a dangerous 

54 Here, Counts II and III fail to allege a monopoly in probability of achieving monopoly power. 


three purported markets, fail to allege acquisition, enhancement or maintenance of a monopoly in 

those thee purorted markets, and fail to allege an attempt to monopolize, instead alleging an 

"attempt to maintain a monopoly." Counts II and in must be dismissed in relevant par. 

(i) Failure to Allege Monopoly 

The Complaint fails to allege a monopoly with respect to the purorted automotive, UPS 

and PE separator markets.ss 

Cascade, where it is also noted that as recently as 1974, the Commission dismissed In re Crouse-Hinds where the facts failed to 

show concerted action. 637 F.2d at 576 citing Triangle Conduit, 168 F.2d 175 (7th Cir. 1948) and Crouse-Hinds, 46 F.T.C. 1114 

(1950). As is described in text, its more recent efforts to mount such cases were rejected in Boise Cascade and Ethyl. 

53 Verizon Commc 'n, 540 U.S. at 407 (quoting Grinnell, 384 U.S. at 570-71). 

S4 Spectrum Sports, 506 U.S. at 456.
 

55 Polypore disputes the designations of the markets as alleged by the FTC and wil assert its defenses to the market
 

claims as necessar at the hearing before the ALl 

13 

PP AB 1 489020v I 
· Paragraph 21 of the Complaint alleges that after the acquisition, Polypore 

had a monopoly in the alleged deep-cycle market and paragraph 22 alleges 

that Daramic and Microporous "were the only competitors in motive 

separators." However, the Complaint contains no such allegations for the 

alleged automotive, UPS or PE separator markets. Similarly, paragraphs 

38(b) and (c) allege monopolies in the deep-cycle and motive markets but 

not iIi automotive, UPS or PE separator markets. 

· Paragraph 23 alleges that Daramic and Entek are "direct competitors" in 

the alleged automotive market but makes no allegation that Daramic had a 

monopoly. 

· Paragraph 24 (and Paragraph 38(b)) allege that Microporous and Daramic
 

were the "only" companies selling separators in the alleged UPS market, 

but that they were sellng "in different segments" of that market. As to 

this market, the word "monopoly," or any derivation thereof, does not 

appear in the Complaint. 

· As for the PE separator market, no allegations of monopoly are set forth in 

paragraph 25, which states instead that Daramic, Microporous and Entek 

are the "only manufactuers of' the product in North America. 

· Whle paragraph 45 alleges "market/monopoly power" and maintenance 

of "market power," (1) the careful distinctions made in paragraphs 21-25 

and 38(b) undermine these allegations; (2) the phrase "market/monopoly 

power" and the reference to maintenance of "market power" fail to allege 

a monopoly since a monopolist must have not just some market power but 

substantial market power;S6 and (3) the allegations of paragraph 45 are, in 

any event, of no consequence since they fail to identify any alleged 

relevant market to which they apply. 

In short, the Complaint fails to allege that Polypore has a monopoly in the alleged 

automotive, UPS and PE separator markets. 

(ii) Failure to Allege Acquisition, Enhancement or Maintenance of
 

Monopoly Power 

Nowhere does the Complaint allege that Polypore "maintained" monopoly power in the 

automotive, UPS and PE separator markets. This omission is highlighted by paragraph 39 where 

56 Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451,481 (1991) ("Monopoly power under §2 requires, of 

course, something greater than market power under §i."); 3B Areeda & Hovenkamp at ii802(a) (3d ed. 2008) ("The 

monopolization offense requires both 'substantial' market power and exclusionar conduct."); Philip Areeda & Louis Kaplow, 

Antitrust Analysis: Problems, Text, Cases 554 (5th ed. 1997) ("Under §2, only substantial market power wil be deemed 

monopoly power"), a copy of which is attached hereto as Exhibit 5. 

14 

PPAB 1489020vl 
the Complaint alleges instead that Polypore "attempted through anti 
 competitive means to 

maintain monopoly power" (emphasis added) in the five alleged markets. Maintenance of 

monopoly power, however, is the necessary element of monopolization; a mere attempt to 

maintain monopoly power is insufficient. The standard as stated by Verizon, supra, is quite 

clear: monopolization requires "willful acquisition or maintenance of that (monopoly) power," 

not "willful acquisition or attempted maintenance" of monopoly power. 
 57 Indeed, 

monopolization requires monopoly power that is durable, not monopoly power that the firm has 

58 merely "attempted to maintain" or that has existed only temporarily. 


The Complaint attempts to cure this defect by alleging in Paragraph 42 that "(i)n 

automotive, motive, UPS and all PE markets Daramic has historically maintained monopoly 

power." This claim, however, is inadequate since it is keyed to some undefined historical period 

antedating the events of the Complaint and it fails to identify or allege any anticompetitive 

actions that produced this "historical maintenance." 59 

Moreover, the monopolization allegations are not saved by paragraph 45, because, as 

discussed above, (1) its broad brush allegation of "maintenance" is inconsistent with paragraph 

39's allegation of "attempt to maintain;" (2) it fails to allege, as required, "maintenance of that 

(monopoly) power" but, instead, alleges maintenance of "market power;" and (3) it fails to allege 

the markets to which it applies. 

57 Verizon, 540 U.S. at 407. See also Endsley v. Chicago, 230 F.3d 276, 283 (7th Cir. 2000) (afrming dismissal of 

Section 2 claim for failure to allege monopoly power over "the relevant market."). 

58 ABA Section of Antitrst Law, Antitrust Law Developments 226, n.8 (6th ed 2007) (citing Reazin v. Blue Cross and 

Blue Shield 0/ Kansas, Inc., 899 F.2d 951, 968 (lOth Cir. 1990) ("market power, to be meaningful for antitrst puroses, must be 

durable")). 

59 Even if the Complaint were not so fatally deficient, Count II would still be subject to dismissal since, as set fort 

above, the Complaint fails to allege a monopoly as to the alleged automotive, UPS and PE separators purported product markets. 

15 

PPAB I489020vl 
(iii) Failure to Allege Attempt to Monopolize
 

The Complaint fails to state an attempt to monopolize claim as to all alleged markets. 

With respect to the alleged PE separator market, paragraph 44 does allege a "dangerous
 

probability that, if successful, (the conduct alleged) would give Daramic the ability to lessen or 

destroy competition." "Dangerous probability," of course, is the third element of the attempt to 

monopolize offense.6o The paragraph 44 allegations, however, are in confict with those of 

paragraph 39, which alleges an "attempt(J to maintain monopoly power" (emphasis added) and 

paragraph 45, which alleges "(maintenance of) market power." (emphasis added) 

In any event, paragraph 44 fails to make the necessar allegation of a dangerous
 

probability of success in achieving a monopoly. Instead of meeting this standard, the Complaint 

inadequately contends that a "dangerous probability" exists that the conduct would convey "the 

ability to lessen or destroy competition." Even if this defect were corrected, the Complaint is 

stil wanting due to the FTC's failure to allege specific intent to monopolize the PE separator 

market. Endsley, 230 F.3d at 283-84 (affrming dismissal of Sherman Act Section 2 claim for 

failure to allege facts demonstrating alleged anti-competitive use of 
 power to control prices). 

(c) Counts II and III Fail Even if the Claims are not Viewed Under Section 2
 

Standards. 

Under the weight of judicial authority, and scholarly commentar that consistently 

cautions against an interpretation of Section 5 in antitrust matters beyond the parameters of 

Section 2 of the Sherman Act, Counts II and in of this Complaint should be dismissed. Even if 

this Cour were to consider some broader and undefined standard for a claim under Section 5 of 

the FTC Act than under Section 2 of the Sherman Act, Counts II and III, which it should not, 

would stil be deficient and require dismissaL. 

60 See supra Spectrum Sports, 506 U.S. at 456. 

16 

PP AB 1 489020v 1 
In a depare from the principles set out in General Foods, the Commission in a 3-2 vote 

anounced in the Negotiated Data Solutions case ("N-Data") that it considers itself authorized to 

bring antitrust-type cases under Section 5 as unair methods of competition where the conduct 

does not violate either the Sherman or Clayton ActsY In its N-Data commentar, the 

Commission, while evidencing an intent to avoid Sherman Act standards, at the same time 

acknowledged that some "limiting principles" should be in place under Section 5. Yet, the FTC 

provides no clear and concise ariculation of those "limiting principles," and the Complaint lacks 

any meangful allegations in this regard. 

Of course, problematic for Complaint Counsel in attempting to avoid dismissal through 

some reliance on N-Data is the fact that the Commission has not defined such "limiting 

principles" and the general comments in N-Data lack precision. For example, the Analysis to 

Aid Public Comment in N-Data referred to the first of two limiting principles that supposedly 

could be derived from the GAG and Ethyl cases, discussed above. It noted that the cour in GAG 

said that a free-standing Section 5 violation could not be found where the respondent "does not 

act coercively,,,62 and Ethyl said there must be "at least some indicia of oppressiveness.',63 In his 

concurng opinion in Rambus, Commissioner Leibowitz provided a slightly fuller statement of 

ths limiting principle when he said that conduct must be "'collusive, coercive, predatory, 

restrictive, or deceitful,' or otherwise oppressive. ,,64 And, in his July 2006 speech, Commissioner 

Rosch also quoted Ethyl and GAG as requiring "some indicia of oppressiveness, such as 

61 In the Matter 01 Negotiated Data Solutions LLC, File No. 051-0094, Analysis of Proposed Consent Order to Aid 

Public Comment ("Analysis to Aid Public Comment") 3-4 (Januar 23, 2008), a copy of which is attached hereto as Exhibit 6, 

and Statement ofthe Federal Trade Commission 1-2, n. 5 (Januar 23,2008), a copy of which is attached hereto as Exhibit 7. 

62 630 F.2d at 927. 

63 729 F.2d at 139-40. However, Chairman Majoras, in her dissenting statement, noted that "(t)he majority has not 

identified a meaningful limiting principle that indicates when an action. . . wil be considered an 'unfair method of competition." 

N-Data, File No. 051-0094, Dissenting Statement of Chairman Majoras 4 (Januar 23, 2008), a copy of which is attached hereto 

as Exhibit 8. 

64 Rambus, File No. OLI-00I7, Concurring Opinion of 
 Commissioner Jon Liebowitz 15-16 (August 2,2006), a copy of 

which is attached hereto as Exhibit 9. 

17 

PPAB 1489020vl 
evidence of anti 
 competitive intent or purose on the par of the producer charged or the absence 

of an independent legitimate business reason for its conduct" (Ethyl) and "no purose to restrain 

competition or to enhance or expand his monopoly, and does not act coercively" (OAG).6s The 

conclusion of these recent "ariculations" of a "limiting" "standard", is that there is no standard 

to apply in this or similar cases. As no standard exists against which conduct can be judged, all 

claims under Counts II and III as related to monopolization and attempt to monopolize the five 

alleged markets must be dismissed. 

Even applying the broad constructs of Commissioners Leibowitz and Rosch to the 

Complaint here, Counts II and III faiL. While the word "coercive" appears in paragraph 44 ofthe 

Complaint, it is not addressed to Polypore's conduct generally, but instead is limited specifically 

to "bargaining tactics." Moreover, nowhere in the Complaint is the alleged offensive conduct, as 

it relates to all five alleged relevant product markets, described as "collusive, coercive, predatory, 

restrictive or deceitfuL."
 

The second limiting principle of N-Data is that the conduct must have an adverse effect 

on competition.66 Commissioner Leibowitz had listed a second, similar but diluted limiting 

principle in Rambus when he said the conduct "must bear a realistic potential for causing 

competitive har. ,,67 Commissioner Rosch would also appear to require "some evidence, direct 

65 Rosch Valassis Speech, supra note 25, at 10. It should be noted that as recently as October 2,2008, Commissioner 

Rosch gave a speech in which he added a third limiting principle to the two he had presented in July 2006. Commissioner 1. 

Thomas Rosch, Section 2 and Standard Setting: Rambus, N-Data & the Role 01 Causation, Address at 13 LSI 4th Antitrst 

Conference on Standard Setting & Patent Pools (October 2,2008), a copy of which is attached hereto as Exhibit 10 and available 

at htto://www.f1:gov/soeeches/rosch/081002section2rambusndata.od£ This limiting principle would weigh in favor of
 

permitting FTC action the greater the extent to which those hared by the conduct were limited in their ability to defend 

themselves. As such, that limiting principle would not operate in favor of the FTC's action in the instant case. 

66 Analysis to Aid Public Comment at 5. 

67 Rambus, Concurng Opinion of 
 Commissioner Jon Leibowitz at 15-16. 

18 

PPAB 1489020vl 
or circumstantial, of actual or incipient anticompetitive effect; otherwise, the claim would 

arguably be too unbounded.',68
 

These "standards" are not true "limiting principles." In paricular, they raise grave 

concerns to the extent they are suggested for use in a single-firm, monopolization/attempt to 

monopolize context. Of course, the antitrust laws aren't even activated unless there is an actual 

or threatened adverse effect on competition. But terminology such as that used by
 

Commissioners Leibowitz and Rosch, i.e., "realistic potential for causing competitive har" and 

"circumstantial (evidence) of incipient anti 
 competitive effect," does not serve as a "limiting 

principle" but, rather, as a "liberating principle." These concepts would trigger liability at an 

unacceptably low level of activity. They would flout the history of the development of rational 

Section 2 Sherman Act standards, which have been designed so as not to discourage or impair 

the competitive zeal upon which the economy depends.69 

The only rational "limiting principles" that have emerged from the Commission for 

application in a single-firm, monopolization context were those ariculated by the Commission 

itself in General Foods. That decision is paricularly relevant because, unike almost all the 

other cases that arse in this context, it was a single-firm case, involving an alleged attempt to 

monopolize, where the FTC refused to let its own complaint counsel "cheat on" established 

Sherman Act standards. By holding complaint counsel to Sherman Act standards in General 

Foods, the Commission adopted the only appropriate "limiting principle" to be applied in a case 

like that - and like this one: "we do not believe that (Section 5) ... should be used to reshape 

68 Rosch Valassis Speech, supra note 25, at 1 i. (emphasis in original). 

69 See discussion and cases cited above at pp. 5- 13. The court in Ethyl pointed out that the inadequacy of "adverse 

impact on competition" as a limiting principle. It observed that such a rule would prevent "the admittedly lawful unilateral 

closing of a plant or refusal to expand capacity" and it would also prevent a patentee from "exercising its lawfl monopoly to 

charge whatever the traffc would bear." 729 F.2d at 138. 

19 

PPAB I489020vl 
those (antitrust) policies when they have been clearly expressed and circumscribed.',7o Indeed, 

the allegations in the pending Complaint (e.g., of "attempt to maintain monopoly power") echo 

the position of complaint counsel in General Foods where the argument was that even if there 

had not been an attempt to monopolize, there was "an incipient attempt on the basis of potential 

market power.,,71 The Commission rightly said that to distinguish between these two concepts 

was "to engage in such fine distinctions as to challenge the legal philosopher, let alone the 

competitor trying to conform its conduct to the law.',72 The "limiting principles" that have been 

more recently referred to by certain Commissioners either are not referenced in the complaint in 

this matter or are of 
 no consequence since they fail in any meanngful way to prevent the FTC's 

enforcement discretion from being wholly "unbounded." 

CONCLUSION 

For the foregoing reasons, Respondent Polypore respectfully moves to dismiss for failure 

to state a claim, Counts II and in of the Complaint with respect to any monopolization claims 

regarding the alleged automotive, UPS and PE separator markets and to dismiss, for failure to 

state a claim, Counts II and III to the extent that they purort to apply to the alleged deep-cycle 

and motive battery separator markets based upon an undefined monopolization offense under 

Section 5 of the FTC Act. 

70 103 F.T.C. at 365-66.
 

71id.
 

72 Id.
 

20 

PPAB 1489020vl 
Dated: October 15,2008
 Respectfully Submitted, 

/~

/., 

Willam L. Rikard, Jr. 

Eric D. Welsh 

PARKR POE ADAMS & BERNSTEIN, LLP 

Three Wachovia Center 

401 South Tryon Street, Suite 3000 

Charlotte, NC 28202 

Telephone: (704) 372-9000 

Facsimile: (704) 335-9689 

wiliamkard~parkerpoe.com 

ericwelsh~parkerpoe.com 

John F. Graybeal 

PARR POE ADAMS & BERNSTEIN, LLP 

150 Fayettevile Street
 

Raleigh, NC 27602 

Telephone: (919) 835-4599 

Facsimile: (919) 828-0564 

johngraybeal~parkerpoe.com 

Attorneys for Respondent 

21 

PP AB 1 489020v 1 
CERTIFICATE OF SERVICE 

I hereby certify that on October 15, 2008, I caused to be filed via hand delivery and 

electronic mail delivery an original and two copies of the foregoing Respondent's Memorandum 

in Support of Motion to Dismiss Counts II and III of the Complaint for Failure to State a 

Claim, and that the electronic copy is a true and correct copy of the paper original and that a 

paper copy with an original signatue is being fied on the same day by other means with: 

Donald S. Clark, Secretary 

Office of the Secretar 

Federal Trade Commission 

600 Pennsylvana Avenue, NW, Rm. H-135 

Washington, DC 20580 

secretary~ftc. gov 

I hereby certify that on October 15, 2008, I served one copy via hand delivery and two 

copies via overnght mail delivery of the foregoing Respondent's Memorandum in Support of 

Motion to Dismiss Counts II and III of 
 the Complaintfor Failure to State a Claim with: 

The Honorable D. Michael Chappell
 

Administrative Law Judge 

Federal Trade Commission 

600 Pennsylvania Avenue, NW 

Washington, DC 20580 

I hereby certify that on October 15, 2008, I served via first-class mail delivery and 

electronic mail delivery a copy of the foregoing Respondent's Memorandum in Support of 

Motion to Dismiss Counts II and III of 
 the Complaintfor Failure to State a Claim with: 

J. Robert Robertson, Esq. Steven Dah, Esq. 

Federal Trade Commission Federal Trade Commission 

600 Pennsylvana Avenue, NW 600 Pennsylvania Avenue, 

Washington, DC 20580 NW 

rrobertsonêftc.gov Washington, DC 20580 

sdah~ftc.gov

OL~ 

Adam C. Shearer 

Parker Poe Adams & Bernstein LLP 

Three Wachovia Center 

401 South Tryon Street, Suite 3000 

Charlotte, NC 28202 

Telephone: (704) 335-9050 

Facsimile: (704) 334-4706 

PPAB 1489020vl 
EXHIBIT 1
 
0110017 

UNITED STATES OF AMERICA
 

BEFORE THE FEDERAL TRADE COMMISSION
 

Commissioners:	 Timothy J. Muris, Chairman 

Sheila F. Anthony 

Mozelle W. Thompson 

Orson Swindle
 

Thomas B. leary 

) 

In the Matter of ) 

) 

RAMBUS INCORPORATED,
 ) DOCKET NO. 9302
 

)
 

a corporation.
 ) 

) 

COMPLAINT 

Puuat to the provisions of the Federal Trade Commssion Act, and by vie of 
 the authority 

vested in it by said Act, the Federa Trae Commssion ("Commssion"), havig reaon to believe that 

Rambus Incorporated (hereinafter, "Rabus" or "Respondent") has violated Section 5 ofthe Federal 

Trade Commssion ("FTC") Act, as amended, 15 U.S.c. § 45, and it appearg to the Commssion 

that a proceedig in respect thereof would be in the public interest, hereby issues its complaint, statig 

its charges as follows: 

Nature of the Case 

1. 'Tough ths action, the Commsion challenges a patter of anticompetitive acts and pratices, 

underten by Rabus over the course of the past decade, and contiuig even today, 

whereby Rabus, though deliberate and intetional mean, has ilegaly monopolied, 

attempted to monopoli, or otherwse engaged in unair methods of competition in cert
 

markets relatig to technological featues necessai for the design and maufactue of a 

common form of digital computer memory, known as dynamic radom access memory, or 

"DRA." 

i 
2. Rabus's anticompetitive scheme involved parcipatig in the work of an industr stadadsettg organtion, known as JEDEC, without makg it known to JEDEC or to its members
 

that Rabus was actively workig to develop, and did in fact possess, a patent and several 

pendig patent applications tht involved specifc technologies proposed for and ultiately
 

adopted in the relevant standads. By concealig ths inormation - in violation of JEDEC's 

own operatig rues and procedures - and though other bad-faith, deceptive conduct, Rambus 

pmpsefuly sought to and did convey to JEDEC the materally false and mileadg impression 

that it possessed no relevant intellectul propert rights. Rambus's anticompetitive scheme 

fuer entailed perfectig its patent rights over these same technologies and then, once the
 

stadads had become widely adopted with the DRA industr, enforcing such patents 

worldwide againt compaies manufactg memoiy products in compliance with the 

standards. 

3. The patt of anticompetitive conduct by Rabus that is at issue in ths action has materially
 

caused or theatened to cause substatial han to competition, and wi in the futue materialy 

cause or theaten to cause fuer substatial injur to competition and to consumers, absent the
 

issuace of appropriate relief in the maner set fort below. 

The Respondent 

4. Rabus is a public coiporation organed, existig, and doing business under and by vie of 

the laws of the State of Delaware, with its offce and pricipal place of 
 business located at 9440 

EI Camo Real, Los Altos, Californa 94022. 

5. Rabus designs, develops, licenses, and markets high-speed chip-connection technology to 

ence the performance of computer, consumer electronics, and communcations systems. 

The company licenses semiconductor compaies to manufactue and sell memoiy and logic 

integrted circuits incorpratig Rambus chip-connection technology and markets its solutions
 

to systems compaies to encourge them to design ths technology into their products. For the 

fical year that ended on September 30, 2001, Rambus reported revenues of approximately 

$117 mion. 

6. Rabus is, and at all relevant ties has been, a coiporation as "coiporation" is defied by 

Section 4 of 
 the Federal Trade Commssion Act, 15 US.C. § 44; and at all times relevant 

herein Rabus ha been, and is now, engaged in commerce as "commerce" is defied in the 

sae proviion. 

Background on the DRA Industr 

7. With the aray of components that together comprise a tyical computer, the computer's
 

"memoiy" fuctions to store digitay recorded inormation such tht it is avaiable to be 

2 
accessed when needed by the centrl processing unt ("CPU"). Computer memoiy is 

produced in the form of semiconductor "chips," which are connected with other computer 

components - such as the CPU and the chipset - via a collection of circuit lines, or a "bus," that 

routes electronic signals and, in ths way, communcates commands and trport data. 

8. DRA is the most common form of computer memoiy in use today. Another form of memoiy 

is known as static random access memoiy, or "SRA." DRA and SRA dier pricipally 

in the followig ways: SRA, une DRA, is able to contiuously hold inormtion whie 

power is being supplied to memoiy. With DRA, on the other hand, the electronic charges 

that sere to hold the stored inormation in place dissipate over tie, causing inormtion to 

"leak" out of memoiy. To counteract ths phenomenon, DRA memoiy chips must be 

constatly "refreshed" with new electronic pulses. DRA and SRA also dier in that the 

latter generally is both faster and more expensive. 

9. DRA is an essential input into a varety of downtream products, includig a wide varety of 

computers, such as personal computers, work stations, and servers, as well as varous other 

tyes of electronic devices, such as fax machies, priters, digital video recorders, video game 

equipment, and personal digital assistats. Total sales of DRA in the United States exceeded 

$12 bilion in 2000, and for the same yea worldwide DRA sales exceeded $28 bilion. 

10. Over the year, a series of dierent architectues for designg DRA chips has been 

introduced. As inmost other aspects of the computer industr, over tie older-generation
 

design have given way to newer-generation design or to improvements on exitig 

architectues. A drvig force behid th contiua process of evolution in DRA design is the
 

quest for improved computer pedormance. In parcular, as the pedormance of other computer 

components and subsystems is enhanced, the marketplace demands equivalent improvements in 

the speed and otherpedormance charcteristics of computer memoiy. 

11. Dug the late 1980s and early 1990s, developments and improvements in the pedormance of 

CPUs and other computer components were movig forward at a rapid clip. It was perceived, 

however, that developments in DRA technology had not kept pace, and that pedormance 

constrts inerent in the available DRA architeces were hiderg technological progress
 

in the computer industr, creatig a vil "memoiy bottleneck." 

12. It was in th environment tht "synchronous" DRA was developed. The essential inovation
 

underlyig synchronous DRA - as compared to the prior genertion of 
 DRA, also known 

as "aschronous" DRA - was to li memoiy fuctions to a "system clock," alowig for 

more rapid sequencing of communcations between the CPU and memoiy, thereby improving 

overall system pedormance. The system clock, in effect, consists of a contiuous series of 

evenly spaced electronic pulses. The period of tie (measured in nanoseconds) elapsing
 

between the intiation of 
 two succeedig pulses is referred to as a single "clock cycle." 

3 
13. The introduction of synchronous DRA offered a potentialy promiing solution to the memoiy 

bottleneck. Yet the success of synchronous DRA depended importtly upon the ability of 

the computer industr to adopt stadads goverg the design and implementation of
 

synchronous DRA. 

JEDEC 

14. The JEDEC Solid State Technology Association ("JEDEC") - origily known as the Joint 

Electron Device Engieerig Council, from which the aconym JEDEC derives - is one of 

several stadad-settg bodies afiated with the Electronic Industres Aliance ("EIA"), a trde 

association representig all segments of 
 the electronics industr. As explained in JEDEC's 

Manua of 
 Organtion and Procedure (hereinafer, the "JEDEC Manua"), the organtion's 

priar purose and fuction is to "promote the development and stadadiation of term,
 

defitions, product charteration, test methods, manufactug support fuctions and 

mechancal stadads for solid state products." 

15. Accordig to the JEDEC Manual, memberhip in JEDEC is freely available to "(a)ny company, 

organtion, or individua conductig business in the USA tht ... manufactus electronic
 

equipment or electronics-related products, or provides electronics or electronics-related 

servces." To become a JEDEC member, an eligible company need only submit an application, 

pay membership fees, and agree to abide by JEDEC's rues. JEDEC members, curently 

numberig in 
 excess of 200, include many of the world's top designers and manufactuers of 

semiconductors and related products, as well as many of the largest purchasers of such 

products. 

16. JEDEC's interal strctue consists of a Board of 
 Directors (formerly known as the JEDEC 

"Council") and numerous operational comittees, subcomittees, and tak groups. Stadads 

tyically are proposed, evaluated, and formalied at the comittee or subcomittee level and 

then presented for approval to the Board of 
 Directors, which has fil authority to approve or
 

disapprove all proposed standards. 

JEDEC Policies and Procedures 

17. At all ties relevant herein JEDEC has steadastly maitained a comitment to promotig free 

competition with the semiconductor industr. Thus, JEDEC ha inisted tht its members 

abide by all applicable laws, includig but not lited to laws prohibitig anticompetitive 

conduct. 

4
 
18. The JEDEC Manual provides that al JEDEC meetigs "shal comply with the curent edition of 

EIA Legal Guides." These Legal Guides - which ar explicitly "incorporated ... by reference" 

into JEDEC's own governg rues, and curently are posted on JEDEC's own website under 

the headig "Manuals" - provide that stadadiation progr must be "conducted under strct
 

policies designed to promote and stiulate our free enterpnse system and to make sure that 

laws for maitaing and preserg th system are vigorously followed."
 

19. The EIAJEDEC Legal Guides establish a "basic rue" that stadadition progrs conducted 

by the organtion "shall not be proposed for or indiectly resut in ... restctig competition, 

givig a competitive advantage to any manufactuer, (or J excludig competitors from the
 

market. "
 

20. Consistent with its commtment to promotig unettered competition, at al ties relevant herein
 

JEDEC also has maintained a commtment to avoid, where possible, the incorporation of 

patented technologies into its published stadads, or at a mium to enure that such 

technologies, if incorporated, wi be available to be licensed on royalty-free or otherwse 

reasonable and non-discriatory term. Toward ths end, JEDEC has implemented
 

procedures designed to ensure that members disclose any patents, or pendig patent 

applications, involvig the stadad-settg work being underten by the organtion. 

21. At al ties relevant herein meetigs of the pertent JEDEC subcommttee routiely were
 

opened with a statement by the chaireron undersconng the existence of such diclosure 

obligations. Th practice is in conformty with requiements set fort in the JEDEC Manua, the 

curent edition of which provides: 

'The chaieron of any JEDEC comittee (expressly defied to include, among other 

thgs, subcommttees J must call to the attention of all those present the requiements 

contaed in EIA Legal Guides, and the obligation of al parcipants to inorm the 

meetig of any knowledge they may have of any patents, or pendig patents, that might 

be involved in the work they are underg." 

Although the above provision was fit added to the JEDEC Manual in October 1993, the 

existence and scope of these disclosure obligations were commonly known with JEDEC 

before that tie, and indeed thoughout the entiety ofRabus's involvement in the 

organation, from late 1991 though mid-1996.
 

22. Whe JEDEC does not altogether prohibit the use of patented items in the stadads that it 

promulgates, the JEDEC Manual does mandate that the use of such items "be considered with 

great care." Indeed, consistent with procedures and practices followed with JEDEC 

thoughout the relevant tie penod, the JEDEC Manual, at least since October 1993, has 

5 
required that no stadad be drfted to include "patented items" - or "items and processes for
 

which a patent has been applied" - absent both 

(1) a well-supported techncal juscation for inclusion of the patente item; and
 

(2) express wrtten assurce from the patent holder that a license to the patented 

technology wi be made available either "without compenation" or under "reasonable 

term and conditions that ar demonstrbly free of any unai dicriation."
 

23. The JEDEC Manual, at least since October 1993, has expressly provided that the disclosure 

and licensing obligations discussed above apply "with equa force" when JEDEC members, 

subsequent to the adoption of a stadad, discover new inormation about existig patent rights 

- or otherwe obtain new patent rights - involvig that stadad. In such situtions, the JEDEC 

member must make the same disclosures and provide the same assurces as would be 

requied if the member knew of such patent rights prior to adoption of the relevant stadard. 

24. Faily interreted the policies, procedures, and practices existig with JEDEC thoughout all
 

ties relevant herein imposed upon JEDEC members cert basic duties with regard to the 

diclosure of relevant patent-related Inonnation and the licensing of relevant patent rights: 

a. Firt, to the extent any JEDEC member knew or believed that it possessed patents or
 

pendig patent applications that might involve the stadad-setg work that JEDEC 

was undertg, the member was requied to disclose the existence of the relevant 

patents or patent applications and to identi the aspect of JEDEC's work to which 

they related. 

b. Second, in the event that technologies covered by a member's known patents or patent
 

applications were proposed for inclusion in a JEDEC stadad, the member was 

requid to state whether the tehnology would be made avaiable either "without
 

compensation" or under "reasonable term and conditions that are demonstrbly free of 

any unai dicration." Absent the member's agrement to one of 
 these two 

conditions, the JEDEC rues would not allow the technology to be incorporated into a 

proposed stadard.
 

JEDEC Work Involving SDRA Standards 

25. The JEDEC commttee responsible for overseeing the development of stadads relatig to 

memory devices is known as the JC-42 Committee on Solid State Memories ("JC-42"), which 

ha several subcommttees, one of which is parcularly relevant for puroses 
 of the intat
 

6 
complaint: the JC-42.3 Subcomittee on RA Devices ("JC-42.3"). 

26. Begig in or around 1990, JC-42.3 commenced work on stadads relatig to the design
 

and architectue of synchronous DRA, referred to with JC-42.3 as "SDRA." JEDEC 

members involved in the SDRA-related work of JC-42.3 have over tie included villy all
 

leadig memoiy designers, manufactuers, and users, whether based in the u.s. or abroad. 

27. Dug the 1990s, JEDEC issued several SDRA-related stadards, the first of 
 which was 

published in November 1993 and was identified as Release 4 of 
 the 21-C Standad. 

Subsequent releases of the 21-C Stadad followed after that, only small portons of which 

related to SDRA, as opposed to other memoiy-related technologies. In August 1999, 

however, JEDEC published a substtially augmented SDRA stadad - Release 9 of the 

21-C Stadad - which introduced a second generation of SDRA. Ths second-generation 

stadard became known as "double data rate," or "DDR," SDRA. 

28. Although the second-generation SDRA standard was not issued until 
 1999, the work that 

culated in that stadad commenced, at the veiy latest, shortly after the fit-generation 

SDRA stadad was adopted in 1993. Indeed, it may have commenced even earlier than 

tht, inasmuch as at leas one of the technological featues intially considered (but ultiately
 

rejected) for the fist-generation SDRA stadad was later adopted in the second-generation 

stadad. In addition, most, if not all, of the technologies encompassed in the fist SDRA 

stadad were 
 cared forward in the second-generation stadad as well. 

29. The process though which JEDEC adopted and published these standards proceeded 

essentialy as follows:
 

a. At reguarly scheduled meetings of 
 the JC-42.3 Subcomittee, which tyicaly 

occured on a quaerly basis - as well as affiated comittee and tak group meetigs, 

which were scheduled as needed - members were allowed to make presentations 

concerg specifc concepts or technologies they proposed for inclusion in a stadad 

under development. 

b. Such presentations genery were accompaned by wrttn materals, which, in addition
 

to being shared with all members present at the meetig, were reproduced and attched 

to the offcial meetig miutes. 

c. Before any proposal could be considered for adoption, it was necessar that it be
 

presented a second tie at a later subcomittee meetig. 

d. At that point, a member could move that the proposal be presented to the
 

7 
subcommttee membership for approval though a formal ballotig process, puruat to 

which wrtten ballots were distrbute and received by maiL.
 

e. Votes were then tabulated at the subsequent meetig of the subcommttee, at which
 

tie members votig "No" were required to explain their reasons for opposing the 

proposal. 

f Techncally, a two-thds majority was required, but in practice proposals raely passed
 

without a consensus of all votig membe. 

g. Individual proposals, once approved by JC-42.3, were often held at the subcommttee
 

level until a complete package of related proposals was ready to be forwarded to the 

Council for fi ratication.
 

30. JEDEC's - specifically, the JC-42.3 Subcommttee's - work on SDRA stadads contiues 

today, and a thd-generation SDRA stadad, known as "DDR II," is èxpected to be 

completed later ths year. 

Rambus and Its Proprietary RDRA Technology 

3 l. Rambus was founded in 1990 by two electrcal engieers, Mark Horowitz and Michael
 

Fanwald, who together developed their own, proprieta synchronous DRA architectue. 

They naed the new architectue Rambus DRA, or simply "RDRA," and contrbuted the 

technology to the new corporation upon its formation. 

32. RDRA, as origially designed, difered from trtional DRA architectus in severl ways, 

includg but not lite to the followig:
 

a. Firt, the RDRA architectue specifed the use of many fewer bus lines than was 

common in trditional DRA design. Thus, RDRA was said to be a "narow-bus" 

architectue. By comparson to RDRA, trditional DRA incorporated what was 

referred to as a "wide-bus" or "broad-bus" design. 

b. Second, in the RDRA architectue, each bus line was capable of carg thee tyes 

of inormation essential to memory fuctionalty: (1) data (2) "address" inormation, 

specifg the location where needed data could be found, or should be placed, in
 

memory; and (3) "control" inormation, specifg, among other thgs, the relevant 

command (e.g., whether the computer should "read" data from memory or "wrte" new 

data to memory). By comparson, in trtional DRA architectues, each bus line 

was generally dedicated to carg only one of these thee tyes of inormation. Thus,
 

8 
the RDRA bus was someties said to be "multiplexed" or "trply multiplexed." 

c. Thd, rather than trmittg data, address, and control inormation separtely, as was
 

common in a trditional DRA architetue, RDRA trmitted such inormation 

together in groupings, called "packets." For ths reason, RDRA is also someties 

referred to as a "packetied" system. 

33. Though Rambus has designed, and obtained patents on, varous DRA-related technological 

concepts or featues, Rambus does not itself manufactue such technologies, choosing intead 

to license its design for a fee to downtream memory manufactuers. Begig in the early 

1990s and contiuig though the present, Rabus ha sought to market and licene its 

proprieta RDRA technology to manufactuers of computer memory and related products, 

includig a number of companes holdig memberhip in JEDEC. 

Rambus's '898 Patent Application and Its Progeny 

34. On April 
 18, 1990, Rambus filed its fit DRA-related patent application with the United 

States Patent and Trademark Offce ("PTO") - Application No. 07/510,898 (hereinafter, "the 

'898 application"). The application contained a 62-page specifcation and 15 drwigs, all
 

purortg to describe Rambus's DRA-related inventions. In addition, the '898 application 

contained 150 separte claim, each of 
 which was limted to a narow-bus, multiplexed 

packetied DRA design. 

35. Patents and patent applications consist of two pricipal par. The first par is a wrtten
 

description, whereby the patent applicant (or, if the application issues as a patent, the patent 

holder) descrbes the invention, though techncal specifications and drwigs, in a maner that 

would allow a person skied in the ar to which the invention applies to understad and pratice 

the invention without undue experientation. The secnd par of the patent or patent 

application consists of one or more "clai" defig, or delieatig, the scope - or outer
 

bounds - of the patent holder's exclusive rights (or, in the case of an application, the exclusive 

rights the applicant seeks to obtain). 

36. Because all 
 150 clais contaed in Rabus's '898 patent application were lited to a 

naow-bus, multiplexed, packetied DRA design, though ths application Rabus was not 

seekig - nor, absent amendment to the application, could it obtain - any patent rights 

exceedg those litations. 

37. In March 1992, Rambus broke out portons of its '898 application into 10 divisional patent 

applications, each of which "claimed priority back" to the '898 application and to its Apri 


fig date. The origial '898 application and these 10 divisional applications, in tu, gave rise
 

9 

1990 
to numerous other amended divisional, or contiuation patent applications - al techncaly the 

"progeny" of the '898 application - and eventully resuted in the issuce of numerous Rabus 

patents. 

a. The process of obtag patents or "pedectig" patent claim, otherwse known as
 

patent prosecution, oftn involves amendig, dividig, or contiuig patet applications 

on fie with the PTO. 

b. Though an "amendment' to a pendig patent application, a patent applicant may delete 

or alter cerin claim contained in the pendig application, or may add new clais, 

whie at the same tie retag the same specifcation, drwigs, and (to the extet not 

amended or deleted) claims of the previously pendig application. 

c. A "diviional" application is one that cares out one of multiple ditict inventions from a
 

prior application and seeks to obtain patent rights over tht distict invention, without
 

addig any new matter to the wrtten descrption of the invention described in the earlier 

application. 

d. A "contiuation" application is a second application, coverg the same invention
 

described in a prior application, that is fied before the earlier application either issues 

as a patent or is abandoned and, again, adds no new matter to the wrtten description 

of the invention descrbed in the earlier application. 

e. Before issuig any patent, the PTO fit seeks to determe whether the invention
 

claimed in the relevant patent application is preceded by "prior ar" - that is, by
 

preexitig inventions or other publicly known facts or Iionnation tht demonstrtes the 

lack of novelty in the invention for which a patet is sought 

£ Generally speakg, deterations of whether prior ar exits in a given case are made 

by reference to the date on which the patent application is filed, otherwse known as the 

"priority date." 

g. When a patent application is amended, divided, or contiued in the maner descrbed 

above, the patent applicant may "clai priority back" to an earlier-filed application ­

thus benefittg from the ealier fig date - but only if the amended diviional, or
 

contiuation application "adds no new matl' to the wrtten descrption of the invention 

described in the earlier application. As noted above, divisional and contiuation 

applications, by defition, include no new matter not contaed with the earlier-


referenced application. 

li Subsequent amendments, diviionals, or contiuations claimg priority back to an
 

10 
earlier-fied patent application are someties said to be with the same "famy" as the 

earlier-fied application, or otherwse are said to be the prior application's "progeny." 

L Thus, the fact that, as stated above, each Rabus patent application in the '898 

"famy" - or each of 
 the '898 application's "progeny" - claied priority back to the 

'898 application, means that al of 
 the patent applications in the '898 famy contained 

the same specifcation and drwigs as were contained in the '898 application itself In 

fac, in each amended, divisional, and contiuation patent application Rabus fied 

claimg priority back to the '898 application's Apri 1990 fig date, Rambus was
 

required to - and did - expressly wart to the PTO that the application added "no
 

new mattef' beyond what was contained in the '898 application's 62-page 

specification and 15 drwigs. 

38. Though al of 
 the Rabus patent applications in the '898 famy contained the same 

specifcation and drwigs as the '898 application itself over tie Rabus sought to expand 

the clai contained with these applications in order to obta patent rights extending beyond
 

the narow-bus, multiplexed, packetized design inerent in the RDRA design. In other 

words, in the coure of prosecutig the '898 famy of patent applications, Rambus made a 

conscious effort to withdrw the narow-bus litations contained in the origial application's 

clai, and thereby sought to signcantly expand the scope of its potential patent rights, whie 

stil cligig to the '898 application's Apri 
 1990 priority date. 

Rambus's Initial Involvement in JEDEC 

39. Even before Rabus was formally incorporated in early 1990, its founders outlied a strtegy 

whereby, in an effort to obtain lugh royalties for RDRA, they would seek to establish 

RDRA as the actul or de facto industr stadad. 

40. Pary with th goal in mid, Rabus attended its fit JEDEC meetig in December 1991, and
 

it offcialy joined the organtion shortly thereafer. Although JEDEC was conductig other 

potentially relevant work at that tie, of parcular relevance to Rabus was the work then 

underway with the JC-423 Subcommttee, wluch was in the process of developing a fit 

generation of standads for SDRA. From December 1991 though December 1995, 

Rabus representatives reguarly attended JC-423 meetigs. 

41. Though Rambus attended its last JC-423 meetig in December 1995, it remaied a member of 

JEDEC, and contiued to receive offcial maigs and other inormation from JEDEC, unti June 

1996, when it formaly withdrew from the organtion.
 

Rambus's Scheme to Capture the SDRA Standards 

11 
42. Shortly after becomig involved in JEDEC, it became apparent to Rabus that JC-42.3 was
 

commtted to developing SDRA stadards based on the traditional wide-bus, non-packetied 

DRA architectue, relyig to the extent possible on non-proprieta technologies. In other 

words, it was highy unely JC-42.3 would be interested in stadadig RDRA, an 

architectue that was both proprieta and distictly non-trditionaL. 

43. Rabus, of coure, would have preferred that its own RDRA technology be adopted as the 

industr stadad. Failig that, Rabus might have preferred to see any 
 effort at adoptig an 

industr-wide SDRA stadad fail, inasmuch as industr adoption of such a stadad would 

make it more dicult for Rabus to market its proprieta RDRA technology. By mid1992, however, Rambus had seized upon an altemative business plan - one that, if successfu, 

might alow Rabus to achieve the goal of chagig high royalties even if the DRA industr 

were to adopt as its stadad somethg other than RDRA. Rambus's CEO, GeoffTate, laid 

out ths scheme in a June i 8, 1992 drft of the Rambus i 992- i 997 Business Plan: 

"For about 2+ years a JEDEC commttee has been workig on the specifcations for a 

Synchronous DRA. No stadard has yet been approved by JEDEC. Our 

expectation is a stadad wi not be reached until end of i 992 at the earliest. 

* * *
 

(We believe that Sync DRAs inge on some claim in our fied patents; and that 

there are additional claim we can fie for our patents that cover featues of Sync 

DRAs. Then we wi be in position to request patent licening (fees and royalties) 

from any manufactuer of Sync DRAs. Ou action plan is to determe the exact 

claim and file the additional clai by the end of Q3/92. Then to advise Sync DRA 

manufactuers in Q4/92." 

44. In what appear to be the fial dr of 
 the same Rambus Business Plan, dated September 

1992, Tate fuher elaborated on the scheme:
 

''Rbus expects the patents wi be issued largely as fied and that companes wi not 

be able to develop Rabus-compatible or Rabus-lie technology without ingig
 

on multiple fudaenta clai of the patents .... Rabus' patents are liely to have 

signcant applications other than for the Rabus Intedace." 

In the same document, Tate also wrote: "Sync DRAs inge clai in Rabus's fied 

patents and other clai that Rambus wi file in updates later in 1992." 

45. In actulity, events unolded somewhat dierently than Rambus's CEO envisioned in these
 

12 
statements, in a maner that afected the tig, but not the core substace, of 
 Ram bus's 

scheme. For intace, although Rambus's '898 application was pendig at the tie these 

sttements were wrtten, not until 
 1996 was Rambus - though a separte application claimg 

priority back to the '898 application - able to obtain its firt patent broad enough to argubly 

cover aspects ofthe wide-bus DRA architectue incorporated into the JEDEC standards. In 

addition, Rabus ultiately elected to wait unti 
 late 1999, afer DRA manufactu and 

their customers had become "locked in" to the JEDEC stadads, before seekig to enforce its 

patents againt memory manufacters producing JEDEC-compliant SDRA. 

46. Aside from such tig issues, the Rabus business plan quoted in Pargrphs 43 and 44 set
 

fort quite accurtely the basic scheme upon which the company would embark - that is, a 

scheme whereby Rabus would actively seek to pedect patent rights coverig technologies 

that were the subject of an ongoing, industr-wide stadadition process, in which Rambus 

itself was a reguar parcipant, without disclosing the exitence of such patet rights (or the 

pertent patent applications) to other parcipants, many of whom, by producing products 

compliant with the stadads, would later be charged with ingig Rabus' s patents.
 

Implementation of Rambus's Scheme 

47. Dug the coure of 
 its parcipation in JEDEC, from late 1991 though mid-1996, Rambus 

observed multiple presentations regarding technologies, proposed for (and later included in) 

JEDECs SDRA stadards, that Rambus either (1) knew or believed to be covered by 

claim contained in its then-pendig patent applications, or (2) believed could be covered 

though amendments to those applications expandig the scope of the patent clai whie
 

addig no new matter to the underlyig tehncal specifcation. 

48. Tht is, at all ties relevant herein Rabus believed tht a number of the specifc technologies
 

that were proposed for, and later incorporated in, the relevant JEDEC stadards were 

encompassed by the 62-page techncal specifcation and 15 related drwigs common to 

Rabus's '898 application (fied in 1990) and the numerous amended, divisional, and 

contiuation applications that stemmed from the '898 application. Rabus fuer believed 

that, to the extent the pendig claim of 
 the '898 application and its later-fied progeny failed to 

cover these technologies as proposed to be used in JEDEC's SDRA stadads, such claims 

could be amended to cover these technologies, whie stil claimg priority back to the '898
 

application's Apri 
 1990 fig date. 

49. As Rabus's CEO described in the company's intema plang documents in mid-1992 (see 

Pargraphs 43-4 above), the intial phase ofRabus's "action plan" required tht it fit 

"detere the exact claim" in its pendig applications tht covered technologies being
 

incorporated into the JEDEC stadads, and then, as needed, "fie ... additional claims" to 

13 
pedect Rabus's patent rights over such technologies. In executig these steps, Rambus 

placed heavy reliance upon two individuas: Richard Crisp, Rabus' s designated 

representative to the JC-42.3 Subcommttee, and Lester Vincent, an attorney with the law fi
 

of Blakely, Sokoloff Taylor & Zafman who served as Rambus's outside patent counel. 

50. Richard Crisp, an electrcal engieer, 
 joined Rabus in 1991. He attended his first JC-42.3 

meetig in Febru 1992 and contiued to attend such meetigs reguarly though December
 \ 

1995. (I addition to Crisp, David Moorig, at that tie Rambus's vice president for business
 

development, and Bily Garett, another Rabus engineer, someties attended JC-42.3 

meetings.) In May 1992, Crisp became Rabus's designated representative to JC-42.3. As 

such, he personally received any inormation, such as meetig miutes and ballot form, tht
 

JEDEC fushed to Rabus by mai. 

51. Thoughout the durtion of 
 Crisp's parcipation in the JC-42.3 Subcommttee, it was his 

customar practice to send comprehensive report to his superiors and others with Rabus 

descrbing in detail the technologies that were being proposed for inclusion in the JEDEC 

SDRA stadads. Typically, these report were communcated via e-mails authored and sent 

whie the JC-42.3 meetigs were sti in progress. 

52. Lester Vincent and his law fi, Blakely, Sokoloff were retaed as patent counel by Rabus
 

in the suer of 1991, at which tie Vincent assumed priar responsibilty for prosecutig
 

Rabus's '898 application before the pro. For several year thereafter, Vincent and his
 

colleagues assisted Rambus with its DRA-related patent strtegy, providig frequent advice 

to Rabus on patent-relate issues and asumg priar responsibilty for drftg, fig, and
 

prosecutig the varous contiuation and diviional patent applications that stmmed from the 

'898 application. 

53. In late March 1992, Vincent met with Crisp and Alen Robert, the Rabus vice president with 

responsibilty for patents, to discuss, among other thgs, Rabus's parcipation in JEDEC. At 

ths meetig, Vincent, Crisp, and Rober discussed whether Rabus, havig joined JEDEC 

and parcipated in JEDEC meetigs, was at risk of fodeitig - on grounds of equitable estoppel 

- its rights to enorce futue patents coverig aspects of the JEDEC stadads. Vincent advised 

that there could be an equitable estoppel problem ifRabus were to convey to other JEDEC 

parcipants the false or mileadg impression that it would not seek to enorce its patents or its 

futue patents. He fuer advised that, in order to reduce such riks, Rabus might remain 

silent and abstain from votig on any proposed JEDEC stadads. Rabus in fact did abstain 

from votig on the scores of JC-42.3 ballot intiatives tht arose durg the coure of its 

parcipation in JEDEC. Richard Crisp did vote on one occasion, however, registerig a "No" 

vote on four separte ballot items. 

14 
54. Thoughout its four and one-hal 
 year of 
 parcipation in the JC-42.3 Subcommttee, Rabus 

engaged in a contiuous pattern of deceptive, bad-faith conduct. Rabus's bad-faith 

parcipation in JEDEC, although evidenced in other ways as well, was perhaps best 

exemplied in the coordited activities of Crisp and Vincent. Durg hi four-year tenure as 

Rabus's representative to JC-42.3, Crisp observed multiple presentations relatig to 

technologies Rambus believed were covered - or, though amendment, could be covered - by 

pendig Rabus patent applications. In fact, in a number of intaces, Crip, whie 

parcipatig in JC-42.3 meetigs, sent e-mail back to Rabus headquaers expressing a 

belief tht Rabus had pendig applications coverg certin technologies being discussed in
 

such meetigs, or otherwse suggestig that Rabus's pendig patent applications be reviewed, 

and if necessai amended, to ensure they covered such technologies. On severa occasions,
 

Crisp - based in par on inormation leared though attending JC-42.3 meetigs - developed 

specifc proposals for amendig Rabus' s pendig patent clai and communcated such 

proposals diectly (or via a Rabus colleague) to Vincent. Likewise, in some cases, Vincent 

sent copies of draft amendments to Rambus's patent applications to Crisp, among others, 

solicitig hi input before fialg such amendments. Plaiy, in light ofRabus's faiures to 

disclose perent patent-related inormation to JEDEC, the activities descrbed in ths 

pargrph constituted bad faith. 

55. As underscored elsewhere in ths complaint, Rambus never disclosed to JEDEC the fact that,
 

thoughout the durtion of its membership in the organtion, Rabus had on fie with the PTO, 

and was actively prosecutig, patent applications that, in its view, either covered or could easily 

be amended to cover elements of the exitig and futue SDRA stadads. 

Technologies Impacted by Rambus's Scheme 

56. Among other specifc technologies adopted or proposed for inclusion in the SDRA stadads 

dug the period ofRabus's parcipation in JEDEC, which Rabus believed were covered
 

by its then-pendig patent applications or could be covered though amendments to such 

applications, were the followig: (1) prograble CAS latency; (2) prograble burt 

lengt; (3) on-chip PLL/DLL; and (4) dual-edge clock. 

57. Colum address strobe (or "CAS") latency refers to the amount of tie it taes for the memoiy 

to release data afer receivig a signal, known as the colum address strobe, in connection with 

a read request from the Cpu. The technology known as prograble CAS latency allows 

memory chips to be progred such that th aspect of the memoiy's operation can be 

taored to faciltate compatibilty with a varety of dierent compute envionments. 

58. Burt lengt generlly refer to the number of 
 ties inormation (or data) is trmitted between 

the CPU and memoiy in conjunction with a single request or intrction. The technology 

15 
known as prograble burt lengt allows memoiy chips to be progred to adjust th
 

the memoiy's operation in order to facilitate compatibilty with a varety of dierent asect of 


computer envionments. 

59. From December 1991 though May 1992, Crisp and other Rambus representatives observed 

multiple JC-42.3 presentations perting to prograble CAS latency and prograble 

burt lengt both of which were proposed to be incorporated in the fit JEDEC SDRA 

stadad. Soon thereafter, in the sumer of 1992, Crisp received, and voted upon, a ballot 

callg for inclusion of both technologies in the stadad. Ths was the only tie tht Crisp
 

voted on a JEDEC ballot, and he voted "No," for techncal reasons that he was called upon to, 

and did, explain but without sayig anytg to suggest that Rambus might possess relevant
 

intellectul propert. 

60. At the tie of these events, Crisp and other with Rambus believed tht both prograble 

CAS latency and prograble burt lengt were encompassed by the inventions set fort in 

the specifcation and drwigs of the '898 application and related applications that were then 

pedig at the PTO, and that Rambus - by amendig the claim in those pendig applications ­

had the abilty to pedect patent rights coverg such technologies as used in the SDRA 

stadad. Indeed, beging in May 1992, Crisp, Roberts, and other Rambus representatives
 

began a seres of consultations with Vincent for the purose of drftg new claim, lied to the
 

'898 application, that would cover use of certin technologies in the wide-bus architectue 

adopted by the SDRA stadad. Prograble CAS latency and prograble burt 

lengt were both among the technologies discussed for inclusion in these new wide-bus clai. 

61. In March 1993, a Rambus representative attended the JC-42.3 meeting at which both 

prograble CAS latency and prograble burt lengt were approved for inclusion in the 

fit SDRA stadad and were forwarded to the JEDEC Council, along with a collection of 

other approved technologies, as par of a comprehensive standad proposaL. Despite 

Rabus's belief that these technologies were subject to pendig Rabus patent claim, the 

Rabus representative remained silent thoughout the meetig. In May 1993, the Council 

formally adopted the proposed SDRA stadad, which was published in November of that 

year. (Both of 
 these technologies were later cared forward in the second-generation SDRA 

stadad publihed in Augut 1999.) Also in May 1993, Vincent's law:f (Blakely, Sokoloff
 

fit fied patent claim on behal ofRabus inteded to cover use of 
 DRA technologies in a 

wide-bus architectue. From that tie though the present, Rabus has contiued its effort to 

perect patent rights coverg use of prograble CAS latency and prograble burt 

lengt as incorporated in the SDRA stadards. 

62. The design objectives sered by inclusion of prograble CAS latency and prograble
 

burt lengt technologies in the fit- and second-generation JEDEC stadads liely could have 

16 
been accomplished though use of alternative DRA-related technologies available at the tie 

these stadads were developed. At a mium, there would have been uncertinty at that tie 

regardig the potential to identi or develop feasible alternative technologies. In either event,
 

had Rabus disclosed to the JC-42.3 Subcommttee that it possessed pendig patent 

applications purorting to cover - or that could be amended to cover - prograble CAS 

latency and burt lengt technologies in a wide-bus synchronous DRA architectue, such 

disclosures liely would have impacted the content of the SDRA stadads, the term on 

which Rabus would later be able to license any pertent patent rights, or both. 

63. Phae lock loop ("PLL") and delay lock loop ("DLL") are closely related technologies, both of 

which are used to synchronie the interal clock that govern operations with a memory chip 

and the system clock that regulates the timg of other system fuctions. The former, PLL, 

synchronies the two clocks by adjustig the internal clock's frequency to match the system 

clock's frequency, whereas the latter, DLL, achieves synchroniation by delayig the interal 

clock. "On-chip" PLLIDLL refers to the approach of placing these technologies on the 

memory chip itself as opposed to the alterative approach of placing these technologies on, for 

intace, the memory module or the motherboard - the latter being known as "off-chip" 

PLLIDLL. 

64. Beging in September 1994, Crisp observed presentations and other work in the JC-42.3 

Subcommttee involvig proposals to include on-chip PLL in the second genertion of the 

SDRA stadad. At that tie, Crisp and other withi Rabus believed that on-chip PLL 

was encompassed by the inventions set fort in the specification and drwigs of the '898 

application and related applications then pending at the PTO, and they had already discussed 

with Vincent their desire to perect patent rights coverg use of this technology in SDRAs. 

Indeed, in June of 1993 Vincent's law fi fied, on Rabus' s behal an amendment to a 

pendig patent application - Application No. 07/847,692 - adding claims that, on their face, 

covered use of on-chip PLLIDLL technology in either a wide-bus or narow-bus DRA 

architecte. From June 1993 though the present, Rabus has contiued its effort to perfect 

patet rights coverig use of on-chip DLL technology as ultiately incorporated in the second-


generation SDRA stadad publihed in Augut 1999. 

65. The design objectives sered by inclusion of on-chip DLL technology in the second-genertion 

JEDEC stadad liely could have been accomplished though use of alternative DRArelated technologies available at the time these stadads were developed. At a mium, there 

would have been uncertinty at tht tie regardig the potential to identi or develop feasible 

alternative technologies. In either event, had Rabus disclosed to the JC-42.3 Subcommttee 

that it possessed pending patent applications purortedly coverig - or that could be amended 

to cover - on-chip PLLIDLL technologies in a wide-bus synchronous DRA architectue, 

17 
such disclosures likely would have impacted the content of the SDRA stadads, the term 

on which Rabus wmùd later be able to licene any perent patent nghts, or both. 

66. Dul-edge clock is a technology that permits inormation to be trmittd between the CPU 

and memoiy twice with eveiy cycle of the system clock, thereby doubling the rate at which 

inormation is trmitted compared to the fit genertion of SDRA, which incorporated a
 

"single-edge clock" and hence permtted inormation to be trmitted only once per clock
 

cycle. 

67. Between December 1991 and Apn11992, Cnsp and other Rambus representatives attended 

JC-42.3 meetigs at which they observed presentations and other work involving dual-edge 

clock technology and a closely related technology known as "toggle-mode." Ultiately, the 

JC-42.3 Subcommttee decided not to incorporate these technologies into the first-generation 

SDRA stadad. At the time ths decision was reached, however, cert JC-42.3 members 

expressed the view that such technologies would be appropnate for reconsideration in 

connection with the next generation of SDRA. Dul-edge clock technology was again 

discussed by the JC-42.3 Subcommittee in May 1995. Soon thereafter, in October 1995, a 

surey ballot relatig in par to dual-edge clock technology was distrbuted to JC-42.3
 

members, and the same ballot was later discussed at a JC-42.3 meetig in December 1995. A 

formal proposal to include dual-edge clock technology in the second-generation SDRA 

stadad was made at a JC-42.3 Subcommttee meetig in March 1996. Followig Rambus's 

withdrawal from JEDEC in June 1996, dual-edge clock technology was the subject offuer
 

presentations, and the technology ultiately was incorporated into the second-generation 

SDRA stadard. 

68. In September 1994, Vincent's law fi, on behalf of Rabus, fied an amendment to Rambus's
 

Patent Application No. 08/222,646, adding dual-edge clock claims that were not lited to a
 

narow-bus RDRA design, but rather purorted to cover use of dual-edge clock technology 

in any synchronous DRA architectue, includig a wide-bus architectue of the sort that was 

the focus of JEDEC's SDRA stadads. Ths application, as amended to include dual-edge 

clock clais, issued as u.s. Patent No. 5,513,327 (hereinafter, "the '327 patent') in Apnl
 

1996, whie Rabus was sti a member of JEDEC. From September 1994 though the
 

present, Rabus has contiued its effort to perfect patent nghts coverig use of dual-edge 

clock technology as used in a wide-bus synchronous DRA architectue. 

69. The design objectives sered by inclusion of dual-edge clock technology in the secondgeneration SDRA stadad liely could have been accomplihed though use of alternative 

DRA-related technologies available at the time these stadards were developed. At a 

miniimun, there would have been uncertty at that tie regardig the potential to identi or
 

develop feasible altemative technologies. In either event, had Rambus disclosed to the JC-42.3 

18 
Subcommttee that it possessed patents or pendig patent applications argubly coverig (or 

that, with respect the applications, could be amended to cover) dual-edge clock technology in a 

wide-bus synchronous DRA architectue, such diclosures liely would have impacted the 

content of the SDRA stadads, the term on which Rabus would later be able to license 

any pertent patent nghts, or both. 

Rambus's Limited and Misleadine Disclosures to JEDEC 

70. At no tie dung its involvement in JEDEC did Rabus ever disclose to the organtion the
 

fact that it possessed an issued patent - the '327 patent discussed in Paragraph 68 above - that 

purorted to cover use of a specifc technology proposed for inclusion in the JEDEC SDRA 

stadads. Nor did Rambus ever disclose to JEDEC that it had on fie with the PTO vanous 

pendig patent applications that purorted to cover, or could be amended to cover, a number 

of other technologies included or proposed for inclusion in the JEDEC SDRA stadads. 

More generaly, Rambus never said or did anytg to alert JEDEC to (1) Rabus's belief 
 tht 

it could claim nghts to cer technological featues not only when used in the context of its
 

propneta, narow-bus, RDRA design, but also when used in the tradtional wide-bus 

architectue that was the focus of JEDEC's SDRA stadad-settg activities; or (2) the fact 

that Rabus, while a member of JEDEC, was actively workig to perfect such patent nghts. 

71. On the contr, Rambus's vei parcipation in JEDEC, coupled with its failure to make 

requied patent-related disclosures, conveyed a matenally false and misleadig impression ­

naely, that JEDEC, by incorporatig into its SDRA stadads technologies openy 

discussed and considered dung Rabus's tenure in the organation, was not at nsk of 

adoptig stadads that Rabus could later claim to inge upon its patents. 

72. On at leat two occasions dung Rabus's involvement in JEDEC, Cnsp was asked by 

JEDEC representatives whether Rambus had any patent-related disclosures to make perting 

to technologies discussed with JC-42.3. In neither intace did Rabus elect to make such 

disclosures. One of these intaces, however, prompted Rambus to present a letter to the JC42.3 Subcommttee, dated September 11, 1995, which stated in par: 

"At ths tie, Rambus elect to not make a specifc comment on our intellectul
 

propert position. . .. Ou presence or silence at commttee meetigs does not 

constitute an endorsement of any proposal under the commttee's consideration nor 

does it make any statement regarding potential ingement of Ram bus intellectu 

propert." 

73. Beyond these statements, the September 1995 
 letter said nothg concerg Rabus's patent 

position. In partcular, it made no reference to the fact that Rambus possessed pendig patent 

19 
applications that purorted to cover, or were being amended to cover, both (1) technologies 

included in aleady published JEDEC stadads, and (2) additional technologies then being 

considered for inclusion in futue JEDEC stadards. Moreover, the episode that gave rise to 

Rabus's September 1995 letter involved dicussion of a narow-bus, multiplexed, packetied 

SDRA design - known as "SyncLin" - that bore a strong resemblance to Rambus's own 

naow-bus, multiplexed packetied RDRA design. As explained elsewhere in th 

complaint, the wide-bus, non-packetied synchronous DRA design adopted by JEDEC 

diered signcantly from Rabus's RDRA design and hence from the SyncLin design as 

well. Thus, to the extent Rabus's September 1995 
 letter could be interpreted to suggest that 

Rabus might possess relevant intellectul propert rights, JEDEC's members would natuy 

have undertood that any such rights related to the SyncLin design, not to the use of certin 

technologies in the JEDEC stadads. 

74. In connection with the same incident that gave rise to th September 1995 
 letter, Crisp and 

other with Rabus intealy debated the extent to which, and maner in which, Rabus
 

should consider makg patent-related disclosures to JEDEC or to individual JEDEC members. 

In ths regard, on May 24,1995, Crisp sent an e-mail to Rambus's CEO, GeoffTate, as well 

as other Rabus executives, suggestig a possible bifcated approach to disclosure. As to 

any "really key" technologies, Crisp suggested that Rambus should consider mag 

disclosures. But "(i)f it is not a really key issue," Crisp stated, ''ten ... it makes no sense to 

alert them to a potential problem they can eaily work around." 

75. In the same e-mail, Crisp outlied a second possible approach to dealing with the disclosure 

issue: 

'We may want to wal into the next JEDEC meetig and simply provide a list of patent 

number which we have issued and say 'we are not lawyers, we wi pass no judgment 

of ingement or non-ingement, but here are our issued patent numbers, you decide 

for yourelves what does and does not inge.'"
 

Although Rabus in th parcular intace did not adopt ths approach to disclosure, Crisp's 

suggestion foreshaowed quite closely the maner in which Rabus would later anounce its 

withdrwal from JEDEC roughy a year later, in June 1996 (see Paragraphs 81-88 below). 

76. Pror to withdrwig from the organtion in June 1996, Rabus did make one patent-related 

disclosure to JEDEC. In September 1993, Rabus inormed JEDEC of the issuance ofD.S. 

Patent No. 5,423,703 (hereinafter, "the '703 patent"). Although the '703 patent claimed 

priority back to Rabus' s '898 application and thus contained the same specifcation and 

drwigs, the claim of the '703 patent related to a specifc clockig technology, unque to 

RDRA, that diered signcantly from any clockig technology considered by JEDEC. For 

20 
ths reason, the patent rights confered upon Rabus by the '703 patent - as reflected in the 

patent's claim - did not relate to or involve JEDEC's work on SDRA stadads. 

Furerore, Rabus's disclosure of 
 ths patent did nothg to alert JEDEC's members to 

Rabus's belief 
 that the specifcation and related drwigs common to the '703 patent and all 

other patent applications in the '898 famly provided a basis upon which it could claim 

additional patent rights coverig technologies incorporated in the SDRA stadads. 

77. Other than the foregoing, Rambus made no patent-related disclosures to JEDEC or to the JC42.3 Subcommttee prior to withdrawig from JEDEC in June 1996. Whe Rabus was a 

member of JEDEC, however, some JEDEC members obtained (or viewed) copies of one or 

more foreign patent applications fied by Rabus, which contaed the same specifcation and 

drwigs as the '898 application and its progeny. In light of 
 the varous inonnation (identied 

in inter alia, Paragraphs 54-55, 60, 64, 68, 70, 73, and 76 above) that Rambus failed to 

diclose to JEDEC, simply viewig these foreign patent applications would have done nothg 

to alert JEDEC's members to the fact that Rambus believed the specifcation and related 

drwigs common to the foreign applications and the '898 famly of 
 US. patent applications 

penntted it to clai additional patent rights coverig the SDRA stadads. 

78. Finlly, before, durg, and afer its tenure as a JEDEC member, in connection with its ongoing
 

effort to market and license RDRA, Rabus made lited, private disclosures about its 

technology to some of 
 the companes parcipatig in JC-42.3. Upon inonnation and belief, 

these disclosures were made puruat to agreements prohibitig the company receiving such 

inonnation from diclosing it to others. In any event, these lited, private diclosures 

concerng Rabus's proprieta, narow-bus RDRA technology were not adequate to 

satisfy Rabus's diclosure obligations, nor did such disclosures do, or convey, anytg to 

place individua JEDEC members on notice ofRabus's belief tht it could clai patent rights
 

over technologies used in the JEDEC SDRA stadads. 

Rambus's Violations ofthe JEDEC Disclosure Duty 

79. As discussed above, upon joing JEDEC, Rabus became subject to the same basic 

disclosure duty applicable to all JEDEC members - the duty to disclose the existence of any 

patets or pendig patent applications it knew or believed "might be involved in" the stadadsettg work that JEDEC was undertg, and to identify the aspect of JEDEC's work to 

which they related. (See Paragraphs 21 and 24 above.) 

80. Rabus violated th duty repeatedly, notwthtadig the limted patent-related diclosures 

discussed above. The fact is that Rabus, whie parcipatig as a JEDEC member, possessed 

a varety of patent applications - and at least one issued patent - that covered, or were 

designed to cover, technologies involved in the JEDEC stadad-settg work, as well as 

21 
additional applications that Rabus believed could be amended to cover such technologies 

without the addition of any new matter. Rabus never disclosed these critical facts to JEDEC. 

Rambus's Withdrawal from JEDEC 

81. In December 1995, Vincent leared of, and discussed with Anthony Diepenbrock, an in-house 

Rabus attorney, the Commssion's proposed consent order in In re Dell Computer 

Corporation, which involved alegations of anticompetitive unater conduct ocurg with 

the context of an industi-wide stadad-settg organation. In Janua 1996, Vincent 

advied Rabus that it should termate "fuer parcipation in any stadads body," includig 

JEDEC. 

82. On June 17, 1996, Rabus formally withdrew from JEDEC via a letter addressed to Ken 

McGhee, an EIA employee who at the time served as Secreta of JEDEC's JC-42 

Commtte. The lettr was origilly drfted by Richard Crip; however, the fial version 

reflected input from Lester Vincent, among others. . Other than McGhee, the letter was sent to 

no one else with JEDEC, including no members of the JC-42.3 Subcommttee. 

83. The letter opened by inormg Mr. McGhee that Rabus would not be renewig its
 

memberhip in the varous JEDEC commttees and subcommttees in which it had parcipate
 

includig JC-42.3, and that it therefore was retug its membership invoices unpaid. The 

remainder of the letter stated as follows: 

''Recently at JEDEC meetigs the subject ofRabus patents has been raised. Rabus 

plan to contiue to licene its proprieta technology on terms tht are consistent with
 

the business plan ofRabus, and those term may not be consistent with the ter set
 

by stadads bodies, including JEDEC. A number of major companes are aleady 

licenees of Ram bus technology. We trt that you wi understad that Rabus 

reserves all rights regardig its intellectul propert. Rambus does, however, 

encourge companes to contat Dave Moorig ofRabus to dicuss licensing term 

and to sign up as licenees.
 

To the extent that anyone is interested in the patents ofRabus, I have enclosed a list 

ofRabus u.s. and foreign patents. Rambus has also applied for a number of 

additional patents in order to protect Rambus technology." 

84. Although it attched a list of23 Rabus patents, Rambus's June 1996 withdrwal letter said 

nothg to inorm JEDEC how, if at all, the 23 listed patents - and the vague reference to 

additional, unpecifed patent applications - might relate to the work of the JC-42.3 

Subcommttee. The unstated message, as Crisp had suggested roughy a year earlier, was: 

22 
"(Here are our issued patent numbers, you decide for yourelves what does and does not 

inge." (See Paragraph 75 above.)
 

85. The list of23 Rambus patents attched to ths letter consisted of2l u.s. and two foreign (one 

Taiwanese and one Israeli) patent numbers, with no accompanyig explanation. 

a. Of 
 the 21 u.s. patents on the lit, five fell with the '898 famy and the remaig 16 

fell outside the '898 famy. 

b. Of 
 the latter group of 16, several related to discrete design for genenc electonic 

circuits - that is, they did not relate unquely to DRA design or specifcally to 

Rabus's RDRA architectue. Severl other patents included with th group of 16 

did relate in some way to DRA design but did not bear any diect connection to 

either Rambus's narow-bus RDRA architectue or the wide-bus architectue 

incoiporated into the JEDEC SDRA stadads. The remaing few patents from ths 

Ram bus's narow-bus architectue. group of 16 related to specific implementations of 


There is no indication that any of these 16 patents related to any specifc technology or 

technological featue adopted or considered for adoption in the SDRA stadads. 

c. The five U.S. patents tht did fall with the '898 famy included the '703 patent
 

discussed in Pargrph 76 above, which Rabus had previously disclosed to JEDEC. 

Of the remaing four, thee of the listed patents -lie the '703 patent - contaed only 

claim that either (1) were expressly lited to the narow-bus RDRA architectue, or 

(2) dealt with a specific aspect of the Rabus RDRA architectue unelated to 

JEDEC's work. The final patent with ths group - u.s. Patent No. 5,473,575 ­

contaed claims that, although potentially broader in scope than the other four, were 

lited to the low-voltage design used in Rabus's RDRA architectue, which 

matenally differed from the higher-voltae design that had been the focus of JEDEC's 

work. 

d. The remaig two Rabus patents on the list of 23 were the two foreign patents. 

Beyond the fact that one of these was wntten in Chiese, these foreign patents, had 

they been reviewed by JEDEC's members, would not have sufced to place them on 

notice of 
 Rabus's patent nghts, or potential patent nghts, for reasons discussed 

above. 

86. More importt th what the June 1996 withdrwal 
 letter said is what it failed to say. Among 

other thgs, the letter made no mention of the fact that Rabus possessed pendig patent 

applications covenng, or that could be amended to cover, specific technologies included, or 

proposed for inclusion, in the JEDEC SDRA stadards. Nor did the letter say anytg to 

23 
aler JEDEC to Rabus's belief 
 that it could claim rights to certin technological featues not 

only when used in the context of its proprieta, narow-bus, RDRA design, but also when 

used in the trditional wide-bus architectue that was the focus of JEDEC's SDRA stadadsettg actvities. 

87. But th was not all the June 1996 letter failed to disclose. As of June 1996, when Rabus
 

submitted its formal withdrawal 
 letter to JEDEC, the company actully possessed 24 issued 

patents, not 23. That is, one - but only one - of Rabus's issued patents was omitted from the 

list attched to the June 1996 withdrawal 
 letter. The omitted patent was Rabus's '327 

patent, which issued in Apri 
 1996, two month before Rambus's withdrwal from JEDEC. 

As discussed in Paragraph 68 above, the '327 patent contained claims purortg to cover use
 

of dual-edge clock technology in any synchronous DRA architectue. As such, it was the 

only patent actully obtained by Rabus while a member of JEDEC that argubly covered use 

of a specific technology included, or considered for inclusion, in JEDEC's wide-bus SDRA 

standards. 

88. Even aft withdrwig from JEDEC, Crip and others with Rabus contiued to closely
 

monitor JEDEC's ongoing work on SDRA stadads, includig work involvig specifc
 

technologies on which Rambus sought to perfect patent rights. 

Industr Adoption of the JEDEC Standards 

89. In the years followig the issuace ofJEDEC's fit SDRA stadad in November 1993,
 

DRA manufactuers and their customers began designg, testig, and ultitely 

manufactug memory and memory-related products incoIporatig, or complyig with, 

JEDEC's stadardied SDRA design. By 1995, JEDEC-compliant SDRA had begu to 

replace older-generation, asynchronous DRA architectues. Thereafter, the shi to the more
 

modern SDRA technology progressed rapidly. By 1998, total worldwide sales of JEDECcompliant SDRA, on a revenue basis, exceeded sales of asynchronous memory. And by 

1999, JEDEC-compliant SDRA had largely replace aschronous DRA in virlly all
 

relevant uses. Toward the end of 
 ths period - roughy 1999 to 2000 - some DRA 

manufactuers and their customers also began using RDRA, but only in very lited end uses,
 

accountig for a relatively small porton (i. e., in the rage of 5%) of overll DRA production. 

90. Leadig up to and following the issuace of JEDEC's second-generation SDRA stadador DDR SDRA - in Augut 1999, DRA manufactuers and their customers began 

designg, testig, and (to a lited extent) producing memory and memory-related products
 

incoIporatig, or complyig with, the DDR SDRA stadad. By 2000, DDR SDRA was 

begig to be manufactued in increasing volumes. Ths trend continued durg 2001, and a
 

number of 
 DRA manufactuer and their customers began to replace fi-generation 

24 
SDRA and RDRA with DDR SDRA for certin high-end uses. Curent projections 

indicate that total sales ofDDR SDRA, on a revenue basis, may account for as large as 40% 

of all DRA produced worldwide in 2002, and by 2004 this figue is expected to exceed 

50%. 

Success of 
 Rambus's Scheme 

91. Thoughout the late 1990s, as the DRA industr became increasingly locked in to use of 

JEDEC-compliant SDRA, and subsequently DDR SDRA, Rambus contiued the process 

of pedectig patent rights on certin technologies incorporated with the JEDEC SDRA 

stadads. By the late 1990s, Rabus had succeeded in obtaing numerous patents, not 

expressly limted to a narow-bus RDRA architectue, that purorted to cover, among other 

technologies encompassed by the JEDEC stadads, prograble CAS latency, 

prograble burt lengt, on-chip DLL, and dual-edge clock. 

92. In late 1999, Rambus began contactig all major DRA and chipset manufactuers worldwide 

assertg that, by vire of their manufactue, sale, or use of JEDEC-compliant SDRA, they 

were ingig upon Rabus's patt rights, and invitig them to contact Rambus for the 

purose of promptly resolvig the issue. 

93. Thereafter, Rambus entered into license agreements with seven major DRA manufactuers:
 

Matsushita Electrc Industral Co., Ltd.; Elpida Memory, Inc.; Samsung Electronics Co.; NEC 

Corporation; Toshiba America Inc.; Oki Electrc Industr Co.; and Mitsubishi Electronics 

America Inc. Puuat to these licenses, Rambus alowed each company to use those aspects 

of its technology necessar for the design and manufactue of JEDEC-compliant SDRA. In 

exchange, each company agreed to pay Rabus ongoing royalties reflectig 0.75% of revenues 

associated with the manufactue and sale of SDRAs and 3.5% of revenues associated with 

the manufactue and sale ofDDR SDRAs. By comparson, Rabus tyicaly licenes al the 

inormation needed to develop Rabus-compatible RDRA memory at royalty rates ragig 

up to a maxum of approxiately 2.5% of revenues. 

94. Afer disclosing its patents, Rabus stated publicly that it would demand even higher royalties 

from any DRA maufactuer tht refued to license the Rambus patents and intead chose to 

litigate. Rabus also publicly thatened that it might simply refue to licene its patents to any 

DRA manufactuer tht was unuccessfu in litigation. 

95. In Janua 2000, Rabus fied the fit in a seres of 
 patet ingement suits. Tht suit, which 

was fied in federal distrct cour in Delaware and named only one defendat - Hitachi - was 

subsequently settled, conditioned upon Hitachi's agreement to submit to Rabus' s license 

terms. 

25 
96. With the signg of the Hitachi licene, combined with the seven additional licenes dicussed 

above, Rambus had succeeded in obtag licenses coverig roughy 50% of total worldwide
 

production of synchronous DRA technology. At curent market prices for SDRA, such 

licenses entitle Rambus to royalties in the rage of $50-1 00 mion per year, a number that 

could increase signcantly in the event Rabus were to prevai in the ongoing litigation and 

secure licenes from the remaing manufactuers of SDRAs. Indeed, under such 

circumstaces, Rabus's SDRA-related patent rights could allow Rambus to extrt royalty 

payments well in excess of a bilon dollar from the DRA indus over the lie of the patents. 

97. In Augut 2000, Rambus fied suit agait another DRA manufactuer - hreon - in federa
 

distrct cour in Virgia, accusing Ineon of patent ingement. hreon late assered 

varous affative defenses and counterclaim. In April 2001, the case proceeded to tral, 

resutig in a jui fidig of frud agai Rabus relatig to its involvement in the stadadsettg activities of JC-42.3 and a legal rug that Rabus's patents were not inged by 

Ineon's use of 
 the SDRA stadads. These and other legal issues are curently pendig on 

appeal before the u.s. Cour of Appeals for the Federl Circuit, which heard oral arguent 

June 3, 2002. (Ieon's antitrt clai agait Rabus was dismised due to a techncal
 

faiure of proof concerng the relevant geogrphic market. Th rug has not been appealed.) 

98. Also in Augut 2000, Rambus itselfwas sued, in federal distrct cour in Californa, by another 

DRA manufactuer - Hyn - seekig a declartory judgment that its manufactue and sale of 

JEDEC-:compliant SDRA did not inge Rambus's patents. In addition to seekig 

declartory relief, Hyn accuses Rabus of, among other thgs, antitr violations, unai 

competition, and breach of contrct. Meanwhie, Rambus counterclaimed, allegig patent 

ingement, and the suit was subsequently stayed pendig a rug by the Feder Circuit in the 

Infineon litigation. 

99. In a second suit fied againt Rabus in Augut 2000, in federal distrct cour in Delawar,
 

another major DRA manufactuer - Micron - seeks a declaratory judgment that its 

manufactue and sale ofJEDEC-compliant SDRA does not inge Rambus's patents. In
 

addition to seekig declartory relief, Micron accuses Rabus of monopoliation, attempted 

monopolition, frud, and inequitable conduct. As in the Hynix suit, Rambus has asserted
 

counterclais againt Micron, accusing it of patent ingement, and the suit ha been stayed, at 

least for puroses other than discover, pendig resolution of the Infneon appeaL. 

100. In the Infineon, Hynix, and Micron lawsuits combined, Rambus has asserted that a dozen or
 

more of its patents have been inged though the production and sale of JEDEC-compliant 

SDRA by these thee companes. Each of the patents upon which Rabus has sued stems 

from, and claims priority back to, Rabus's '898 application. 

26 
101. Upon inormation and belief, Rabus also possesses additional patents and patent applications, 

some claig pnonty back to the '898 application, tht it has not yet sought, but could in the 

futue seek, to enorce agait memory manufactuer producing JEDEC-compliant SDRA, 

absent issuace of the relief requested below. 

102. il addition 1: the foregoing, Rabus is involved in other litigation in vanous foreign countres
 

relatig to foreign patents that cover, or purort to cover, many of the same DRA-related 

technologies that are at issue in the u.s. litigation. 

103. Notably, whie Rabus has licenses coverig roughy 50% of 
 the synchronous DRA industi, 

Rabus assert in litigation that all or viry all synchronous DRA produced worldwide
 

incoiporates Rambus technology and that those synchronous DRA manufactuer that are not 

payig royalties to Rabus are liable in daages. il addition to facing the theat of potential 

daages, those companes that have chosen to litigate againt Rabus have been forced to 

incur sustatial 
 litigation costs, reachig into the mions, if not ten of mions, of dollar. 

Unless they prevail againt Rabus in litigation, such companes also face the prospect of 
 being 

denied licenes to Rabus' s patents, or otherse being requied to pay royalties signcantly in 

excess of the amounts paid by the memory manufactuers that acquiesced to Rabus's 

licensing demands without resort to litigation. 

l04. Rabus also has licensed companes, such as iltel, that do not produce memory chips but do 

produce related computer components - in iltel' s case, chipsets - that are designed to be 

compatible with synchronous DRAs. 

Inabilty of 
 DRA Industr to Work Around Rambus's Patents 

105. Given the extenive degree to which the DRA industi has become locked in to the JEDEC 

SDRA stadads, it is not economically feasible for the industi to attempt to alter or work 

around the JEDEC stadads in order to avoid payment of royalties to Rambus. Any such 

effort would fac inumerble practical and economic impedents, includig but not lited to
 

the out-of-pocket costs associated with redesigng, valdatig, and qualig SDRA 

products to conform with a revised set of stadads. On top of ths, such manufactuers could 

be forced to absorn potentially massive revenue losses if, as a result of modig the JEDEC 

stadads, their introduction of new products were delayed. 

106. Agreeing upon revised SDRA stadads could in itself 
 be a very costly and tie-consumg 

process. ildeed, it is unclear whether the industi would be able to reach any such consensus, 

given complications inerent in the curent maret envionment, includig the fact tht some 

DRA maufactuers have acquiesced to Rabus's licensing demands whie other have not. 

27 
107. Added to these complications is the fact that purchasers and other users of JEDEC-compliant
 

SDRA technology - includig manufactuers of computer, chipsets, grphics cards, and
 

motherboards - have themselves become locked in to the JEDEC stadads. For this and 

other reasons, even if 
 the DRA industr were otheiwise able to underte the complicated 

and costly tak of 
 revising the JEDEC stadads to work around Rabus's patent claims, it is 

unclear whether downtream purchasers of synchronous DRA would welcome or accept 

such an action, given the costs that they would be forced to incur in order to conform their own 

product design and manufactug processes to a revised set of stadads. Nor is it clear 

whether downtream purchasers and other users of SDRA technology would tolerate the 

delay in the introduction of new products that liely would result from the process of chagig 

the standard.
 

108. Any effort to revise the JEDEC stadads on a going-foiward basis could also intedere with the 

ability of 
 DRA designers, manufactuers, and users to maitain the backwards compatibility 

among successive generations of sychronous DRA that JEDEC has sought to preserve. 

109. For these and other reasons, the DRA industr has had little or no practical ability to work 

around Rabus's patent clai, and it is not at all clear the industr could do so in the futue. 

Relevant Product Markets 

110. Synchronous DRA is produced thoughout the world by varous memoiy manufactuers 

located or doing business in the U.S. and varous foreign countres. Synchronous DRAs, and 

products incorporatig synchronous DRAs, are imported and exported thoughout the world 

in large volumes. 

111. Commercial DRA chip manufactuers wishig to design and produce synchronous DRA 

chips, wherever they may be located thoughout the world, are practicaly lited to using one
 

of two altemative architectues: the JEDEC-compliant SDRA architectue or Rabus's own 

proprieta RDRA architectue, itself a synchronous DRA technology. No other 

synchronous DRA architectues have been developed and made available for wide-spread 

commercial use. 

112. The RDRA and JEDEC-compliant SDRA architectues, in tu, each consist of a varety 

of subsidiai technologies - or technological featues - tht are necessai in order successfuly 

to design and manufactue a synchronous DRA chip. These subsidiai technologies may be 

regarded as essential technology inputs into the design and manufactue of synchronous 

DRAs. 

1 13. As in other aspects of engineerg, electrcal engieer involved in the design of synchronous
 

DRA chips select from among alterative technological featues, concepts, or approaches in 

28 
order to address or solve issues, or problems, that arse in the coure of developing such chips. 

The alternative technologies avaiable to address a given techncal issue arsing in the coure of 

synchronous DRA design together may comprise a separte, well-defined product market. 

At lea four such markets are relevant for puroses of the intat complait, includig the
 

followig: 

a. The maket for technologies used to specify the lengt of tie - or "latency" perod ­

between the memory's receipt of a read request and its release of data corresponding 

with the request (hereinafter, the "latency technology market'). Ths market includes 

prograble CAS latency and any alternative technologies that may be economically 

viable substitutes for the use of prograble CAS latency in synchronous DRA 

design. 

b. The maret for tehnologies used to specify the number of 
 ties inormation (data) is 

tranmitted between the CPU and memory - i. e., the "burt lengt" - associated with a 

single request or intrction (hereinaf, the "burt lengt technology market'). Th 

market includes prograble burt lengt and any altemative technologies that may
 

be economically viable substitutes for the use of prograble burt lengt in
 

sychronous DRA design. 

c. The maret for technologies used to synchroni the internal clock that govern 

operations with a memory chip and the system clock that reguates the tig of other
 

system fuctions (herinfter, the "clock synchronition technology market'). Th 

market includes on-chip DLL technology and any alternative technologies that may be 

economically viable substitutes for the use of an on-chip DLL in synchronous DRA 

design. 

d. The market for technologies used to accelerate the rate at which data are trmitted
 

between the CPU and memory (hereinafer, the "data accelertion technology 

market"). Ths market includes dua-edge clock technology and any alteative
 

technologies that may be economically viable substitutes for the use of a dual-edge 

clock in sychronous DRA design. 

114. Technologies used in the design of synchronous DRA chips, to solve separate but related 

design issues, may be viewed as economic complements. The complementa natue of such 

design technologies is evidenced by, among other thgs, the fact tht they someties are 

licensed together in a package, as is the case with respect to the patented Rambus technologies 

encompassed by each of the aforementioned product markets. Where such close relationships 

exist among a group of technologies, all of which are necessar inputs into the design or 

manufactue of a common downtream product, one may appropriately defie a product 

29 
maket encompassing the group of complementa technologies and their close substitutes. 

Thus, in addition, or in the alternative, to the four product markets identified above, there is a 

fift well-defied product market tht is relevant for puioses of ths complaint - namely, a 

maket comprising, collectively, all technologies fallg with anyone of these naower 

markets (hereinafter, the "synchronous DRA technology market"). 

Geographic Scope of Relevant Product Markets 

115. Technologies encompassed with each of 
 the foregoing product markets are used on a 

worldwide basis. Technologies origitig outside the United States frequently 
 are considered 

for and used in JEDEC stadards, and indeed have been used in both the first- and secondgeneration SDRA stadads promulgated by JEDEC. The technologies selected for inclusion 

in these JEDEC stadards, in tu, have been incorporated and used by synchronous DRA 

manufactuer thoughout the world. 

116. Both proprieta and non-proprieta technologies have been used in synchronous DRA 

design. To the extent such technologies are non-proprieta, they are free to be used, on a 

non-royalty-incurg basis, by any synchronous DRA manufactuer or downtream user 

worldwide. On the other hand, to the extent such technologies are proprieta, inasmuch as 

they are subject to patents or potential patent claim in one or more jursdictions, the use of 

such technologies by synchronous DRA manufactuers or downtream users may depend 

upon the user's agreement to specifc license term negotiated with the patent holder. il the 

event that patent rights are similar in most relevant jursdictions, however, there is no apparent 

legal or economic impeent that would preclude licenes from being made avaiable on a 

multi-national or worldwide basis. ildeed, Rabus, which holds synchronous DRA-related 

patents issued in the Unite States and numerous foreign countres, commonly grts licenses to 

companes in the u.s. and abroad encompassing rights to use Rabus's patented technologies 

worldwide. 

117. For these and other reasons, each of 
 the technology-related product markets identied above is 

worldwide in scope. 

118. Alteratively, or in addition, the geogrphic scope of such product markets might appropriately 

be defied as the United States if, for example, Rabus's U.S. patent rights diered 

signcantly from rights recogned in varous foreign jurdictons, or ifRabus othere had 

the ability to vai royalty rates from one jurdiction to another. 

Anticompetitive Effects of Ram bus's Conduct 

30 
119. The foregoing conduct by Rabus, durg and afer its involvement in JEDEC's JC-42.3 

Subcommttee, has materialy caused or theatened to cause substatial har to competition 

and wi, in the futue, materially cause or theate to cause fuer substatial injur to
 

competition and consumers, absent the issuace of appropriate relief in the maner set fort 

below. 

120. The theateed or actu anticompetitive effects of 
 Ram bus's conduct include but are not lited 

to the followig: 

a. increased royalties (or other payments) associated with the manufactue, sale, or use of
 

synchronous DRA technology; 

b. increases in the price, and/or reductions in the use or output, of synchronous DRA
 

chips, as well as products incorporatig or using synchronous DRAs or related 

tehnology; 

c. decreased incentives, on the par of memory manufactuer, to produce memory using
 

sychronous DRA technology; 

d. decreased incentives, on the par of 
 DRA manufactuers and others, to parcipate in 

JEDEC or other industr stadad-settg organations or activities; and 

e. both with and outside the DRA industr, deceased reliance, or wiligness to rely, 

on stadads established by industr stadad-settg collaborations. 

Rambus's Knowine Destruction of Documents 

121. Rambus has engaged in a systematic effort - blessed if not orchestrted by its most senior 

executives - to destroy documents and other inormation. Upon inormation and belief, among 

other pertent fies destroyed as a result of ths campaign were notes and other documentation 

relatig to, among other thgs, Rabus's involvement in the JC-42.3 Subcommtt. Upon 

inormation and belief, ths document-destrction campaign was underen, wholly or in 

substatial par, with the purose of avoidig or mig the adverse legal repecussions of 

the anticompetitive conduct described in the intat complaint. Parly as a consequence of 

these docuent-destrction activities, in combination with other bad-faith litigation conduct, 

Rambus was requied by the federl distrct cour presidig over the Infineon litigation to pay a 

saction exceedig $7 mion. 

First Violation Alleeed 

31 
122. As described in Pargraphs 1-121 above, which are incorporated herein by reference, Rambus
 

ha wily engaged in a pattern of anticompetitive and exclusionar acts and pratices, 

underten over the coure of 
 the past decade, and continuig even today, whereby it has 

obtained monopoly power in the synchronous DRA technology market and narower 

markets encompassed therein - naely, the latency, burt lengt, clock synchronition, and
 

data acceleration markets discussed above - which acts and practices constitute unair methods 

of competition in violation of Section 5 of the FTC Act. 

Second Violation Alleged 

123. As described in Paragraphs 1-121 above, which are incorporated herein by reference, Rambus 

ha wiy engaged in a patter of anticompetitive and exclusionar acts and pratices, 

underen over the coure of the past decade, and contiuig even today, with a specifc intent 

to monopolize the synchronous DRA technology market and narower markets encompassed 

therein resutig, at a mium in a dagerous probabilty of monopolition in each of the 

aforementioned markets, which acts and practices constitute unai methods of competition in 

violation of Section 5 of the FTC Act. 

32
 
Thid Violation Aleged 

124. As described in Paragraphs 1-121 above, which are incorporated herein by reference, Rambus 

ha wiy engaged in a pattern of anticompetitive and exclusionar acts and practices, 

underen over the coure of the past decade, and contiuig even today, whereby it has 

uneasonably restrined trde in the synchronous DRA technology market and narower 

markets encompassed therein, which acts and practices constitute unair methods of 

competition in violation of Section 5 of the FTC Act. 

33
 
Notice 

Notice is hereby given to the Respondent that the eighteenth day of September, 2002, at 10:00 

a.m., or such later date as determed by an Admstrtive Law Judge of 
 the Federal Trade
 

Commssion, is hereby fied as the tie and Federa Trae Commssion offces, 600 Penylvana
 

Avenue, N.W., Room 532, Washigton, D.C. 20580, as the place when and where a hearg wil be
 

had before an Admstrtive Law Judge of 
 the Federal Trade Commssion, on the charges set fort in 

ths complaint, at which tie and place you wi have the right under the FTC Act to appear and show
 

cause why an order should not be entered requig you to cease and desist from the violations oflaw 

charged in the complaint. 

You are notied tht the opportty is afforded to you to file with the Commssion an anwer 

to th complaint on or before the twentieth (20th) day aftr servce of it upon you. An anwer in which 

the allegations of the complaint are contested shall conta a concise statement of the facts constitutig 

each ground of defene; and specific adssion, denial, or explanation of each fact aleged in the 

complait or, if you are without knowledge thereof, a statement to that effect. Alegations of the 

complaint not thus anwered shall be deemed to have been adtted.
 

If you elect not to contest the allegations of fact set fort in the complait, the anwer shall 

consist of a statement tht you adt all of the materal facts to be tre. Such an anwer shall constitute
 

a waiver of 
 heargs as to the facts aleged in the complaint and, together with the complait, wi 

provide a record basis 
 on which the Admsttive Law Judge sha fie an intial decision contag 

appropriate fidigs and conclusions and an appropriate order disposing of the proceedig. In such
 

anwer, you may, however, resere the right to submit proposed fidigs and conclusions under § 3.46 

of the Commssion's Rules of Prtice for Adjudicative Proceedgs and the right to appeal the intial 

decision to the Commsion under § 3.52 of said Rules. 

Failure to answer with the tie above provided shall be deemed to constitute a waiver of 
 your 

right to appear and contest the alegations of the complaint and sha authorie the Admtrtive Law 

Judge, without fuer notice to you, to fid the facts to be as alleged in the complait and to enter an 

intial decision containg such fidigs, appropriate conclusions, and order.
 

The AU will schedule an initial prehearing scheduling conference to be held not later than 

14 days after the last answer is filed by any party named as a respondent in the complaint. Unless 

otherwise directed by the AU, the scheduling conference and further proceedings will take place at 

the Federal Trade Commission, 600 Pennsylvania Avenue, N,W., Room 532, Washington, D.C. 

20580. Rule 3.21 (a) requires a meeting of the parties' counsel as early as practicable before the 

prehearing scheduling conference, and Rule 3.31 (b) obligates counsel for each part, within 5 days 

of receiving a respondent's answer, to make certain initial disclosures without awaiting a formal 

discovery request. 

34 
Notice of Contemplated Relief 

Should the Commssion conclude from the record developed in any adjudicative proceedigs in 

ths matter that Respondent's conduct violated Section 5 of 
 the Federl Trade Commssion Act as 

alleged in the complait, the Commssion may order such relief as is supported by the record and is 

necessai and appropriate, including but not lited to:
 

1. Requig Respondent to ceae and desist all effort it ha underten by any mean, includig 

without litation the threat, prosecution, or defense of any suits or other actions, whether legal,
 

equitable, or admstrtive, as well as any arbitrtion, mediation, or any other form of private
 

dispute resolution, though or in which Respondent has asserd that any person or entity, by 

manufactug, sellig, or otheiwse using JEDEC-compliant SDRA and DDR SDRA 

technology (includig futu varations of JEDEC-compliant SDRA and DDR SDRA 

technology), inges any of Respondent's curent or futue United States patents that clai
 

priority back to US. Patent Application Number 07/510,898 fied on April 
 18, 1990 or",any 

other US. Patent Application filed before June 17, 1996. 

2. Requig Respondent not to underte any new effort by any mean, includig without 

limtation the theat, prosecution, or defense of any suits or other actions, whether legal, 

equitable, or admstrtive, as well as any arbitrtion, mediation, or any other form of private
 

dipute resolution, though or in which Respondent has assered that any person or entity, by 

manufactug, sellig, or otheiwe using JEDEC-compliant SDRA and DDR SDRA 

technology (includig futue varations of JEDEC-compliant SDRA and DDR SDRA 

technology), inges any of Respondent's curent or futue United States patents tht clai
 

priority back to US. Patent Application Number 07/510,898 filed on April 
 18, 1990 or any 

other US. Patent Application filed before June 17, 1996. 

3. Requig Respondent to cease and desist all effort it ha underten by any mean, includig 

without litation the theat, prosecution, or defene of any suits or other actions, whether legal,
 

equitable, or adstrtive, as well as any aritrtion, mediation, or any other form of private
 

dipute resolution, though or in which Respondent has assered that any person or entity, by 

manufactug, sellg, or otheiwse using JEDEC-compliant SDRA and DDR SDRA 

technology (includig futue varations of JEDEC-compliant SDRA and DDR SDRA 

technology), for import or export to or from the United States, inges any of 
 Respondent's 

foreign patents, curent or futue, that claim priority back to US. Patent Application Number 

07/510,898 filed on April 
 18, 1990 or any other Patent Application filed before June 17, 1996. 

4. Requig Respondent not to underte any new effort by any mean, includig without 

litation the theat, prosecution, or defense of any suits or other actions, whether legal,
 

35 
equitable, or adtrtive, as well as any arbitrtion, mediation, or any other form of private
 

dipute resolution, though or in which Respondent has asserted that any person or entity, by 

manufactug, sellg, or using JEDEC-compliant SDRA and DDR SDRA technology 

(includig futue varations of JEDEC-compliant SDRA and DDR SDRA technology), for 

import or export to or from the United States, inges any of 
 Respondent's foreign patents, 

curent or futue, that claim priority back to U.S. Patent Application Number 07/510,898 filed 

on Apri 
 18, 1990 or any other Patent Application filed before June 17, 1996. 

5. Requirg Respondent to employ, at Respondent's cost, a Commssion-approved compliance
 

offcer who will be the sole representative of 
 Respondent for the purose of communcatig 

Respondent's patent rights related to any stadad under consideration by any stadad-settg 

organation of which Respondent is a member.
 

6. Such other or additional relief as is necessar to correct or remedy the violations alleged in the 

complait. 

WHREFORE, TI PREMISES CONSIDERED, the Federal Trade Commssion on ths eighteenth 

day of June, 2002, issues its complaint againt said Respondent. 

By the Commsion. 

Donald S. Clark 

Secretary 

36
 
EXHIBIT 2
 
!NITro. D1OISLON.:.. 11/25/03
 

(PUBLIC) 

UNITED STATES OF AMERICA 

FEDERAL TRDE COMMSSION 

OFFICE OF ADMISTRTI LAW JUDGES 

DOCKET NO. 9305 

In the Matter of 

UNION OIL COMPANY OF CALIFORN, 

Respondent. 

INTI DECISION
 

D. Michael Chappell 

Admnistrative Law Judge 

Date: November 25, 2003 

..
 
Federal Tradé Commission Counsel 

Supportng the Complaint: 

Peggy D. Bayer 

David Conn 

Lisa D. Fialco 

Dean Graybil 

Rhett R. Krlla 

Chul Pal 

Chong S. Park 

John Roberti 

J. Robert Robertson 

Harry Schwirck 

Norris Washington 

Counsel for Respondent 

Union Oil Company of California 

David W. Beehler
 

Joseph Kattan 

Bethany D. Kregar 

MarinR. Lueck
 

Chrstopher W. Madel 

Kathleen A. Maron 

David E. Oslund 

Sara A. Poulos 

Diane L. Simerson 

Steven E. Uh 

K. Craig Wildfang 

J. Chrstopher Wood 
TABLE OF CONTENTS
 

i. INODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
 

A. Procedural Background ...........................................1
 

B. Summar of 
 Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . 1 

II. POSITIONS OF TH 
 PARTIES . . . . . . . . . .. . .. . . .. .. . ... . . . . . . . .. . .. . .. . . .2
 

A. Summary of the Allegations of 
 the Complaint and Answer. . . . . . . . . . . . . . . . .2
 

1. Complaint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
 

2. Answer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
 

B. Summary of Arguments Made Regarding Respondent's Motion to Dismiss Based 

On Noerr-Pennington Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
 

1. Respondent's arguments in support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
 

2. Complait Counsel's arguments in opposition . . . . . . . . . . . . . . . . . . . . . 5
 

C. Summar of Arguments Made Regarding Respondent's Motion to Dismiss Based 

On Failure to Make Suffcient Allegations That Respondent Possesses or 

Dangerously Threatens to Possess Monopoly Power ..................... 5
 

1. Respondent's arguments in support . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 5
 

2. Complaint Counsel's arguments in opposition. . . . . .. . . . . . . . . . . . . . .6
 

II. EVIENTIAY STANARS .......................................... 6
 

A. Motion to Dismis's Standard " . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
 

B. Factual Allegations Accepted as True; ................................ 7
 

Conclusions of 
 Law Not Accepted as True . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

C. Matters Whch May Be Considered on a Motion to Dismiss and 

For Whch Offcial Notice May Be Taken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
 

D. Motions To Dismiss Involvig Noerr-Pennington . . . . . . . . . . . . . . . . . . . . . . . 10
 

E. Burden of 
 Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
 

. IV. STATEMENT OF FININGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
 

A. Facts As Alleged in the Complaint ...............................;.. 13
 

1. Responaent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . . . . . . . . . . . . . . 13
 

2. Respondent's patents .......................... ~ . . . .. . . . . . . 14
 

3. Californa Air Resources Board ("CAR") .... . . . . . . . . . . . . . . . . . . 14
 

4. Reformulated gasoline in Californa. . . .'. . . . . . . . . . . . . . . . . . . . . . . . 15
 

5. Unocal's conduct before CAR ..............:............... 16
 

6. Unocal's parcipation in industry groups. . . . . . . . . . . . . . . . . . . . . . . . 19
 

7. Unocal's patent prosecution and enforcement. . . . . . . . . . . . . . . . . . . . 21
 

B. Legislative and Agency Materials of 
 Whch Offcial Notice is Taken . . . . . . . . . 23
 1. Notice of 
 Public Hearg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
 

2. Final Statement of 
 Reasons For Rulemakg . . . . . .. . . . . . . . . . . . . . . 24
 

3. Statutory authority under which CAR' s reguations were adopted ... 25
 

4. Calforna Administrative Procedure Act . . . . . . . . . . . . . . . . . . . . . . . . 27
 
v. ANALYSIS AN CONCLUSIONS OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
 

A. Overvew of the Noerr-Pennington Docte .......................... 29
 

B. Noerr-Pennington Provides Immunty to Conduct Alleged in the Complaint
 

. . . . . . . . . . . . . . . . '.' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
 

1. CAR' s Phase 2 reformulated gasoline ruemakng process was quasi-


legislative ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
 

a. Distinction made between legislative versus adjudicatory arena


..................................................32
 b. Determnation of 
 whether action is legislative or adjudicatory .. 34
 

(i) Political discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
 

(ii) Policy setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
 

(iii) Procedures used. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 37 .
 

(iv) Authority invok~d ............................. 38


2. CAR was not wholly dependent on Respondent for information ..... 40
 

3. There is immunty even if CAR was unaware it was being asked to
 

restrain trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
 

C. Conduct Aleged in the Complaint Is Not Outside the Reach of Noerr-Pennington 

...................:................ _........................47
 

1. "Sham" exception and SelL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
 

2. Pialker Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
 

D. Noerr-Pennington Immunity is Available in Actions Brought Under Section 5 of
 

the FTC Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
 

E. Respondents Conduct Before Private Industry Groups .................. 55
 

1. Indirect petitioning ....................................... . . 56
 

2. Conduct directed at Auto/Oil Group and WSP A separate from conduct
 

directed at CAR .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
 

(i) Allegations relating to conduct separate from conduct directed at
 

CAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
 

(ii) No independent basis for liability . . . . . . . . . . . . . . . . . . . . . . . . 60
 

(ii) Allegations raise substantial patent issues. . . . . . . . . . . . . . . . . . 61
 

(iv) Federal courts decide substantial patent issues. . . . . . . . . . . . . . 63
 

(v) Commssion without 
 jurisdiction as Complaint is aleged . . . . . . 64

(vi) Complaint Counsel has burden of 
 proof . . . . . . . . . . . . . . . . . . . 66

VI. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
 

VI. SUMY OF CONCLUSIONS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
 

-11­
L INTRODUCTION,
 

A. Procedural Background
 

This Intial Decision is fied pursuant to Rule 3.22(e) of 
 the Commssion's Rules of 

Practice which requires that "( w )hen a motion to dismiss a complaint. . . is granted with the result 

that the proceeding before the Admistrative Law Judge is terminated, the Administrative Law 

Judge shall fie an initial decision in accordance with the provisions of § 3.51. 16 C.F.R. 

§ 3.22(e). As set forth below, the motions to dismiss filed by Respondent Union Oil Company of 

Californa ("Respondent" or "Unocal") art granted in par with the result that the proceeding 

before the Administrative Law Judge is termnated. Accordingly, this Intial Decision is filed in 

accordance with the provisions ofRuIe 3.51 of 
 the Commssion's Rules of Practice. 16 C.F.R.
 

§ 3.51(c). 

Respondent fied two motions to dismiss pui:suant to Rule 3.22(e) of 
 the Commssion's 

Rules of Practice, on April 2, 2003. The first motion seeks dismissal of the Complait based upon 

immunity under Noerr-Pennington ("Motion"). Complaint Counsel filed its opposition on Apri 

21, 2003 ("Opposition"). By Order dated August 25, 2003, the paries were ordered to .file reply 

briefs. Respondent fied its reply brief on September 9, 2003 ("Reply"). Complaint Counsel filed 

its response to Respondent's reply brief on September 26, 2003 ("Sur-reply"). 

Respondent's second motion seeks dismissal of the Complaint for failure to make 

suffcient allegations that Respondent possesses or dangerously threatens to possess monopoly 

power ("Market Power Motion"). Complaint Counsel filed its opposition on April 2 i, 2003 

("Market Power Opposition"). 

B. Summary of Decision
 

As set forth below, there is no set of 
 facts that Complaint Counsel could introduce in 

support of the violations of law that are alleged in the Complaint that would overcome NoerrPennington immunity with respect to Respondent's efforts to solicit governent action. 

Accordingly, Respondent's motion to dismiss the Complaint based upon immunity under NoerrPennington is GRATED IN PART as to all violations alleged and all allegations of 
 the 

Complaint, except the allegations of 
 Respondent's conduct directed toward the Auto/Oil Air 

Quality Improvement Research Program ("Auto/Oil Group") and the Western States Petroleum 
Association ("WSP A"), independent of the conduct directed toward the Californa Air Resources 

Board ("CAR"). 

As set forth below, with respect to the allegations ofRespondents conduct directed 

toward Auto/Oil Group and WSP A, independent of the conduct directed toward CAR, there is
 

no set of facts that Complaint Counsel could introduce in support of the violations oflaw that are 

alleged in the Complait that would establish that the Commssion has junsdiction to resolve the 

substantial patent issues which are entangled in and raised by the allegations and violations of the 

Complaint. The motion is GRATED IN PART to the extent that the Commssion lacks 

jurisdiction to decide the fundamental and substantial patent issues raised by the allegations of the 

Complaint. Because of this determnation, the remaining issues raised by Respondent's motion to 

dismiss for failure to make sufcient allegations that Respondent possesses or dangerously 

threatens to possess monopoly power are not reached. Accordingly, the remainder of 

Respondent's Market Power Motion is DENID WITHOUT PREJUICE. 

Therefore, as discussed in detail below, no allegations or violations of the Complaint 

remain and the ~omplaint in Docket 9305 is dismissed in its entirety. 

ll. POSITIONS OF TH PARTIS
 

A. Summary of the Allegations of the Complaint and Answer 

1. Complaint
 

According to the Complaint, in the 1980s, the Californa Air Resources Board ("CAR") 

initiated rulemakng proceedings to determne "cost-effective" reguations and standards 

governng the composition oflow emissions, reformulated gasoline ("RFG"). Complaint at ir 1. 

The Complaint aleges that, through misrepresentations and omissions, Respondent infuenced the 

outcome ofCAR's Phase 2 reformulated gasoline rulemakg. Complaint at irir 35,37,39,41, 

42,46,48. On November 22, 1991, CAR adopted Phase 2 RFG regulations that set paricular 

stadards for the composition of
 . .low emissions, reformulated gasoline. Complaint at ir 44. 

CAR's Phase 2 RFG reguations substantially overlap with patents held by Respondent relating 

to low emissions, reformulated gasoline. Complaint at irir 15,32,45. 

In addition, the Complaint alleges that durig the CAR RFG rulemakng, Respondent 

2 
partcipated in the Auto/Oil Group, a cooperative, joint research program between automobile 

and oil industries, and in the WSP A, an oil industry trade association. Complaint at ~~ 50, 56. 

The Complaint alleges that Respondent made misrepresentations and material omissions to the 

Auto/Oil Group and WSPA and that, but for Respondent's fraud, these parcipants in the 

rulemakg process would have taken actions including, but not limited to, (a) advocating that 

CAR adopt regulations that minimized or avoided infngement on Respondent's patent clais; 

(b) advocating that CAR negotiate license terms substantially diferent from those that 

Respondent was later able to obtain; and/or (c) incorporating knowledge. of 
 Respondent's pending 

patent rights in their capital investment and refinery reconfguration decisions to avoid and/or 

mimize potential infringement. Complaint at ~ 90. 

The Complaint fuher alleges that Respondent did not anounce the existence of its 

proprietar interests and patent rights relating to RFG until shorty before CAR' s Phase 2 

regulations were to go into effect. Complaint at ~ 6. By that time, the refinig industry had spent 

billons of dollars in capital expenditures to modify their refineries to comply with the CAR 

Phase 2 regulations. .Id Afer CAR and the refiners had become locked into the Phase 2 

regulations, Respondent commenced patent enforcement efforts by publicly anouncing its RFG 

patent rights and its intention to collect royalty payments and fees. Id Since Respondent's public 

anouncement of the issuance of 
 its first RFG patent on Januar 31, 1995, Respondent has 

obtained four additional patents and enforced its RFG patent rights through litigation and 

licensing activities. Id 

The Complaint charges Respondent with th~ legal violations of engaging in 

anticompetitive and exclusionar practces, whereby, in the markets defined in the Complaint, 

Respondent has wrongflly obtained monopoly power, has attempted monopolization, and has 

unreasonably restrained trade, in violation of 
 Section 5 of 
 the Federal Trade Commssion Act, 

15 U.S.C. § 45. 

2. Answer
 

Respondent's Answer denied the substantive allegations of 
 the Complaint. In addition, 

Respondent, in its Anwer, asserted that there are two basic underpinnngs of the Complait 

3 
which are unsupportable and eviscerate any viability to the Complaint. First, Respondent avers 

that the Complaint implicitly and incorrectly suggests that when the word "non-proprietary" or 

"proprietary" is used, a representation is made as to the status of patent rights, and that 

Respondent's opinion on the flexibility and cost effectiveness of a predictive model is not a 

representation on the status of patent rights. Second, Respondent asserts in the introduction to 

the Answer, that its conduct is petitioning conduct, imune from antitrust scrutiny. 

B. Summary of Arguments Made Regarding Respondent's Motion to Dismiss 

Based On Noer-Pennington Immunity 

1. Respondent's arguments in support
 

Respondent moves to dismiss the Complaint on the ground that the conduct alleged in the 

Complaint is immunized from antitrust liability under the Noerr-Pennington doctrine. See 

Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 US. 127 (1961); United 

Mine Workers v. Pennington, 381 US. 657 (1965). Respondent asserts that CAR, an 

admstrative agency, exercised quasi-legislative authority in enacting the Phase 2 RFG 

regulations. Respondent argues that its involvement in CAR's Phase 2 RFG rulemakng was 

political petitioning conduct, proteced under Noerr-Pennington. Thus, Respondent argues, 

Respondent should be shielded from antitrst liability regardless of its motives or the effects of the 

governental action. Respondent further asserts that the Complaint does not allege facts 

suffcient to.support the "sham" exception to the Noerr-Pennington doctrine. See Professional 

Real Estate Investors, Inc. v. Columbia Pictures, Inc., 504 U.S. 49 (1993). In addition, 

Respondent argues that the exception to Noerr immunity recogned in contexts involving the 

enforcement of patent rights obtained though knowig fraud on the Patent and Trademark Offce 

is inapplicable to this proceeding. See Walker Process Equipment, Inc. v. FoodMachinery & 

Chemical Corp., 382 US. 172 (1965). 

Respondent also asserts that immunity under the Noerr-Pennington doctrine extends to 

causes of action brought under Section 5 of the FTC Act. Finally, Respondent asserts that the 

Complaint's allegations that Respondent made misrepresentations to two private bodies, the 

4
 
Auto/Oil Group and WSP A, do not take Respondent's activities outside of the realm of Noerr 

protected political activities.. 

2. Complaint Counsel's arguments in opposition
 

Complaint Counsel argues first that the motion to dismiss is inappropriate because there 

are factal disputes and because the Complaint "specifically alleges" that Noerr-Penníngton 

immunity does not apply here as a "matter of 
 fact. " Opposition at 2; Complaint at ~ 96. 

Complaint Counsel next argues that Respondent's fraudulent statements were maqe to an agency 

acting in a quasi-adjudicative maner and that misrepresentations are not iinunized when made 

in an adjudicatory setting or where the agency is dependent upon the petitioner for information. 

Complaint Counsel further asserts that Noerr-Penníngton immunity does not extend to situations 

where the governent agency is unaware that it is being asked to adopt or paricipate in a 

restraint of trade.
 

In addition, Complaint Counsel argues that Respondent's conduct is outside the reach of 

Noerr-Penníngton because the harm was caused not by CAR's adoption of 
 the regulations, but 

by Respondent's enforcement ofits patents. Complaint Counsel also asserts that Respondent's 

conduct falls under the sham exception to the Noerr-Penníngton doctrine. Next, Complaint 

Counsel argues that Noerr does not immunize Respondent's conduct because ths action is 

brought under the FTC Act, and not the Sherman Act. Finally, Complait Counsel argues that 

Respondent's conduct towards Auto/Oil Group and WSPA, is not shielded by Noerr-Penníngton 

and states an independent cause of action. 

c. . Summary of Argments Made Regarding Respondent's Motion to Dismiss
 

Based On Failure to Make Suffcient Allegations That Respondent Possesses 

or Dangerously Threatens to Possess Monopoly Power 

1. Respondent's arguments in support
 

Respondent's motion to dismiss based on failure to make suffcient alegations that 

Respondent possesses or dangerously threatens to possess monopoly power raises several issues. 

However, the only issues raised by Respondent in that motion that are decided herein are as 

5 
follows: whether the allegations of the Complaint arise under patent law; and whether the FTC
 

has jurisdicton to decide the substantial questions of patent law alleged in the Complaint. The
 

remaining issues are not reached because the determination on the Noerr-Pennington motion and
 

the determnation ofthe jurisdictional argument make any analysis of the remaining issues raised
 

in the Market Power Motion unnecessar. 

Respondent argues that the allegations of this Complaint arse under patent law because 

they require an inquiry into claim construction and infgement. Respondent further argues that 

jurisdiction to decide issues arsing under patent law lies solely with federal courts and that the
 

Commssion does not have jurisdiction to decide the patent issues raised by the Complaint.
 

2. Complaint Counsel's arguments in opposition
 

Complaint Counsel asserts that the alegations of this Complaint do not arse under patent
 

law. Complaint Counsel further asserts that the Commssion has jurisdiction to decide issues that
 

touch on patent law.
 

il. EVIENTIY STANDARDS
 

A. Motion to Dismiss Standard
 

Rule 3.22(e) of 
 the Commssion's Rules of 
 Practice authorizes the filig ofa motion to 

dismiss a complaint. 16 C.F.R. § 3.22(e). Although the Commssion's Rules of 
 Practce do not
 

have a rue identical to Rule 12(b)(6) of 
 the Federal Rules ofCivi Procedure, the Commssion has
 

acknowledged a par's right to file, and the Administrative Law Judge's authority to rue on, a
 

motion to dismiss for failure to state a claim upon which relief could be granted. E.g.. In re Times 

Mirror Co., 92 F.T.C. 230 (1978); In re Florida Citrs 
 Mutual, 50 F.T.C. 959,961 (1954) (ALJ 

may "dismss a complaint ifin his opinion the facts aleged do not state a cause of 
 action."). 

Rule 3.1 1 
 the Commssion's Rules of
 (b)(2) of Practice sets forth that the Commssion's 

complaint shal contain a "clear and concise factual statement suffcient to inform each respondent 

with reasonable definiteness of 
 the tye of acts or practices alleged to be in violation of 
 the law."
 

i 6 C.F.R. § 3.11 (b )(2). This rue requires that the complait contain "a factual statement 

. suffciently clear and concise to inform respondent with reasonable definiteness of the tyes of 

6 

,. 
acts or practices alleged to be in violation oflaw, and to enable respondent to frame a responsive 

answer." In re New EnglandMotor Rate Bureau, Inc., 1986 FTC LEXIS 5, *114 (1986). A 

motion to dismiss for failure to state a claim upon which relief can be granted is judged by 

whether "a review of the complaint clealy shows that the allegations, if proved, are suffcient to 

make out a violation of 
 Section 5." In re TK-7 Corp., 1989 FTC LEXIS 32, *3 (1989). 

For purposes ofa motion to dismiss, "the factual allegations of 
 the complaint are 

presumed to be true and all reasonable inferences are to be made in favor of complaint counseL." 

TK-7 Corp., 1989 FTC LEXIS 32, *3 (citing 
 Miree v. DeKalb County, 433 US. 25, 27 n.2 

(1977); Jenldns v. McKeitchen, 395 US. 411,421-22 (1969)). If the motion to dismiss raises 

material issues offact which are in dispute, dismissal is not appropriate. In re Herbert R. Gibson, 

Sr., 1976 FTC LEXIS 378, *1 (1976); In re Jewell Companies, Inc., 81 F.T.C. 1034, 1035-36 

(1972) (denying motion to dismiss where there was a substantial dispute on questions offact). 

See also In re College Football Assoc., 1990 FTC LEXIS 485, *4 (1990) (Where facts are 

needed to make determination on a "close question," the motion to dismiss will be denied.). 

B. Factual Allegations Accepted as True;
 

Conclusions of 
 Law Not Accepted as True 

The standard used in Commssion proceedings mirrors the standard used for 

evaluating motions to dismiss raised in federal district courts under Rule 12(b)(6) of 
 the Federal 

Rules of Civil Procedure. The Supreme Court has held that it "is axomatic that a complaint 

. should not be dismissed unless 'it appears beyond doubt that the plaitiff can prove no set offacts 

in support of his clai which would entitle him to relief.'" McClain v. Real Estate Bd of New 

Orleans, Inc., 444 U.S. 232,246 (1980) (quoting Conley v. Gibson, 355 U.S. 41,45-46 (1957)). 

Moreover, it is well established that, in ruling on a motion to dismiss, alegations in the complaint 

must be accepted as true and construed favorably to the plaintiff Scheuer v. Rhodes, 416 US. 

232,236 (1974). "(iJn antitrst cases, where 'the proofis largely in the hands of 
 the alleged
 

conspirators,' dismissals prior to giving the plaintiff ample opportunity for discovery should be 

granted very sparngly." Hospital Building Co. v. Trustees of 
 Rex Hosp., 425 US. 738, 746 

(1976) (quotingPoller v. Columbia Broad, 368 U.S. 464, 473 (1962)). 

7 
While well-pleaded allegations are taken as admitted, "conclusions ofJaw and 

unreasonable inferences or unwaranted deductions offact are not admitted." Hiland Dairy, Inc.
 

v. Kròger Co., 402 F.2d 968,973 (8th Cir. 1968); Violanti v. Emery Worldwide A-CF, 847 

F. Supp. 1251, 1255 (M.D. Pa. 1994). 
 (conclusory allegations oflaw need not be accepted as 

true). On motions to dismss, cours routinely reject allegations that are, or contain, legal 

conclusions. E.g., UnitedMine Workers of America, Inc. v. Wellmore Coal Corp., 609 F.2d 

1083, 1085 (4th Cir. 1979) (allegation that plaintiff 
 acted under color of 
 state law was a legal 

conclusion and insuffcient to survive a motion to dismiss); Donald v. Orfila, 6 18 F. Supp. 645, 

647 (D.D.C. 1985) (allegations that offcial acted in bad faith-beyond the scope of 
 his authority so 

as not to be entitled to imunity were legal conclusions and thus were not admitted for purposes 

of a motion to dismiss ). "Were it otherwse, Rule 1 2(b)( 6) would serve no function, for its 

purpose is to provide a defendant with a mechansm for testing the legal suffciency of the 

complaint." UnitedMine Workers, 609F.2d at 1086. 

The Complait specifically aleges that "Unocal is not shielded from antitrust liabilty 

pursuant to the Noerr-Pennington doctrie for numerous reasons as a matter of law and as a 

matter of fact. . . ." (Complait at ir 96) (emphasis added). Whether or not Noerr-Pennington 

immunity applies to the facts alleged requires a legal conclusion and clearly is a matter oflaw. 

See Razorback Ready Mix Concrete Co, Inc. v. Weaver, 761 F.2d 484,488 (8th Cir. 1985). 

Whether or not an issue is a matter offact or is a matter of 
 law is also a legal determation. In 

Mark Aero, Inc. v. Trans World Airlines, Inc., 580 F.2d 288 (8th Cir. 1978), although the 

complaint alleged that the agency was an adjudicatory body, the Cour of Appeals dismissed the 

complaint afer finding that defendant's actions, including misrepresentations to the agency and 

city councii were genuine political activity. Id at 293, 297. In the instant case, paragraph 96 of 

the Complaint is not a properly plead factual allegation in so far as it aleges a conclusion oflaw; 

it need not be, and is not, taken as tre for puroses of 
 Respondent's motion to dismiss. 

C. Matters Which May Be Considered on a Motion to Dismiss and
 

For Which Offcial Notice May Be Taken 

In ruling on a motion to dismiss, it is appropriate to consider the allegations of the 

8 
complaint, as well as documents attached to or specifically referenced in the complaint. and 

matters of 
 public record. Hoffan-LaRouche Inc. v. GenPharm, Inc., 50 F. Supp. 2d 367,377 

(D.N.J. 1999) (citing Pittsburgh v. West Penn Power Co., 147 F.3d 256, 259 (3d Cir. 1998); SA 

Charles A. Wright & Arhur R. Miller, Federal Practice & Procedure § 1357 at 299 (2d ed.
 

1990)). The Complaint specifically references California Health and Safety Code § 43018 and
 

Californa's Administrative Procedure Act. Complaint at ~~ 17, 18,21, and 26. As set forth 

below, it is also appropriate to take offcial notice of 
 the statutes governng CAR, the Notice of 

Public Hearing through which CAR initiated the rulemakng, and the Final Statement of 
 Reasons 

for Rulemakng, all of which are beyond dispute. 

The Commission's Rules of 
 Practice authorize the use of offcial notice. 16 C.F.R. 

§ 3 .43( d) ("when any' decision of an Administrative Law Judge or of the Commssion rests. in 

whole or in part, upon the takng of offcial notice of a material fact not appearing in evidence of 

record, opportunity to disprove such noticed fact shall be granted any par making timely motion 

therefor"). Because the Commssion Rule does not define offcial notice, it is appropriate to look 

to Federal Rule of Evidence ("F. R. Evid.") 201(b). "A 
 judicially noticed fact must be one not 

subject to reasonable dispute in that it is either (l) generally known withn the terrtorial 

jurisdiction of 
 the trial court or (2) capable or accurate and ready determnation by resort to 

sources whose accuracy canot reasonably be questioned." F. R. Evid. 201(b). 

Under Commssion precedent, offcial notice may be taken of references "generally 

accepted as reliable." In re Thompson Medical Co., 104 F.T.C. 648, 790 (1984). The 

Commssion and Administrative Law Judges have frequently taken offcial notice of statutes and 

regulations. E.g., In re New EnglandMotor Rate Bureau, Inc., 1989 FTC LEXIS 62, *16 n.6 

(1989) (amendment to New Hampshie statue); In re Great Atlantic & Pacifc Tea Co., 85 

F.T.C. 601, 608 (1975) (Trade Regulation Rule); In re Blanton Co., 53 F.T.C. 580, 588 (1954) 

the Secretar of Agrculture in the Federal Register). (regulations of 


Federal Rule of 
 Evidence 201 authories federal courts to take judicial notice of 

adjudicative facts on a motion to dismiss. Zimora v. Alamo Rent-A-Car, Inc., ILL F.3d 1495, 

1503 (lOth Cir. 1997). Ths includes takg notice of 
 regulations and statutes. See id at 1504 (to
 

the extent that plaintifs allegations confcted with the provisions of the ordinance, plaintiffs 

9 
allegations were appropriately rejected or ignored). In Kottle v. Northwest Kidney Centers, 146 

F.3d 1056 (9th Cir. 1988), where the district court relied upon the public records of 
 the 

administrative agency in ruling on a motion to dismiss on Noerr-Pennington grounds, the Court 

of Appeals held that these records were properly the subject of judicial notice. ¡d. at 1064 n. 7. 

Moreover, the Commission has taken offcial notice of changes in an agency's amendments to 

regulations in detennining to dismiss a complaint. In re Marcor Inc., 90 F.T.C. 183, 185 (1977). 

Respondent, in its motion, specifically cited to the California Clean Air Act (CaL. Health & 

Safety Code § 39601) and Chapter 3.5 (commencing with Section 11340) of the Governent 

Code, and cited to and attached the Notice of 
 Public Hearng through which CAR initiated the 

rulemakng and the Final Statement of 
 Reasons for Rulemakng. Motion at 11-12, 23 n.7, and 

Appendices B and D. Complaint Counsel had an opportunity to disprove these statutes and 

agency materials of which offcial notice is taken not only through the filing of its Opposition, but 

was also provided an additional opportnity when directed to submit additional briefig by Order 

dated August 25,2003. These statutes and public documents were relied upon by Respondent 

and their veracity and accuracy were not disputed by Complaint Counsel. 

D. Motions To Dismiss Involving Noerr-Pennington
 

Courts routinely resolve, on a motion to dismiss, the legal issue of 
 whether Noe.rrPennington immunity shields a defendant. E.g., A.D. Bedell Wholesale Co. v. Philip Morris Inc., 

263 F.3d 239,250 (3ro Cir. 2001); Baltimore Scrap Corp. v. The David J. Joseph Co., 237 F.3d 

394,396 (4th Cir. 2001); 
 Manistee Town Ctr. v. Glendale, 227 F.3d 1090, 1091 (9th Cir. 2000). 

In Kott/e, the court examned, on a motion to dismiss, whether an administrative agency bore 

many of 
 the indicia ofa true adjudicatory proceeding, such as conducting public heags, 

accepting written and oral arguments, issuing wrtten findings afer hearng, and whether its
 

decision was appealable to determe whether the sham exception to Noerr-Pennington applied. 

146 F.3d at 1059. See also Armtrong Surgical Center v. Armstrong City Mem 'i Hosp., 185 F.3d 

154, 163 (3d Cir. 1999) ("On the facts alleged in the complait, it is also clear that the state 

decision makers were disinterested, conducted their own investigation, and aforded al interested
 

parties an opportunity to set the record straight."). Thus, although other courts have deferred 

10 
I 

ruling on whether the Noerr-Pennington doctrine applies until afer discovery, e.g., Fox News 

Network v. Time Warner, Inc., 962 F. Supp. 339, 345 (E.D.N.Y. 1997); Israel v. Baxter 

Laboratories, Inc., 466 F.2d 272 (D.C. Cir. 1972), where, as here, the dispositive issues are legal, 

there are no facts within reasonable dispute, and the issues can be resolved on a motion to 

¡ dismiss, it is appropriate to do so. 

Furthennore, courts, in ruling on motions to dismiss based on Noerr-Pennington, review 

the statutory authority under which an agency is acting to detennne whether the conduct 

challenged in the complaint occurred in a political setting. For example, in Mark Aero, despite 

allegations in the complaint that the Aviation Department and the city council were "adjudicatory 

bodies," the court, upon reviewing state statutes, concluded that city council's passage of 

ordinances was an exercise of legislative power. 580 F.2d at 290. In 
 Metro Cable Co. v. CAW 

of Rockford, Inc., 516 F.2d 220,228 (711 Cir. 1975), on a motion to dismiss, the court determed 

that the city council was a body to which the state had delegated legislative powers, that the 

council did not need to compile an evidentiar record through fonnal proceedings, and that its 

. members were subject to lobbying and other forms of ex parte inuence, to conclude that the
 

conduct challenged in the complaint occurred in a political setting. In St. Joseph's Hosp., Inc. v. 

Hosp. Corp. of Am., 795 F.2d 948, 955 (1111 Cir. 1986), the Court of Appeals for the Eleventh 

Circuit reviewed the statute applicable to the State Health Planng Agency's (SHP A) action in 

issuing a certificate of need and found that each application was reviewed individually according 

to a process which required consideration of a number of 
 health planing issues, any interested 

par could have submitted infonnation to SlI A in connection with the application, the initial 

review was conducted without an evidentiar hearng, the Act provided for a separate review 

board to handle any appeals from SLI A decisions, and the review board, at its discretion, could 

grant discovery rights prior to conducting a mandatory evidentiar hearng. This analysis led the 

court to detennne, on a motion to dismiss, that the agency was acting in an adjudicatory maner. 

Id. Thus, a determation of 
 whether CAR was acting in a legislative or adjudicative maner 

may properly be made on a motion to dismiss by review of the applicable statutes, as well as the 

factual alegations ofthe Complaint. As discussed below, other issues raised by Respondent's 

11 
motions and Complaint Counsel's responses do not require the resolution of genuine factual 

disputes and are properly decided on the motions to dismiss. 

E. Burden of Proof
 

Noerr-Pennington immunity is not merely an affrmative defense. McGuire Oil Co. v. 

MACO, Inc., 958 F.2d 1552, 1558 n.9 (11th Cir. 1992). "Rather, 'the antitrust plaintiff 
 has the 

burden of establishing that the defendant restrained trade unreasonably, which cannot be done 

when the restraining action is that of the governent.'" Id (quoting P. Areeda and H.
 

Hovenkamp, Antitrust Law § 203.4c). The antitrust plaintiff 
 also bears the burden of 
 proving that 

the action of 
 the defendant comes within the sham exception to Noerr-Pennington. Westmac, 

Inc. v. Smith, 797 F.2d 313, 318 (611 Cir. 1986). Thus, the burden falls on Complaint Counsel to 

allege facts suffcient to show that Noerr-Pennington immunity does not attach to Respondent's 

actions. 

In addition, where jurisdiction is limited to only that power authorized by statute, the 

burden of establishig jurisdiction rests upon the party asserting jurisdiction. Kokkonen v. 

Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Ifa complait before the Federal 

Trade Commission does not allege suffcient facts to confer jurisdiction, it must be dismissed. 

In re R.J. Reynolds Tobacco Co., Inc., 111 F.T.C. 539, 541 (1988). Thus, the burden is on 

Complaint Counsel to demonstrate that jurisdiction exists over all violations aleged in the 

Complaint. 

IV. STATEMENT OF FIDINGS 

Rule 3.22(e) of 
 the Commssion's Rules ofPractce requires that when a motion to dismiss 

a complait is granted with the result that the proceeding before the Administrative Law Judge is 

tennated, the Administrative Law Judge shan file an initial decision in accordance with the 

provisions of § 3.51. 16 C.F.R. § 3.22(e). Rule 3.5 I 
 (c) requires an initial decision to include a 

statement of findings and conclusions and an appropriate rule or order. 16 C.F.R. § 3.51(c). 

Accordingly, this section sets forth as fidings those facts alleged in the Complait that are taen 

as tre only for the limited purpose of ruling on both motions to dismiss. Citations to specifc 

12 
numbered fidings offact in this Initial Decision are designated by 
 "F." 

Allegations that are not relevant to the issues decided are not included. As discussed 

above (section niB. supra) argumentative language and allegations that constitute legal 

conclusions need not be taken as true and are not included as findings of fact. 

As is permtted when ruling on a motion to dismiss, offcial notice may appropriately be 

taken oflegislative and public agency materials. (Section in.c. supra). Therefore, ths section
 

also includes excerpts from the Notice of 
 Public Hearing through which CAR initiated the 

rulemakng at issue, the Final Statement of 
 Reasons for Rulemakig, and the statutes governng 

CAR, upon which this order granting the motion to dismiss on Noerr-Pennington grounds and 

the Initial Decision are based. The Notice of 
 Public Hearng and the Final Statement of Reasons 

for Rulemakng are Appendices Band D to Respondent's motion for dismissal based on NoerrPennington,. available at ww.ftc.gov/os/adipro/d9305/index.htm. 

A. Facts As Alleged in the Complaint
 

1. Respondent
 

1. Union Oil Company of Californa is a public corporation organized, existing, and doing 

business under, and by vie of, the laws of Californa. Its offce and principal place of 
 business
 

is located at 2141 Rosecrans Avenue, Suite 4000, EI Segundo, Californa 90245. Since 1985,
 

Union Oil Company of Calornia has done business under the name "Unocal." Unocal is a
 

wholly-owned, operatig subsidiaiy ofUnocal Corporation, a holding company incorporated in 

Delaware. Complaint at' 11. 

2. Unocal is, and at all relevant times has been, a corporation as "corporation" is defied 

by Section 4 of 
 the Federal Trade Commssion Act, is U.S.C. § 44; and at all times relevant 

herein, Unocal has been, and is now, engaged in commerce as "commerce" is defined in the same 

provision. Complaint at , 12. 

3. Prior to 1997, Unoca owned and operated refieries in Californa as a vertically 

integrated producer, refiner, and marketer of petroleum products. In March 1997, Unocal 

completed the sale of its wes coast refining, marketig, and transportation assets to Tosco 

Corporation. Currently, Unoca's priar business activities involve oil and gas exploration and 

production, as well as production of geothermal energy, ownership in proprietar and common 

caer pipelines, natural gas storage facilities, and the marketing and trading of hydrocarbon 

commodities. Complaint at , 13. 

13 
4. In its anual report for the year 2001 filed with the United States Securities and
 

Exchange Commssion, Form lO-K, Unocal lists as another of 
 its key business activities: 

"rp )ursuing and negotiating licensing agreements for reformulated gasoline patents with refiners, 

blenders and importers." Unocal has publicly anounced that it expects to ear up to $150 millon
 

in revenues a year from licensing its RFG patents. Complaint at ~ 14. 

2. Respondent's patents
 

5. Unocal is the owner, by assignment, of 
 the following patents relating to low emissions, 

reformulated gasoline: United States Patent No. 5,288,393 (issued Februar 22, 1994); United 

States Patent No. 5,593,567 (issued Januar 14, 1997); United States Patent No. 5,653,866 

(issued August 5, 1997); United States Patent No. 5,837,126 (issued November 17, 1998); and 

United States Patent No. 6,030,521 (issued Februar 29,2000). Complaint at ir 15. 

6. On May 13, 1990, Unocal scientists presented the preliminar research results of their 

emissions research program to the highest levels ofUnocal's management to obtain approval and 

funding for additional, confrmatory research. Unocal's management approved funding for' 

additional emissions testing, and this project became known as the "5/14 Project." Complaint 

at ir 29. 

7. Unocal's management approved the filing of a patent application covering the invention 

and discovery that sprang from the 5/14 Project. Specifcally, the Unocal scientists' novel 

discovery of 
 the directional relationships between eight fuel properties - RVP, TI0, T50, T90, 

olefin content, aromatic content, paraffn content, and octane - and three types of tailpipe 

emissions - i.e., incompletely burned or unburned hydrocarbons, carbon monoxide, and nitrogen 

oxides. Complaint at ~ 30. 

8. On December 13, 1990, Unocal filed with the United States' 
 Patent and Trademark 

Offce a patent application, No. 07/628,488. This application presented Unocal's emissions 

research results, including the regression equations and underlying data; detailed the directional 

relationships between the fuel properties and emissions studied in Unocal's 5/14 Project; and set 

forth composition and method claims relating to low emssions, reformulated gasoline. Complaint 

at ~ 32. 

3. California Air Resources Board ("CARB")
 

9. The Californa Air Resources Board ("CAR") is a deparment of the California 

EnVironmental Protection Agency. Established in 1967, CAR's mission is to protect the health, 

welfare, and ecological resources of Calforna through the effective and effcient reduction of ai 

pollutants, while recognzing and considering the effects of its actions on the Californa economy. 

CAR fufills the mandate by, among other thigs, setting and enforcing standards for low 

emissions, reformulated gasoline. Complaint at ~ 16. 

14 
4. Reformulated gasoline in California
 

I 

i 

! 

10. CAR intiated rulemakng proceedings in the late 1980s to determne "costeffectve" regulations and standards governng' 
 the composition oflow emissions, reformulated
 

gasoline. Unocal actively parcipated in the CAR RFG rulemakng proceedings. Complaint
 

at1¡ 1.
 

I I. CAR' s RFG regulations had their genesis in an effort by Californa to study the 

viability of alternative fuels for motor vehicles, such as methanoL. In 1987, the Californa 

legislature passed AB 234, which resulted in the formation of a panel to study the environmental 

impact of alternative fuels and to develop a proposal to reduce emissions. This panel included 

representatives from the refining industry, including Roger Beach, a high level Unocal executive 

who later became the Chief Executive Offcer and Chaian of 
 the Board ofUnocal. Complaint 

at ~ 19.
 

12. Based in substantial par on the representations of oil industr executives that the oil 

industry could, and would develop gasoline that would be cleaner-burnng and cheaper than 

methanol, the AB 234 study panel recommended exploring reformulated gasoline as an alternative 

to methanoL. Complaint at ~ 20. 

13. In late 1988, the Californa legislature amended the Californa Clean Air Act to 

require CAR to take actions to reduce harl car emissions; and directed CAR to achieve this
 

goal through the adoption of new standards for automobile fuels and low emission vehicles. 

CAR's legislative mandate, set forth in Cåliforna Health and Safety Code Section 43018, 

provided, inter alia, that CAR undertake the followig actons: 

a. Take "necessar, cost-effective, and technologically feasible" 

actions to achieve "reduction in the actal emissions of reactive,
 

organc gases of at least 55 percent, a reducton in emissions of 

oxides of iitrogen of at least 15 percent from motor vehicles" no 

later than December 31, 2000; 

b. Take actions "to achieve the maxmum feasible reduction in
 

pariculates, carbon monoxide, and toxic ai contamnants from 

vehicular sources"; 

c. Adopt standards and regulations that would result in "the most
 

cost-effective combination of control measures on all classes of
 

motor vehicles and motor vehicle fuel~" including the "specification 

of vehicular fuel composition." 

Complaint at 1f 21. 

15 
14. Following the 1998 Californa Clean Ai Act amendments, CAR embarked on two 

rulemakg proceedings relating to low emissions, refonnulated gasoline. In these rulemakng 

proceedings - Phase 1 and Phase 2 - CAR prescribed limits on specific gasoline propertes. 

Complaint at ~ 22. 

i 5. CAR' s Phase 2 RFG proceedings represented an effort by CAR to develop 

stringent standards for low emissions, reformulated gasoline. Paricipants to the Phase 2 RFG 

proceedings understood that the CAR Phase 2 RFG regulations would require refiners to make 

substantial capital investments to reconfgure their refineries to produce compliant gasoline. 

Complaint at ~ 24. 

16. In its Phase 2 RFG proceedings, CAR did not conduct any independent studies of its 

own, but relied on the industry to provide research and infonnation. Complaint at ~ 25. 

17. In the course of CAR' s Phase 2 RFG proceedings, CAR adhered to the 

procedures set forth in the Californa Administrative Procedure Act. CARprovided notice of 

proposed regulations; provided the language of these proposed regulations and a statement of 

reasons; solicited and accepted written comments from the public; and conducted lengthy hearings 

at which oral testimony wa~ received. CAR also issued wrtten findings on the results of its 

rulemaking proceedings. Following adoption of the regulations, several paries sought judicial 

review of the CAR Phase 2 RFG regulations that provided smal refiers with a two-year 

exemption for compliance with the regulations. Complaint at ~ 26. 

5. Unocal's conduct before CAR
 

18. Prior to and after the filing of 
 the patent application on December 13, 1990, Unocal 

employees and management discussed and considered the potential competitive advantage and 

corporate profit that could be gained through effectuating an overlap between the CAR 

regulations and Unocal's patent claims. Complaint at ~ 33. 

i 9. During the same time that Unocal parcipated in the CAR RFG ruemakng 

proceedings, specific discussions' 
 took place withi the company concerng how to induce the 

regulators to use infonnation supplied by Unocal so that Unocal could realize the licening 

income potential of 
 its pending patent claims. Complaint at ~ 34. 

20. Beginnig in 1990, and continuing throughout the CAR Phase 2 RFG rulemakng 

process, Unocal provided information to CAR for the purpose of obtaing competitive 

advantage. Unocal gave CAR this information in private meetings with CAR, through 

paricipation in CAR' s public workshops and heargs, as well as by paricipating in industry 

groups that also were providing inp1.t into the CAR regulations. Unocal suppressed facts 

relating to its proprietar interests in its emissions research results. Complaint at ~ 35. 

16
 
21. On June 11, 1991, CAR held a public workshop regarding the Phase 2 RFG 

regulations. Ths workshop included discussions of CAR stafs proposed gasoline 

specifications - i.e., the levels at which certain gasoline properties should be set - to reduce the 

emissions from gasoline-fueled vehicles. The set of specifcations proposed by CAR for 

discussion at this workshop did not include a T50 specification. Complaint at 1f 36. 

22. On June 20, 1991, Unocal presented to CAR staf 
 the results of 
 its 5/14 Project to 

show CAR that "cost-effective" regulations could be achieved through adoption of a "predictive 

model" and to convince CAR of 
 the importance ofT50. Unocal's pending patent application 

contained numerous claims that included T50 as a critical limitation, in addition to other fuel 

properties that CAR proposed to regulate. Complaint at 1f 37. 

23. Prior to the presentation to CAR, Unocal's management decided not to discloSe
 

Unocals pending '393 patent application to CAR staf Complaint at ir 38.
 

24. On July 1, 1991, Unocal provided CAR with the actual emissions predicton 

equations developed in the 5/14 Project. Unocal requested tht CAR "hold these equations 

confdential, as we feel that they may present a competitive advantage in the production of 

gasoline." But Unocal went on to state: "IfCAR pursues a meanngful dialogue on a predictive 

model approach to Phase 2 gasoline, Unocal will consider makng the equations ard underlying 

data public as required to assist in the development of a predictive modeL." Complaint at ir 39. 

25. Following CAR's agreement to develop a predictive model, Unocal made its
 

emissions results, including the test data and equations underlyig its 5/14 Project, publicly
 

available. Complaint at ir 40. 

26. On August 27, 1991, Unocal stated in a letter to CAR that its emissions research 

data were "nonproprietar." Specifically, Unocal stated: "Please be advised that Unocal now 

considers this data to be nonproprietar and available to CAR, environmental interests, groups, 

other members of 
 the petroleum industry, and the general public upon request." Complaint 

at ir 41. 

27. At the time Unocal submitted its August 27, 1991 letter to CAR, it did not disclose 

to CAR its proprietar interests in the 5/14 Project data and equations, its prosection of a 

patent application, or its intent to enforce its proprietar interests to obtain licensing income. 

Complaint at ir 42. 

28. CAR used Unocal's equations in setting a T50 specifcation. Subsequently, in 

October i 991, CAR published -rnocal's equations in public documents supportg the proposed 

Phase 2 RFG regulations. Complaint at ir 43. 

29. On November 22, 1991, the CAR Board adopted Phase 2 RFG regulations that set 

paricular standards for the composition oflow emissions, reformulated gasoline. These 

17 
regulations specified limits for eight gasoline properties: RVP, benzene, sulfu, aromatics, olefins, 

oxygen, T50, and T90. Unocal's pending patent claims recited limits for five of 
 the eight
 

propertes specifed by the regulations: T50, T90, olefins, aromatics, and RVP. Complaint 

at' 44.
 

30. The Phase 2 RFG regulations substantially overlapped with Unocal's patent clais.
 

. For example, CAR included a specifcation for T50 in its Phase 2 RFG regulations and
 

eventually adopted a "predictive model" that included T50 as one of 
 the parameters. Complaint 

at' 45.
 

31. Although Unocal knew by July 1992 that most of the pending patent clais based on 

its emissions reseach had been allowed by the United States Patent and Trademark Offce, 

Unocal did not disclose this material infonnation to CAR and other paricipants in the CAR 

RFG proceedings. Complaint at' 4. 

32. Prior to the final approval of 
 the CAR Phase 2 RFG regulations in November 1992, 

Unoca submitted comments and presented testimony to CAR opposing CAR's proposal to 

grant small refiners a two-year exemption for complying with the regulations. Unocal opposed 

this proposed exemption on the grounds that it would increase the costs of compliance and 

undennine the cost-effectiveness of 
 the CAR Phase 2 RFG regulations. In making these 

statements, Unocal did 
 not disclose that it had proprietar rights that would materially increase 

the cost and reduce the cost-effectiveness and flexibility of 
 the regulations that CAR had 

adopted. Complaint at' 46.
 

33. CAR amended the Phase 2 regulations in June 1994 to include a predictive model as 

an alternative method of complyig with the regulations that was intended to provide refiers with 

additional flexibilty. At the urging of numerous companies, including Unocal, this "predictive 

model" permts a refiner to comply with the RFG regulations by producing fuel that is predicted ­

based on its composition and the levels of the eight properties - to have equivalent emissions to a 

fuel that meets the strict gasoline property limits set forth in the reguations. Complaint at , 47. 

34. During the development of 
 the predictive model. Unocal continued to meet with
 

CAR, providing testimony and infonnation. Unocal submitted comments to CAR touting the
 

predictive. model as offering "flexbilty" and furtering CAR's mandate of "cost-effective" 

regulations. Complaint at , 48. . 

35. Unocal made statements and comments to CAR relating to the "cost effectiveness"
 

of CAR Phase 2 regulations, and the "flexibilty" offered by the implementation of a predictive
 

. model to reduce refiner compliance costs. These statements and comments include, but are not 

limited to, both wrtten and/or oral statements made to CAR on the following dates: October 

29. 1991, November 21, 1991, November 22, 1991, March 16, 1992, June 19, 1992, August 14, 

1992, September 4, 1992, June 3, 1994 and June 9, 1994. Complait at' 78.
 

18 
36. Throughout its communications and interactions with CAR prior to Januar 31, 

1995, Unocal did not disclose that it had pending patent rights, that its patent claims overlapped 

with the proposed RFG regulations, and that Unocal intended to charge royalties. Complaint 

at ~ 79. 

37. On Februar 
 22, 1994, the United States Patent Offce issued the '393 patent. CAR 

first became aware ofUnocal's '393 patent shortly afer Unocal's issuance of a press release on 

Januar 31, 1995. Complaint at ~ 49; 

6. Unocal's participation in industry groups
 

38. During the CAR RFG rulemakng, Unocal actively paricipated in the Auto/Oil Air 

Qualty Improvement Research Program ("Auto/Oil Group"), a cooperative, joint research 

program between the automobile and oil industres. By agreement dated October 14, 1989, the 

big three domestic automobile manufacturers - General Motors, Ford, and Chrsler - and
 

representatives from fourteen oil companies, including Unocal, entered into a joint research 

agreement in 'accordance with the National Cooperative Research Act of 1984 ("Auto/Oil 

Agreement"). Complaint at ~ 50. 

39. The stated objective of 
 the Auto/Oil 
 joint research venture was to plan and can out 

research and tests designed to measure and evaluate automobile emissions and the potential 

improvements in air qualty achievable through the use of reformulated gasolines, methanol, and 

other alternative fuels, and to evaluate the.relative cost-effectiveness of 
 these various 

improvements. Complaint at ~ 51. 

40. The Auto/Oil Agreement provided that "(t)he results of 
 research and testing of the
 

Program wil be disclosed to government agencies, the Congress and the public, and otherwse
 

placed in the public domai." This agreement specifically provided for the following dedication of 

any and all intellectual propert rights to the public: "No proprietar rights wil be sought nor 

patent applications prosecuted on the basis of the work of the Program unless required for the 

purpose of ensurig that the results of the research by the Program will be freely available, 

without royalty, in the public domain." Complaint at ii 52. 

41. Whie the Auto/Oil Agreement permitted paricipating companies to conduct 

independent reseach, and further peritted them to withhold the frits of such independent
 

research from the Auto/Oi Group, once data and information were in fact presented to the 

Auto/Oil Group, they became the "work of 
 the Program." Complaint at ~ 53. 

42. On September 26, 1991, Unocal presented to the Auto/Oil Group the results of 

Unocal's emissions research, including the test data, equations, and corresponding directional 

relationships between fuel properties and emissions derived from the 5/14 Project. Unocal's 

management authorized this presentation, which was substantially similar to that made to CAR . 

on June 20, 1991. Unocal informed Auto/Oil parcipants that the data had been made available 

19
 
to CAR and were in the public domai. Unocal also represented that the data would be made 

available to Auto/Oil paricipants. Complaint at iI 55. Unocal failed to disclose Unocal's 

proprietar interests in its emissions research results and Unocal's intention and efforts to enforce
 

its intellectual property rights. Complaint at iI 82. 

43. Throughout all of 
 its communications and interactions with the Auto/Oil Group prior 

to)anuar 3 I, 1995, Unocal failed to disclose that it had pending patent rights, that its patent 

claims overlapped with the proposed RFG reguations, and that Unocal intended to charge 

royalties. Complaint at iI 83. 

44. During the CAR Phase 2 RFG rulemakng proceedings, Unocal also actively 

parcipated in the Western States Petroleum Association ("WSPA))), an oil industry trade 

association that represents companes accounting for the bulk of petroleum exploration, 

production, refining, transportation and marketing in the western United States. WSP A, as a 

group, actively paricipated in the CAR RFG rulemakng process. WSP A commissioned, and 

submitted to CAR, three cost studies in connection with the CAR Phase 2 RFG rulemakng. 

Complaint at iI 56. 

45. One cost study commssioned by WSPA incorporated ihrormation relating to process 

royalty rates associated with non-Unocal patents and was used by CAR to determne the cost'" 

effectiveness of the proposed CAR Phase 2 RFG standards. This WSP A cost study estimated 

the costs oftn.e proposed regulations on a cents-per-gallon basis and estimated the incremental 

costs associated with regulating specific gasoline properties. This WSP A study could have 

incorporated costs associated with potential royalties flowing from Unocal's pending patent 

rights. Complaint at iI 57. 

46. On September 10, 1991, Unocal presented its 5/14 Project emissions research results 

to WSPA. .Unocal's management authorized the presentation of 
 the research results to WSPA.
 

This Unocal presentation created the impression that Unocal's emissions research results,
 

including the data and equations, were nonproprietar and could be used by WSP A or its 

individual members without concern for the existence or enforcement of any intellectual propert 

rights. Complaint at iI 58. 

47. Throughout all of its comiunications and interactions with WSP A prior to Januar 

3 i, i 995, Unocal failed to disclose that it had pending patent rights, that its patent claims 

overlapped with the proposed RFG regulations, and that Unocal intended to charge royalties. 

Complaint at iI 88. 

48. None of the paricipants in the WSPA or Auto/Oil Group knew of 
 the existence of 

Unoca's proprietar interests and/or pending patent rights at any time prior to the issuance ofthe 

'393 patent in February i 994, by which time most, if not all, of the oil company parcipants to 

these groups had made substantial progress in their capital investment and refiery modifications 

plans for compliance with the CAR Phase 2 RFG regulations. Complaint at iI 59. 

20 
7. Unocal's patent prosecution and enforcement
 

49. Followig the November 1991 adoption ofCAR Phase 2 RFG specifications, 

Unocal amended its patent claims in March 1992 so that the patent claims more closely matched 

the regulations. In some cases, Unocal s patent claims were narrowed to resemble the 

regulations. Complaint at ~ 60. 

50. On or about July i, 1992, Unocal received an offce action from the US. Patent and 

Trademark Ofce indicating that most ofUnocal's pending patent claims had been allowed. 

Unocal did not disclose this information to CAR or other parcipants to the CAR Phase 2 

RFG rulemaking. Complaint at ~ 61. 

51. Subsequently, afer the submission of additional amendments, Uno.cal received a
 

notice of allowance from the US. Patent and Trademark Offce for all of 
 its pending claims in
 

Februar 1993. Unocal did not disclose this information to CAR or other parcipants to the
 

CAR Phase 2 RFG rulemakng. Complaint at ~ 62. 

52. In June 1993, Unocal filed a divisional application (No. 08/77,243) of 
 its original 

patent application that allowed Unocal to pursue additional patents based on the discoveries of 

the 5/14 Project. Complaint at ~ 63. 

53. The US. Patent and Trademark Offce issued the '393 patent to Unocal on Februar 

22, 1994. On Januar 31, 1995, Unocal issued a press release announcing issuance of 
 the '393 patent. The Unocal press release stated that the '393 patent "covers many of 
 the possible fuel
 

compositions that refiners would find practical to manufactre and still comply with the strict 

Californa Air Resources Board (CAR) Phase 2 requirements." Complaint at il64. 

54. In March 1995, Unocal met separately with Californa Governor Pete Wilson and 

CAR and made assurances that Unocal would not enjoin or otherwise impai the ability of 

refiners to produce and supply to the Californa market gasoline that complied with the CAR 

Phase 2 RFG reguations. In or about the same time period, CAR expressed its own concern to 

Unocal about the coverage of 
 the patent and even sough and received from Unocal a license to 

use the '393 patent in makng and using test fuels. Complaint at il65. 

55. On March 22, 1995, five days afer meeting with CAR staf Unocal filed a 

continuation patent application (No. 08/409/074) claing priority to the original December 1990 

application. Unocal did not inform CAR or Governor Wilson that it intended to obtain 

addition~ RFG patents. Complaint at ~ 66. 

56. Unocal subsequently filed additional continuation patent applications on June 5, 1995 

(No. 08/464,544), August 1, 1997 (No. 08/904,594), and November 13, 1998 (No. 08/191,924), 

21
 
all claiming priority based on Unocal's original December 13, 1990 patent application. Complaint 

at 1f 67. 

57. On April 13, 1995, ARCO, Exxon, Mobil, Chevron, Texaco, and Shell filed suit in the 

United States District Court for the Central District of 
 Californa seeking to invalidate Unocal's 

'393 patent. Unocal filed a counterclaim for patent infngement of the '393 patent. The jury in 

this private litigation determned that Unocal's '393 patent was valid and infnged, and found that 

the refiners must pay a royalty rate of 5.75 cents per gallon for the period from 
 March through
 

July 1996 for sales of infnging gasoline in Californa. Complaint at 1f 68. 

58. The United States Court of Appeals for the Federal Circuit subsequently afrmed the 

trial court'sjudgment. The United States Supreme Court denied the refiner-defendants' petition 

for a wrt of certiorari. The refiner-defendants have made payments totaling $91 millon to 

Unocal for damages, costs, and attorneys' fees. Complaint at 1f 69. 

59. An accounting action is stil ongoing in the United States District Court for the 

Central District of Calforna to determne damages for infgement of 
 the '393 patent by the
 

refiners for the period from August 1, 1996, through December 31, 2000. The court ruléd in
 

August 2002 that the 5.75 cents per gallon royalty fee awarded by the jury would apply to all
 

infnging gasoline produced and/or supplied in Californa. Complaint at 1f 70.
 

60. On Januar 23,2002, Unocal sued Valero Energy Company in the Central District of 

Californa for willful infgement of 
 both the '393 patent and the '126 patent. In its complaint, 

Unocal seeks damages at the rate of5.75 cents per gallon for al infging gallons, and treble
 

damages for willful infgement. Complaint at 1f 71.
 

61. Unocal also has enforced its patent claims through licensing activities. To date, 

Unocal has entered into license agreements with eight refiners, blenders and/or importers covering 

the use of all five RFG patents. The terms of 
 these license agreements are confdential. Unocal 

has anounced that these license agreements feature a "unorm" licensing schedule that specifies 

a range from 1.2 to 3.4 cents per gallon depending on the volume of gasoline falling withi the
 

scope of the patents. As a licensee practices under the license more frequently, the licensing fee
 

per gallon is reduced. Complaint at 1f 72.
 

62. Refiners in California invested billons of dollars in sunk capital investments without
 

knowledge ofUnocal's patent claims to reconfgure their refineries in order to comply with the
 

CAR Phase 2 RFG regulations. These refiners canot produce signcant volumes on noninfngig CAR-compliant gasoline without incurrng substantial costs. Complaint at 1f 93.
 

63. Were Uriocal to receive a 5.75 cents per gallon royalty on all gallons of "summertime" CAR RFG produced annually for the Californa market, this would result in an estimated
 

. anual cost of 
 more than $500 millon (assuming approximately 14.8 billon gallons per year 

22
 
Californa consumption, with up to 8 months ofCAR summer-time gasoline requiements). 

Complaint at ii i o. 

B. Legislative and Agency Materials of 
 Which' Offcial Notice is Taken 

1. Notice of 
 Public Hearing 

64. CAR issued its Notice of 
 Public Hearng to Consider' 
 Adoption of and Amendments 

to Regulations Regarding Reformulated Gasoline (phase 2 Gasoline Specifcations), and the 

Wintertime Oxygen Content of Gasolie on September 24, i 99 i, ("Notice of 
 Public Hearng") in connection with the Phase 2 regulations. Notice of 
 Public Hearng, p. i. 

65. The Notice of 
 Public Hearng states that the Air Resources Board ("the Board") will 

conduct a public hearng to consider the adoption of ánd amendments to regulations to establish 

more stringent gasoline specifications for Reid vapor pressue ("RVP"), distilation temperatures, 

and sulfur, benzene, olefin, oxygen and aromatic hydrocarbon content starting in i 996. Notice of 

Public Hearng, p. i. 

66. The Notice of Public Hearg states that the Board staf 
 has prepared a Staf 
 Report 

for the proposed Phase 2 reformulated gasoline proposal that is available to the public. Notice of
 

Public Hearng, p. 6. 

67. The Notice of 
 Public Hearng states that based on cost data submitted to the Board, 

the stafhas determned that the regulations wil cost between 14 cents per gallon to 20 cents per 

gallon, if 
 the entire cost is passed on to the consuer. The total capital investment costs to the 

. refiners are estiated to be in the range of 
 four to seven bilion dollars. Notice of 
 Public Hearng, p.7. 

68. The Notice of 
 Public Hearng states that the staf estimates that implementation of 

Phase 2 specifications will result in ozone precursor emission reductions of about 190 tons per 

day in 1996. Emissions of 
 CO wil be reduced by about 1300 tons per day and sulfur oxides by 40 

tons per day. Other Phase 2 specifications will also result in reduced toxic emissions. Notice of 

Public Hearng, p. 7. 

69. The Notice of 
 Public Hearng states that the stafis conducting an independent cost 

analysis using the Process Industry Modeling System refinery modeL. Notice of 
 Public Hearg, p.7. 

70. The Notice of 
 Public Hearng states that before takg fial action on the proposed 

regulatory action, the Board must determne that no alternative considered by the agency would 

be more effective in carng out the purpose for which the action is proposed or would be as
 

effective and less burdensome to afected private persons than the proposed action. Notice of 

Public Hearg, pp. 7-8. 

23 
71. The Notice of 
 Public Hearing states that the public may present comments relating to 

this matter orally or in writing. The Board encourages members of the public to bring to the 

attention of staf in advance of the hearng any suggestions for modification of the proposed 

regulatory action. Notice of 
 Public Hearng, p. 8. 

2. Final Statement of Reasons For Rulemaking
 

72. The Californa Air Resources Board issued its Final Statement of 
 Reasons for
 

Rulemaking, Including Summar of Comments and Agency Response ¡-elating to the public
 

hearng to consider the adoption and amendments to Phase 2 gasoline specifications held on 

November 21-22, 1991. ("Final Statement of 
 Reasons for Rulemaking"j. 

73. Final Statement of 
 Reasons for Rulemakng states: "(t)he statutes do not mandate 

what specific fuel characteristics must be controlled, how stringent those controls should be, what 

the compliance dates should be, to whom the controls should apply, whether the limits should be 

statewide or limited to areas with substantial ai pollution problems, whether the limits should 

apply yea-round or only during seasons with bad air ql1ality, whether all batches offuel should be 

subjec to the same limit or an 'averaging' program of some sort should be instituted, how the 

controls should be enforced, and whether there should be provisions granting temporar 

'varances' based on unforeseen unique events." Final Statement of 
 Reasons for Rulemakng, 

p.190. 

74. The Final Statement of 
 Reasons for Rulemakng states that the Board conducted a
 

hearng at which it received oral and wrtten comments on the regulatory proposals. Final
 

Statement of 
 Reasons for Rulemakig, p. 1. 

75. The Final Statement of 
 Reasons for Rulemakng states that the staf conducted an 

informal public workshop on October 14, 1991 to discuss the Phase 2 RFG regulatory proposal. 

Final Statement of 
 Reasons for Rulemakng, p. 17, n.5. 

76. The Final Statement of 
 Reasons for Rulemakng contains a summar of 
 the comments 

the Board received on the Phase 2 RFG reguations durig the formal rulemakng process and the 

Board's responses to the comments. Final Statement of 
 Reasons for Rulemakng, p. 3. 

77. An attachment to the Final Statement of 
 Reasons for Rulemakng shows that 51 

entities, including automobile companes, assemblymen, business associations, chemical 

companes, environmental associations, forestr associations, labor unions, oil companes, 

petroleum associations, refiners' associations, and trckig associations, all provided comments to 

the Board during the formal rulemaking process. Final Statement of 
 Reasons for Rulemakng, 

pp. A-I - A-6.
 

24 
3. Statutory authority under which CARB's regulations were adopted
 

78. The Notice of 
 Public Hearing states that CAR' s regulatory action is proposed under 

that authority granted in sections 39600,39601,43013,43018, and 43101 of 
 the Health and 

Safety Code.and Western Oil and Gas Ass'n v. Orange County Air Pollution Control District, 14 

Cal. 3d 41 I, 121 Cal. Rprt. 249 (1975). No~ce of 
 Public Hearg, p. 8. 

79. CAR also has the authority to conduct adjudicatory hearings. The proced~res for 

hearngs can be found at CaL. Code Regs. tit. 17 §§ 60040-60053. The provisions of 
 this article 

do n.ot apply to review of decisions related to programs or actions of air pollution control or air 

quality management districts. Cal. Health & Safety Code § 60040. 

80. The Notice of 
 Public Hearng does not state that CAR's regulatory action is 

proposed under the authority granted in sections 60040-60053 of 
 the Health and Safety Code. Notice of 
 Public Hearng, p. 8. 

81. Section 39600 of 
 the Health and Safety Code states: The state board shall do such 

acts as may be necessar for the proper execution of 
 the powers and duties granted to, and imposed upon, the state board by this division and by any other provision of 
 .law. Cal. Health & 

Safety Code § 39600. 

82. Secton 39601 of 
 the Heath and Safety Code states, in par: 

(a) The state board shall adopt standards, rules, and regulations in accordance with the provisions of Chapter 3.5 (commencing with Section i 1340) of 
 Part 1 of Division 3 of 
 Title 2 of the Governent Code, necessar for the proper execution of 
 the powers and duties granted to, 

and imposed upon, the state board by this division and by any other provision oflaw . . . ; 

(c) The standards, rules, and regulations adopted pursuant to this section shal, to the 

extent consistent with the responsibilties imposed under ths division, be consistent with the state 

goal of providing a decent home and suitable living environment for every Californan. Cal. 

Health & Safety Code § 39601. 

83. Secion 43013 of 
 the Health and Safety Code states, in par: 

(a) The state board may adopt and implement motor vehicle emission standards, in-use 

pedormance standards, and motor vehicle fuel specifcations for the control of air contamnants 

and sources of air pollution which the state board has found to be necessar, cost-effective, and 

technologically feasible, to car out the purposes of ths division, unless preempted by federal 

law... . 

(e) Prior to adopting or amending any standard or regulation relating to motor vehicle 

fuel specifications pursuant to this section, the state board shall, afer consultation with public or 

private entities that would be significantly impacted. . . do both of 
 the following: 

(1) Determne the cost-effecveness of the adoption or amendment of the 

standard or regulation. The cost-effectiveness shall be compared on an incremental basis with 

other mobile source control methods and options. 

25 
(2) Based on a preponderance of scientific and engineering data in the record, 

determne the technological feasibility of the adoption or amendment of the standard or
 

regulation. . . .
 

(f) Prior to adopting or amending any motor vehicle fuel specification pursuant to this
 

section, the state board shall do both of the following:
 

(1) To the extent feasible, quantitatively document the signifcant impacts of the proposed standard or specification on afected segments of 
 the state's economy. The economic 

analysis shall include, but is not limited to, the signficant impacts of any change on motor vehicle 

fuel effciency, the existing motor vehicle fuel distribution system, the competitive position of 
 the 

afected segment relative to border states, and the cost to consumers. 

(2) Consult with public or private entities that would be signficantly impacted to 

identif those investigative or preventive actions that may be necessar to ensure consumer 

. acceptance, product availability, acceptable performance, and equipment reliabilty. The 

significantly impacted parties shal include, but are not limited to, fuel manufacturers, fuel 

distributors, independent marketers, vehicle manufacturers, and fuel users. Cal. Health &.Safety 

Code § 43013.
 

84. Section 43018 of 
 the Health and Safety Code states, in par: 

(a) The state board shall endeavor to achieve the maxmum degree of emission reduction 

possible from vehicular and other mobile sources in order to accomplish the attainment of the 

state standards at the earliest practicable date. 

(b) Not later than Januar 1, 1992, the state board shall take whatever actions are
 

necessar, cost-effective, and technologically feasible in order to achieve, not later than December 

31, 2000, a reduction in the actual emissions of reactive organc gases of at least 55 percent, a 

reduction in emissions of oxides of nitrogen of at least 15 percent from motor vehicles. These 

reductions in emissions sh~i be calcuated with respect to the 1987 baseline year. The state board 

also shal take action to achieve the maxum feasible reductions in pariculates, carbon 

monoxide, and toxic air contamnants from vehicular sources. 

(c) In carng out ths secton, the state board shall adopt standards and regulations
 

which will result in the most cost-effective combination of control measures on all classes of 

motor vehicles and motor vehicle fuel, including, but not limited to, all of the following: 

(1) Reductions in motor vehicle exhaust and evaporative emissions.
 

(2) Reductions in emissions from in-use emissions from motor vehicles through 

improvements in emission system durability and performance. 

(3) Requirng the purchase oflow emission vehicles by state fleet operators. 

(4) Specification of 
 vehicular fuel composition.

(d) In order to accomplish the purposes of this division, and to ensure timely approval of 

the district's plans for attainment of the state air quality standards by the state board, the state 

board shal adopt.the following schedule for workshops and hearngs to consider the adoption of 

the standards and regulations requied pursuant to this section: 

(1) Workshops on the adoption ofvehicuar fuel specifications for aromatic 

content, diesel fuel qualty, light-duty vehicle exhaust emission standards, and revisions to the 

standards for new vehicle certfication and durability to reflect current driving conditions and 

26 
useful vehicle life shall be held not later than March 3 i, 1989. . . . 

(2) Notwthstanding Section 43830, workshops on the adoption of 
 regulations 

governng gasoline Reid vapor pressure, and standards for heavy-duty and medium-duty vehicle 

emissions, shall be held not later than Januar 31, i 990. . . . 

regulations governng detergent content,
 

emissions from.off-highway vehicles, vehicle fuel composition, emissions from construction
 (3) Workshops on the adoption of 


equipment and far equipment, motorcycles, locomotives, utility engines, and to the extent 

penntted by federal law, marne vessels, shall be held not later than Januar 3 i, 1991. . . . 

(e) Prior to adopting standards and regulations pursuant to this section, the state board shall consider the effect of 
 the standards and regulations on the economy of 
 the state, including, 

but not limited to, motor vehicle fuel effciency. . . . CaL. Health & Safety Code § 430 i 8.
 

85. Section 43101 of 
 the Health and Safety Code states: The state board shall adopt and 

. implement emission standards for new motor vehicles for the control of emissions therefrom, 

which standards the state board has found to be necessar and technologically feasible to carr
 

out the purposes of this division. Prior to adopting such standards, the state board shall consider 

the impact of such standards on the economy of the state, including, but not limted to, their effect 

on motor vehicle fuel effciency~ The state board shal submit a report of its findings on which the 

standards are based to the Legislature within 30 days of adoption of 
 the standards. Such 

standards may be applicable to motor vehicle engines, rather than to motor vehicles. CaL. Health 

& Safety Code § 43101. . 

4. California Administrative Procedure Act
 

86. The Notice of 
 Public Hearg and CaL. Health & Safety Code § 39601 state that 

CAR's public hearng and adoption of 
 regulations shal be conducted in accordance with the
 

Californa Admistrative Procedure Act, Title 2, Division 3, par 1, Chapter 3. 5 (commencing
 

with section i 1340) of the Governent Code ("Californa AP A"). Notice of 
 Public Hearing, p. 8; 

Cal. Health & Safety Code § 39601. 

87. Par 1 of Division 3 of 
 Title 2 of 
 the Governent Code governs state deparments and 

agencies within the executive deparment. Cal. Gov't. Code, Par 1, Division 3.' Chapter 3.5 is 

entitled "Admstrative Reguations and Rulemakig." CaI. Gov't. Code, Par 1, Division 3, 

Chapter 3.5. Chapter 3.5 encompasses Sections i 1340 through i 1351. Id 

88. Section 11340.1 of 
 the Californa APA declares the intent to establish an Offce of 

Administrative Law which is charged with reviewig adopted regulations for the purpose of 

reducing the number of regulations and to improve the qualty of those regulations adopted. It is 

the intent of the Legislatue that neither the Offce of Admstrative Law nor the court should 

substitute its judgment for that of the rulemaking agency. Cal. Gov't Code § 11340.1 

89. Secton 11342 of 
 the Californa APA defies "regulation" as every rule, regulation, 

order, or standard of general application. Cal. Gov't Code § i 1342. 

27 
90. Section 11346 of 
 the Californa APA states: 

(a) It is the purpose of 
 this chapter to establish basic minimum procedural requirements

for the adoption, amendment, or repeal of administrative regulations. Except as provided in 

Section 11346.1, the provisions of 
 this chapter are applicable to the exercise of any quasilegislative power conferred by any statute heretofore or hereafer enacted . . . 

(b) An agency that is considering adopting, amending, or repealing a regulation may 

consult with interested persons before initiating regulatory action pursuant to this aricle. Cal.
 

Gov't Code § 11346.
 

91. Section 11346.3 ofthe California APA states: 

(a) State agencies proposing to adopt. . . any administrative regulation shall assess the 

potential for adverse economic impact on Calforna business enterprises and individuals. CaI. 

Gov't Code § 11346.3
 

92. Section 11346.4 of the Californa APA requires notice of 
 the proposed action prior to hearg and close of 
 the public comment period. CaI. Gov't Code § 11346.4. 

93. Section 11346.45 of 
 the California APA requires agencies proposing to adopt
 

regulations to involve paries who would be subject to the proposed regulations in public
 

discussions regarding those proposed regulations. This requirement is not imposed where the
 

state agency is required to implement federal law and regulations for which there is little or no
 

discretion on the par of 
 the state to var. Cal. Gov't Code § 11346.45. 

94. Section 11346.8 of 
 the Californa APA states that if 
 a public hearing is held, both oral 

and written statements, arguments, or contentions, shall be penntted. If a public hearng is not
 

scheduled, the state agency shall aford any interested person the opportunity to present 

statements, arguments or contentions in wrting. The state agency shall consider al relevant 

matter presented to it before adopting, amending, or repealing any reguation. In any hearg 

under this section, the state agency shal have authority to administer oaths or afrmations. Cal. Gov't Code § 11346.45. .
 

95. The Notice of Public Hearg indicates that CAR's adoption of regulations was 

required to be in accordance with Chapter 3.5 ("Admistrative Regulations and Rulemakng"). 

Cal. Health & Safety Code § 39601. It was not required to be in accordance with Chapter 4 

("Administrative Hearngs"), Chapter 4.5 ("Administrative Adjudication: General Provisions"), or 

Chapter 5 ("Administrative Adjudication: Formal Hearng"). See Cal. Gov't. Code, Par 1, 

Division 3. 

28
 
v. ANALYSIS AND CONCLUSIONS OF LAW
 

A. Overview of the Noerr-Pennington Doctrine
 

The evolution of 
 the judicially created immunity from antitrust liability under the NoerrPennington doctrine begins in Eastern Railroad Presidents Conference v. Noerr Motor Freight, 

Inc., 365 U.S. 127 (19~1). In Noerr, truck operators and their trade association alleged that 

.railroads and their trade association conspired to restrain trade in violation of Sections 1 and 2 of 

the Sherman Act by engaging in a publicity campaign agaist the truckers designed to foster the 

adoption and retention oflaws and law enforcement practices destructive of the trcking business.
 

Id at 129. The defendants argued that their activities could not create liabilty under the Sherman 

Act when they were only tryng to inform the public and the legislature of certain facts. The 

Supreme Court agreed, noting "that where a restraint upon trade or monopolization is the result 

of valid governental action, as opposed to private action, no violation of the (Sherman) Act can 

be made out." Id at 136 (citing United States v. Rock Royal Co-op, 307 U.S. 533 (1939); Parker 

v. Brown, 317 U.S. 341 (1943)). 

The Supreme Court based its finding of immunity from antitrust liabilty on two premises. 

First, to hold an entity liable under antitrust laws for actions taken to infuence the passage or 

enforcement of 
 laws "would substantially impair the power of governent to take actions through 

its legislature and executive that operate to restrain trade." Noerr, 365 U.S. at 137. The 

Supreme Court explained: 

In a representative democracy such as this, these branches of governent 

act on behalf of the people and, to a very large extent, the whole concept 

of representation depends upon the abilty of the people to make their 

wishes known to their representatives. To hold that the governent retains 

the power to act in this representative capacity and yet hold, at the same 

time, that the people canot freely inform the governent of their wishes 

would impute to the Sherman Act a purpose to regulate, not business 

activity, but political activity, a purpose which would have no basis 

whatever in the legislative history of that Act. 

Id at 137.
 

The second premise for imunity from antitrust liabilty stems from the Constitutional 

right to "petition the Governent for redress of grevances," u.s. Const. amend I, d. 6. "The 

29
 
right of petition is one of the freedoms protected by the Bil of 
 Rights, and we canot, of course, 

lightly impute to Congress an intent to invade these freedoms." Noerr, 356 U.S. at 138. Thus, 

the Supreme Court held that the Sherman Act does not apply to the activities that "comprised 

mere solicitation of governmental action with respect to the passage and enforcement oflaws." 

Id at 138.
 

The antitrust immunity established in Noerr for attempts to infuence governental action 

was reafrmed in UnitedMine Workers v. Pennington, 381 U.S. 657 (1965). In Pennington, the 

union and large coal companies agreed upon steps to exclude the marketing, production, and sale 

of non-union coaL. Together they successfully approached the Secretar of Labor to obtai a
 

mimmum wage requirement for employees of contractors sellng coal to the Tennessee Valey 

Authority ("TV A"), makng it diffcult for small companes to compete for TV A term contracts. 

Other executive action was also sought and obtained. The Supreme Court held that the actions 

seeking changes in policy or law by the goveÌ1ent were immune from antitrust liabilty, 

"regardless of intent or purpose." Id at 670. "(The) legality of the conduct 'was not at al 

afected by any anti-competitive purpose it may have had,' . . . even though the' sole p~rpose in 

seeking to infuence the passage and enforcement oflaws was to destroy . .. competitors. . . . '" 

Id at 669 (citation omitted). AccordMarkAero, 580 F.2d at 294 (Noerr sruelds from antitrust 

liability a concerted effort to infuence public offcials regardless of intent or purpose.); Clipper 

Exxpress v. Rocky Mountain Motor Tarif Bureau, Inc., 690 F.2d 1240, 1254 (9th Cir. 1982) 

("Genuine efforts to induce governental action are shielded by Noerr even if their express and 

sole purose is to stife or eliminate competition."). 

In California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (l972), the 

Supreme Court extended the Noerr-Pennington doctne to attempts to infuence administratie 

and adjudicatory bodies. Id at 510. Lower courts have made clear 
 that lobbyig efforts designed
 

to infuence a state adminstrative agency's decision are witrun the ambit of the NoerrPennington doctrine. Kottle, 146 F.3d at 1059; Tarabishi v. McAlester Regional Hosp., 951 F.2d 

1558, 1570 n.17 (lOth Cir. 1991); St. Joseph's Hosp., 795 F.2d at 955. "Noerr-Pennington 

immunity extends to efforts to infuence 
 all branches of governent, including state admistrative 

30
 
agencies." Livingston Dawns Racing Assoc. v. Jefferson Dows Corp., 192F. Supp. 2d 519,532 

(M.D. La. 2001). 

B. Noe"-Pennington Provides Immunity to Conduct AUeged in the Complaint
 

The Supreme Court has a broad view of Noerr-Pennington immunity. "Those who 

petition the governent for redress are generally immune from antitrust liability." Professional 

Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 56 (1993). Accord
 

Kottle, 146 F.3d at 1059 (The Noerr-Pennington doctrine "sweeps broadly and is implicated by
 

both state and federal antitrust claims that allege anticompetitive activity in the form oflobbying 

or advocacy before any branch of either federal or state governent. "). 

Complaint Counsel argues that the conduct alleged in the Complaint is not iinunized by 

Noerr-Pennington because: (1) CAR was acting in a quasi-adjudicatory setting; (2) CAR was 

dependent on Respondent for information; and (3) regardless of 
 whether the agency's actions are 

determned to be adjudicatory or legislative, there is no immunity where an agency is unaware that 

it is being asked to adopt or paricipate in a restraint of trade. The Complaint specificaly alleges: 

Unocal is not shielded from antitrust liability pursuant to the NoerrPennington doctrine for numerous reasons . . _ including, but not limited 

to, the following: (i) Unocal's misrepresentations were made in the course 

of quasi-adjudicative rulemakng proceedings; (ii) Unocal's conduct did not 

constitlite petitioning behavior . . . .1 

Complait at ii 96. 

Notwithstanding this legal conclusion contained within the factual allegations of the 

Complait, the facts alleged in the Complait, the legislative and agency materials relating to 

CAR's rulemakg, and applicable case law demonstrate that CAR' s Phase 2 RFG ruemakg 

process was a quasi-legislative proceeding and that Respondent's conduct did constitute political 

petitionig behavior.
 

Paragraph 96 of the Complaint alleges that Respondent is not shielded from 

anitrst liability for a third reason, that "Unocal's misrepresentations and materially false and 

misleading statements to Auto/Oil and WSP A, two non-governental industry groups, were not 

covered by any petitioning privilege." Complaint at ii 96. This issue is discussed at Secton V.E. 

infra. 

31 
1. CAR's Phase 2 reformulated gasoline rulemaking process was quasilegislative 

a. Distinction made between legislative versus adjudicatory arena
 

Noerr' and its progeny hold that misrepresentations are condoned if made in the political 

process, but may result in antitrust liability if made in the adjudicative process. This distinction 

between the context (legislative versus adjudicatory) in which misrepresentations are made is set 

forth most clearly in Professional Real Estate Investors: 

In surveying the "forms of ilegal and reprehensible practice which may 

corrpt the administrative or judicial processes and which may result in
 

antitrust violations," we have noted that "unethical conduct in the setting of 

the adjudicatory process often results in sanctions" and that 

"misrepresentations, condoned in the political arena, are not immunized
 

when used in the adjudicatory process."
 

508 US. at 61 n.6 (quoting CaliforniaMotor Transport, 404 US. at 512-13).
 

Misrepresentations condoned in the legislative arena extend to deliberate deception. "A publicity
 

campaign directed at the general public, seekig legislation or executive action, enjoys antitrst
 

immunity even when the campaign employs unethical and deceptive methods." Alled Tube &
 

Conduit Corp. v. Indian Head, Inc., 486 U.S. 492,499-500 (1988). In Noerr itself, where the
 

pnvate pary engaged in conduct that could be "termed unethical" and "deliberately deceived the 

public and public offcials" in its successful lobbying campaign, the Supreme Court said, 

"'deception, reprehensible as it is, can be of 
 no consequence so far as the Sherman Act is 

concerned.'" City of Columbia v. Omni Outdoor Advertising, Inc., 499 US. 365, 383-84 (1991); il 

Noerr, 365 US. at 141, 145. 

Circuit courts applying the Noerr-Pennington doctnne hold that misrepresentations made 

in the context ofIegislative activities are immune from antitrst liability. E.g., Armstong 

Surgical Center, 185 F.3d at 162 (liability for injunes caused by states acting as regulators is 

precluded even where it is alleged that a pnvate par urging the action did so by bnbery, deceit 

or other wrongfl conduct that may have afected the decision makng process); Kottle, 146 F.3d 

at 1060 ("the political arena has a higher tolerance for outnght lies than the judiCial arena does"); 

Boone v. Redevelopment Agency of San Jose, 841 F.2d 886, 894 (9th Cir. 1988) 

32
 
(misrepresentations offacts made by defendant real estate developer to the city coun'ci relating to 

the city council's decision to not construct a parking garage is conduct that "certainly fals within 

the ambit of the Noe"-Pennington doctnne"); First Am. Title Co. v. South Dakota Lad Title 

Assn., 714 F.2d 1439, 1447 (8th Cir. 1983) (lobbying campaign alleged to involve '''a misuse of 

the lobbying process' though the use offalse statements and inaccuracies made by defendants to
 

the state legislature" protected by Noerr-Pennington doctnne);Metro Cable, 516 F.2d at 228 

(when a legislative body granted an exclusive franchise to defendant, allegedly due to defendant's 

illcit conduct, the complait was dismissed, because while the legislature could have had an
 

adjudicatory body issue the license, it chose not to do so ); Woods Exploration & Producing Co., 

v. Aluminum Company of America, Inc., 438 F.2d 1286, 1297 (5th Cir. 1971) ("The germnation 

of the allowable formula was political in the Noe" sense, and thus paricipation in those rule- . 

makng proceedings would have been protected."). 

By contrast, where the agency is using an adjudicatory process, misrepresentations are not 

immunized. CaliforniaMotor Transport, 404 U.S. at 512-13; Alled Tube, 486 U.S. at 499-500 

("in less political arenas, unethical and deceptive practces can constitute abuses of administrative 

or judicial processes that may result in antitrst violations"). E.g., St. Joseph's Hosp., 795 F.2d at 

955 (a governmental agency passing on specifc certficate applications is acting 
 judicially; 

misrepresentations under these circumstances do not enjoy Noerr imunity); Clipper Exxress, 

690 F.2d at 1261 ("fraudulent furnishing offalse information to an agency in connection with an 

adjudicatory proceeding can be the basis for antitrust liabilty"). 

Thus, apparently seeking to circumvent Noerr-Pennington immunity, the Complaint 

alleges that "CAR's Phase 2 RFG proceedings were quasi-adjudicative in nature." Complaint at 

ir 26. Complaint Counel argues that "where, as here, a party makes matenal misrepresentations 

in the course of 'adjudicatory' proceedings, such misconduct bnngs the case withn the 

independent misrepresentation exception to Noerr." Opposition at 20. Despite this conclusory
 

allegation, if the conduct complaied about is genuine petitioning in the legislative context, the 

violations alleged in the complait must be dismissed. See Mark 
 Aero, 580 F.2d at 292-93,97. 

Asset forth in the foHowig section, the facts, as alleged in the Complaint, guided by the statutory 

authority governng CAR, and demonstrated in the Notice of 
 Public Heanng through which 

33 
CAR intiated .the rulemakng and in the Final Statement of 
 Reasons for Rulemakng, establish 

that the Phase 2 RFG proceedings were legislative, and not adjudicative. 

b. Determination of whether action is legislative or adjudicatory 

"As a necessar prologue to any Noerr-Pennington immunity analysis, . . . the Court must
 

determe whether. . . an executive agency is more akn to a politica entity or to a judicial body."
 

Livingston Downs Racing Assoc. v. Jefferson Downs Corp., etal., 192F. Supp. 2d 519, 533 

(M.D. La. 2001). When the issue is whether a deliberate misrepresentation is protected, "the
 

basis of the type of governmental body involved (legislative or administrative) and the function it
 

exercises (rule-makng or adjudicative) also "shed light on whether the (pares being charged) 

were engaged in "political activity. . ..''' United States v. AT&T Co., 524 F. Supp. 1336, 1362 

n.108 (D.D.C. 1981) (quoting 
 Federal Prescription Service, Inc. v. Am. Pharmaceutical Ass'n, 

663 F.2d 253 (D.C. Cir. 1981)). 

A determnation of 
 whether CAR was actig in a quasi-legislative maner, as argued by
 

Respondent, or in a quasi-adjudicatory maner, as argued by Complaint Counsel, may be made by
 

an examnation of 
 the followig: (1) the level ofpoIiticai discretion granted to CAR; 

(2) whether CAR was setting policy; (3) the procedures used during the rulemakng; and (4) the 

authority invoked by CAR in adopting the Phase 2 RFG regulations. It is also useful to note 

that the Californa Supreme Cour has characterized CAR's rulemakngs as "quasi-legislative." 

Western States Petroleum Ass'n v. Superior Court, 9 Cal. 4th 559, 565 (1995). 

(i) Political discretion
 

One factor in determng whether an executive agency is actng in a legislative or 

adjudicative manner depends upon the "degree of political discreton exercised by the governent 

agency." Kottle, 146 F.3d at 1061. Complaint Counsel asserts that CAR, in using its techncal 

expertise to design the applicable regulations, was merely carng out the Californa legislature's 

mandate to implement èertain policy judgments, rather than acting in an independent political 

maner. Opposition at 24. However, it is apparent, on the facts aleged in the Complaint, that 

CAR exercised political discretion. F. 9 (Complaint at 1116) ("CAR's mission is to protect the 

34 

J~ 
health, welfare, and ecological resources of Californa through the effective and effcient reduction 

of air pollutants, while recognizing and considenng the effects of its actions on the California . 

economy."). The regulations enacted byCAR "set particular standards for the composition of 

low emissions RFG. These regulations specify limits for eight RFG properties: RVP, benzene, 

sulfur, aromatics, olefins, oxygen, T50, and T90." F. 29 (Complaint at ir 44). 

The statutory guidelines that govern CAR's rulemakng give CAR broad discretion to 

do such acts as may be necessary, consistent with the goal of providing a suitable living 

environment for every Californian. F. 81,82 (Cat Health & Safety Code §§ 39600, 39601). The 

statute lists only benchmarks that CAR' s reguations must fulfill and interests that CAR must 

keep in mind when formulating its regulations. F. 83,84 (Cal. Health & Safety Code §§ 43013, 

43018). CAR retains discretion in deciding what standards it will actually impose to achieve the 

maxum degree of emission reduction possible from vehicular or other mobile sources. See F. 

83, 84 (Cal. Health & Safety Code §§ 43013,43018). Nowhere does the statute state what 

properties ofRFG must be regulated. See F. 83-85 (Cal. Health & Safety Code §§ 43013, 43018, 

43101). Nor does the statute set limits to be placed 
 upon such properties. Id However, these 

two factors are cntical components of 
 the Phase 2 regulations and were the topics of 

Respondent's petitioning conduct as alleged in the Complait. F. 21, 22 (Complaint at irir 36,37). 

The California Air Resources Board descnbed the breadth of its rulemakng discreton in 

the Final Statement of 
 Reasons for Rulemakng for its Phase 2 rules as follows: 

The statutes do not mandate what specific fuel charactenstics must be 

controlled, hciw stnngent those controls should be, what the compliance 

dates should be, to whom the controls should apply, whether the limits 

should be statewide or limted to areas with substantial air pollution 

problems, whether the limits should apply year-round or only dunng 

seasons with bad air quality, whether all batches offuel should be subject 

to the same limit or an "averaging" program of some sort should be 

instituted, how the controls should be enforced, and whether there should 

be provisions granting temporar "varances" based on unforeseen unique 

events. 

F. 73. Thus, CAR exercised political discretion in promulgating the Phase 2 RFG regulations, 

indicating that CAR was acting in a quasi-legislative maner. 

35 
(ii) Policy setting
 

In deciding whether an agency is acting in a legislative or adjudicative maner, courts have 

focused on whether the agency has been granted the authonty to create policy on its own, or is 

. limited in its authonty to apply policy that was previously established to a paricular set offacts. 

See Israel v. Baxer Labs., Inc" 466 F.2d 272, 276-77 (D.C. Cir. 1976) (Noerr-Pennington does 

not apply to pnvate part efforts to infuence an agency that is not in a position to make 

governental policy, but rather carnes out policy already made); Woods, 438 F.2d at 1298 

(Noerr-Pennington is "inapplicable to the alleged fillng of false nominations (since J this conduct 

was not action designed to infuence policy, which is al the Noerr-Pennington rue seeks to 

protect.").' The California Supreme Court has found that CAR is vested with broad discretion 

pedormng its quasi-legislative rulemakng function and its decisions are entitled to a "high degree 

of deference." Western States Petroleum Ass 'n, 9 Cal. 4th at 572. 

Rulemakng concerns poli~y judgments to be applied generally in cases that may arse in 

the future. PortlandAudubon Soc'y v. EndangeredSpecies, 984 F.2d 1534, 1540 (9th Cir. 1993). 

Rulemakg nonnally refers to the prospecve allocation of 
 benefits and penalties according to a 

specific standard that reflects the policy choice of the rulemaker. Association of Nat'l 

Advertisers, Inc. v. FTC, 617 F.2d 611, 615 (D.C. Cir. 1979). By contrast, "(w)here an agency's 

task 'is to adjudicate disputed facts in parcular cases,' an administrative decision is quasijudiciaL." PortlandAudubon, 984 F.2d at 1540. "(A)n adjudication refers to the application ofa 

pre-existing legal stadard to a well-defined set of controverted facts to determne whether a 

paricular person or group of persons should receive a benefit or penalty." Association of Nat'/ 

Advertisers, 617 F.2d at 615. In Boone, in determning Noerr-Pennington immunity, the court 

distinguished between actons involving the application of 
 rules to specifc parcels ofprO:pert, 

which it deemed adjudicative in nature, and those afecting the future rights of many individuals, 

such as a redevelopment plan, which it deemed legislativè in nature. 841 F.2d at 896. 

The factal allegations of 
 the Complaint leave no doubt that CAR's Phase 2 rulemakng 

was setting policy to be applied generally to the iIidustry and affecting consumers in the future. . 

CAR convened its rulemakng to enact reguations "governng the composition oflow 

emissions, refonnulated gasoline. . . ." F. 10 (Complaint at ii 1). The Complait further avers 

36 
that CAR conducted the rulemakng pursuant to legislation that required the agency "to take 

actions to reduce harmfl car emissions." F. 13 (Complaint at 1f 21). Approximately 14.8 billon 

gallons ofRFG are sold each year in Californa. F. 63 (Complaint at 1f 10). To comply with 

Phase 2, industiy paricipants had to modify their refineries, which, in the aggregate, cost "billons 

of dollars." F. 15,62 (Complaint at 1f1f 24,93). Phase 2 substantially afects a large number of 

consumers through higher prices for summer time compliant gasoline. F. 63 (Complaint at 1f 10). 

No alegations in the Complaint indicate that CAR's Phase 2 rulemakng was in any way a
 

judicial determnation of the rights and obligations of specific parties before it.
 

In addition, the Notice of 
 Public Hearing through which CAR initiated the rulemakng 

states that CAR staf estimated future costs of 
 between 14 cents per gallon to 20 cents per 

galon, if the entire cost is passed on to the consumer, and capital investent costs to the refiners 

to be in the range of four to seven bilion dollars. F.67. The Notice of 
 Public Hearing also states 

that CAR staf estimated that implementation of 
 Phase 2 specifications wil result in ozone 

precursor emission reductions of about 190 tons per day in 1996, that emissions of CO will be 

reduced by about 1300 tons per day and sulfur oxides by 40 tons per day, and that other Phase 2 

specifications will álso result in reduced toxic emissions. F.68. These effects are not determned 

by individuals' specific factal circumstances, but rather are broad effects on all individuals who 

purchase RFG and who breathe the air in Californa. Thus, the application and effect of 
 Phase 2 is 

more consistent with what has traditionally been understood to be legislation, not an adjudication. 

(iii) Procedures used
 

In formal adjudications, certain procedures must be followed to comport with the Due 

Process Clause. Goldberg v. Kelly, 397 U.S. 254, 268 (1970) (welfare recipients' 
 could not be
 

termnated from the program without an adjudicatoiy proceeding where they could present their
 

case oraly, confont adverse witnesses, appear with or through an attorney, and receive a
 

decision based exclusively on the hearg record). See also Association of Nat'l Advertisers, Inc.
 

. v. FTC, 617 F.2d 611,635 (D.C. Cir. 1979) ("Congress never intended that parcipants in 

informal rulemakng . . . would have the type of 
 wide-rangig cross-examnation rights aforded 

paries in formal adjudication. . . ."). 

37 
An examnation of the procedures used by CAR, as alleged in the Complaint, reveals that 

the procedures used by CAR do not bear the indicia of a formal adjudicatory proceeding. The 

Complaint does not allege that CAR, in deciding on the Phase 2 regulations, conducted trial-like 

hearngs, including cross-examnation, rules of evidence, and burdens of proof Instead,
 

according to the Complaint, CAR conducted the Phase 2 rulemakiig pursuant to Calorna's 

Admistrative Procedure Act, which required CAR to issue a notice of proposed ruemakng, 

explain the basis and purpose of the regulations, provide an opportunity to comment, and conduct 

hearings. F. 17. See also Complaint at ir 17. The Complaint alleges that, in developing the RFG 

regulations, CAR provided notice of the proposed regulations, conferred in private meetings 

with varous interested persons, held public workshops and hearngs, solicited input from varous 

industry groups and numerous companies, conducted lengthy hearngs at which oral testimony 

was received, and collected wrtten comments by interested parties. F. 17,20,21,33 (Complaint 

at irir 26,35, 36,47). See also F. 74, 75 (the Final Statement indicates the Board conducted a 

hearng and public workshop). In the Final Statement of 
 Reasons for Rulemakng, CAR 

included all .of the meaningfl, relevant comments that it analyzed in formulating Phase 2 and its 

responses to these comments. F. 76, 77. As aleged in the Complaint, the processes used by 

CAR ilustrate clearly that CAR's rulemakng was undertaken in a legislative, and not an 

adjudicative context. 

(iv) Authority invoked
 

The Notice of 
 Public Hearng states that CAR's regulatory action is proposed under that 

authority granted in sections 39600,39601,43013,43018, and 43101 of 
 the Health and Safety 

Code and Western Oil and Gas Ass'n v. Orange County Air Pollution Control District, 14 Cal. 

3d 411, 121 Cal. Rprt. 249 (1975). F. 78 (Notice of 
 Public Hearng, p. 8). These statutory 

provisions require CAR, inter alia, to consult with the public or private entities that would be 

impacted, prepare an economic analysis of impacts of the regulations, conduct workshops on the 

adoption of regulations, and submit a report of its findings to the legislature. F. 82-85 (Cal. 

Health & Safety Code §§ 39601, 43013, 43018, 43101). These procedures are customar in
 

rulemakng, but not in adjudication. 

38 
Furter, the Notice of 
 Public Hearing states and the statute requires that CAR's public 

hearing and adoption of regulations shall be conducted in accordance with the Californa 

Admistrative Procedure Act (APA), Title 2, Division 3, Par 1, Chapter 3.5 of 
 the Governent 

Code. F. 86 (Notice of 
 Public Hearng, p. 8; Cal. Health & Safety Code § 39601). Compliance 

with Californa AP A procedures in the context of a rulemakng does not undercut the quasilegislative character of the rulemakng. Rivera v. Div. of Indus. Welfare, 265 Cal. App. 2d 576, 

586 (Cal. App. 1968); see also Wilson v. Hidden Valley Muni. Water Dist., 256 Cal. App. 2d 

271,278 (Cal. App. 1967) ("(t)he Legislature and administrators exercising quasi-legislative 

powers commonly resort to the hearing procedure to uncover, at least in par, the facts necessar 

to arve at a sound and fair legislative decision"); Joint Council of Interns and Residents v. Bd 

of Supervsors of Los Angeles, 2lOCal. App. 3d 1202,1211 (Cat App. 1989) (rejecting
 

characterization of rulemakng as adjudicative based on the use of certain procedures because
 

"(t)he decisionmakng process under review here involved much more than the mechancal 

application of statutory criteria to existing fact"). Thus, even where an administrative 

decisionmakng process embodies "certain 'characteristics common to the judicial process," this 

does "not change the basicaly quasi-legislative nature of 
 the subject proceedings." Wilson, 


CaL. App: 2d at 279.
 

Furthennore, the chapter of the Californa AP A that CAR was required to comply with 

was Chapter 3.5. F. 86. Chapter 3.5, entitled "Administrative Regulations and Rulemakng," 

states that "the provisions of 
 this chapter are applicable to the exercise of any quasi-legislative 

power conferred by any statute. . . ." F. 90 (Cal. Gov't Code § 11346(a)). CAR wàs not 

diected to comply with Chapter 4 ("Admistrative Hearngs"), Chapter 4.5 ("Administrative
 

Adjudication: General Provisions"), or Chapter 5 ("Administrative Adjudication: Fonnal 

Hearg"). F. 95. 

Although CAR is empowered to conduct adjudicative proceedings (see Cal. Code Regs. 

tit. 17, §§ 60040-60053), the Notice of 
 Public Hearng indicates that such procedures were not 

invoked in connecton with the Phase 2 ruemakng. F.78. Under sections 11370 et seq. of 
 the 

Californa Governent Code and Title 17 of the Calfornia Code of 
 Regulations at sectons 60040 

to 60094, CAR' s exercise of quasi-adjudicative powers is subject to the famliar strctures 

39 

256 
associated with adjudications. When it is conducting adjudications, CAR must provide notice, 

the hearng examner controls what evidence may be admitted, oral testimony must be under oath, 

the paries may cross-examine adverse witnesses or offer rebuttal evidence if the hearng examner 

deems it necessary to resolve disputed issues of 
 material fact, Californa's rules of 
 privilege apply, 

hearsay may not be used by itself 
 to support a finding unless it falls under an exception to the 

heasay rule, offcial notice may be taken, and afdavits are admissible. Cal. Code Regs. tit. 17, 

§§ 60040-60053. CAR's "adjudication procedures" need not be considered since the Complaint 

does not allege that CAR followed these quasi-adjudicative procedures durng its development 

of the Phase 2 RFG regulations and since the Notice of Public Hearing explicitly states that
 

CAR's regulatory action was proposed, instead, under sections 39600, 39601, 43013, 43018,
 

and 43101 of 
 the Health and Safet Code. F. 78, 80. 

It strains credulity to suggest that a "rulemakng," as it is referred to in the Complaint in at 

least 13 instances, was not a rulemakng in a legislative sense where the Californa statute 

governng CAR' s rulemakg denominates it as admistrative rulemakng and an exercise of 

quasi-legislative power. Nevertheless, as discussed above, an analysis of 
 whether CAR was in a 

position to exercise' policy discretion, whether the Phase 2 regulations affected people generally, 

in the future (as opposed to a determnation of 
 the specific rights of 
 individuals), the procedures 

used by CAR, and the statutory authority under which CAR promulgated the regulations 

conclusively demonstrates that CAR was not acting in ai adjudicatory maner, but in a 

legislative maner. 

2. CARD was not wholly dependent on Respondent for information 

Complaint Counsel argues that, regardless of whether CAR' s rulemakng was legislative 

or adjudicatory, Noerr-Pennington imunity does not apply where the decision makg agency is 

dependent upon the pettioner for information. Opposition at 30. Complaint Counsel relies 

chiefly on Clipper Exress, which holds: 

"(a)djudicatory procedures wiJ not always ferret out misrepresentations. 

Admnistrative bodies and courts, however, rely on the inormation 

presented by the partes before them. They seldom, if ever, have the time 

or resources to conduct independent investigations." 

40 
Opposition at 30-31 (quoting Clipper Exress, 690 F.2d at 1262).' 

Clipper Exxpress involved a ratemakng proceeding before the Interstate Commerce 

Commission (ICe), wherein the plaintiff alleged that the defendants had attempted to infuence 

ICC action by supplying fraudulent information to the ICC. The proceeding at issue was one in 

which the governent agency adjudicated the entitlement of a parcular party - Clipper Exxpress 

- to offer transport servces at a paricular rate. Clipper Exxress, 690 F.2d at 1261. Thus, 

Clipper Express does not compel a fiding of no immunity under the facts alleged in the 

Complaint in the instant case. 

In support of its argument that where the agency is dependent on facts known only to the 

petitioner, there is no immunity for fraud, Complaint Counsel alsl? cites to Whelan v. Abell, 48 

'F3d 1247, 1253-54 (D.C. Cir. 1995); Wood, 438 F.2d at 1295; and De loach v. Philip Morris
 

Cos., 2001 U.S. Dist. LEXIS 16909, *44 (M.D.N.C. 2001). Opposition at 31-32. The facts 

alleged in the instant case are readily distiguishable from those cases relied upon by Complaint 

CounseL. In Whelan, the court held that Noerr-Pennington did not protect knowing 

misrepresentations made in an adjudicative context - a letter of complaint to state securities 

administrators and to a federal court - from clais of malicious prosecution, abuse of process,
 

and tortious intederence with prospective business advantage. 48 F.3d at 1249. 

In both Woods and Deloach, the courts found that the deceptions at issue were not made 

during a policy makng exercise, and thus were not immune. In Woods, plaintifs alleged that 

entr of orders by the Texas Railroad Commssion setting production allowables for plaintis' 

wells in specific fields had been based in par on false nomiation forecasts and reports filed by 

defendants with the Texas Railroad Commssion. 438 F.2d at 1292. The Court of Appeas 

discussed whether the Texas Rairoad Commission was dependent on the defendants for the 

factual information in the context of determng whether defendants' conduct could be found to 

have become merged with the action of the state and thus exempt from antitrst liability under the 

state action doctrne. Id at 1295. In its examation of 
 whether defendants were exempt from 

antitrust liabilty under the Noerr-Pennington doctrie, the .Court of Appeals focused on whether 

the "germnation of the allowable formula was political" and thus protected, and found that where 

41
 
there was no attempt by defendants to infuence the policies of 
 the Texas Railroad Commssion, 

there was no immunity. 

In De Loach, the United States Deparment of Agrculture ("USDA") was tasked with
 

determining the annual quota for certain tobacco by calculating using a statutory formula that
 

factored in tobacco manufacturers' purchase intentions. 2001 U.S. Dist. LEXIS 16909, *8-10.
 

With the exception of the Secretar of Agrculture's abilty to adjust the quota by plus or minus
 

three percent from the statutory formula, the USDA had no discretion in determning the quota. 

Id at *10. Defendants' actions of 
 intentionally submitting false purchase intentions to the USDA 

that resulted in lower quotas were not protected by Noerr-Pennington because the "submission of 

their purchase intentions in no way involved the policy-making process." Id. at *44. "Rather, it
 

was part ofan administrative determination that relied upon (defendants') truthflness in 

calculating the anual quota." Id 

In Walker Process Equipment, Inc. v. FoodMachinery & Chemical Corp., 382 U.S. 172 

(1965), the Supreme Court held that "the enforcement of a patent procured by fraud on the Patent 

Offce may be violative of § 2 . . . provided th~ other elements necessary to a § 2 case are 

present." ld at 174. As characterized by the Court of Appeals for the Third Circuit, the Patent
 

Offce was wholly dependent on the applicant for the facts. Armstrong Surgical Center, 185 F.3d 

at 164 n.8 (3d Cir. 1999). "Whle the Patent Offce can determe the pnor ar from its own 

records, it effectively and necessarly delegates to the applicant the factal determations 

underlying the issuance of a patent." Id See also Chales Pfizer & Co. v. Federal Trade 

Commission, 401 F.2d 574,579 (6th Cir. 1968) ("The Patent Offce, not having testing facilties of 

its own, must rely upon inormation furnshed by applicants and their attorneys. (Respondents),

like all other applicants, stood before the Patent Offce in a confdential relationship and owed the 

. .
 

obligation offran and truthfl disclosure."). 

The facts of this case are not at all like the facts at issue in the cases relied upon by 

Complaint Counsel holding tha~ where an agency is dependent upon the petitioner for truthfl 

information, Noerr-Pennington immunty does not apply. CAR's rulemakng was not a 

ratemakng procedure. CAR' s ruemakng was not the mere 'application of a statutory formula 

to the facts presented. Respondent's alleged conduct was not the :fling of a complaint before an 

42
 
adjudicatory body. Respondent s aleged conduct was not fraud 
 on the Patent Offce. 

Instead, as set forth in the preceding section, CAR was vested with political discreton, 

set policy through its regulations, and was not acting in an adjudicatory manner. (Section V.B. 1. 

supra). Section 43013 required CAR to consult with public or private entities that would be 

significantly impacted. F.83. As alleged in the Complaint, CAR, in developing the RFG 

regulations, conferred in private meetings with various interested persons, held public workshops 

and hearings, solicited input from varous industry groups and numerous companies, and collected 

written comments by interested paries. F. 17,20,21,33 (Complaint at ~~ 26, 35, 36, 47). The
 

Notice of Public Hearig states that CAR staff 
 was to conduct an independent cost analysis 

using the Process Industry Modeling System refinery modeL. F. 69. The Final Statement of 

Reasons for R1ilemaking contains a summar of the comments the Board received on the Phase 2 

RFG regulations durig the formal rulemakng process and the Board's responses to the 

comments. F. 76 (Final Statement of 
 Reasons for Rulemakng, p. 3). An attachment to the Final 

Statement of 
 Reasons for Rulemakng shows that 51 entities, including automobile companes, 

assemblymen, business associations, chemical companes, envionmental associations, forestry 

associations, labor unions, oil companies, petroleum associations, refiners' associations, and 

trucking associations, al provided comments to the Board during the formal rulemaking process. 

F. 77 (Final Statement of 
 Reasons for Rulemaking, pp. A- i - A-6). The text of 
 these comments 

demonstrates that CAR was not solely dependent on Respondent for information. Moreover, 

the Complait alleges that CAR "relied on indust to provide research and inormation." F. 16 

(Complaint at ~ 25): Accordingly, because CAR was not wholly dependent on Respondent in its 

rulemakng proceedig, Noerr-Pennington applies. 

3. There is immunity even if CARD was unaware it was being asked to
 

restrain trade 

Complaint Counsel asserts that there is no immunity where an agency is unaware that it is 

being asked to adopt or parcipate in a restraint of 
 trade. Opposition at 14-15; Sur-reply at 7. 

Complaint Counsel further asserts that because CAR was unaware that it was being asked to 

adopt or parcipate in a restraint of trade and did not intend the consequences of its regulations, 

43
 
Respondent's actions do not constitute genuine petitioning activities and thus are not shielded by 

Noerr-Pennington. Opposition at 14-15; Sur-reply at 7. 

Noerr protects "the right of the people to inform their representatives in governent of 

their desires with respect to the passage or enforcement of 
 laws," regardless of the petitioner's
 

intent in doing so. Noerr, 365 U.S. at 139. "Petitioning" the governent, as used in 
 Noerr and
 

its progeny, equates to advocatig for or persuading the governent to take some action. Noerr, 

365 U.S. at 138 (petitioning is "solicitation of 
 governmental action with respect to the passage
 

and enforcement oflaws"); Omni Outdoor Advertising, 499 U.S. at 379-80 (entities must be
 

allowed to "seek anticompetitive action from the government"). 

Acce~ting the allegations of 
 the Complait as true, it is clear that Respondent engaged in 

petitioning conduct. E.g., F. 20 (Complaint at ~ 35 (Respondent provided inormation to CAR 

for the purpose of obtaining competitive advantage)); F. 22 (Complaint at ~ 37 (Respondent 

presented to CAR staf the results of 
 its 5/14 project)); F. 32 (Complait at ~ 46 (Respondent 

submitted comments and presented testimony to CAR opposing CAR's proposal to grant 

small refiners a two-yea exemption)); F. 34 (Complaint at ~ 48 (Respondent submitted comments 

to CAR touting the predictive model as offering flexibility and furtering CAR's mandate of 

cost-effective regulations)). This communication of 
 information to governent regulators 

regarding Respondent's "desires with respect to the passage or enforcement oflaws," is without 

question solicitation of governental action. 

Complait Counsel asserts that Noerr and its progeny protect petitioning only if the 

governent is "actually aware of the anticompetitive restraint it is imposing and takes state action 

nonetheless." Oppositon at 14-15 (emphasis added). For support, Complaint Counsel cites to 

Areeda & Hovenkamp, at ~ 209a and to FTC v. Superior Ct. Trial Lawers Ass 'n ("SClL"), 

493 U.S. 41 i, 424-25 (1990). Neither of 
 these cites support Complaint Counsel's proposition. 

Section 209a of Areeda & IIovenkamp sets forth the general rule for the "comnercial 

exception" to Noerr-Pennington. Philip E. Areeda & Herbert Hovenkamp, Antitrst La ~ 209a 

at 259 (2d ed. 2000). Within the context of 
 the "general rule" that a private person dealing with 

the governent as a buyer, seller, lessor, lessee, or franchisee has no greater antitrst priviege or 

immunity than in simar dealings with non-governental paries, the Areeda treatise states, "a 

44
 
prerequisite for Noerr immunity is that the governent actally know about the restraint being 

imposed. As a result, there is no immunity for secret pnce-fixing agreements directed at 

governent purchasers. . . ." Id In this case, as alleged in the Complaint, CAR is not acting as
 

a buyer, seller, lessor, lessee, or franchisee; nor are there allegations of secret pnce-fixig 

agreements directed at government purchasers. Thus, the commercial exception to NoerrPennington does not apply, and this quote, taken completely out of context, has no persuasive 

value. 

The quote from SCTLA upon which Complaint Counsel relies states: "(b Jut in the Noerr 

case the alleged restraint of trade was the intended consequence of public action; in this case the 

boycott was the means by which respondents sought to obtain favorable legislation." Reply at 15 

n.7, quoting 493 US. 411,424-25 (1990) (emphasis added). This quote has very little relation to 

the definition of 
 "petitioning." SCTLA does not hold that the legislature must have intended the 

consequences of its actions; rather, it compares the facts before it - where the restraint of trade 

was the mean by which respondents sought legislation (boycott) - from the facts of Noerrwhere restraint oftrade was the conseque,nce of petitioners' action (legislation). SClLA, 493 

US. at 424-25. 

The quoted language in SelL could not reasonably be constred to mean that Noerr 

requires the legislating agency to be aware of or intend the consequences of its regulations. In 

Noerr, the public and public offcials were "deliberately deceived." Noerr, 365 US. at 145. "And 

that deception, reprehensible as it is, can be of no consequence so far as the Shennan Act is 

concerned." Id. The very concept of deception assumes that the deceived par does not know it 

is being deceived. See Black's La Dictiona (defining "deception" as the act of deceit, and 

"deceit" as a deceptive misrepresentation used to deceive and tnck another, who is ignorant of 
 the 

true facts). 

Further, Omni Outdoor Advertising, makes clear 
 that an analysis of 
 the legislature's intent. \ 

should not be undertaken. In discussing state action immunity, the Supreme Court wrote that an 

analysis into whether legislation was thought by the state actors to be in the public interest ''would 

require the sort of deconstrction of 
 the governental process and probing of 
 offcial 'intent' that
 

we have consistently sought to avoid." 499 US. at 378. In furter context of 
 the state action 

45 
immunity, the Omni Outdoor Advertising court held, "we reafrm our rejection of any 

interpretåtion ofthe Sherman Act that would allow plaintiffs to look behind the actions of state 

sovereigns to base their claims on 'perceived conspiracies to restrain trade.'" Id at 379. In
 

discussing Noerr-Pennington immunity, the Supreme Court held: 

The same factors which. . . make it impracticable or beyond the purpose of 

the antitrst laws to identify and invaldate lawaking that has been 

infected by selfishly motivated agreement with private interests likewise 

make it impracticable or beyond that scope to identify and invalidate 

lobbying that has produced selfishly motivated agreement with public 

offcials. 

Id at 383 (emphasis added). Thus, even where the antitrust violation alleged was that the 

petitioner conspired with city offcials to harm a competitor, an analysis of the intent of 
 the

legislature was avoided. Id at 368-69. See also Areeda & Hovenkamp, 1f 202b at 158 ("To be 

sure, the legislature may be mistaken or unaware of 
 the consequences of its actions. . . but the 

antitrst court may not reappraise the legislature's assessment of 
 the public welfare. . . . (I)f a 

statute excludes everyone but the monopolist from a market, the monopolist canot itself be 

faulted. "). 

Complait Counsel also relies on cases interpreting the state action imunity developed in 

Parker v. Srown, 317 U.S. 341 (1943) and its progeny for Complaint Counsel's argument that 

petitioning is protected only if the governent agency is aware of 
 the restraint oftrade it is being 

asked to adopt. Sur-reply at 1 1. Parker and subsequent caselaw interpreting ths doctre explairi
 

that there must be conscious and deliberate efforts of the state to restrain competition in order for 

the state aCtion immunity to apply. California Retail Liquor Dealers Ass'n v. Midcal Aluminum,' 

Inc., 445 U.S. 97, 105 (1980) (private anticompetitive actvity is impliedly exempt from antitrst. 

scrutiny under the state action doctrine only if: (1) the aleged anticompetitive conduct was taken 

pursuant to a cle~ly ariculated and afrmatively expressed state policy to displace competition
 

with state regulation; and (2) the state actvely supervses the implementation of 
 its policy.). This 

doctrine, with its necessar focus on "whether the anticompetitive scheme is the State's own," 

FTC v. Ticor Title Ins. Co., 504 U.S. 621,635 (1992), is in no way controllig in the instant case 

46
 
where the alleged anticompetitive scheme was undertaken, not by the state, but instead, by the 

petitioner. 

Numerous cases have addressed both the Parker iinunity and the Noerr-Pennington 

immunty. E.g., Ticor Title Ins. Co. v. FTC, 998 F.2d 1129 (3d Cir. 1993); Boone, 841 F.2d 886 

Wh Cir. 1988); Wood, 438 F.2d at 1295; and De Loach, 2001 U.S. Dist. LEXIS 16909, *44. In 

each of 
 these cases, the courts, in analyzing the state action immunity, addressed whether the 

legislature or agency was aware of or intended the consequences of 
 its actions. None of 
 these 

cases addressed whether the legislature or' agency was aware of or intended the consequences of 

its actions when analyzing the asserted Noerr-Pennington defense. 

Respondent filed its motion to dismiss based on Noerr-Pennington immunity; its motion is 

not based on state action immunity. Thus, case law interpreting the state action doctrie has no 

bearng on ths motion. Complaint Counsel has cited no cases holding that, for purposes of 

Noerr-Pennington immunity, the government agency must have known that it was being asked to 

enact a regulation that would restrain trade. Case law interpreting Noerr-Peimington allows 

deliberate deception in a legislative proceeding where the agency is not solely dependent on the 

petitioner for information. Supra Y.B.2. Because Respondent's activities constitute petitioning 

gen,uinely undertaken to persuade CAR to enact regulations favorable to it and there is no 

requirement that the agency know what the effect of 
 its legislation wi be, Respondent's alleged 

conduct is protected by Noerr-Pennington. 

C. Conduct Alleged in the Complaint Is Not Outside the Reach of NoerrPennington 

Noerr-Pennington applies only where the "restrait upon trade or monopolization is the' 

result of 
 valid governental action, as opposed to private action'. . . ." 365 U.S. at 136. 

Complaint Counsel argues that the alleged monopolization, attempted monopolization, and 

restraint of trade in this case is not the result of governental action, but is instead the result of 

private action. Specifcally, Complaint Counsel argues that the aleged anticompetitive har at
 

issue flows not from CAR's Phase 2 regulations, but from Respondent's private business 

47
 
conduct in enforcing its patents. Opposition at 4, 18. On this basis, Complait Counsel argues 

that Noerr-Pennington does not reach the conduct alleged in the Complaint.
 

In assertng that the conduct alleged in the Complaint is outside the Noerr-Pennington
 

doctrine, Complaint Counsel argues, fist, that this case resembles "sham" cases and FTC v. 

Superior Court Trial Layers Ass 'n ("SCTLA "), 493 US. 411 (1990). Second, Complaint 

Counsel argues that because the alleged anticompetitive harm flows from the enforcement of 

patents, the han in this case is analogous to the har found to be anti 
 competitive in Walker 

Process Equipment, Inc. v. FoodMachinery & Chemical Corp., 382 US. 172 (1965). 

1. "Sham" exception and SCTLA
 

The Supreme Court, in Noerr, recognized that antitrst petitionig immunity could be 

withheld in circumstances where petitioning activity "ostensibly diected toward infuencing 

government action, is a mere sham to cover . . . an attempt to intedere directly with the business 

relationships ofa competitor." 365 US. at 144. Subsequent decisions have clanfied that the 

"sham" exception referred to in Noerr is applicable to situations in which persons use the 

governmental process, as opposed to its outcome, as an anti 
 competitive weapon. California 

Motor Tranort, 404 U.S. at 510 (sham exception where complaint alleged one group of
 

highway carers sought to bar competitors from meanngfl access to adjudicatory tribunals); 

Omni Outdoor Advertising, 499 US. at 381 (1991) (no sham exception where defendant set out 

to disrupt plaintiffs business relationships not through the process oflobbyig, but though the' 

ultimate product of 
 that lobbying, the zoning ordinances). 

The Complaint does not allege that Respondent attempted to gain monopoly though the 

use of CAR's process in adopting the Phase 2 RFG regulations. Instead, the Complaint alleges 

that Respondent sought to and did use the outcome of the governent action - the Phase 2 RFG 

reguations. F. 29 (Complaint at ~ 44 (CAR Board adopted Phase 2 RFG reguations that set 

paricular standards for the composition of low emissions, reformulated gasolie. Unocal's
 

pending patent claims recited limits for five of the eight properties specified by the regulations.));
 

F. 30 (Complaint at ir 45 (CAR adopted Phase 2 RFG regulations that substantially overlapped . , 

48 
with Respondent's patent claims.)). See also Complaint at 1176 (Respondent "caused CAR to 

enact regulations that overlapped almost entirely with Unocal's pending patent rights."). 

An effort that results in the adoption of 
 the standards sought by petitioner into statutes 

and local ordinances "certainly canot be characterized as a sham. . . ." Allied Tube, 486 U.S. at
 

502; Armstrong Surgical Center, 185 F.3d at 158 (3rd Cir. 1999) ("(T)he sham petitioning 

exception does not apply in a case like the one before us where the plaintiff has not alleged that 

the petitioning conduct was for any purpose other than obtaining favorable government action."). 

In the instant case, where the Complaint alleges Respondent used the outcome of the governent 

action to its advantage, the sham exception does not apply. 

In SClL, lawyers in private practice who served as court-appointed counsel in the 

District of Columbia organzed a boycott in connection with their effort to force the city 

government to increase fees for court-appointed servces. 493 U.S. at 414. Although this 

boycott otherwise constituted a classic restraint of trade, the lawyers argued that their conduct 

was protected under Noerr because the objective ofthe boycott was to obtain favorable 

legislation. Id at 424. The Supreme Court rejected ths argument fiiiding that respondents' 

agreement to restrain trade was not outside the coverage of the Sherman Act simply because its 

objective was the enactment of favorable legislation. Id 

In SCTLA, it did not matter that the result was favorable legislation; what mattered was 

that horizontal competitors engaged in a concerted refusal to deal and entered into an 

arangement designed to obtain higher prices. In the instat case, for Noerr-Pennington 

purposes, it does matter that the result of 
 Respondent's alleged misconduct is the adoption by 

CAR of 
 Phase 2 reguations that substantially overlap Respondent's patents. See F. 29, 30. The 

Complait aleges that Respondent "obtained unlawfl market power though afrmative 

misrepresentations, materialy false and misleading statements, and other bad-faith, deceptive 

conduct that caused CAR to enact regulations that overlapped almost entirely with Unocal's 

pending patent rights." Complaint at 1176. Because the anticompetitive har alleged in the
 

Complaint arses from the adoption of 
 regulations that substatially overlap Respondent's patents, 

the har arises from governental action and thus Noerr-Pennington applies.
 

49 
2. Walker Process
 

In Walker Process, the question presented was "whether the maintenance and enforcement 

of a patent obtained by fraud on the Patent Offce may be the basis of an acton under § 2 
 of the 

Sherman Act. . . ." Walker Process, 382 U.S. at 173. To the extent that some courts have held 

that Walker Process is not limited to fraud on the Patent Offce, see Clipper Erxpress, 690 F.2d 

at 1260-63 (relying on Walker Process in the context of a ratemakng proceeding); Whelan, 48 

F.3d at 1255-58 (relying on Walker Process in the context of a complaint fied with state 

securities commssioner and a lawsuit filed in federal district court), those cases arose in a context 

in which the state action at issue was quasi-adjudicatory and dependent on the petitioner for 

factal information and thus, as set forth above in Section V.B.2. supra, are distinguishable from'
 

the instant case.
 

Complaint Counsel argues that this case is like Walker Process because the alleged 

competitive harm flows from private conduct - the defendant's efforts to enforce the patent ­

rather than from the governental action itself Opposition at 17. However, in Walker Process, 

the Supreme Court held that "proof 
 that Food Machinery obtained 
 the patent by knowingly and 

willfully misrepresenting facts to the Patent Offce" would be sufcient to stnp Food Machinery 

its exemption from the antitrust laws. 382 U.S. at 177 (emphasis added). Thus, the focus was 

on the fraud on the Patent Offce in the procuement of patents. 

In Walker Process, there could be no har from the enforcement of a patent if the Patent 

Offce had never issued the patent. Here, there could be no har from the enforcement of 

Respondent's patents if CAR had not enacted the Phase 2 regulations that substantially 

overlapped with CAR's patents. Complaint at ~ 92 ("The extensive overlap between the CAR 

RFG reguations and the Unocal patent claims makes avoidance ofUnocal patent claims . 

of 

techncaly and/or economically infeasible."); F. 62 (Complaint at ~ 93) (Refiers in Calorna 

invested billons of dollars in sunk capital investments in order to comply with the CAR Phase 2 

RFG regulations.). Thus, it is not solely private conduct - Respondent's enforcement of 
 its valid 

patents - that caused the anticompetitive har alleged. Because the alleged har stems from the 

cost of compliance with CAR' s regulations that substantially overlap Respondent's patents, the 

restraint of trade is the result of valid governental action and Noerr-Pennington applies. 

50 
D. Noerr-Pennington Immunity is Available in Actions Brought Under Section 5 

of the FTC Act 

Complaint Counsel argues that "Noerr does not apply to actions brought under Section 5 

of the FTC Act." Opposition at 33. As set forth below, while Noerr-Pennington was developed 

as an immunty to the Shennan Act, the underlying rationale for immunity is equally applicable in 

unfair competition cases brought under the FTC Act. Further, in later Supreme Court cases, 

discussed infra, Noerr-Pennington immunity has been extended more generally to antitrust cases 

and in other contexts. Moreover, Commssion opinions and courts have applied the NoerrPennington doctrine to cases alleging violations of Section 5 of the FTC Act on numerous 

occasions. 

In Noerr, the Supreme Court's "staIing poiiit" for consideration of the case was "that no 

violation of 
 the (Sherman) Act can be predicated upon mere attempts to infuence the passage or 

.enforcement oflaws." .365 U.S. .at 136. Immunity from antitrust liabilty was based, in par, on 

the Constitutional right to "petition the Government for redress of grievances," U.S. Const. 

amend I; c1.6. "The right of petition is one ofthe freedoms protected by the Bil of 
 Rights, and 

we canot, of course, lightly impute to Congress an intent to invade these freedoms." Noerr,356 

U.S. at 138.
 

The Supreme Court further held: 

Insofar as the (Sherman) Act sets up a code of ethics at all, it is a code that 

condems trade restraints, not political activity . . .. The proscriptions of 

the (Shenn) Act, taored as they are for the business world, are not at al 

appropriate for application in the political arena. Congress has traditionally 

exercised extreme caution in legislating with respect to problems relating to 

the conduct of political activities, a caution which has been reflected in the 

decsions of this Court interreting such legislation. All of this caution 

would go for naught if we permitted an extension of the Shennan Act to 

regulate activities ofthat nature simply because those activities have a 

commercial impact and involve conduct that can be termed unethcal. 

Id. at 140-41. The concerns that the Supreme Court had with Congress limiting the right to 

petition through the enactment of the Sherman Act must be of equal concern with respect to 

Congress limting the right to petition through the enactent of the FTC Act. 

51 
. Indeed, the Commssion has argued as much in a brief filed with the Court of Appeals for 

the Ninth Circuit in Rodgers v. Federal Trad Commission, 492 F.2d 228 (9th Cir. 1974): 

"The proscriptions of Section 5 of the FTC Act, as we view them, like the 

proscriptions of the Sherman Act, are taiored for the business world, not 

for the political arena . . . . 

Even assuming a wrongfl motive. . . and the wilful use of distortion or 

deception, it is our view that actionable violation of Section 5 of the FTC 

Act is not indicated due to the overrding public interest in preservation of 

uninhbited communication in connection with political activity with 

legislative processes." 

Id at 230 (quoting Letter of Charles A. Tobin Secretar, Federal Trade Commission, to William
 

H. Rodgers, Jr., Jan. 26, 1971, in Brief of Appellant, Appendix at 10, 11-12). The Cour of 

Appeals accepted the Commssion's argument and upheld the Commssion's reliance on Noerr to 

determine that action on the complait was not waranted. Rodgers, 492 F.2d at 230. 

The Noerr-Pennngton doctrine has not been strictly limited to Sherman Act cases, but has 

been characteried by the Supreme Court as applyig more broadly to "antitrust laws." See Omni 

Outdoor Advertising, 499 U.S. at 380 (citig 
 Noerr, 365 U.S. at 141). "Those who petition 

governent are generally immune from antitrst liabilty." Professional Real Estate Investors, 

508 U.S. at 56 (emphasis added). In 
 Professional Real Estate Investors, the Supreme Court, 

including in its authority a case brought under Section 5 of 
 the FTC Act, implied that Noerr is not 

strictly limted to Sherman Act cases. "Whether applying Noerr as an antitrust doctrine or 

invoking it in other contexts, we have repeatedly reafrmed that evidence of anticompetitive 

intent or purpose alone canot transform otherwse legitimate activity into a sham." 504 U.S. at 

59 (citing SCTL, 493 U.S. at 424; NAACP v. Claiborne Hardware Co., 458 U.S. 8.86,913-14 

(1982)). 

It is appropriate to apply Noerr-Pennington, whether as an antitrst doctrine or "in 

another context," to the alegations of 
 ths Complait. The very first alegation of 
 the Complaint, 

describing the "Nature of 
 the Case," ilustrates that Respondent is charged with engaging in acts 

and practices that, if not shielded by Noerr-Pennington, could provide the basis for antitrust 

52
 
liability under Section 2 of 
 the Sherman Act. 15 US.C. § 2 (monopolization; attempted 

monopolization). 

Through a pattern of anticompetitive acts and practices that continues even 

today, Unocal has ilegally monopolized, attempted to monopoli,?e, and 

otherwise engaged in unair methods of competition in both the technology 

market for the production and supply ofCAR-compliant 'summer-time' 

RFG and the downstream CAR 'summer-time' RFG product market. 

Complaint at ii 1. All five violations in the Complaint charge Respondent with "acts and practices 

(that) constitute unfair methods of competition in violation of Section 5 of the FTC Act." The 

Commssion and courts routinely analyze causes of actions challenging unfair methods of 

competition through antitrust principles. Atlantic Refining Co. v. FTC, 381 US. 357, 369 (1965) 

("When conduct does bear the characteristics of recognized antitrst violations it becomes 

suspect, andthe Commssion may properly look to cases applying those laws for guidance."); In 

re AmericanMed Assoc., 94 F.T.C. 701, 994 (1979) ("It is instructive to look at cases 

constring the Sherman Act for initial guidance as to the reach of 
 Section 5."). Thus, even 

though the doctrine' was developed in cases alleging violations of 
 the Sherman Act, it is 

appropriate and logical to 
 apply the Noerr-Pennington doctrne of immunity from antitrust 

liability to a case alleging unfair methods of competition in violation of the FTC Act. 

Complaint Counsel argues that the Supreme Court's decision in BE & K Constr. Co. v. 

NLR, 536 U.S. 516 (2002) compels the conclusion that Noerr-Pennington does not apply to 

cases brought under the FTC Act. In BE & K Const., the Supreme Court declined to extend 

"antitrst immunity principles" to unsuccessful retaliatory lawsuits filed under the National Labor 

Relations Act. 536 US. at 525-33. Contrar to the situation in BE & K, in the instant case, 

"antitrst imunity priciples" are appropriately applied in a case allegig causes of action that
 

could also state a claim under Sectons 1 and 2 of the Sherman Act. 

Despite Complaint Counsel's assertion that "no court has held that Noerr's narow 

exception to Sherman Act liabilty applies to Secton 5 of 
 the FTC Act," Sur-reply 
 at 30, courts 

have analyzed the Noerr-Pennington defense in Section 5 cases. E.g., Ticor Title Ins., 998 F.2d 

at 1138; Rodgers, 492 F.2d at 228-29 (accepting Commssion argument that Noerr doctrie is 

applicable to FTC Act). Both the Commssion and the Supreme Court applied the Noerr53 
Pennington doctrine to the alleged violations of Section 5 of the FTC Act in In re Superior Cou 

Trial Lawyers Ass'n, 107 F.T.C. 510, 590 (1984), vacated by 856 F.2d 226, rev'd in 
 par, and 

remanded by, 493 U.S. 411 (1990). The Commssion stated, "ri)fthe respondents' activity had 

been limted to 'mere attempts to infuence the passage of enforcement of laws,' Eatern Railroad 

Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. at 135, then the respondents would 

merit the protection of 
 the First Amendment under Noerr and succeeding cases." 107 F.T.C. at 

590. The Commission then held, "rw)e thiIi that Noerr and Pennington alone provide suffcient 

guidance for our conclusion that First Amendment immunity should not extend to the kind of 

conduct in which the respondents have engaged." Id at 594..
 

The Supreme Court also utilzed Noerr principles to determie whether there was 

immunity from antitrust liability in FTC v. Superior Court Trial Layers, 493 U.S. 411 (1990). 

Thus, though not explicit in holding that Noerr-Pennington applies to actions brought under the 

FTC Act, by application of the doctrine to the alegations of violations of 
 the FTC Act, SelL
 

makes clear that Noerr-Pennington immunity is fully available in FTC Act cases.
 

In numerous other opiiùons, the Commssion has analyzed whether respondents have 

asserted valid Noerr-Pennington defenses to Section 5 causes of action. E.g., In re Ticor Title 

. Ins. Co., 112 F.T.C. 344, 460-64 (1989) (holding the Noerr defense inapplicable to the facts, but 

stating that if respondents had instead agreed on a political advocacy campaign to convince the 

state to adopt or change a ratemakng policy, such activity would be protected under NoerrPennington); In re New EnglandMotor Rate Bureau, Inc., 112 F.T.C. 200,283-85 (1989) (the 

Noerr-Pennington docmne "shields from antitrust scrtiny concerted efforts by competitors to 

petition government offcials");1n reMichigan StateMed Soc)1, 101 F.T.C. 191,296-301 

(1983) (appiying Noerr-Pennington to facts and holding that respondents' activities constitued 

ilegal conduct tht fell outside the protective shield of Noerr-Pennington). In none of 
 these cases 

did the Commssion hold that Noerr-Pennington defenses were not available to respondents in 

FTC Act cases. Indeed, Complaint Counsel has cited no cases so holding. 

Because Supreme Court and Commssion precedent establish that the Noerr-Pennington 

doctrine is a defense to antitrst liability and have applied the doctrine in Section 5 cases, 

Complaint Counsel's unsupported argument that Noerr-Pennington .should not be avaiable where 

54
 
the remedy sought is an order requiring Respondent to cease and desist from enforcing its patents, 

in other words, de facto invalidation ofRespondents patents, rather than the "chilling" treble 

damages allowed under the Sherman Act, does not withstand scrutiny. For the same reason, 

Complaint Counsel's argument that the "unitar nature" ofthe FTC Act precludes application of 

the Noerr-Pennington doctrine to cases brought under the FTC Act, also does not ~thstand 

scrutiny. Again, without citation, Complaint Counsel argues that because the FTC Act applies to 

the closely associated areas of "unfair methods of competition" and "unfair or deceptive 

practices," it would be incongrous to allow the Commssion to prevent unfair or deceptive acts 

or practices to the full exent constitutionaly permtted by the First Amendment, but prevent 

unfair methods of competition only to the extent permtted by antitrust principles. Opposition at 

33-34. Complaint Counsel has cited no cases indicating that causes of action chalenging unfair 

methods of competition are required to be analyzed by case law relating to causes of action 

challenging unfair and deceptive practces rather than antitrust law. 

To hold that the Noerr-Pennington doctrine does not apply to Section 5 of 
 the FTC Act, 

where the Commssion has asserted to the contrar in another case, and where no other court or 

Commssion opinion has so held, would be inappropriate and unfair. Accordingly, NoerrPennington immunity is fully available in this case alleging unfair methods of competition in 

violation of Section 5 of the FTC Act. 

E. Respondent's Conduct Before Private Industry Groups
 

The Complaint aleges that Respondent paricipated in two private industry groups, the 

Auto/Oil Air Quality Improvement Research Program ("Auto/Oil Group") and the Western States 

Petroleum Association ("WSP A"), which conducted research on automobile emissions and 

reported their findings to the governent. F. 38-40, 44 (Complait at irir 50-52, 56). The 

Complaint alleges that Respondent made statements to the Auto/Oil Group and to WSP A that 

were materially false and misleading in that they failed to disclose Unocal's proprieta interests in 

its emissions research results and Unocal's intention to enforce its intellectual propert rights.
 

F. 42, 46, 48 (Complaint at irir 58, 59, 82); see also Complait at ir 85. In its opposition to the 

motion to dismiss on Noerr-Pennington grounds, Complait Counsel asserts that: (1) 

55 
Respondent's misrepresentations to Auto/Oil Group and WSPA are not covered by any 

petitionig privilege; and (2) Respondent's misrepresentations to Auto/Oil Group and WSPA 

form an independent basis for liability. Opposition at 35-37. 

To the extent that Respondent's statements to Auto/Oil Group and WSP A were par of 

Respondent's alleged scheme to induce CAR to act, as alleged in the Complaint, this conduct is 

political petitioning protected by Noerr-Pennington. To the extent that Respondent made 

statements to Auto/Oil Group and WSP A independent of its alleged scheme to induce CAR to 

act, these allegations involve substantial issues of 
 patent law and, thus, do not state an
 

independent cause of action over which the Commission has jurisdiction as alleged in the
 

Complaint.
 

1. Indirect petitioning
 

According to the allegations of 
 the Complaint, Respondent made knowing and willful
 

misrepresentations to the Auto/Oil Group and to WSPA and subverted the Auto/Oil Group's and
 

WSPA's process of 
 providing accurate and nonproprietar research data and information to 

CAR. F. 20 (Complait at ii 35 (Unocal parcipated in industry groups that provided input into 

the CAR regulations)); Complaint at iiii 84,89 (Unocal subverted the Auto/Oil Group's and 

WSP A's process of providing accurate and nonproprietary research data and information to 

CAR)). The Complaint does not allege that the Respondent prevented the Auto/Oil Group or 

WSP A from communicating with CARB. 

Misrepresentations to third paries as a means of infuencing the governent's passage of 

laws fall withn the bounds of Noerr-Pennington. In Noerr, the rairoads' use of "the so-caled 

..thid pary technque," involved deception of 
 the public, manufactue of bogus sources of
 

reference, and distortion of 
 public sources of information. Noerr, 365 U.S. at 140-42 (holding
 

such conduct, "so far as the Sherman Act is. 
 concerned, legaly irrelevant"). In Allied Tube, the
 

Supreme Court held that a "claim of Noerr immunity canot be dismissed on the ground that the 

conduct at issue involved no 'direct' petitioning of governent offcials, for Noerr itself
 

immunized a form of'indirect petitionig." Alled Tube, 486 U.S. 
 at 503. 

56 

:... 
To determe whether Noerr immunizes anti 
 competitive activity intended to infuence the 

governent requires an evaluation not onl of its impact, but also of the context and nature of the 

activity. Alled Tube, 486 U.S. at 504. Here, it is clear from the allegations of 
 the Complaint that 

Respondent's actions with respect to the Auto/Oil Group and WSP A were par of an alleged 

scheme to induce these thrd paries to inuence CARR F. 44 (Complaint at 1156 (Dring the 

CAR Phase 2 RFG rulemakng proceedings, Unocal actively paricipated in WSP A, which 

actively paricipated in the CAR RFG rulemakg process; WSP A commssioned, and submitted 

to CAR, thee cost studies in connection with the CAR Phase 2 RFG rulemakng.)); Complaint 

at 1187 (Unocal participated in WSP A commttees that discussed the potential cost implications òf 

the CAR Phase 2 RFG regulations; Unocal knew that royalties were considered in a cost study 

commissioned by WSPA for submission to CAR)); Complaint at 1111 84,89 (Respondent's 

deceptive conduct subverted Auto/Oil's and WSPA's process of 
 providing accurate and
 

nonproprietar research data and information to CAR.)); Complait at 1190 (aut for Unocal's
 

fraud, these paricipants in the rulemakg process would have taken actions including, but not 

limited to, advocating that CAR adopt regulations that minimized or avoided infngement on 

Unocal's patent claims, or advocating that CAR negotiate license terms substantially diferent 

from those that Unocal was later able to obtain.)). 

This case is different from the context and nature of the private standard setting process 

evaluated in 
 Alled Tube. There, where the anticompetitive har was found to be a result ofan 

implicit agreement by the private standard setting association's members not to trade in a certain 

tye of electrical conduit, the Supreme Cour held that the context and nature of the conduct was 

"more aptly characteried as commercial activity with a political impact." 486 U.S. at 507. Whle 

Allied Tube does state, as quoted by Complait Counsel (Sur-reply 
 at 25), "the mere fact that an 

anticompetitive activity is also intended to infuence governental action is not alone suffcient to 

render that activity immune from antitrust liabilityr,)" this quote must be put in context. It was 

only afer finding that the anticompetitive conduct was commercial activity, the Supreme Court 

held, "at least outside the political context, the mere fact that an anticompetitive activity is also 

intended to infuence governental acton is not alone.suffcient to render that activity imune 

from antitrust liabilty." 486 U.S. at 507 (emphasis added). But in the instant case, where 

57 
according to the Cpmplait, Respondent's conduct was par of its attempt to infuence 

governental action and where the anticompetitive har results from CAR's adoption of 
 Phase 

2 RFG regulations that "substantially overlap() with Unocal's concealed patent claims" 

(Complaint at ~ 45), the "antitrust laws should not regulate political activities 'simply because 

those activities have a commercial impact.'" 486 US. at 507 (quoting Noerr, 356 U.s. at 141). 

Thus, because Respondent's alleged misconduct occurred within the political context, Noerr 

immunity extends to protect this conduct. 

Nor is this case like California Motor Transport, where petitioners were alleged to have 

'''instituted the proceedings and actions. . . with or without probable cause, and regardless of 
 the 

merits of 
 the cases.'" 404 US. at 512. The Supreme Court held that those actions served to 

deny plaintis free and unlimted access to administrative and judicial tribunals. California Motor 

Transport; 404 US. at 509, 511. In Omni Outdoor Advertising, the Supreme Court described
 

California Motor Transport as limited to the "context in which the conspirators' parcipation in 

the governental process was itself claimed to be a 'sham,' employed as a means of imposing
 

cost and delay." Omni Outdoor Advertising, 499 U.S. at 381-82 (quoting CaliforniaMotor 

Transport, 404 US. at 512). The Supreme Court, in Omni Outdoor Advertising, explained as 

follows: 

Any lobbyist or applicant, in addition to getting himself 
 heard, seeks by 

procedural and other means to get his opponent igrored. Policing the 

legitimate boundaries of such defensive strategies, when they are 

conducted in the context of a genuine attempt to inuence governental 

action, is not the role of the Sherman Act. In the present case, of course, 

any denial to Omn of "meaningfl access to the appropriate city 

administrative and legislative fora" was achieved by COA in the course of 

an attempt to inuence governental action that, far from being a "sham" 

was if anything more in earest than it should have been. If the denial was 

wrongfl there may be other remedies, but as for the Shermar Act, the 

Noerr exemption applies. 

Omni Outdoor Advertising, 499 US. at 382. In the instant case, where it is clear from the 

alegations of 
 the Complaint that Respondent's alleged conduct with respect to the Auto/Oil 

Group and WSP A was par of a scheme to infuence CAR, Respondent's conduct wih respect
 

to these third paries falls within Noerr's protection. 

58 
2. Conduct directed at Auto/Oil Group and WSPA separate from
 

conduct directed at CARR 

To the extent that the alleged misrepresentations made to the Auto/Oil Group and to 

WSPA were not par ofRespondents scheme to solicit favorable governental action, the 

allegations of misconduct directed toward the Auto/Oil Group and WSP A independent of the 

conduct directed toward CAR alleged in the Complaint, do not state an independent cause of 

action as a violation of Section 5 of the FTC Act over which the Commsslon has jurisdiction. 

Respondent, in its motion for dismissal of 
 the Complaint for failure to make suffcient allegations 

that Respondent possesses or dangerously threatens to possess monopoly power (''Market Power 

Motion"), asserts that the Commssion does not have jurisdiction to decide patent issues. The 

scope ofRespondents patents and whether or not third paries could have invented around these 

patents and whether any such newly created products or methods could have avoided 

infngement is called directly into question by the alegations of the Complaint regarding 

Respondent's conduct towards Auto/Oil Group and WSP A. Thus, in order to fairly and 

completely resolve the factual and legal allegations of 
 the Complait, an in depth analysis of 

substantial issues of patent law would be required. 

(i) Allegations relating to 
 conduct separate from conduct directed

at CARR 

Afer the conclusion that the steps that Respondent took, whether direct or indirect, to 

solicit CAR' s adoption of the Phase 2 regulations were political petitioning conduct, immunied 

by Noerr-Pennington, the remaining allegations of the Complait are as follows: 

Throughout al of its communications and interactons with Auto/Oil prior 

to Januar 3 I, 1995, Unocal failed to disclose that it had pending patent 

rights, that its patent claims overlapped with the proposed RFG 

regulations, and that Unocal intended to charge royalties. Complaint 

at 1f 83. 

By deceptiv~ conduct that included, but was not limited to, false and misleading 

statements concernng its proprietar interests in the results of its emissions 

59 
research results, Unocal violated the letter and spirit of 
 the Auto/Oil Agreement 

and breached its fiduciary duties to the other members of the Auto/Oil joint 

venture. Complaint at 1J 84. 

Throughout all of its communications and interactions with WSP A prior to 

Januar 31, 1995, Unocal failed to disclose that it had pending patent rights, that 

its patent claims overlapped with the proposed RFG regulations, and that Unocal 

intended to charge royalties. Complaint at 1J 88. 

By deceptive conduct that inçluded, but was not limited to, false and misleading 

statements concernng its proprietar interests in the results of its emissions 

research results, Unocal breached its fiduciary duties to the other members of 

WSP A. Complaint at 1J 89. 

But for Unoca' s fraud, these parcipaits in the rulemakng process (Auto/Oil 

Group and WSPAJ would have taken actions including, but not limited to. . . 

incorporating knowledge ofUnocal's pending patent rights in their capital 

investment and refinery reconfguration decisions to avoid and/or minimie 

potential inngement. Complaint at 1J 90( c). 

In its opposition to the Noerr-Pennington motion to dismiss, Complaint Counsel argues that even 

if CAR had enacted Phase 2 knowing that the regulations substantially overlapped with 

Respondent's patents, the oil companes could have avoided signficant harm had Respondent not 

duped them independently through its fraudulent, inequitable, and bad-faith business conduct. 

Opposition at 36. 

(ii) No independent basis for liability 

The alegations in the Complaint pertaig to Respondent's conduct towards Auto/Oil 

Group and WSPA, separate from its alleged scheme to infuence CAR, (1J1J 83,84,88,89) do 

not establish a legaly cognzable independent cause of action under Section 5 of the FTC Act .'. 

over which the Commssion has jurisdiction. The issue of whether or not Respondent had a 

fiduciar duty arising under Section 5 of the. FTC Act towards WSP A or Auto/Oil Group or 

breached any such duty is not reached. As discussed in detail infra, there is no set offacts alleged 

in the Complait that could establish that any antitrust injury or har was caused from any breach 

of such duty without a thorough analysis of numerous substantial patent law issues. . 

60
 
CAR passed regulations substantially overlapping with Unocal's patents. F. 30; 53 

(Complaint at ~V 45,64). See also F. 29 (Complaint at ~ 44) (Respondent's patent claims recite 

limts for five of 
 the eight properties specified by the Phase 2 RFG regulations: T50, T90, olefins, 

aromatics, and RVP.). There is no set offacts alleged in the Complaint that, if established, would 

prove that anticompetitive injury and resulting har to the Auto/Oil Group and WSP A resulted 

from the alleged misconduct directed at the Auto/Oil Group and WSPA, instead offrom CAR's 

enactment of Phase 2 regulations and Respondent's subsequent enforcement of 
 its patent rights. 

To the contrar, the Complaint alleges har that resulted from compliance with the Phase 2 RFG
 

regulations. F. 62 (Complaint at ~ 93 (refiners invested billons of dollars in order to comply with 

the CAR Phase 2 RFG regulations. These refiners cannot produce signficant volumes of noninfrnging CAR-compliant gasoline without incurring substantial costs.)). See also Complaint at 

~ 92 ("extensive overlap between the CAR RFG regulations and the Unocal patent claims makes 

avoidance of the Unocal patent claims technically and/or economically infeasible"). Any 
 alleged
 

harm beyond that caused by CAR' s regulations cannot be determed without knowing the
 

scope of Respond ent s patents, whether or not Auto/Oil Group and WSP A could have invented 

around these patents, and whether any such newly created products or methods could have 

avoided infngement. Accordingly, to find any other har, as alleged, would require the 

substantial patent law analysis discussed herein and thus, logically, the issue of other har can not 

be reached.
 

(iii) Allegations raise substantial patent issues
 

To analyze whether the allegations of 
 the Complaint state an independent cause of action 

separate from the alleged violations stemmng from Respondent's efforts to get CAR to adopt 

reguations favorable to Respondent would require å resolution of substantial patent issues. 

Complaint at ~~ 83, 88 (Respondent failed to disclose that it had pending patent rights and that its 

patent claims overlapped with 
 the proposed RFG regulations.); Complaint at ~~ 84, 89 

(Respondent made false and misleadig statements concernng its proprietar interests.); 

Complaint at ir 90( c) (Auto/Oil Group and WSP A would have incorporated knowledge of 

Unocal's pending patent rights in their capital investment and refinery reconfguration decisions 

61 
to avoid and/or minimize potential infrngement.) (Emphases added). To properly determe 

whether there is any set of facts that, if proven, could support these allegations would require an 

in depth and thorough analysis of 
 what Respondent's "proprietar interests" were, which 

"proprietar interests" were and were not included in any patent, what was patented, what was 

not patented, the scope ofRespondent s patents, the scope of any competitor's patents, whether 

any competitor products or methods exist or could be invented, whether any of 
 the competitor 

products or methods that could be created or invented infnged, and whether refineries could be 

reconfigured so as to avoid 
 or minimize infringement ofRespondenfs patents. 

These are fundamental and substantial patent issues, as defined by the Supreme Court in 

Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988). There, the Supreme Court 

held that a case arses under federal patent law when the "plaitis right to relief 
 necessarily
 

depends on resolution of a substantial question offederal patent law, in that patent law is a
 

necessar element of one of the well-pleaded clai:' Id at 808. Whether a claim "arses under"
 

patent law "'must be determned from what necessary appears in the plaintiffs statement of 
 his 

own claim in the bil or declaration, unaided by anything alleged in anticipation or avoidance of 

defenses wmch it is thought the defendant may interpose.... Christianson, 486 U.S. at 809 

(citations omitted) (claim did not arse under patent law where complaint only obliquely hinted at 

patent law issues). In the instant case, as discussed herein, alegations of 
 the Complaint do more 

than obliquely hint at patent law issues. Afer a determnation that Noerr-Pennington immunizes 

Respondent's conduct before CAR, what appears in the Complaint, paricularly paragraph 

90(c), - third paries would have incorporated knowledge ofUnocal's pending patent rights in 

their capital investment and refinery reconfguration decisions to avoid and/or minimize potential 

infngement - plaiy aleges a claim under patent law in that patent law is a necessar element of 

the claims. There is no fair way to detennne whether any "reconfguration decisions" would 

"avoid and/or minimie potential infrngement" without a determnation of 
 non-infgement. As
 

discussed. below, infringement and non-infngement are clearly fundameptal and substantial patent 

issues. 

62
 
(iv) Federal courts decide substantial patent issues
 

The determnation of the scope of the federally created propert right is a substantial 

question offederal patent law. Hunter Douglas, Inc. v. Haronic Design, Inc., 153 F.3d 1318, 

1330 (Fed. Cir. 1998) (infringement is a substa~tial issue in the federal scheme for it determes 

what is the scope of the federally created propert right), rev'd in part on other grounds, Midwest 

Ind, Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999). See also U.S. Valves, Inc. v. 

Dray, 190 F.3d 811,814 (7th Cir. 1999) (the only way to determne whether a product is covered 

by the licensed patents is to apply substantive patent law). Where a court must "interpret the 

validity and scope of a paricular patent," a clai arses under patent law. Boggild & Dale v. 

Kenner Products, 853 F.2d 465, 468 (6th Cir. 1988). 

The authority to' decide questions of 
 patent law arses solely under 28 U.S.C. § 1338(a), 

which confers original jurisdiction over patent law questions upon the federal courts. The statute 

gives federal district courts original jurisdiction over "any civil action arising under any Act of 

Congress relating to patents," and further provides that "(s)uchjurisdiction shall be exclusive of 

the courts of 
 the states in patent. . . cases." 28 U.S.C. § 1338(a). See also Scherbatskoy v. 

Hallburton Co., 125 F.3d 288 (5th Cir. 1997) ("Section 1338(a) grants exclusie jursdiction to 

the federal district courts in cases arsing under the patent laws") (emphasis added). 

Complaint Counsel argues that. Section 1338 operates only to preclude state courts, not 

federal agencies, from asserting jurisdiction over cases arising under the patent laws. Market 

Power Opposition at 26. Complaint Counsel further argues that because the statute explicitly 

prohibits state court jurisdiction, "the canon of statutory interpretation of expressio unis est 

exc/usio alterius teaches that the mention of one thng (i.e., state courts) implies that Congress 

chose not to exclude agencies from hearng patent cases." Market Power Opposition at 27. 

Under this logic, one could infer, albeit not reasonably, that Congress chose not to exclude 

municipal courts, tax courts, the Court of Claims, etc. from hearng patent cases. Moreover, the 

Federal Circuit has held that this jursdictional question arses not only in deterning if state law 

claims are preempted, but also with respect to deternig whether there is a confict with other
 

federal law. Midwest Ind, Inc., 175 F.3d at 1357 (Federal Circuit will apply federal patent law 

and precedent "in determg whether patent law conficts with other federal statutes or preempts 

63
 
state law causes of action. "), rev'd in part on other grounds by TrafFix Devices, Inc. v. Mkg. 

Displays, Inc., 532 U.S. 23 (2001). E.g., Helfgott & Karas, P.c. v. Director of 
 the United States 

Patent and Trademark Offce, 209 F.3d 1328, 1334 (Fed. Cir. 2000) (The question of 
 whether 

the Commssioner of 
 the Patent and Trademark Offce has violated the Administrative Procedure 

Act raises a substantial question under the patent laws suffcient to vest jurisdiction with the 

district court based in part upon 28 U.S.C. 1338(a).). 

(v) Commission without jurisdiction as Complaint is alleged 

Whle the FTC may have jurisdiction over cases that "touch on patent law," as argued by 

Complaint Counsel, (Market Power Opposition at 4), the FTC has no jurisdiction over the 

allegations in this Complaint that depend on and require the resolution of substantial questions of 

federal patent law. In 
 Decker v. FTC, 176 F.2d 461 (D.C. Cir. 1949), the FTC charged 

respondents with unfair and deceptive acts with regard to misrepresentations about the functions 

of respondent's product. Respondents asserted that the alleged misrepresentations were 

substantialy like the statements that were included in the patent application, and thus respondents 

challenged the jurisdiction of the Commssion on grounds that the proceedings were, in effect, an 

attack upon the patent itself The Court of Appeals for the District of Columbia Circuit 

disagreed: "(t)he proceedings before the FTC related only to advertising. They did not draw into 

question the validity of the patent grant. Hence the case is not one arsing under the patent laws, 

cognable only in district court." Id at 463. 

Here, unlike in 
 Decker, a fiding ofliabilitybased upon Respondent's conduct towards the 

Auto/Oil Group and WSPA can be made only upon a determnation of 
 what were Respondent's 

proprietar interests, what was patented, what was not patented, and whether thrd parties could 

have, in their capital investment and refinery reconfguration decisions, avoided and/or minimized 

potential infngement, and whether any competing patents existed or would be valid and would
 

not infge. These issues draw into question the very scope of 
 Respondent's patents and whether 

third parties can compete without infnging. Hence, unlike in Decker, the allegations here arse 

under the patent laws, cognizable only in federal district court. To be fair to all parties involved, a 

determation of the scope of 
 Respondent's patents and any other competing, similar, or 

64 
overlapping patents would be required. Due process demands that the issues raised in the 

allegations of 
 the Complaint) entangled in numerous patent issues, be thoroughy and completely 

examned and resolved. Without such analysis and reference to federal patent law, any evidence 

presented would be speculative) incomplete, and not sufcient to fairly resolve the issues raised in 

this case. 

The Federal Trade Commssion is limited to the exercise of 
 those specific powers granted 

to it by the Federal Trade Commssion Act. FTC v. Nat'l Lead Co,) 352 US. 419) 428 (1957). 

Under the FTC Act, the Commission has jurisdiction to prevent unfair methods of competition 

and unfair or deceptive practices. 15 US.C. § 45. Nothing in either the language of the FTC Act 

or its legislative history contemplates that the Commssion would exercise jurisdiction over 

substantial questions of federal patent law. No case was cited to, nor found) that held that the 

Commssion has jurisdiction to decide causes of action arsing under patent laws. 

In American Cyanamid) the Commssion issued a cease and desist order based on a 

finding that the respondent's inequitable conduct before the Patent and Trademark Offce 

constituted a violation of 
 Section 5 of 
 the FTC Act. American Cyanaid) 63 F.T.C. 1747, 1855­

57 (1963)) vac. on other grounds) 363 F.2d 757 (6th Cir. 1966), on rehearing, 72 F.T.C. 623 

(1967)) af'd sub nom., Charles Pfizer & Co. v. FTC, 401 F.2d 574 (6th Cir. 1968). The 

Commssion held that there is nothing within 28 US.C. § 1338(a) which would prevent the 

Commssion from investigating methods of 
 unfair competition before the Patent Offce. 63 F.T.C. 

at 1857. On appeal to the Sixth Circuit, the Court of Appeals held that the Commssion has 

jurisdiction to determe whether conduct before the Patent Offce resulting in the issuance of a 

patent) and the subsequent use of the frits of such conduct, may constitute a violation of Section 

5 of 
 the FTC Act. 363 F.2d at 771. 

Unle American Cyanamid, ths Complait does not challenge conduct before the Patent 

Offce, where "Pfizer and Cyanamd, like al other applicants, stood before the Patent 9ffce in a 

confdential relationship and owed the obligation offran and truthfl disclosure." Pfizer, 
 401 

F.2d at 579, Unlike the allegations in the instant matter, American Cyanamid did not require an 

examation ofscòpe and ingement issues. 363 F.2d ~t 769. Here, there are alegations 

requiring an examnation of the scope of patents and infgement or avoidance thereof. 

65 
Accordingly, if a fair and complete analysis of 
 the allegations and violations oflaw is to be do~e, a 

resolution of the allegations in this Complaint goes far beyond what was required in American 

Cyanamid. Because questions of possible patent infngement and scope must be resolved in the 

instant case, these substantial questions of federal patent law vitiate jurisdiction under Section 5 of 

the FTC Act as this case is alleged. 

Complait Counsel also relies on 
 In re VISX, Inc., Docket No. 9286, 1999 WL 33577396, 

Initial Decision (filed May 27, 1999), and the Commission's recent proposed consent agreement 

in Bristol-Myers Squibb for the proposition that the Commssion may exame antitrust 

considerations relating to patent law. Market Power Opposition at 24. To the extent that the 

Admistrative Law Judge in VISX construed patent and patent issues in the initial decision, that 

initial decision was not appealed and was, in fact, dismissed. Subsequent to the issuance of that 

initial decision, complaint counsel fied a motion to dismiss the complait in which complaint 

counsel asked the Commssion to expressly state that the Commssion does not adopt the initial 

decision. In re VISX, Inc., Docket No. 9286, (motioi; fied December 1, 1999) (available at 

ww.ftc.gov/os/adipro/d9286/index:htm). By order of the Commssion, dated Februar 7,2001,
 

the Commssion dismissed the complait. In addition, the Commssion's recent proposed consent 

decree in Bristol-Meyers Squibb, relied upon by Complaint Counsel; provides no precedential 

value. "(T)he circumsances surrounding. . . negotiated (consent decrees) are so diferent that 

they canot be persuasively cited in a litigation context." E.I. du Pont, 366 U.S. at 330 n.12. 

Indeed, the consent decree itself acknowledges, "(a) consent order is for settlement purposes only 

and does not constitute an admission of a law violation.'~ Bristol-Myers Squibb, Co., File Nos. 

001 0221, 011 0046, and 021 0181 (p.T.C. March 7,2003) (available at 

ww.ftc.gov/opa/2003/03/bms.htm). 

(vi) Complaint Counsel has burden of proof
 

Complaint Counsel, as the par required to assert jurisdiction, bears the burden of 

proving subject matter jursdiction. Kokkonen, 511 U.S. at 377; In re R.J Reynolds Tobacco 

Co., Inc., iii F.T.C. at 541,549 n.17 (plainti 
 bears burden of 
 proving subject matter 

jurisdiction and failure to meet that burden requires dismissal of the proceeding). As this case is 

66
 
alleged in the Complaint, there is no set offacts that Complaint Counsel could prove to 

demonstrate that the Commssion has jurisdiction to resolve these claims arsing under patent law. 

An analysis of the conduct alleged in the Complaint that was directed at Auto/Oil Group and 

WSP A would require a resolution of substantial issues arsing under patent law. Because the 

Commssion does not have 
 jurisdiction to adjudicate the scope of 
 Respondent's patents and
 

whether the third paries could compete with other products or methods without infnging on
 

valid patents, the allegations of 
 the Complaint with respect to Respondent's conduct towards
 

Auto/Oil Group and WSP A are dismissed.
 

VI. CONCLUSION
 

For the above stated reasons, Respondent's motion to dismiss the Complaint based upon 

immunity under Noerr-Pennington is GRATED IN PART as to all violations alleged and all 

allegations of the Complaint, except the allegations of 
 Respondent's conduct directed toward 

Auto/Oil Group and WSPA, independent of the conduct directed toward the CAR. 

and WSP A, independent of the conduct directed toward CAR, requies'resolution of the 

As stated above, the allegations ofRespondents conduct directed toward Auto/Oil Group

. .
 

substantial patent issues which are entangled in and raised by the allegations and violations of the 

Complaint. Respondent's motion to dismiss for failure to make suffcient alegations that 

Respondent possesses or dangerously threatens to possess monopoly power is GRATED IN 

PART to the extent that the Commssion lacks jurisdiction to decide the fundamental and 

substantial patent issues raised by the allegations of the Complaint. The remainder of 

Respondent's Market Power Motion is DENID WITHOUT PREruICE. 

As discussed in detail above, no allegations or violations of the Complaint remain and the 

Complaint in Docket 9305 is dismissed in its entirety. 

VI. SUMMY OF CONCLUSIONS OF LAW
 

1. Respondent Union Oil Company of Californa ("Unocal") is a corporation, as 

"corporation" is defied in Secton 4 of 
 the Federal Trade Commssion Act, 15U.S.C. § 44. 

67
 
2. Respondent is engaged in commerce and afected commerce, as "commerce" is defined 

. in Section 4 of 
 the FTC Act, as amended, 15 U.S.C. § 44. 

3. Pursuant to Section 5 of the FTC Act, the FTC has jurisdiction over the subjec matter 

of this proceeding, except as to the claims raised in the Complait arsing under patent law. 

4. Offcial notice is taken of the statutes governg the Californa Air Resources Board 

("CAR"), the Notice of 
 Public Hearing through which CAR initiated the rulemaking, and the

Final Statement of Reasons for Rulemakng, all of 
 which are beyond dispute and have not been disputed. . 

5. Complaint Counsel bears the burden of showing that the Noerr-Pennington doctrine
 

does not immunize Respondent's conduct alleged in the Complaint.
 

6. Complaint Counsel bears the burden of showig that the FTC has jurisdiction. on all 

violations oflaw alleged in the Complaint. 

7. Noerr-Pennington immunizes Respondent's efforts to induce CAR to adopt
 

regulations on low emissions, reformulated gasoline ("RFG").
 

8. CAR's Phase 2 RFG rulemakng process was a legislative exercise. 

9. CAR was not wholly dependent on the Respondent for information durng the RFG
 

rulemakng process.
 

10. Noerr-Pennington immunity exists even ifCAR did not know that it was being 

asked to enact a regulation that would restrain trade. 

11. The restrait of trade or monopolization alleged in the Complaint is the result of valid 

governental action, CAR's adoption of 
 Phase 2 regulations that substantially overlapped with 

Respondent's patent claims. 

12. The sham petitioning exception does not apply in ths case. 

13. The Walker Process exception does not apply in this case. 

14. The 
 Noerr-Pennington doctne provides immunity in this case alleging unfair 

methods of competition under Section 5 of the FTC Act. 

15. To the extent that Respondent's alleged conduct towards Auto/Oil Group and WSPA 

were par of 
 Respondent's scheme to induce CAR to act, it constitutes indirect petitionig 

protected by Noerr-Pennington. 

68 
16. There is no set of facts aleged in the Complaint that, if established, would prove that 

anticompetitive injury and resulting har to the Auto/Oil Group and WSP A resulted from the 

alleged misconduct directed at the Auto/Oil Group and WSP A, instead of from CAR' s 

enactment of Phase 2 reguations and Respondent's subsequent enforcement of 
 its patent rights. 

17. There is no set offacts alleged in the Complaint that could establish that any 
 antitrst 

injury or har was caused from any breach of a fiduciar duty without a thorough analysis of
 

substantial patent law issues. 

18. To determine whether there is any set offacts that, if 
 proven, could support the
 

allegations of conduct directed at Auto/Oil Group and WSP A separate from the alleged violations 

stemmng from Respondent's efforts to get CAR to adopt reguations favorable to Respondent 

would require an in depth and thorough analysis of 
 what Respondent's "proprietar interests" 

were, which "proprietar interests" were and were not included in any patent, what was patented, 

what was not patented, the scope of Respondent's patents, the scope of any competitor's patents, 

whether any competitor products or methods exist or could be invented, whether any of the 

competitor products or methods that could be created or invented innged, and whether 

refineries could be reconfgured so as to avoid or minimize infngement of 
 Respondent's patents. 

19. The scope of Respondent's patents, the scope of 
 any competitor's patents, whether 

any of the competitor products or methods that could be created or invented infged, and 

whether refineries could be reconfgured so as to avoid or minimize iningement of 
 Respondent's 

patents are issues raised by the allegations of the Complaint and are substantial patent law issues. 

20. Due process and fairness require that the issues raised in the allegations of 
 the 

Complaint, entangled in numerous patent issues, be thoroughy and completely examned and 

resolved. 

21. The FTC has no jurisdiction over the allegations in ths Complaint in Docket 9305 that 

depend on the resolution of substantial questions offederal patent law. 

. 22. Complait Counsel can prove no set of facts in support of its Complaint in Docket 

9305 that would entitle it to relief 

69
 
I 

r 

i .
 

ORDER 

For the reasons stated above, 

IT is ORDERED that Respondent's Motion to Dismiss the Complaint Based Upon Immunty 

Under Noerr-Pennington is GRATED IN PART as to all violations alleged and all allegations of 

the Complait, except the allegations of 
 Respondent's conduct directed toward Auto/Oil Group 

and WSP A, independent of the conduct directed toward the CARB. 

IT is ORDERED that Respondent's Motion to DisiIss the Complaint for Failure to Make 

Suffcient Allegations That Respondent Possesses or Dangerously Threatens to Possess 

Monopoly Pqwer is GRATED IN PART as to al violations alleged with respect to the 

alegations of 
 Respondent's conduct directed toward Auto/Oil Group and WSPA, independent of 

the conduct directed toward CARB. The remaider of Respondent' s Market Power Motion is

DENID WITHOUT PREJUICE.
 

IT is ORDERED that all violations'ofthe Complaint be, and hereby are, dismissed. 

ORDERE: 

D. Michael Chappell
 

:PIA (M

Administrative Law Judge 

Dated: November 25, 2003 

70
 
EXHIBIT 3
 
"PERSPECTIVES ON THREE RECENT VOTES: 

THE CLOSING OF THE ADELPHIA COMMUNICATIONS 

INVESTIGATION, THE ISSUANCE OF THE V ALASSIS COMPLAINT & 

THE WEYERHEUSER AMICUS BRIEF" 

J. THOMAS ROSCH1
 

COMMISSIONER, FEDERAL TRAE COMMISSION
 

before 

THE NATIONAL ECONOMIC RESEARCH ASSOCIATES 

2006 ANTITRUST & TRADE REGULATION SEMINAR 

Santa Fe, New Mexico 

July 6, 2006 

Rather than recount everyhing the Commission has done since I joined it six months ago, 

I thought I would discuss my votes in three significant antitrust matters, and, since I did not 

explain them at the time, explain why I cast those votes. 

ADELPHIA COMMUNICATIONS (January 2006) 

A few days after I was sworn in, the Commission was forwarded a staff recommendation 

to close the investigation ofthe purchase by Comcast and Time Warner of the assets of 

Adelphia, a bankpt cable operator that provided cable service in a variety oflocal markets. 

The staff concluded that the transaction was effciency-enhancing because of the 

overhead/administrative savings realized from consolidating adjacent service areas and services. 

However, staff and the Commission considered arguments that the transaction would facilitate 

exclusive dealing arrangements of Com cast and Time-Warner with respect to Regional Sports 

The views stated 
 here are my own and do not necessarily reflect the views of the 

Commission or other Commissioners. 
Network ("RSN") offerings and thereby foreclose rivals from competing effectively for 

consumers who regarded RSN offerings as a "must have" offering in the Adelphia service areas. 

Commissioners Harbour and Leibowitz voted against closing the investigation and issued 

a statement describing their reasons.2 The Chairman, Commissioner Kovacic and I voted to 

close it.3 These are my reasons for voting to close. 

The threshold issue in any merger investigation is whether there is reason to believe the 

transaction would violate Section 7 of the Clayton Act because it was likely to result in 

anticompetitive effects. This is a prophylactic standard. Under Section 7, the Commission does 

not have to show there already is an anticompetitive effect. That said, however, the Commission 

always bears the burden of proving that the transaction is likely to have anti 
 competitive effects 

likely injure consumers). I had doubts that the Commission could sustain that 

burden for the following reasons: 

First, the consolidation efficiencies were not challenged, and Comcast and Time 

(i.e., that it wil 


Warner's track record for innovation was better than Adelphia's, an additional benefit of the 

transaction in my mind. Arguably, both as a matter oflaw (under the Supreme Court's decision 

2 Statement of Commissioners Pamela Jones Harbour and Jon Leibowitz
 

the Investigation into the 

transactions involving Comcast, Time Warner Cable, and Adelphia Communications (January 

31, 2006), available at 

(concurrng in part and dissenting in part), Concerning the Closing of 


htt://ww.ftc.gov/os/closings/ftc/051 0 151 twadelphialeibowitz _ harbour.pdf
 

3 Statement of 
 Chairman Deborah Platt Majoras, Commssioner William Kovacic, 

and Commissioner J. Thomas Rosch, Concerning the Closing of 
 the Investigation into the 

transactions involving Comcast, Time Warner Cable, and Adelphia Communications 
 (January 31,
 

2006) available at 

htt://ww.ftc.gov/os/closings/ftc/05l 0 151 twadelphiamajoras _ kovacic -losch.pdf
 

2 
in Cargil v. Monfort') and as a matter of policy, where - because of efficiencies - it is doubtful 

that a transaction is likely to have a net anticompetitive effect (i.e., cause injury to consumers), it 

competitive effects occur and challenge the transaction 

under Sherman Act § 2 ifthey do. It was acknowledged that § 2 would afford a post-transaction 

is better to wait and see if those net anti 


remedy if 
 there were exclusive dealing arrangements that injured consumers. However it was 

claimed that "soft" foreclosure (foreclosure resulting from the licensing ofRSN broadcasts to 

rivals on exorbitant terms) might be hard to detect. 

Second, it was doubtful on the record that the transaction would increase the likelihood 

of either "soft" or "hard" foreclosure. Several examples of hard and soft RSN exclusives were 

cited as evidence that the transaction was likely to increase that likelihood in the futue. 

However, it was acknowledged that this phenomenon can occur whether or not the cable 

company is vertically integrated. A cable company can engage in "hard" foreclosure in a 

contract with an independent provider of RSN - just like Direct TV has done with the NFL 

Ticket. Moreover, it was strking that there was no allegation of any current or past foreclosure 

in the 7 or 8 different markets where it was argued the post-merger market shares would be high. 

There was no suggestion that Comcast or Time Warer had engaged in foreclosure in any of 

those markets - with or without vertical integration - and there was nothing to suggest that the 

transaction would alter the incentives for the firms to engage in such foreclosure. 

Additionally, it was acknowledged that the cable companies would have an incentive to 

their subscriber revenues from not licensing would 

exceed the revenue they received from rivals for the licenses. Some of the arguments against the 

deny their RSN offerings to rivals only if 


4 479 u.s. 104 (1986)
 

3 
transaction presented by third parties used projections of the total number of contestable 

subscribers in certain markets where there had been - or were going to be - RSN exclusives 

post-transaction. In my view, the analysis should have focused instead on the number of 

subscribers for which RSN was "must have" programming. However, the third parties did not 

focus on that number. One could not extrapolate that number from the larger number of overall 

subscribers. Thus, in the few markets where there had been/or were going to be RSN exclusives, 

the economic data purporting to demonstrate harm - even to competitors - did not hold up. 

Third, Paddock Publications v. Tribune Co.5 teaches that exclusives can help firms 

differentiate themselves and compete more effectively. In this case, it was possible that MSVDs 

that were cut off from a RSN might compete harder with differentiated programming, and at a 

minimum compete harder for the RSN contract the next time it is available (if there were no 

vertical integration). There was nothing in the record to demonstrate that these pro-competitive 

effects would not occur. 

The Commission would have been confronted with all of the above even if it could 

establish consumer harm. As to competitive injury, it is a fundamental tenet of antitrst law that 

injury to competitors is not necessarily injur to competition. I found convincing none of the 

theories of consumer harm ultimately convincing in this case. 

It was argued that RSN exclusives would reduce subscriber choice. However, the 

Supreme Court in Jefferson Parish v. Hyde6 appeared to reject a reduction in consumer choice, 

standing alone, as a viable theory of consumer injury. At the very least, the Court limited the 

5 103 F.3d 42 (7th Cir. 1996), cert denied 520 U.S. 1265 (1997) 

6 466 u.s. 2 (1984)
 

4 
theory to situations where there are high switching costs - which do not exist when switching 

between cable and satellite television. 

There were also complaints about raising rivals' costs, but there was no suggestion that it 

would competitors would be eliminated. Nor was it suggested that the higher costs for RSN 

would be passed on to subscribers in the local markets - given the competitors' national pricing 

modeL. 

Finally, some forecasted an increase in the rates Comcast and Time Warner charged its 

subscribers for RSN. However, there was no evidence that subscribers who "must have" RSN in 

any local market would be so numerous that such a strategy would be profitable (and there was 

scant evidence of abilty to discriminate). In other words, an increase in RSN prices would only 

be profitable if enough customers continued to subscribe to the service; if enough subscribers 

abandoned the service when faced with a price increase then the increase would be unprofitable. 

Net, net, the Commission had the burden to show: 

- - foreclosure was likely; and 

- - it could not just harm rivals, but would have an anticompetitive effect (on consumers) 

In the end, I did not believe that the Commission could bear that burden. The battle 

continues before the FCC, which has a different statute that may be more forgiving to some of 

the arguments presented to the Commission.7 

7 On July 13,2006, the FCC announced that it would allow the transaction to 

proceed subject to conditions. Approval was conditioned on the cable companies making 

available all of their RSN programming except Comcasts Philadelphia RSN offering to rivals, 

including DTV; the order provides for baseball style arbitration in the event the parties cannot 

agree on terms. The conditions are similar to those imposed by the FCC when it approved 

NewsCorp's acquisition ofDTV several years ago. 

5 
VALASSIS (March 2006) 

In March 2006, the Commission voted 5-0 to issue a complaint that challenged an 

invitation to collude by Valassis in a duopoly market (newspaper inserts) solely on the basis that 

its conduct constituted an unfair method of competition under Section 5 of the FTC Act. 8 

Because there was a consent decree and the Aid To Public Comment focused primarily on the 

context in which the invitation to collude occurred - namely in an analyst conference call- the 

significance of the way the conduct was challenged went largely unnoticed. But a few 

cognoscenti are starting to ask whether Valassis was a harbinger of things to come or an outlier

(to mix a few metaphors). 

The answer is - I really don't know. The Aid to Public Comment issued from the staff 

rather than the Commission, and there is nothing on the public record to indicate how any 

individual Commissioner would answer that question. I wil flesh out my tentative - very 

tentative, I should stress - thinking about when a stand-alone unfair methods of competition 

claim might be brought. 

By its terms, Section 5 of the FTC Act prohibits all "unfair methods of competition." 

That's very broad language- -much broader than any language found in the Sherman or Clayton 

Acts. But apart from treating conduct that would violate those bedrock antitrst statutes as a 

kind of per se unfair method of competition, until Valassis, the Commission had not challenged 

conduct as an unfair method of competition for many years - and the challenges based on the 

bedrock antitrst statutes were tred essentially as Sherman or Clayton Act cases. This led many 

8 In the matter of 
 Val ass is Communications, Inc. FTC File No. 051 0008 (March 

16,2006) available at htt://www.ftc.gov/os/caselist/05l0008/0510008.htm 

6 
commentators to suggest that the unfair methods of competition prohibition was a dead letter and 

that the Commission would not challenge conduct on that basis alone. 

I do not believe it is a dead letter. The Supreme Court's decision in FTC v. Sperry & 

Hutchinson CO.,9 endorses an expansive reading of Section 5 and unfair methods of competition. 

In that case, the Supreme Court held that Section 5 empowered the FTC to "define and proscribe 

an unfair competitive practice, even though the practice does not infrnge either the letter or the 

spirit of the antitrst laws" and to "proscribe practices as unfair or deceptive in their effect on 

competition.',IO This expansive reading of Section 5 was not surprising. About two decades 

earlier the Court declared that "(t)he 'unfair methods of competition' which are condemned by 

the Act, are not confined to those that were ilegal as common law or that were 

condemned by the Sherman Act."ll 

An expansive reading of Section 5 is not only supported by Supreme Court precedent but 

Section 5(a) of 


it also seems sound as a matter of 
 policy. A Commission decision finding conduct to be an 

unfair method of competition under Section 5 is not given collateral estoppel or prima facie 

evidentiary effect in a subsequent antitrst treble-damages action against the respondent, based 

on the same conduct.l Nor is such a finding a basis, even theoretically, for follow-on federal or 

state criinal actions based on the Sherman Act or its state law equivalents. Consequently, a 

Commission conclusion that an act or practice is an unfair method of competition under Section 

9 405 U.S. 233 (1972)
 

10
 !d. at 239. 

11 FTC v. Motion Picture Advert. Servo Co., 344 U.S. 392, 394-95(1953). 

12 See, In re Antibiotic Antitrst Actions, 333 F. Supp. 3 i 7,322 (S.D.N.Y. 1971); 15 

U.S.C. § 16(a) (2006). 

7 
5 is less likely than a finding that an act or practice is a Sherman Act violation to do collateral 

damage. 

I believe that S&H is alive and well, notwithstanding the trlogy of appellate cases 

decided in the early 1980s that rejected Commission decisions challenging conduct as unfair 

methods of competition under Section 5 Y 

In the first ofthese cases, Boise Cascade v. FTCI4, the Ninth Circuit overtrned the 

Commission's decision that the plywood industr's use of a non-collusive delivered price system 

was an unfair method of competition. The Ninth Circuit held that, absent proof of overt 

collusion (which would have made the practice a per se violation of Section 1 of the Sherman 

Act), the Commission could not use Section 5 to get around the lack of evidence of actual 

anticompetitive effect.15 The court rejected a standalone unfair methods of competition claim 

when there was "well forged" Sherman Act case law governing the conduct, lest it "blur the 

distinction between guilty and innocent commercial behavior."16 

Subsequently, in Offcial Airline Guides v. FTC ("OAG")17, the Second Circuit 

overtrned a Commission decision holding that it was an unfair method of competition for the 

then sole provider of airline flight schedule information to refuse to publish listings of 

13 See, Boise Cascade v. FTC, 637 F.2d 573 (9th Cir. 1980); Offcial Airline Guides 

("OAG") v. FTC, 630 F.2d 920 (2d Cir. 1980); E.1. duPont de Nemours & Co. v. FTC, 729 F.2d 

128 (2d Cir. 1984).
 

14 637 F.2d 573 (9th Cir. 1980) 

15 Id. at 579. 

16 Id. at 581-82. 

17 630 F.2d 920 (2d Cir. 1980)
 

8
 
connecting flghts of commuter airlines. The practice was not proscribed by Section 2 of the 

Sherman Act because GAG was not a participant in the airline market in which competition was 

allegedly affected. The court acknowledged that the refusal was arbitrary and that it had an 

adverse effect on competition between certificated and commuter air carrers. However, the 

court held that treating the practice as an "unfair method of competition," notwithstanding its 

legality under the Sherman Act, "would give the Commission too much power to substitute its 

own business judgment for that of the monopolist in any decision that arguably affects 

competition in another industry."ls 

these cases, E.I duPont de Nemours & Co. v. FTC ("Ethyl"),19 the Second 

Circuit overtrned a Commission decision holding that various parallel "price-signaling" and 

other unilateral practices by oligopolists was an unfair method of competition, notwithstanding 

the absence of an actual agreement. The court described a more specific standard for unfair 

methods of competition than had been described in the Boise Cascade or GAG cases, stating that 

"at least some indicia of oppressiveness must exist such as (1) evidence of anticompetitive intent 

or purpose on the part of the producer charged, or (2) the absence of a legitimate business reason 

for its conduct.',20 

In the third of 


None ofthese decisions directly challenges the holding in S&H that conduct not 

governed by the Sherman Act may be treated as an unfair method of competition. Indeed, after 

these decisions issued, the Supreme Court (albeit in dictum) repeated the teaching of S&H that 

IS Id. at 927. 

19 729 F.2d 128 (2d Cir. 1984) 

20 Id. at 139-40. 

9
 
"(t)he standard of 'fairness' under the FTC Act is, by necessity, an elusive one, encompassing 

not only practices that violate the Sherman Act and other antitrst laws, but also practices that 

the Commission determines are against public policy for other reasons. . . .'02 

The Commission initially responded to these decisions by downplaying their 

significance. GAG was said to have been incorrectly decided.22 The holding in Ethyl was said to 

be very narrow, imposing no requirement to prove anticompetitive purpose or effects.23 I believe 

these readings of the Second Circuit decisions are too cramped. Moreover, I think that the 

decisions articulate important limiting principles for unfair methods of competition analysis. 

First, the Second Circuit cases appear to require proof of anticompetitive purpose (and 

the lack oflegitimate business justification). In Ethyl, the court described an unfair method of 

competition as requiring "at least some indicia of oppressiveness, such as evidence of 

anti competitive intent or purpose on the part of the producer charged or the absence of an 

independent legitimate business reason for its conduct.24 And, in GAG, the court held that a 

monopolist could refuse to deal with whomever he pleases "as long as he has no purpose to 

restrain competition or to enhance or expand his monopoly, and does not act coercively, retains 

this right."25 

21 FTC v. Indiana Federation of 
 Dentists, 476 U.S. 447, 454 (1986).

22 See, General Motors Corp., 99 F.T.C. 464, 580 n.45 (1982). 

23 See Coca-Cola Co., 117 F.T.C. 795, 915 n.24 (1994). 

24 Ethyl, 729 F.2d at 139.
 

25 GAG, 630 F.2d at 927. 

10
 
Second, the Ninth Circuit's decision in Boise Cascade appears to teach that in the 

absence of per se ilegal conduct, proof of actual or incipient anti 
 competitive effect is also 

required.26 Indeed, former Chairman Tim Muns has written that sound antitrust analysis must 

always be grounded in anti competitive effects.27 His focus was on single firm conduct cases 

under Section 2, but his views would seem to apply with equal force to an unfair method of 

competition claim under Section 5. It may be that the effect element of the claim can be inferred 

from clear evidence of anticompetitive intent (and lack of legitimate business purose). The 

Analysis to Aid Public Comment in Valassis, for example, stated that an invitation to collude 

could be treated as an unfair method of competition where there was clear evidence of 

anti competitive intent and of a dangerous probability of an anticompetitive effect.28 However, I 

think there must be some evidence, direct or circumstantial, of actual or incipient anti 
 competitive 

effect; otherwise, the claim would arguably be too unbounded. 

Net, net, the Commission's action in Valassis should not be read to endorse the treatment 

of conduct as an unfair method of competition when the conduct is plainly governed by the 

Sherman Act. In Valassis, the alleged conduct was not squarely covered by the Sherman Act. 

An invitation to collude is conduct that does not fit neatly within the language of Section 1 or 

Section 2. It is unilateral conduct not governed by Section 1. Moreover, United States v. 

26 See, Boise Cascade, 630 F.2d at 582. 

27 See, Timothy 1. Muris, "FTC and The Law of Monopolization," 67 ANTITRUST
 

L.J. 693 (2000). 

28 In the Matter of 
 Val ass is, File No. 051-0008 (Consent Order, March 14,2006, 

Analysis to Aid Public Comment at p. 5) available at, 

http://www .ftc. gOV / os/ caselist/051 0008/060314ana051 0008. pdf. 

11 
American Airline~9 is the only decision that has blessed treating an invitation to collude as a 

Section 2 offense. Numerous decisions have held that there is no such offense--that the 

monopolization referred to in Section 2 is inherently a single firm concept.30 Thus, in my view, 

Valassis was an "out-of-round" Sherman Act case that could, and should, legitimately be 

brought simply and solely as an unfair method of competition case under Section 5 - and the 

case involved the anti competitive intent and incipient anticompetitive effect required by the 

Trilogy for a stand alone unfair method of competition claim. 

29 743 F.2d 11.4 (5th Cir. 1984) 

30 See e.g., Harkins Amusement Eters. v. General Cinema Corp., 850 F.2d 477, 490
 

(9th Cir. 1988); Sun Dun, Inc. v. Coca-Cola Co., 740 F.Supp. 381,390 (D. Md. 1990). 

12 
WEYERHAEUSER (May 2006) 

I suspect many of 
 you know that Commissioner Leibowitz and I voted against the joining 

the United States' amicus brief fied in the Weyerhaeuser case.31 The brief recommended that 

the Supreme Cour grant cert. Here's why I voted the way I did. 

The central premise of the amicus brief 
 was said to be the passage at page 12, asserting 

that the Sherman Act protects sellers in an input market as well as buyers in an output market. 

The brief cited the Supreme Cour's 1948 decision in Mandevile Farms32 as its support for this 

premise. Based on that premise, the governent's brief argued that Brooke Group33 applied 

foursquare to a buyer case alleging predatory pricing as well as to a seller case alleging 

predatory pricing. However, I believe this premise is wrong and would create bad law for the 

following reasons. 

First, it has long been settled that the antitrst laws do not protect buyers or sellers, as 

such. They protect consumers.
 

Second, the Guidelines adopted by both agencies have made it clear that agreements 

among competitors as buyers (which would probably be condemned as per se ilegal if engaged 

in by those same competitors as sellers) wil be treated as ilegal only when the agreements are 

likely to injure consumer we1fare.34 The Guidelines for Collaborations Among Competitors, for 

31 See, Brief for the United States as Amicus Curiae, No. 05-381 (May 31, 2006); 

Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 

2005); 

32 Mandevile Farms, Inc. v. American Sugar Co., 334 U.S. 219 (1948) 

33 Brooke Group Ltd. v. Brown & Wiliamson Tobacco Corp., 509 U.S. 209 (1993) 

34 See, United States Department of Justice and Federal Trade Commission,
 

Guidelines for Collaborations Among Competitors (April 7, 2000), reprinted in 4 Trade Reg. 

13 
example, identifies three situations where buy-side agreements can have that effect.35 The first is 

where the buyers enjoy monopsony power such that their buying agreement can depress output 

and thereby produce supra-competitive prices in the long run (to the detrment of consumers). 

The second is where the buy-side agreement can standardize costs of an input that is so 

important in output prices that they can effectively fix sell-side prices (to the detrment of 

consumers). The third is where the buy-side agreement wil enable participants to monitor 

important input prices so as to facilitate prediction of competitor production levels and thereby 

influence output and pricing decisions on the sell-side (to the detrment of consumers). 

The Health Care Guidelines likewise treat threats to consumer welfare as the defining 

characteristics of 
 buy-side agreements that should be condemned and challenged.36 Absent 

evidence of consumer injury, buy side conduct - whether unilateral or concerted - that reduces 

input costs and thus is efficiency-enhancing is likely to help, not harm, consumer welfare, and 

thus should not be condemned or challenged. In short, there is nothing in the governent 

Guidelines to suggest that we should be concerned about seller (rather than consumer) welfare, 

Rep. (CCH), 13,160; United States Department of Justice and Federal Trade Commission, 

Policy Statements on Health Care Antitrst Enforcement (August 18, 1996), reprinted in 4 Trade 

Reg. Rep. (CCH)' 13,153. But ct, Federal Trade Commission and United States Department of 

Justice, IMPROVING HEALTH CARE: A DOSE OF COMPETITION, Chapter 6 at pp.13-20 (July 2004), 

available at htt://ww.ftc.gov/reportslhealthcare/040723healthcaremt.pdf 

35 See, United States Department of Justice and Federal Trade Commission,
 

Guidelines for Collaborations Among Competitors, § 3.3l(a) at p. 14 (April 
 7, 2000) 

36 See, United States Department of Justice and Federal Trade Commission, Policy
 

Statements on Health Care Antitrust Enforcement, Statement 7 on Joint Purchasing 

Arrangements Among Health Care Providers (August 18, 1996), reprinted in 4 Trade Reg. Rep. 

(CCH)' 13,153. 

14 
much less to support the sweeping assertion made in the amicus brief that the antitrst laws are 

designed to protect sellers and buyers equally. 

Third, Mandevile Farms does not compel that conclusion either. As previously stated, 

the governent's brief argued that the Supreme Cour's 1948 decision in Mandevile Farms 

supported its position. It does, to be sure, contain the language quoted in the brief. However, 

Mandevile Farms is nearly a half century old, and that language was written long before 

consumer welfare became the lodestar of antitrst analysis for the cours (including the Supreme 

Court) and commentators. Moreover, even in Mandevile Farms, the Supreme Court said in its 

analysis of 
 the facts that the defendant sugar beet processors enjoyed monopsony power on the 

buy-side and market power on the sell-side so that their buy-side agreement had the potential to 

impact sell-side prices (and thus injure consumers).37
 

In short, I thought this critical portion of the amicus brief was not just out of 
 step with 

modem (and proper) antitrst analysis. By suggesting that the antitrst laws broadly protect 

sellers, I was concerned that it would chil buy-side conduct that would reduce input costs and 

thereby advantage, not hurt, consumers. 

This is not to say that I thought the Ninth Circuit's decision affirming the judgment 

against Weyerhaeuser was right. Ironically, I think it was dead wrong. In the jury verdict 

underlying the judgment, the jury found that Weyerhaeuser lacked any market power in the 

alleged relevant product market (namely lumber). If 
 that is so, its buy-side conduct could not 

harm consumers. But a wrong result in an appellate court decision, standing alone, is usually not 

37 Mandevile Farms at 240-41.
 

15
 
a suffcient basis for certiorari. I, therefore, could not join the Commission majority in 

recommending that it be granted. 

16
 
EXHIBIT 4
 
STATEMENT OF COMMISSIONERS HARBOUR, LEIBOWITZ AND ROSCH 

ON THE ISSUANCE OF THE SECTION 2 REPORT 

BY THE DEPARTMENT OF JUSTICEl 

Today the Deparment of Justice ("the Department") issued a Report that, if adopted by the 

courts, would be a blueprint for radically weakened enforcement of Section 2 of the Sherman Act.2 

We recognize that, in response to our concerns, today's Report includes more balanced discussion 

sections than earlier drafts we reviewed. Nevertheless, the final Report's descriptions and 

conclusions respecting how Section 2 is and should be enforced cannot be said to represent the 

consensus, or even the prevailing, view of the myrad of stakeholders interested in Section 2 

enforcement. The Report also goes beyond the holdings of the Supreme Cour cases upon which 

it relies. The Federal Trade Commission ("FTC") does not endorse the Deparent's Report. 

We have two overarching concerns with the Deparent's Report. First, the U.S. Supreme
 

Cour has declared that the welfare of consumers is the primar goal of the antitrst laws.3 

However, the Departent's Report is chiefly concerned with firms that enjoy monopoly or nearmonopoly power, and prescribes a legal regime that places these firms' interests ahead of the 

interests of consumers. At almost every tu, the Departent would place a thumb on the scales in 

favor of firms with monopoly or near-monopoly power and against other equally significant 

stakeholders. 

Second, the Report seriously overstates the level oflegal, economic, and academic consensus 

regarding Section 2. For example, the witnesses who participated on the hearng panels were far 

from unanimous in their opinions about what the settled law was, much less what it should be.4 

Indeed, in hindsight, we are concerned that the testimony gathered durng the hearngs was not 

representative ofthe views of all Section 2 stakeholders, despite the best efforts ofthe two agencies 

to assemble balanced witness panels. In paricular, we are concerned that voices representing the 

interests of consumers were not adequately heard. And insofar as the Report relies on economic 

Chairan Wiliam E. Kovacic does not join this statement and wrtes separately. 

2 U.S. DEP'T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT
 

UNDER SECTION 2 OF THE SHERMAN ACT (2008), available at 

http://ww.usdoi.gov/atr/public/reports/236681.pdf (hereinafter REpORT). Section 2 prohibits, 

among other things, monopolization and attempts to monopolize. 

3 Reiter v. Sonotone Corp., 442 U.S. 330,342 (1979). 

4 We express our appreciation to Commission and Deparment staff members who 

labored long and hard to put together the Section 2 hearngs. Weare equally appreciative of the 

time and effort invested by all of the witnesses who testified at the hearings (identified in an 

Appendix to the Deparent's Report), and we join the Departent in saluting them for their 

contributions. 
theory, the recent warning of Justice Breyer bears repeating: while economic theory is an important 

consideration in applying antitrst law, economic theory is not tantamount to the law itself.5 

We envisioned a Report that would identify outstanding issues in Section 2 enforcement; 

provide neutral and balanced ilustrations of the conflicting positions that have been taken on those 

issues; and suggest topics for further study to help resolve the debate. Such a Report would 

carefully distinguish between Supreme Court holdings and dicta in terms oftheirprecedential value. 

Additionally, it would take special care not to imply that the testimony at the hearings was 

representative of the views of all of the Section 2 stakeholders. Such a Report would have made a 

significant contrbution to Section 2 jurisprudence. 

I. The Report's Premises
 

The Department's descriptions of its Section 2 enforcement intentions are based on four 

fundamental premises. First, the Report embraces the theory that the promise of monopoly profits 

drives firms to innovate and compete.6 Anticipated financial rewards certainly drve inovation and 

competition. But this does not guarantee that profits resulting from monopoly power wil have the 

same beneficial market effects as profits resulting from competition. Monopolies have been 

appropriately criticized because they tend toward ineffciency and have reduced incentives to 

Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705, 2729 (2007) (Breyer, 

J., dissenting) ("(A )ntitrust law cannot, and should not, precisely replicate economists' (sometimes 

conficting) views. That is because law, unlike economics, is an administrative system the effects 

of which depend upon the content of rules and precedents only as they are applied by judges and 

jures in courts and by lawyers advising their clients."). 

6 See, e.g., REpORT, Chapter 1 at 7-8; Chapter 2 at 1; Chapter 4 at 49 (low prices);
 

Chapter 7 at 119 (refusals to deal with rivals). 

2 
innovate.7 Monopolies also have been criticized because monopoly power in one market (even 

where legitimately acquired or maintained) may be used to leverage power in other markets.8 

Second, the Report concludes that the risk of over-enforcement of Section 2 is greater than 

the risk of under-enforcement, contending that fear of liabilty leads firms to compete less
 

aggressively.9 The Report notes that it is often diffcult to distinguish between aggressive
 

competition and exclusionar conduct.Io This may be true in some cases, but that challenge also 

exists in other areas of antitrust law and is not unique to Section 2. Regardless of the underlying 

theory of potential 
 liability, antitrst counseling and enforcement decisions require an in-depth, 

the facts. We believe that the federal antitrst enforcement agencies 

and the private antitrst bar are (and wil remain) up to that task, in the Section 2 realm and 

elsewhere. 

context-specific assessment of 


At the same time, the Report downplays the risks of under-enforcement. The Report 

espouses the economic theory that monopoly power is self-destrctive and that markets are self- I I In other words, it is said that a firm with monopoly power (however that power was correcting. 

obtained or maintained) wil not have that power forever; thus, the risks of under-enforcement are 

outweighed by the risks of over-enforcement. Even if correct, however, this hypothesis does not 

7 Standard Oil Co. v. United States, 221 U.S. 1,52 (1911) (citing the danger that a
 

monopoly wil "fix the price," impose a "limitation on production," or cause a "deterioration in the 

the monopolized product"); United States v. Aluminum Co. of Am., 148 F.2d 416,427 

(2d Cir. 1945) (Hand, J.) ("unchallenged economic power deadens initiative, discourages thrift and 

depresses energy"); Federal Trade Commission and Department of Justice Hearings on Section 2 

quality of 


of the Sherman Act: Single-Firm Conduct As Related to Competition, Sept. 26, 2006 Hr' g Tr., 

Empirical Perspectives at 13 (Scherer), available at 

htt://ww .ftc.gov/ os/sectiontwohearngs/docs/transcripts/sept26EmpiricalPerspectivestrans. pdf
 

(observing that reluctance to "cannibalize the rents that they are earng on the products that they 

already have marketed" may make monopolists "sluggish innovators"). 

8 TownofConcordv.BostonEdisonCo., 915 F.2d 17, 
 23-24(1st. Cir.1990); compare 

REpORT, Chapter 5 at 77,90 (declaring that tyg is ubiquitous, tyicallybenefits consumers, and
 

is often procompetitive, with no exception for situations where engaged in by a firm with monopoly 

or near-monopoly power). 

9 See, e.g., REpORT, Chapter 1 at 14-15; Chapter 3 at 46-47; Chapter 4 at 49,69 (low
 

prices); Chapter 5 at 88, 90 (tyng); Chapter 6, section 1 at 102 (bundled discounts); Chapter 6, 

section 2 at 116 (loyalty discounts); Chapter 7 at 126, 129 (refusals to deal with rivals). 

10 See, e.g., REpORT, Chapter i at 
 9, 12-13, 18; Chapter 3 at 33-34, 43; Chapter 4 at 


(predatory pricing); Chapter 5 at 88 (tyng); Chapter 6, section i at 102, 104-05 (bundled discounts);

Chapter 6, section 2 at 116-17 (loyalty discounts); Chapter 7 at 125-26 (refusals to deal with 
 rivals).

See, e.g., REPORT, Chapter 2 at 25. 

3 

49 

II 
adequately consider the har consumers wil suffer while waiting for the correction to occur. 

Markets can and do take years, even decades, to correct themselves. For one reason or another, it 

may take a long time for rivals to surmount entr barriers or other impediments to effective
 

competition. Indeed, the monopolist's own deliberate conduct may further delay a market correction 

and prolong the duration of consumer harm. 

Third, the Department repeatedly cites the "costs of administration" as a factor weighing 

against enforcement of Section 2.12 Of course those costs must be considered, by the federal 

antitrust enforcement agencies as well as by the cours. For example, ifit would be impossible to 

fashion a meaningful remedy for an alleged violation, arguably it is not worth challenging the 

suspect conduct in the first place. But no one - including the Department - has yet provided a 

methodology for weighing the costs and benefits of Section 2 enforcement (including potential 

remedies), or for comparing the relative costs and benefits to businesses versus consumers.
 

Therefore, we do not agree that any category of conduct can be excluded from the scope of Section 

2 based on the diffculty of devising an appropriate remedy. 

Fourh, the Report emphasizes a need for clear and administrable rules, asserting that this 

need has motivated courts to fashion "bright line" tests.13 While clear rules are desirable in the 

abstract, the benefits of clarity must be balanced against the benefits of effective and reasonable law 

enforcement, lest the interests of consumers be compromised.14 Drawing an analogy to Section i 

enforcement, rules of per se ilegality largely have been tempered by rule of reason analysis, despite 

the clear guidance afforded by earlier per se rules. Similarly, the Report overstates the extent to 

which the Supreme Cour has embraced bright-line rules of per se legality. The only "safe harbors" 

blessed by the Supreme Court relate to alleged predatory pricing and bidding;15 they were adopted 

because of the unique threat to consumer welfare that otherwise might result from challenges to low 

12 See, e.g., REpORT, Chapter 1 at 9, 16; Chapter 2 at 4; Chapter 3 at 45; Chapter 6, 

section 1 at 102 (bundled discounts); Chapter 7 at 123, 126-27 (refusals to deal with rivals). 

13 See, e.g., REpORT, Introduction at 2; Chapter 1 at 13-15, 17-18; Chapter 3 at 34-35; 

Chapter 4 at 49-50, 61, 73 (predatory pricing); Chapter 6, section 1 at 97-98, 105 (bundled 

discounts); Chapter 6, section 2 at 116 (loyalty discounts); Chapter 8 at 141 (exclusive dealing). 

14 We recognize that businesses are key stakeholders interested in Section 2 

enforcement. Firms that enjoy monopoly or near-monopoly power are among these stakeholders, 

as are their rivals and customers. To the extent the federal antitrust enforcement agencies can 

provide detailed and transparent guidance to the business community regarding our interpretation 

of Section 2 and our enforcement priorities - without compromising the interests of consumers ­

of course we should do so. 

15 Brooke Group v. Brown & Wiliamson Tobacco Corp, 509 U.S. 209 (1993); 

Weyerhauser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S.Ct. 1069 (2007). The Court has 

not, however, adopted the "average avoidable cost" safe harbor set forth in the Report. REpORT, 

Chapter 4 at 65-67. 

4 
prices.16 The Report incorrectly suggests that the Cour in Trinko adopted a rule of per se legality 

for refusals to deal with rivals, ignoring both the context of the case and the Court's express 17 language to the contrary. 


This is not to say that the Department's premises are entirely 
 without merit. These premises 

are not totally lacking in support from some of the witnesses at the Section 2 hearings, Supreme 

Cour dicta in some cases, and additional scholarship. But these premises do not represent the 

consensus, or even the prevailing, views of the section 2 stakeholders. They do not reflect the 

conclusions of those who enacted Section 2 and its counterparts, who decided that, on balance, the 

negatives associated with the acquisition or maintenance of monopoly power outweigh the positives. 

Nor do these premises represent the views of the Supreme Court, as those views have been 

expressed by the Cour in its holdings in Section 2 cases. As law enforcement agencies, the 

Deparent and the Commission must respect existing law. Of course, the agencies have an equally 

important obligation to encourage the development of the law - a role that the Commission, in 

particular, has always taken quite seriously. But with respect to Section 2 enforcement policy, 

neither the views of the many stakeholders, nor the Supreme Cour's holdings, provide clear 

guidance regarding whether the drastic changes proposed by the Department are necessary. 

Therefore, we strongly distance ourselves from the enforcement positions stated in the Report. 

II. The Report's Law Enforcement Standards
 

The Departent's premises lead it to adopt law enforcement standards that would make it 

nearly impossible to prosecute a case under Section 2 of the Sherman Act. For example, the 

Departent's baseline test for Section 2 liability would only condemn conduct ifthe demonstrable 

competitive potentiaL.18 The 

disproportionality test distorts the rule of reason standard, which simply asks whether the 

anti competitive effects are "disproportionately" greater than the pro 

anti competitive harm "outweighs" the pro competitive effects. The existing rule of reason standard 

already poses a significant hurdle to liability, unless care is taken to ensure that a Section 2 plaintiff 19 does not bear a prohibitively high burden of proof. 


The Department also adopts specific tests for a variety of conduct such as predatory pricing, 

loyalty discounts, price bundling, tyng, refusals to deal with rivals, and exclusive dealing. In almost 

every case, the Departent adopts standards that are tougher - and in some cases much tougher ­

than existing standards as defined by Section 2 case law. 

16 Brooke Group, 509 U.S. at 226-27. 

17 Verion Comms. Inc. v. Law Offces of Curis V. Trio, LLP, 540 U.S. 398 (2004).
 

18 REpORT, Chapter 3 at 45. 

19 See, e.g., United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). 

5 
1. Predatory Pricing
 

With respect to predatory pricing, the Departent states that as long as prices are above a 

finn's "average avoidable costs" (which would not include any costs incurred before the alleged 

predatory pricing occurs), the firm's pricing is 1ega1.20 The Departent adopts this broad rule of 

legality despite acknowledging that the rule could enable a firm with monopoly or near-monopoly 

power to exclude a rival who otherwise could constrain the firm' s exercise of monopoly power. 

This would occur, for example, where the firm and its rival must incur large up-front costs but the 

"avoidable costs" of producing each unit are de minimis.21 Moreover, in the event that a firm's 

pricing falls outside this price-cost safe harbor, the Departent would allow proof of "efficiencies" 

as a "defense even in a setting where there is existing monopoly power.',z No Supreme Cour 

decision has embraced either the Deparment's "average avoidable cost" safe harbor or the proof 

of "efficiencies" as an extra defense of conduct that could facilitate foreclosure effects.23 Indeed, 

the Department acknowledges that the latter defense "received little attention" at the Section 2 24 hearngs. 

2. Loyalty Discounts
 

Similarly, in the case ofloyalty discounts, the Departent states that it "would likely apply 

a standard predatory pricing test."25 That price-cost "safe harbor" would apply even when the 

loyalty discounts are so-called "first dollar" or "non-linear" discounts.26 The Departent again 

adopts this price-cost "safe harbor" despite recognizing that this legal standard could permit a firm 

with monopoly or near-monopoly power to foreclose a weaker rival from the minimum viable scale 

20 REpORT, Chapter 4 at 65-67. 

21 !d. at 63-64. 

22 Id. at 71-72. 

23 In Brooke Group, the Cour stated only that "an appropriate measure of cost" should 

be used. Brooke Group, 509 U.S. at 222-24. The Cour did not say it would be "appropriate" to use 

a price-cost test that could facilitate foreclosure of rivals in a market where monopoly power exists, 

and the Cour has never blessed an additional "efficiencies" defense in those circumstances. 

24 REpORT, Chapter 4 at 71. 

25 REpORT, Chapter 6, section 2 at 116. 

26 "First dollar" or "non-linear" discounts are discounts offered not only on the 

"contestable" portion of sales made to customers (sales for which the firm and its rival can both 

compete) but also on "uncontestable" sales (sales for which a rival cannot compete because, for 

example, the rival 
 lacks the economies of scale or scope to do so). See REpORT, Chapter 6, section 

2 at 111-12. 

6 
it would need to constrain the exercise of 
 monopoly power.27 In an even more strikng declaration, 

the Deparment says that if a rival "remains in the market" (no matter how crippled the rival may 

be), the rival's existence wil be treated as evidence that the loyalty discounts are legal, even if the 

practices fall outside the ambit of the price-cost "safe harbor." 

There is no authority for these law enforcement prescriptions in the holdings ofthe Supreme 

Cour or, for that matter, the holdings of 
 the "lower cour" invoked by the Deparment,28 Moreover, 

the Deparent's use of the "standard" price-cost "safe harbor" (or any kind of price-cost "safe 

harbor"), rather than using an exclusive dealing analysis for these kinds of loyalty discounts, is 

inconsistent with the Report's recognition that these practices represent a form of exclusive 

dealing.29 

3. Bundled Discounts
 

The Departent acknowledges that bundled discounts can be used by a firm with monopoly 

or near-monopoly power to foreclose a rival from the scale it needs to constrain the firm's exercise 

of monopoly power, especially when the rival cannot offer all ofthe products in the bundle.3o Yet 

the Deparment declares that if the rival can offer all of the products in the bundle, the "standard" 

price-cost safe harbor wil be used.31 If the rival cannot do so, the price-cost "safe harbor" wil stil
 

be used, modified only to attbute the discount at which the bundle is sold to the products sold in 

common by the firm and the rivaL. 32 Additionally, even if the bundled discount falls outside of these 

price-cost "safe harbors," the Department wil nevertheless consider it legal, unless a public or 

private plaintiff demonstrates that the practice has "no procompetitive benefit" or that the har is
 

"disproportionate" to the benefit,33 

Again, no Supreme Cour decision has ever blessed the use of any price-cost rules oflegality 

for any practice except predatory pricing, and the Department is the sole author and authority for 

27 Id. at 107, 111-12. 

28 The Supreme Cour has never blessed the use of any price-cost rules of per se legality 

for any practice except predatory pricing. It is not clear that any of the lower cour decisions cited 

in the Report involved "first dollar" or "non-linear" discounts granted by a firm with monopoly or 

near-monopoly power. In any 
 event, even if such discounts were involved, the lower cours did not 

address their exclusionary potentiaL. 

29 REpORT, Chapter 6, section 2 at 114-15. 

30 REpORT, Chapter 6 at 105-06. 

31 Id. at 105.
 

32 !d. 

33 Id. at 117.
 

7 
use of 
 the "disproportionality" safety net.34 Moreover, the Report does not mention the possibilty 

of analyzing bundled discounts as a form of exclusive dealing instead of affording them the 

protection of price-cost "safe harbors" and requirg proof of "disproportionality," despite the 

Departent's recognition of the kinship between bundled discounts and "first dollar" loyalty 

discounts (the latter having been identified by the Deparment as a form of exclusive dealing). 

4. Tying
 

The Deparent declares that tyng is ubiquitous.35 Contrary to existing Supreme Cour case 

law,36 the Deparent says that tying (presumably even by a firm with monopoly or near-monopoly 

power) "tyically benefits consumers" and is "often procompetitive.',37 Tying surely benefits 

consumers in some instances, but the Departent draws no distinction between the use of tyng by 

a firm with monopoly power or near-monopoly power and the use ofthe practice by other firs.38 

Additionally, lest the practice of tyng be challenged despite these admonitions, the Department 

would require public and private plaintiffs to prove that the anti competitive consequences of a tyng 

scheme are "significantly disproportionate" to any benefits.39 As previously stated, the 

disproportionality test is of 
 the Deparment's own making.40 The Department's position enjoys no 

support in the law, and it is so il-defined that it wil be hard, if not impossible, for any public or 

private plaintiff 
 to satisfy it. 

5. Unilateral Refusals to Deal with Rivals
 

The Report flatly declares that unilateral refusals to deal with rivals "should not play a 

meaningful role in antitrst enforcement," regardless of a firm's monopoly power or the potential 

for foreclosure.41 The Departent incorrectly implies42 that the Commission subscribed to this 

34 REpORT, Chapter 3 at 45-46. 

35 REpORT, Chapter 5 at 77. 

36 Jefferson Parish Hosp. Dist. No.2 v. Hyde, 466 U.S. 2 (1984). 

37 REpORT, Chapter 5 at 90. 

38 Id. 

39 Id. 

40 See REpORT, Chapter 3 at 45-46. 

41 REpORT, Chapter 7 at 127, 129. 

42 ¡d. at 124 and n. 71. 

8 
position in the agencies' joint April 2007 report on intellectual propert issues ("IP Report").43 The 

IP Report concluded that "mere unilateral, unconditional refusals to license will not play a 

meaningful part in the intedace between patent rights and antitrst protection.'04 That statement 

reflected the agencies' view that the simple act of refusing to license intellectual propert may not 

constitute a violation ofthe antitrst laws. That view is consistent with the Supreme Cour's holding 

in Ilinois Tool Works that intellectual propert mayor may not confer monopoly power.45 

If a patent does confer monopoly power, however, then denial of access to the patented 

technology may not be a "mere" unilateral refusal to license intellectual propert. A firm with 

monopoly power or near-monopoly power may violate Section 2 if it refuses to license to, or 

otherwise refuses to deal with, a rivaL. The Commission has never itself, or in conjunction with the 

Department, said otherwise. Indeed, the Supreme Court repeatedly has held, as it stated long ago 

in its Colgate decision, that when there is a "purpose to create or maintain a monopoly" there may 

be a duty to deal with a rival.46 Although the Cour held in Trink047 that a fir with monopoly 

power had no duty to deal with rivals when the public was protected by regulation ofthe fir's
 

practices, the Court declared in Trinko that the right to refuse to deal with rivals is not unqualified.48 

The Department acknowledges this aspect of Trinko in its Report but fails to apply such a standard 

to the conclusions in this chapter.49
 

6. Exclusive Dealing
 

Finally, with respect to exclusive dealing, the Deparment adopts another "safe harbor," 

declarng that the practice is legal if no more than thir percent of the market is foreclosed to a 

43 U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, ANTITRUST ENFORCEMENT AND
 

INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (Apr. 2007), 

available at
 

htt://ww .ftc.gov /reports/innovationI040 i 0 1 PromotingInovationandCompetitionrt0704. pdf. 

44 Id. at 6, 32. 

45 Ilinois Tool Works Inc. v. Independent In, Inc., 547 U.S. 28 (2006). 

46 United States v. Colgate & Co., 250 U.S. 300 (1919) (dictum); OtterTail 
 Power Co. 

v. United States, 410U.S. 366 (1973); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 

585, 602 (1985); Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 466-467 

(1992). 

47 Trinko, 540 U.S. 398. 

48 Id. at 408 (citing Aspen Skiing, 472 U.S. at 601). 

49 REpORT, Chapter 7 at 122, 125. 

9 
riva1.50 According to the Report, that rule applies despite the Deparment's acknowledgment that 

a rival may need greater access to the market in order to achieve suffcient scope and scale to 

constrain the exercise of monopoly 
 power. 51 The Department fuher declares that exclusive dealing 

wil be considered legal, even if outside the "safe harbor," unless the public or private plaintiff can 

establish that the conduct has no procompetitive effects or that its anti 
 competitive effects are 

"disproportionate" to its benefits under the Departent's newly-created "disproportionality"
 

requirement.52 

III. Conclusion
 

The Departent's Report does not consider all of the exclusionary practices that may be used 

to obtain or maintain monopoly power and cause har to consumers.53 

The Departent embraces a series of 
 "safe harbors" applicable to individual practices, even 

though each of these practices has substantial potential to lead to anti 
 competitive foreclosure if 

employed by a firm with monopoly power or near-monopoly power. In other words, each practice 

might be used by a firm with monopoly power or near-monopoly power to foreclose a rival from 

making sales the rival needs to compete effectively. As a result, the dominant firm might be 

sheltered from competition that otherwise would constrain its exercise of monopoly power. 

Even for practices that fall outside the "safe harbors," the Department would impose rigorous 

burdens of proof on both public and private plaintiffs. These burdens of proof wil be diffcult, if 

not impossible, for plaintiffs to meet. 

In short, the Deparment's Report erects a multi-layered protective screen for firms with 

monopoly or near-monopoly power. As an inevitable consequence, dominant firms would be able 

to engage in these practices with impunity, regardless of potential foreclosure effects and impact on 

consumers. Indeed, it appears that the Deparent intends for this screen to apply even when a firm 

uses two or more of these practices collectively, instead of just one practice individually. 

50 REpORT, Chapter 8 at 141. 

51 Id. at 137.
 

52 Id. at 140.
 

53 As one notable example, except for a passing reference, the Report ignores forms of 

"cheap exclusion;" that is, virally costless forms of exclusionary conduct, which may be employed 

by a firm with monopoly or near-monopoly power. See Susan A. Creighton, D. Bruce Hoffman,

Thomas G. Krattenmaker & Ernest A. Nagata, Cheap Exclusion, 72 ANTITRUST LJ. 975 (2005) 

(citing, as examples, the Commission's Unocal case and the Commission's Orange Book exclusion 

payment cases). 

10 
This Commission stands ready to fill any Sherman Act enforcement void that might be 

created if the Departent actually implements the policy decisions expressed in its Report. We will 

continue to be vigilant in investigating and, where necessary, prosecuting Section 2 violations. 

The Deparment's Report undoubtedly wil spark lively discussion and spur additional 

Section 2 scholarship, and we look forward to being a part of that process. In addition, we wil 

continually seek to strengthen our relationships with our foreign counterpars, as we look around the 

world for additional perspectives on dominant firm conduct and other competition issues. 

11 
EXHIBIT 5
 
EDITORIAL ADVISORY BOARD
 

Aspen Law & Business
 A Division of A'lpen Publishers, Inc.
 

Richard A. Epstein 

James Parker Hall Distinguished St'l''ict' Professor of Law Cní"t'sitj' of Chicago 

E. Allan Farnsworth 

Alfred :'1cCol1nack Professor of La\-' 

Columbia University 

Ronald J. Gilson 

Charles J. Me)'el'S Professor of Law and Business 

Stanford University 

~1arc and Eva Stern Professor of Law and Business 

Columbia Univel'Sity 

GeofTrey C. Hazard, Jr. 

Trustee Professor of LîW 

l'niversit), of Pennsylvania 

Jaiit'S E. Krier 

Earl Warren Delano Professor of Law 

L'nin:rsity of !vIichigan
 

Elizabeth Warren 

Leo Gottlieb Professor of Law 

Harvard University Bernard Wolfman 

Fessenden Professor of Law 

Har\'rd University
 

ANTITRUST ANALYSIS
 

Problems, Text, Cases
 

Fifth Edition PHILLIP AREEDA 

Late Langdell Professor of Law
 Harvard University
 

LOUIS KAPLOW
 

Professor of Law
 

Harvard University
 

~ 

¡ 

æ ~ f: 

H \; 

I (

Formerly published by
 Little, Brown and Company " ! 

i 

I 

ASPEN lAW & BUSINESS
 A Division of Aspen Publishers, Inc. , LAW LIBRARY 

UNIVl:RSITY OF GEORGIA 

I
 

i
 

I
 

1 .,tlt 3 :"jlìë
 
554 

555 

MO'nopolj' Power 11335 

cial inquiries into market power. Paragraph 343 summaiizes the 

discussion, emphasizing points where confusion is common. This 

textual presentation is followed by government guidelines and two 

leading market power decisions in the monopolization context. 

336. Monopoly and market power. (a) Defning monopoiy in lerms 

of market power. Although the monopolization offense is routinely
 

assumed to require market power in an economic sense, it is useful :~: 

to trace the motivation for this approach. Sherman Act §2 does not 

speak of power or markets but merely condemns those "who shall 

monopolize ... any part of the trade or commerce among the
 

several states, or with foreign nations." Conventional definitions of
 

monopoly explicitly refer to exclusive possession or control. But §2
 

does not adopt this dictionary definition. It has been clear from the
 

earliest days of the Sherman Act that one can be a monopolist and
 

monopolize within the meaning of the statute without being the
 

sole supplier of a product. Rather, the courts have defined the
 

possession of monopoly power as the power to control price or to
 

exclude competìtion. A dominant fion might possess such power
 

even though it accounts for, say, only 90 percent of the sales of a
 product. Moreover, a firm accounting for i 00 percent of such sales
 

might lack power over price if customers are readily satisfied by
 

substitute products or if new entr is very easy.2
 

This power to elevate prices above (and to restrict output below)
 

competitive levels is called market power by economists (and, increasingly, by courts as well). It is possessed to some degree by 


every firm that is not constrained by perfect competition. But we have already seen that it does not appear to be the purpose of the 

Sherman Act to bring about a regime of perfect competition.3 

Under §2, only substantial market power will be deemed monopoly 

power. Thus, two problems face the courts: (1) How do we determine how much market power exists in a given case? (2) At what 

point on the spectrum between perfect competition and perfect 

monopoly should market power be deemed suffcient?4 The factors 

2. For example, consider a iniàing company that otTers the only regular deliv­ ery between two cities. Its 100 percent share may make it a literal monopoly, but Ît 

has hardly an)' power to exploit consumers because even modest price increases 

above the competitive lel'el would induce shippers to telephone other trucking companies to arrange for them to haul the freight at a better price. After all, there 

are few industries in which the relev¡int capital stock is more mobile. 

3. See 11 125-127. 

4. This second formulation is itself overly simplistic, since a perfect monopolist 

can have no power or substantial power, depending on the circiimstances. 

,¡336 Monopo(,' Power described in ~335 should determine, in principle, what threshold is 

appropriate in a given context.5
 

Although the abilty to charge 50 percent more than the competitive price is generally understood to show market power and be of 

equal legal concern whether the product is steel or paper clips, the impact on consumer welfare varies. Even in markets of similar magnitude, the economic loss from a given excess of price over cost varies with the shape of demand and cost curves at monopoly and 

competitive levels of output, although these variations are typically 

too complex to be considered in antitrust litigation. Secondly, the 

assumed 50 percent excess impairs consumer welfare much more in 

the multibilion dollar steel market than in the far smaller clip 

market. Does this mean that society should be readier to control possible misbehavior in the larger market and thus to set a lower threshold of market power before doing so? (To put the same
 

question from the opposite angle, should we insist on higher-thanusual power thresholds before intervening in smaller markets?) In 

favor of doing so, the cost and complexity of antitrust litigation 

does not rise proportionally with the economic stakes, On the other 

hand, varyng the legal standard according to the absolute sii.e of the market may overcomplicate the system. In addition, the social 

consequence of an erroneous condemnation may also be greater in the larger market.
 

(b) The price of monopoly.õ Since market power is to serve as our measure of the evil effects of monopoly, we must begin by recallng 

the reasons that we object to monopoly and value competition. Monopoly, for example, produces economic ineffciency. In the formal model of 
 perfect competition, the output ofa commodity tends to expand until price falls to the point just equal to each firm's 

marginal cost of production, which, in equilibrium. will also equal 

long-run average cost (including normal profits but no more). 

Where :i single firm controls the production of that commodity, the 

output will be smaller and price higher. 7 Thus, the monopolist profits at the expense of buyers, who are forced to pay more. Consumers unable to pay the monopolist's high price will spend their 

funds elsewhere and thus induce increased production of other 

commodities - commodities that consumers would not want under competitive pricing conditions. Thus, monopolistic limitations on output divert society's productive energies to less valued undertak5. Market power inquiries in contt'xts other than §2 will emptoy similar anal)'sis as to the first question, but the appropriate answer to the secoiid may differ 

substantially. 

u. For a more detailed stateiieiit, see ,¡~ i 12-113. 7. See 111 12a. 
556 

557 

Monopoly Pmuer
 11336 

l~ 

ings and thereby distort resource allocation away from the maximum satisfaction of consumer wants. 

(c) A1amet power as power oiier price. Given this statement of the


economic harms for monopoly, market power is measured by the extent to which price can be elevated above the competitive level, 

which corresponds to cost. Common statements of market powerthe power to control price, the range of discretion, or choice that 

the firm possesses - are suggestive of this definition but leave some 

room tor confusion. Such terms are meant to contrast the powerful 

finn with the perfectly competitive firm that has no choice but to match the market price. It cannot obtain more than its rivals 

charge, and it has no reason to take any less (because, by definition, 

the perfectly competitive firm is too small to have any impact on 

market price and thus can sell all it can produce at the going price). 

By contrast, a monopolist maximizes profits by choosing the price 

at which any further increase would cost it more in lost sales than it 

gains in increased profit on sales retained. Typically, there is only one siich price that maximizes profits.1i Thus, at least if the monopolist is a rational, profit-maximizing firm, it, like the perfect competitor, has only one choice. But the absence of discretion for a profit maximizer, is, of course, irrelevant. The evil of monopoly is that the 

profit-maximizing price, even if not truly discretionary, harms consumers and reduces economic effciency, while that of the perfect 

competitor does not.9 

(d) Market power and the goals oj the antitrust laws. This definition of market power focuses entirely on competitive prices and economicalIy effcient results. Is that narrow focus inconsistent with the 

broader social and political values that the antitrust laws are sometimes said to foster? 10 That question has not been much explored, but several answers are possible. First, the behavior of firms without market power might be thought too inconsequential to affect any of 

those broader purposes of the antiu'ust laws. Second, some would 

argue that the noneconomic motives for the legislation are less 

important than serving the economic function or that pursuing 

competitive prices and eficiency actually serves the broader objectives to the extent that Congress intended. Third, the diffculty of formulating standards to serve the broader objectives may leave the courts, by default, with those of the economic model of competi8.Id. 

9. The monopolist that chooses nOt to charge the full monopoly price still 

exploilS consumers and impairs effcient resource allocation. Even the monopolist that chooses the competitive price still has the power to do otlieiwise (although we may not be able to detect it when prices and profits are merely at the coripetitive 

level). 

lO. See Akoa, Ch. 3A, iiiid 1111117, 130, 505. 

11337 Monopoi), PUWfl 

tion: allocative or productive effciency, innovation, and consumer 

welfare. The last point, however, might still leave some room for 

these broader concerns - to whatever extent that can be articulated and sensibly applied - in setting the market power threshold 

for particular offenses, resolving uncertainties concerning market 

power in individual cases, defining the range of conduct that subjeci') firms to liabilty in the presence of market power, and limiting 

permissible defenses to such conduct. 

337. Ways of measg maket power. (a) Introduction. Although we shall see that the conventional approach to measuring 

market power is to defìne a relevant market, the resulting market 

share merely offers a basis for injerng market power - that is, the degree to which price wiIl be elevated above the competitive leveL.
 \Vhen the existence of monopoly is the issue, would it not be simpler to go directly to the ultimate question, Uiat is, to ask whether 

and how much price is above cost? The remainder of this Paragraph notes the limitations on this approach and helps explain the 

role of the market definition concept.
 

(b) Difficult)' oj direct measurement. We seldom measure power directly because it is diffcult to obtain and appraise the relevant i i Although identifying the price is often straightforward, mea- data. 

suring the relevant cost is not. An alternative would be to ask whether the finn's profits on the product exceed the nonnal return 

to which they would be diiven in a competitive equilibrium. Cost 

and profits involve many components buried wiUiin mounds of 

accounting information, where the books do not directly reflect economic concepts of cost and profit. Problems with overhead, inventories, depreciation, joint production costs, and allocations of 

charges within a conglomerate make such inquiries notoriously diffìcul t. 12 

11. Recently some studies have attempted to show how market power could be 

directly measured. See D. Kamerschen & j. Kohler, Residual Demand Analysis of the Ready-ta-Eat Breakfast Cereal Market, 38 Amitr. BulL. 903 (1993); D. Kamersehen &j. Park, An Alternative Approach to Market Structure and Market Price. 25 

Applied Econ. 1 ii (l993);j. Baker & T. Bresnahan, Einpirical l'Iethods of Identifying and Measuring Market Power, 61 Amitr. LJ. 3 (1992); j. Baker & T. 

Bresnahan, Estimating the Residual Demand Curve Facing a Single Firm, 6 IntI. J. 

Indus. Org. 283 (1988). And courts hal'e expressed a willingness to consider direct evidence of market power. See Rebel Oil Co. v. Atlantic Richfield Co.. 51 F.3d 1421 

(9th CiL), cert. denied, J 1f S. Ct. 515 (1995) (in predation case, market power may be shown by direct evidence of its exercise or by more collmon method of 

circumstantial evidence pertaining to market structure). 

12. This problem was explored in 11232a and is addressed furthc:r in the excerpt 

in 11347, at note 107. 
EXHIBIT 6
 
ANALYSIS OF PROPOSED CONSENT
 

ORDER TO AID PUBLIC COMMENT
 

In the Matter of Negotiated Data Solutions LLC, File No. 051 0094 

The Federal Trade Commission ("Commission") has accepted, subject to final approval, 

an Agreement Containing Consent Order ("Agreement") with Negotiated Data Solutions LLC 

(''N-Data''), a limited liabilty company whose sole activity is to collect royalties in connection 

with a number of 
 patents. The Agreement settles allegations that N-Data has violated Section 5 

of the Federal Trade Commission Act, 15 V.S.C. § 45, by engaging in unfair methods of 

competition and unfair acts or practices relating to the Ethernet standard for local area networks. 

Pursuant to the Agreement, N-Data has agreed to be bound by a proposed consent order 

("Proposed Consent Order"). 

The Proposed Consent Order has been placed on the public record for thir (30) days
 

for comments by interested persons. Comments received durng this period wil become par of 

the public record. After thir (30) days, the Commission wil again review the Agreement and 

the comments received and wil decide whether it should withdraw from the Agreement or make 

final the Agreement's Proposed Consent Order. 

The purose of this analysis is to facilitate comment on the Proposed Consent Order. 

This analysis does not constitute an offcial interpretation of 
 the Proposed Consent Order, and 

does not modify its terms in any way. The Agreement has been entered into for settlement 

puroses only, and does not constitute an admission by N-Data that the law has been violated as 

alleged or that the facts alleged, other than jurisdictional facts, are tre.
 

Background 

The Institute of 
 Electrcal and Electronics Engineers ("IEEE") is a standard-setting 

organization active in a number of different industres. IEEE standards often enhance the 

interoperabilty of communications products. One important example, which is at issue here, is 

the 802 series of networking standards. Many of the standards in the 802 series allow users to 

reliably access and share information over communications systems by interconnecting many 

compatible products manufactued by different producers. 

The IEEE 802.3 standard, first published in 1983, and commonly referred to as 

"Ethernet," applies to local area networks ("LANs") built on copper, and more recently fiber 

optic, cables. That standard initially accommodated a maximum data transmission rate of 10 

megabits per secgnd (10 Mbps) between networked devices. By 1994, the 802.3 Working Group 

was developing a new 802.3 standard for "Fast Ethernet," which would transmit data across a 

copper wire at 100 Mbps. The Working Group determined that it would be desirable for Fast 

Ethernet equipment to be compatible, to the extent possible, with existing LAN equipment and 

with futue generations of equipment. A technology, varously known as "auto detection" and 

"autonegotiation," was developed that would permit such compatibility. 
Employees of 
 National Semiconductor Corporation ("National") were members and 

active paricipants in the 802.3 Working Group. In 1994, National proposed that the 802.3 

Working Group adopt its autonegotiation technology, referred to as "NWay," into the Fast 

Ethernet standard. At the time, National disclosed to the Working Group that it had already fied 

for patent protection for the technology. Several other paricipants also had developed 

competing technologies and the Working Group considered several alternatives, each having 

advantages and disadvantages compared to NWay. The 802.3 Working Group also considered 

adopting the Fast Ethernet standard without any autonegotiation featue. 

At IEEE meetings to determine which autonegotiation technology to include in 802.3, 

one or more representatives of 
 National publicly announced that ifNWay technology were 

chosen, National would license NWay to any requesting par for a one-time fee of $ 1 ,000. In a 

subsequent letter dated June 7, 1994, and addressed to the Chair of 
 the 802.3 Working Group of 

IEEE, National wrote: 

In the event that the IEEE adopts an autodetection standard based upon National's 

NWay technology, National wil offer to license its NWay technology to any 

requesting par for the purose of making and sellng products which implement 

the IEEE standard. Such a license wil be made available on a nondiscriminatory 

basis and wil be paid-up and royalty-free after payment of a one-time fee of one 

thousand dollars ($1,000). 

Based on National's licensing assurance, and following its 
 normal balloting and voting 

procedures, IEEE incorporated NW ay technology into the Fast Ethernet standard, which IEEE 

published in final form in July 1995. To maintain compatibility with the installed base of 

Ethernet and Fast Ethernet equipment, subsequent revisions of the 802.3 standard also have 

incorporated NWay autonegotiation technology. The "Fast Ethernet" standard became the 

dominant standard for LANs, and users are now locked in to using NWay technology due to 

network effects and high switching costs. Therefore, today, autonegotiation technologies other 

than NWay are not attactive alternatives to NWay for manufactuers who want to include intergenerational compatibility in their Ethernet products. 

NWay contrbuted to the success of 
 Fast Ethernet technology in the marketplace. An 

installed base of milions of 
 Ethernet ports operating at 10 Mbps already existed when IEEE 

published the Fast Ethernet standard. The autonegotiation technology in the Fast Ethernet 

standard allowed owners of existing Ethernet-based LANs to purchase and install multi-speed, 

Fast Ethernet-capable equipment on a piecemeal basis without having to upgrade the entire LAN 

at once or buy extra equipment to ensure compatibility. 

National benefitted financially from its licensing assurance. The assurance accelerated 

sales of 
 National products that conformed to the Fast Ethernet standard by first, allaying 

concerns about the future costs of auto negotiation, and so speeding completion of the standard, 

and second, making Fast Ethernet-compatible products backward compatible with Ethernet 

2 
equipment already installed on existing LANs, increasing the demand for Fast Ethernet products 

by those with existing systems. 

In 1997, the United States Patent and Trademark Office issued U.S. Patent Nos. 

5,617,418 and 5,687,174 (the'4l8 and '174 Patents) to NationaL. Both patents arose from the 

patent application that National disclosed to the IEEE in 1994. National later received 

equivalent patents in other countries. 

In 1998, National assigned a number of 
 patents, including the '418 and the' 174 Patents, 

to Vertical Networks ("Vertical"), a telecommunications start-up company founded by former 

National employees. Before the assignent, National gave Vertical a copy of 
 the June 7, 1994 

letter to the 802.3 Working Group. Vertical's outside patent counsel, Mr. Alan Loudermilk, 

acknowledged in wrting that National had informed him "that several of the patents may be 

'encumbered'" by actions National had taken with respect to the IEEE standards. The final 

agreement between Vertical and National stated that the assignent was "subject to any 
 existing 

licenses that (National) may have granted." It fuher provided, "Existing licenses shall include 

. .. (p )atents that may be encumbered under standards such as an IEEE standard...." 

In 2001, Vertical turned to its intellectual propert portfolio in an effort to generate new 

revenues by licensing its technology to third paries. One aspect ofthis strategy was Vertical's 

effort to repudiate the $1,000 licensing term contained in National's 1994 letter of assurance to 

the IEEE. On March 27,2002, Vertical sent a letter to the IEEE that purorted to "supersede" 

any previous licensing assurances provided by NationaL. Vertical identified nine U.S. patents 

assigned to it by National, including the '174 and '418 patents, and promised to make available 

to any par a non-exclusive license "on a non-discriminatory basis and on reasonable terms and
 

conditions including its then curent royalty rates." 

In the Spring of 2002, Vertical developed a list of "target companies" that practiced the 

IEEE 802.3 standard and which it believed infringed on the' 174 and '418 patents. Vertical 

sought to enforce the new licensing terms on these companies. These companies, which ' 

included many large computer hardware manufactuers, represented a substantial majority of all 

producers of 802.3 ports. Vertical's patent counsel, Mr. Loudermilk, sent letters to most of these 

companies between 2002 and 2004 offering a license for patents covering aspects of "the autonegotiation functionality" in networking products, including products compliant with IEEE 

802.3. Vertical also fied suit against a number of companies alleging that "switches, hubs, 

routers, print servers, network adapters and networking kits" having autonegotiating 

compatibility, infrged its' 174 and' 418 patents. Vertical entered into several 
 licensing 

agreements producing licensing fees far in excess of$1,000 from each licensed company. 

3 
In late 2003, Vertical assigned some of 
 its patent portfolio, including the '174 and '418 

patents, to N-Data, a company owned and operated by Mr. Loudermilk.! N-Data was aware of 

National's June 7, 1994 letter of assurance to the IEEE when Vertical assigned those patents to 

N-Data. Yet it rejected requests from companies to license NWay technology for a one-time fee 

of$I,OOO. Instead, N-Data threatened to intiate, and in some cases prosecuted, legal actions 

against companies refusing to pay its royalty demands, which are far in excess of that amount. 

The Proposed Complaint 

Vertical and N -Data sought to exploit the fact that NWay had been incorporated into the 

802.3 standard, and had been adopted by the industr for a number of 
 years, by reneging on a 

known commitment made by their predecessor in interest. Even if their actions do not constitute 

a violation of the Sherman Act, they threatened to raise prices for an entire industr and to 

subvert the IEEE decisional process in a maner that could cast doubt on the viabilty of 

developing standards at the IEEE and elsewhere. The threatened or actual effects ofN-Data's 

conduct have been to increase the cost of practicing the IEEE standards, and potentially to reduce 

output of 
 products incorporating the standards.2 N-Data's conduct also threatens to reduce the 

incentive for firms to participate in IEEE and in other standard-setting activities, and to rely on 

standards established by standard-setting organizations. 

The Proposed Complaint alleges that this conduct violates Section 5 of the FTC Act in 

two ways: first, N-Data engaged in an unfair method of competition; and second, N-Data engaged 

in an unfair act or practice. 

1. Unfair Method of Competition
 

N-Data's conduct constitutes an unfair method of competition. The Supreme Cour in 

FTC v. Sperry & Hutchinson Co. endorsed an expansive reading of the "unfair method of 

competition" prong of Section 5, stating that the Commission is empowered to "define and 

proscribe an unfair competitive practice, even though the practice does not infringe either the 

letter or spirit of the antitrst laws" and to "proscribe practices as unfair ... in their effect on 

! Vertical subsequently sold its remaining business assets and ceased operations. 

2 The conduct by Vertical and N-Data has led to, or threatened to lead to, increased prices in the 

markets for autonegotiation technology (1) used in 802.3 compliant products and (2) used in 

products that implement an IEEE standard enabling autonegotiation with 802.3 compliant 

products. 

4 
competition.,,3 That description of the scope of Section 5 accords with the legislative history of 

Section 5.4
 

Notwithstanding that broad description, the unfair method of competition prong of Section 

5 is subject to limiting principles. The first relates to the natue ofthe conduct. In OAG, the 

Second Circuit held that such a violation could not be found where the respondent "does not act 

coercively."5 Similarly, in Ethyl the Second Circuit held that "at least some indicia of 

oppressiveness must exist ...."6 This requirement is met here, given N-Data's efforts to exploit 

the power it enjoys over those practicing the Fast Ethernet standard and lacking any practical 

alternatives. This form of patent hold-up is inherently "coercive" and "oppressive" with respect 

to firms that are, as a practical matter, locked into a standard. 

The second limiting principle relates to the effects of the conduct. Although the Supreme 

Cour has made it clear that the respondent's conduct need not violate the letter (or even the 

spirit) of 
 the antitrst laws to fall under Section 5, that does not mean that conduct can be 

considered an unfair method of competition if it has no adverse effect at all on competition. That 

requirement, however, is also satisfied here, given the conduct's adverse impact on prices for 

autonegotiation technology and the threat that such conduct poses to standard-setting at IEEE and 

elsewhere. 

Respondent's conduct here is particularly appropriate for Section 5 review. IEEE's 

determination to include National's technology in its standard rested on National's commitment 

to limit royalties to $ 1 ,000. That commitment had substantial competitive significance because it 

extended not to a single firm, but rather to an industr-wide standard-setting organization. 

Indeed, in the standard-setting context with numerous, injured thid parties who lack privity 

3 FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 239 (1972); see also FTC v. Ind. Fed'n of 

Dentists, 476 U.S. 447, 454 (1986). See generally Concurg Opinion of 
 Commissioner Jon
 

Leibowitz, In re Rambus, Inc., Docket No. 9302, available at 

http://ww .:fc.gov/ os/ adjpro/ d9302/060802rambusconcurngopinionofcommissionerleibowitz. p 

df; Statement of Commissioner J. Thomas Rosch, "Perspectives on Thee Recent Votes: the 

Closing of the Adelphia Communications Investigation, the Issuance of the Valassis Complaint 

& the Weyerhaeuser Amicus Brief," before the National Economic Research Associates 2006 

Antitrst & Trade Regulation Seminar, Santa Fe, New Mexico (July 6,2006) at 5-12, available 

at http://ww .:fc.gOV /speeches/rosch/osch- NERA -Speech-July6- 2006. pdf
 

4 See, e.g., Congo Rec. 12,153 (1914) (statement of Sen. Robinson) ("unjust, inequitable or 

dishonest competition" proscribed), 51 Congo Rec. 12,154 (1914) (statement of 
 Sen. Newlands) 

(conduct that is "contrar to good morals" proscribed). 

5 Offcial Airline Guides v. FTC, 630 F.2d 920, 927 (2d Cir. 1980) ("OAG"). 

6 E.I. Du Pont v. de Nemours & Co. v. FTC, 729 F.2d 128, 139-40 (2d Cir. 1984) ("Ethyl"). 

5 
with patentees and with the mixed incentives generated when members may be positioned to pass 

on royalties that raise costs market-wide contract remedies may prove ineffective, and Section 5 

intervention may serve an unusually important role. 

N -Data's conduct, if allowed, would reduce the value of standard-setting by raising the 

possibilty of opportnistic lawsuits or threats arising from the incorporation of patented
 

technologies into the standard after a commitment by the patent holder. As a result, firms may be 

less likely to rely on standards, even standards that already exist. In the creation of new 

standards, standard-setting organizations may seek to avoid intellectual propert entirely,
 

potentially reducing the technical merit ofthose standards as well as their ultimate value to 

consumers. 

A mere depare from a previous licensing commitment is unlikely to constitute an unfair 

method of competition under Section 5. The commitment here was in the context of 

standard-setting. The Supreme Cour repeatedly has recognized the pro 
 competitive potential of 

standard-setting activities. However, because a standard may displace the normal give and take 

of competition, the Court has not hesitated to impose antitrst liability on conduct that threatens 

to undermine the standard-setting process or to render it anticompetitive.7 The conduct ofN-Data 

(and Vertical) at issue here clearly has that potentiaL. 8
 

2. Unfair Act or Practice
 

N-Data's efforts to unilaterally change the terms of 
 the licensing commitment also 

constitute unfair acts or practices under Section 5 of the FTC Act. The FTC Act states that 

"unfair or deceptive acts or practices in or affecting commerce(J are . . . unlawfuL." An unfairess 

claim under this part of Section 5 must meet the following statutory criteria: 

The Commission shall have no authority . . . to declare unlawful an act or practice 

on the grounds that such act or practice is unfair unless the act or practice causes 

or is likely to cause substantial injury to consumers which is not reasonably 

7 See Standard Sanitary Mfg. Co. v. United States, 226 U.s. 20,41 (1912); Alled Tube & 

Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1989); Am. Soc y of Mech. Engineers, 

Inc. v. Hydrolevel Corp., 456 U.S. 556, 571 (1982). 

8 It is worth noting 
 that, because the proposed complaint alleges stand-alone violations of 

Section 5 rather than violations of Section 5 that are premised on violations of the Sherman Act, 

this action is not likely to lead to well-founded treble damage antitrust claims in federal cour. 

See Herbert Hovenkamp, Federal Antitrst Policy at 588 (2d ed. 1999). 

6 
avoidable by consumers themselves and not outweighed by countervailing benefits 

to consumers or to competition.9 

The Commission may consider established public policies as evidence to be considered with all 

other evidence, though not as a primar 
 10 As the Eleventh basis for a determination of unfairess. 

1 1 the Commission has applied limiting Circuit emphasized in Orkin Exterminating Co. v. FTC, 


principles requirng a showing that (1) the conduct caused "substantial consumer injur," (2) that
 

injur is "not. . . outweighed by any countervailing benefits to consumers or competition that the
 

practice produces," and (3) it is an injur that "consumers themselves could not reasonably have 

avoided."12 

This Section 5 claim against the efforts of 
 Vertical and N-Data to unilaterally increase the 

price for the relevant technology by knowingly reneging on National's commitment meets these 

statutory criteria, and thus constitutes a violation of 
 Section 5's prohibition of unfair acts and practices. NWaywas chosen for the standard on the basis of 
 the assurances made by National to 

the IEEE 802.3 Working Group. Furher, the industr relied, at least indirectly, on National's 

assurances regarding pricing, and made substantial and potentially irreversible investments 

premised on those representations. After the standard became successful, and it became difficult, 

ifnot impossible, for the industr to switch away from the standard, Vertical and then N-Data 

took advantage of 
 the investments made by these firms by reneging on National's commitment. 

Because it is now no longer feasible for the industr to remove the technologies, the value that 

N-Data was able to extract from market paricipants was due to the opportnistic nature of its 

conduct rather than the value of the patents. 13 

Accordingly, an action against this conduct meets the criteria set forth in the statute and in 

Orkin. First, N-Data's reneging on its pricing commitments here involved "substantial consumer 

9 15 U.S.c. § 45(n) (1992).
 

io !d.
 

II Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1364 (11th Cir. 1988). 

12 See Letter from Federal Trade Commission to Senators Ford and Danforth (Dec. 17, 1980), 

reprinted in H.R. Rep. No. 156, Pt. 1, 98th Cong., 1st Sess. 33-40 (1983) available at 

htt://www.ftc.govlbcp/policystmt/ad-unfair.htm. appended to the Commission's decision in 

International Harvester, 104 F.T.C. at 949, 1061 (1984), and subsequently codified by Congress
 

at 15 U.S.C. § 45(n). 

13 The IEEE designed its rules to avoid just such a result. IEEE's stated purose for requesting 

letters of assurance was to avoid giving "undue preferred status to a company" and to ensure that 

the adoption of a technology would not be "prohibitively costly or noncompetitive to a 

substantial part of 
 the industr." 1994 IEEE Standards Operations Manual §6.3. 

7 
injur." The increase in royalties demanded by Vertical Networks and later N-Data could result
 

in milions of dollars in excess payments from those practicing the standard, not to mention the 

legal fees those firms might spend defending lawsuits.14 In addition, often in market-wide 

standard-setting contexts, the licensees have an incentive to pass along higher costs to the 

ultimate consumers who purchase the products.15 Thus, these end consumers who purchase 

products using N-Data's technology may face increased prices due to the higher royalties. 

Furher, those demands also have no apparent "countervailing benefit" to those upon whom 

demands have been made, ultimate consumers, or to competition so the second requirement is 

also met. With respect to the third requirement, both the Commission and the Eleventh Circuit in 

Orkin stated that consumers "may act to avoid injur before it occurs if 
 they have reason to 

anticipate the impending harm and the means to avoid it, or they may seek to mitigate the damage 

afterward if they are aware of 
 potential avenues to that end.,,16 Here, those who created the 

standard had no way to anticipate the repudiation of the price commitment before it occured and, 

apart from expensive litigation, those locked into the standard had no way to avoid the threatened 

injur posed by the demands that they faced. Thus, those practicing the standard were locked in 

to even a greater extent than the consumers in Orkin. Put simply, this is a form of what has been 

described as "patent hold-up." 

The facts alleged in the complaint here are similar to those found in the Commission's 

decision in Orkin, which was affrmed by the Eleventh Circuit.17 In that case, the respondent 

signed contracts with consumers to supply lifetime extermination services at a fixed annual 

renewal fee. Years later, the respondent unilaterally increased these fees. Consumers needing 

extermination services had no reason to anticipate Orkin's unilateral price increase and there was 

no evidence that they could contract with Orkin's competitors on terms similar to Orkin's initial 

terms. The Commission held, and the Eleventh Circuit agreed, that Orkin's unilateral price 

increase was an unfair act or practice under Section 5. Similarly, National made non-expirng 

royalty commitments that Vertical and N-Data later repudiated with unilateral increases, which 

14 The Commission has a "longstanding position that the statutory prohibition against 'unfair or 

deceptive acts or practices' includes practices that victimize businesspersons as well as those 

who purchase products for their own personal or household use," given that businesses "clearly 

do consume goods and services that may be marketed by means of deception and unfairess." 

Brief of 
 Federal Trade Commission as Amicus Curae at 3-4, 8-9, Vermont v. International 

Collection Service, Inc., 594 A.2d 426 (Vt. 1991) (citing cases); see also, e.g., 16 C.F.R. § 436.1 

(FTC rule protecting franchisees); United States Retail Credit Ass 'n v. FTC, 300 F .2d 212 (4th 

Cir. 1962) (deception involving business clients); United States Ass 'n of Credit Bureaus, Inc. v. 

FTC, 299 F.2d 220 (4th Cir. 1962) (same). 

15 Susan A. Creighton, Cheap Exclusion, 72 ANTITRUST LJ. 975,994 (2005). 

16 Orkin, 849 F.2d at 1365.
 

17 In re Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff'd, 849 F.2d 1354 (11th Cir. 1988). 

8 
the industr could not have reasonably anticipated before the market wide adoption of the
 

standard and which consumers had no chance of avoiding due to network effects and lock-in. 

Clearly, merely breaching a prior commitment is not enough to constitute an unfair act or 

practice under Section 5. The standard-setting context in which National made its commitment is 

critical to the legal analysis. As described above, the lock-in effect resulting from adoption of the 

NW ay patent in the standard and its widespread use are important factors in this case. In 

addition, the established public policy of supporting efficient standard-setting activities is an 

important consideration in this case.18 Similarly, it must be stressed that not all breaches of 

commitments made by owners of intellectual propert during a standard-setting process wil 

constitute an unfair act or practice under Section 5. For example, if the commitment were 

immaterial to the adoption of the standard or if those practicing the standard could exercise 

countermeasures to avoid injur from the breach, the statutory requirements most likely would 

not be met. Finally, it needs to be emphasized that not all depares from those commitments 

wil be treated as a breach. The Orkin cour suggested that there might be a distinction between 

an open-ended commitment and a contract having a fixed duration.19 That distinction does not 

apply here because the context of the commitment made it plain that it was for the duration of 

National's patents. However, most such commitments, including the one here, are simply to offer 

the terms specified. Indeed, those principles are reflected in the remedy set forth in the consent 

decree. 

The Proposed Consent Order 

The Proposed Consent Order prohibits N-Data from enforcing the Relevant Patents, 

defined in the order, unless it has first offered to license them on terms specified by the order. 

The terms of that license follow from those promised by National Semiconductor in its letter of 

June 7, 1994, to the IEEE. Specifically, N-Data must offer a paid-up, royalty-free license to the 

Relevant Patents in the Licensed Field of Use in exchange for a one-time fee of$l,OOO. The form 

of this license is attached as Appendix C to the order. The Licensed Field of Use is defined in the 

license as the "use ofNWay Technology to implement an IEEE Standard," and this includes 

"optimization and enhancement features" that are consistent with such use. NW ay Technology is 

defined in the license to have the same meaning as it did in the June 7, 1994 letter, and the license 

gives examples of documents describing the use ofNWay Technology. 

The Commission recognizes that some firms may inadvertently allow the $1,000 offer 

from N-Data to languish. Therefore, if an offeree has failed to accept such an offer within 120 

18 See Alled Tube & Conduit Corp. v. Indian Head, Inc., 486 u.s. 492, 500-01 (1998) 

private associations promulgating safety 

standards). 

(regarding the potentialprocompetitive advantages of 


19 Orkin, 849 F.2d at 1361.
 

9 
days, the Proposed Consent Order allows N-Data to sue to enforce the Relevant Patents. At the 

time N-Data fies suit, however, it must make a second offer. This second offer provides a 

prospective licensee with an opportnity to accept the patent license specified by the order in 

retu for a payment ofthir-five thousand dollars ($35,000). The requirement that the second
 

offer be delivered in the context oflitigation gives N-Data an incentive to pursue patent 

enforcement only against companies over which it has a reasonable likelihood of prevailing in 

cour. It wil also ensure that the second offer will receive the full attention of 
 knowledgeable counsel for the offeree. A $35,000 license fee wil offset some ofN-Data's costs of 
 litigation, 

and it wil discourage recipients of an initial offer from simply waiting to be sued, and then 

accepting the first offer. The offeree's time to accept the second offer expires with the time to 

file a responsive pleading to the fiing that accompanies the second offer. After that, the amount 

that N-Data can collect from an accused infrnger is not limited by the order. 

The Proposed Consent Order requires N-Data to distribute copies of 
 the complaint and the Proposed Consent Order to specified persons. It also prohibits N-Data from transferrng any 
 of 

the Relevant Patents, except to a single person who has agreed to be bound by the Proposed 

Consent Order and by the patent licenses formed thereunder. The Proposed Consent Order also 

contains standard reporting, notification and access provisions designed to allow the Commission 

to monitor compliance. It terminates twenty (20) years after the date it becomes finaL. 

10 
EXHIBIT 7
 
STATEMENT OF THE FEDERAL TRADE COMMISSION 

In the Matter of 
 Negotiated Data Solutions LLC 

File No. 0510094 

The Federal Trade Commission ("Commission") has voted to issue a Complaint
 

against Negotiated Data Solutions LLC ("N-Data") and to accept the proposed consent
 1 The Complaint in this matter alleges that N-Data reneged on a agreement settling it. 


prior licensing commitment to a standard-setting body and thereby was able to increase 

the price of an Ethernet technology used by almost every American consumer who owns 

a computer. Based on the facts developed by staff during the investigation, we find 

reason to believe that this conduct violated Section 5 of the FTC Act. 2 

The impact of Respondent's alleged actions, if not stopped, could be enormously 

harmful to standard-setting.3 Standard-setting organization participants have long 

worred about the impact of firms failng to disclose their intellectual propert until after 

industry lock-in. Many standard-setting organizations have begun to develop policies to 

deal with that problem. But ifN-Data's conduct became the accepted way of doing 

business, even the most diligent standard-setting organizations would not be able to rely 

on the good faith assurances of respected companies. The possibility exists that those 

companies would exit the business, and that their patent portfolios would make their way 

to others who are less interested in honoring commitments than in exploiting industry 

lock-in.4 Congress created the Commission precisely to challenge just this sort of 

conduct. 

To prohibit such unacceptable behavior, the Commission today accepts a 

proposed consent agreement premised on a Complaint that identifies two separate 

violations. First, we find that N-Data's alleged conduct is an unfair method of 

competition. Second, we find that this conduct is also an unfair act or practice. 

There is little doubt that N-Data's conduct constitutes an unfair method of 

competition.5 The legislative history from the debate regarding the creation of the 

1 Commissioners Harbour, Leibowitz, and Rosch support the issuance of the Complaint and 

proposed consent agreement and join in this statement. 

2 Section 5 of the FTC Act prohibits "unfair methods of competition in or affecting commerce, 

and unfair or deceptive acts or practices in or affecting commerce." 15 USC § 45(a)(l). 

3 One dissent recites a different set of 
 facts than those alleged in the Complaint. We do not agree 

with that version of the facts. Rather, we believe that staffs investigation, as described in the Analysis to 

Aid Public Comment, accurately depicts the facts in this case. 

4 See generally Fed. Trade Comm'n, To Promote Innovation: The Proper Balance olCompetition 

and Patent Law and Policy ch. 2 at 3 i, n. 220; ch. 3 at 38-41, available at 

htt://www.ftc.gov/os/2003/l0/innovationrpt.pdf(2003) (conduct by "non-producing entities" - sometimes 

referred to as 'patent trolls' - may harm consumers when such firms force manufacturers to agree to 

licenses after the manufactuers have sun substantial investments into technologies). 

5 See, e.g., E.!. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984) ("Ethyl'); 

Offcial Airline Guides v. FTC, 630 F.2d 920 (2d Cir. 1980). The conduct falls squarely within the 

parameters of cases like Ethyl. One dissent quotes a passage from the Ethyl decision; even that excerpt 
Commission is replete with references to the tyes of conduct that Congress intended the 

Commission to challenge. See, e.g., 51 Congo Rec. 12,153 (1914) (statement of Sen. 

Robinson) ("unjust, inequitable or dishonest competition"), 51 Congo Rec. 12,154 (1914) 

Sen. Newlands) (conduct that is "contrary to good morals"). The Supreme 

Court apparently agrees as it has found that the standard for "unfairness" under the FTC 

Act is "by necessity, an elusive one, encompassing not only practices that violate the 

Sherman Act and the other antitrst laws, but also practices that the Commission 

(statement of 


determines are against public policy for other reasons." F.T.C v. Ind. Fedn of 
 Dentists, 

476 U.S. 477,454 (1986); see also F.T.C v. Sperry & Hutchinson Co., 405 U.S. 233,242 

(1972) (FTC has authority to constrain, among other things "deception, bad faith, fraud or 

oppression"). 

We also have no doubt that the tye of 
 behavior engaged in by N-Data harms 

consumers. The process of establishing a standard displaces competition; therefore, bad 

faith or deceptive behavior that undermines the process may also undermine competition 

in an entire industr, raise prices to consumers, and reduce choices.6 We have previously 

makes clear that a Section 5 violation can be found when there are "some indicia of oppressiveness" such 

as "coercive...conduct." For the reasons stated in the Analysis to Aid Public Comment, we find reason to 

believe that Respondent engaged in conduct that was both oppressive and coercive when it engaged in 

efforts to exploit licensees that were locked into a technology by the adoption of a standard. We believe 

the Analysis to Aid Public comment adequately describes the limiting principles applicable here. See 

generally Statement of Commissioner J. Thomas Rosch, Perspectives on Three Recent Votes: the Closing 

o/the Adelphia Communications Investigation, the Issuance o/the Valassis Complaint & the Weyerhaeuser 

Amicus Brief, before the National Economic Research Associates 2006 Antitrst & Trade Regulation 

Seminar, Santa Fe, New Mexico (July 6, 2006) at 5~12, available at 

htt://www .ftc. gov /speeches/rosch/osch-NERA -Speech-July6- 2006.pdf; Concuring Opinion of 

Commssioner Jon Leibowitz, In re Rambus, Inc., Docket No. 9302, available at 

htt://www .ftc. gov/os/adioro/d9302/060802rambusconcurgopinionofcommissionerleibowitz.pdf. 

One dissent cites the Areeda and Hovenkamp antitrst treatise as well as several other sources to 

mistaenly suggest that there is a "scholarly consensus" that an unfair method of competition carot be 

found under Section 5 unless there is liability under the antitrst laws. Most of the sources cited by the 

dissent, however, actually support the Analysis to Aid Public Comment, which notes that, although Section 

5 extends beyond the antitrst laws, there are limitations on its reach. Indeed, Professor Hovenkarp has 

explicitly acknowledged that there is a lack of consensus on the scope and application of Section 5. See 

HERBERT HOVENKMP, FEDERA ANTITRUST POLlCY at 596-97 (3d ed. 2005). Professor Hovenkarp states 

that "(t)here are two views about the wisdom of the FTC's use of Section 5" and goes on to discuss "(A)n 

alternative view, pedectly consistent with the proposition that the FTC's antitrst concern should be limited 

to identifying practices that are economically anticompetitive." Under that alternative view, it is 

appropriate to apply "the FTC Act to practices that do not violate the other antitrst laws. . . when (1) the 

practice seems anticompetitive but is not technically covered by the antitrst laws; and (2) the social cost of
 

an error seems to be relatively small." The social cost of an error here is small given the natue of 
 the 

remedy and the low likelihood that a Commission consent order will be followed by a valid antitrst-based 

class action suit. See id. ("Findings of violations of the FTC Act that are not also antitrst violations wil
 

not support subsequent private actions for treble damages"). We nevertheless recognize Commissioner 

Kovacic's concern that FTC "unfair methods" cases may support private actions based on state law, and 

join him in encouraging comment on that issue. 

6 See Alled Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1989); Am. Soc'y of 

Mech. Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556,571 (1982); Standard Sanitar Mfg. Co. v. 

United States, 226 U.S. 20, 41 (1912). See generally Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 

310-314 (3d Cir. 2007). 

2 
noted that "(i)ndustr standards are widely acknowledged to be one ofthe engines 

driving the modem economy.',7 Conduct like N-Data's - which undermines standardsetting - threatens to stall that engine to the detrment of all consumers. 

N-Data's conduct is also an unfair act or practice under Section 5(n) ofthe FTC 

Act and Orkin Exterminating Co., 108 F.T.C. 263 (1986), aftd, 849 F.2d 1354 (11th Cir. 

1988). This Commission - unanimously - has often found an unfair act or practice 

proscribed by Section 5 in conduct that victimizes businesses (as well as individuals) who 

are consumers. The dissent would distinguish those cases on the ground that the 

businesses here are all "large, sophisticated computer manufacturers" who are able to 

protect themselves. There is no basis for that distinction in Section 5. In any event, 

moreover, there is no basis in the record of this investigation for describing all of the 

"locked in" licensees that way. Similarly, as discussed in detail in the Analysis to Aid 

Public Comment, no meaningful distinction can be drawn between the circumstances in 

Orkin, where the respondent sought to exploit consumers who were "locked into" long 

term contracts, and the unique circumstances of this case, where licensees are "locked 

into" the standard containing technology controlled by this Respondent. 

We recognize that some may criticize the Commission for broadly (but 

appropriately) applying our unfairness authority to stop the conduct alleged in this 

Complaint. But the cost of ignorig this particularly perncious problem is too high. 

Using our statutory authority to its fullest extent is not only consistent with the 

Commission's obligations, but also essential to preserving a free and dynamic 

marketplace. 

7 U.S. Dep't of Justice & Fed. Trade Comm'n , Antitrst Eriorcement And Intellectual Property 

Rights: Promoting Innovation And Competition 33, available at 

http://ww .ftc. gov/rep0l1s/innovationIP040 I 01 PromotinglnnovationandCompetitiom:pt0704.pdf (2007). 

3 
EXHIBIT 8
 
Dissenting Statement of Chairman Majoras 

In the Matter of 
 Negotiated Data Solutions LLC, File No. 0510094 

I respectfully dissent from the decision to lodge a Complaint in this matter and to accept 

the settlement described in the majority's Analysis of 
 Proposed Consent Order to Aid Public 

Comment ("Analysis"). The facts do not support a determination of antitrst liability. The 

preconditions for use of stand-alone Section 5 authority to find an "unfair method of 

competition" are not present. And the novel use of our consumer protection authority to protect 

large corporate members of a standard-setting organization ("SSO") is insupportable. 

This case presents issues that appear on first inspection to resemble those in our line of 

standard-setting "hold up" challenges, including Unocal, i Dell,2 and Rambus. 3 As we and the 

Justice Department have explained jointly, "multiple technologies may compete to be 

incorporated into the standard under consideration,,4 by an SSO. Once a technology has been 

selected and the standard that incorporates the technology has been specified, however, the 

standard's adopters often wil face significant relative costs in switching to an alternative 

standard. "(T)he chosen technology may lack effective substitutes precisely because the SSO 

chose it as the standard. Thus,... the owner of a patented technology necessary to implement 

the standard may have the power to extract higher royalties or other licensing terms that reflect 

the absence of competitive alternatives. Consumers of the products using the standard would be 

harmed ifthose higher royalties were passed on in the form of 
 higher prices.',5 In an effort to 

avoid the hold-up problem, some SSOs take measures to protect their members, such as 6 imposing patent disclosure rules or securing agreement on licensing terms. 


In re Union Oil Company of California, 2004 FTC LEXIS 115 (FTC 2004) ("Unoca1"), available 

at htt://www .ftc.gov/os/adipro/d9305/040706commissionopinion.pdf.
 

2 In re Dell, 121 F.T.C. 616 (1996). 

In re Rambus, FTC Dkt. No. 9302 (Liability Opinion, July 31, 2006), appeal pending, Docket 

Nos. 07-1086, 07-1124 (D.C. Cir. 2007). 

4 U.S. Deparent of Justice and Federal Trade Commission, ANTITRUST ENFORCEMENT AND 

INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOV A nON AND COMPETITON (Apri12007) at 35-36 

(hereinafter "DOJ/FTC Intellectual Propert Report"), available at 

htt://ww .ftc.gov/reports/innovationI040 1 0 1 PromotingInnovationandCompetitionrt0704.pdf. 

Id. at 36. See also Chairman Deborah Platt Majoras, Recognizing the Procompetitive Potential of 

Royalty Discussions in Standard Setting, Remarks before the Stanford University Conference on 

Standardization and the Law: Developing the Golden Mean for Global Trade (September 2005), available 

at htt://www .ftc.gov/speeches/maioras/050923stanford. pdf.
 

6 DOJ/FTC Intellectual Propert Report, supra note 4, at 36. 
This case departs materially from the prior line, however, in that there is no allegation 

that National engaged in improper or exclusionary conduct to induce IEEE to specify its NWay 

technology in the 802.3u standard. No one contends that National deceived SSO members at the 

time of its initial 
 licensing offer in 1994. Further, from the time National submitted its letter of 

assurance in 1994 and at least until 2002, some patent holders changed or clarified the terms of 

their letters of assurance - even after the relevant standard was approved. And although a new 

IEEE bylaw, passed in January 2002, purorted to make patent letters irrevocable, it did not 

address whether it was to apply retroactively. When Vertical submitted its 2002 proposal under 

which it would offer its entire patent portfolio that originated with National for license on 

reasonable and nondiscriminatory terms, the IEEE's Patent Administrator did not object to the 

departre from the $1,000 commitment, even while requesting and securing specific changes to 

Vertical's proposaL. The IEEE then appeared to have accepted the revised proposal by posting 

Vertical's letter on its web site along with National's June 7, 1994 letter. 

There is also a substantial question as to whether N-Data enjoyed measurable market 

power, even with the adoption of the IEEE standard. Under the terms of 
 the standard, the NWay 

technology was an optional technique. Although National in 1994 had offered to grant a paidup, royalty-free license to the technology for $1,000 to anyone seeking to practice the standard, 

no company had sought to accept the offer until after publication of the 2002 revision on the 

IEEE web site. And despite ongoing licensing efforts by National's successors, Vertical and NData, only one company paid materially more than the originally-quoted $1,000 for rights to the 

NWay technology. 7 Most users evidently have preferred to infrige, running the risk of 

presumably minimal patent damages that they might face at the outcome of litigation. 

Thus, the facts do not support antitrst liability here. 

The majority evidently agrees that respondent's conduct does not amount to improper 

acquisition or maintenance of monopoly power so as to fall within the ambit of Section 2 of the 

Sherman Act. Instead, the majority seeks to find liability purely under Section 5 of the FTC Act. 

This is not advisable as a matter of policy or prosecutorial discretion. 

The majority's first theory is that N-Data engaged in an unfair method of competition. 

Although Section 5 enables the Commission to reach conduct that is not actionable under the 

Sherman or Clayton Acts, we have largely limited ourselves to matters in which respondents 

took actions short of a fully consummated Section 1 violation (but with clear potential to harm 

Paragraph 31 of the Complaint alleges that "several companies" entered into license agreements 

that have produced fees "far in excess" of $1,000 per company. In fact, thee companies entered into 

license agreements (with Vertical) for the patents. N-Data has never received royalties or fees from those 

agreements, nor, as I understand it, has it collected any royalties for the relevant patents on terms 

inconsistent with those offered in the 1994 letter. N-Data itself has initiated suit against one company, 

with which it had a dispute involving numerous patents other than those at issue in this case. 

2 

7 
competition), such as invitations to collude.8 This limitation is partly self-imposed, reflecting 

the Commission's recognition of 
 the scholarly consensus that finds the Sherman and Clayton 

Acts, as currently interpreted, to be suffciently encompassing to address nearly all matters that 

properly warrant competition policy enforcement.9 But the limitation also reflects the insistence 

of the appellate cours that the Commission's discretion is bounded and must adhere to limiting 

principles. In E.I. du Pont de Nemours & Co. v. FTC, for example, the Second Circuit stated: 

"( w )hen a business practice is challenged by the Commission, even though, as here, it does not 

violate the antitrust or other laws and is not collusive, coercive, predatory or exclusionary in 

character, standards for determining whether it is 'unfair' within the meaning of § 5 must be 

formulated to discriminate between normally acceptable business behavior and conduct that is 10 Writing in the context of a challenge to parallel conduct that unreasonable or unacceptable." 


8 See, e.g., In re Valassis Communications, Inc., Docket No. C-4160, FTC File No. 051 008 

(Complaint), available at http://ww.ftc.gOv/os/caselistl0510008/05l 0008c4160V alassisComplaint.pdf. 

In its Analysis, the Commission explained that competition would not be adequately protected if antitrst 

enforcement were directed only at consumated cartel agreements. The Commission fuer explicated 

the several 
 legal (including precedent) and economic justifications that support the imposition of liability 

upon firms that communicate an invitation to collude where acceptance canot be proven. Prior to the 

Valassis case, the Commission entered into consent agreements in several cases alleging that an 

invitation to collude - though unaccepted by the competitor - violated Section 5 of the FTC Act. 

MacDermid, Inc., Docket No. C-3911, FTC File No. 991 0167 (Decision & Order), available at 

htt://ww.ftc.gov/os/2000/02/macdermid.do.htm; Stone Container Corp., 125 F.T.C. 853 (1998); 

Precision Moulding Co., 122 F.T.C. 104 (1996); YKK (USA) Inc., 116 F.T.C. 628 (1993); A.E. Clevite, 

Inc., 116 F.T.C. 389 (1993); Quality Trailer Products Corp., 115 F.T.C. 944 (1992). 

9 See, e.g., 5 JULIAN O. YON KALINOWSKI, PETER SULLIVAN & MAUREEN MCGUIRL, ANTITRUST 

LAWS AND TRADE REGULATION, § 77.02 at 77 -3 (2007) ("the prevailing view is that there are litations 

on Section 5' s applicability to conduct which stretches beyond the letter of (the Shennan or Clayton 

Acts)."); 2 PHILIP AREEDA & HERBERT HOYENKAMP, ANTITRUST LAW ~ 302(h) (2006) ("Apar from 

possible historical anachronisms in the application of those statutes, the Sherman and Clayton Acts are 

broad enough to cover any anti-competitive agreement or monopolistic situation that ought to be attacked 

whether 'completely full blown or not."'); Richard A. Posner, The Federal Trade Commission: A 

Retrospective, 72 ANTITRUST L.J. 761,766 (2005) ("It used to be thought that 'unfair methods of 

competition' swept fuer than the practices forbidden by the Sherman and Clayton Acts, and you find
 

this point repeated occasionally even today, but it is no longer tenable. The Shennan and Clayton Acts 

have been interpreted so broadly that they no longer contain gaps that a broad interpretation of Section 5 

of the FTC Act might be needed to fill."); John F. Graybeal, Unfair Trade Practices, Antitrust And 

Consumer Welfare In North Carolina, 80 N.C. L. REv. 1927, 1949 (2002) ("Undoubtedly, the FTC today 

wil proceed with great caution under section 5 to claim as an unfair method of competition any conduct 

that does not violate the Shennan or Clayton Acts."). See also ABA SECTION OF ANTITRUST LAW, 

ANTITRUST LAW DEVELOPMENTS (6th ed. 2007) ("FTC decisions have been overturned despite proof of 

anticompetitive effect where the cours have concluded that the agency's legal standard did not draw a 

sound distinction between conduct that should be proscribed and conduct that should not."). 

10 729 F.2d 128, 138 (2d Cir. 1984). 

3 
did not arise from an agreement but that facilitated oligopolistic coordination, the Second Circuit 

adopted this test: 

In our view, before business conduct in an oligopolistic industr may be labelled "unfair" 

within the meaning of § 5 a minimum standard demands that, absent a tacit agreement, at 

least some indicia of oppressiveness must exist such as (1) evidence of anticompetitive 

intent or purose on the par of the producer charged, or (2) the absence of an
 

independent legitimate business reason for its conduct. . .. In short, in the absence of 

proof of a violation ofthe antitrust laws or evidence of collusive, coercive, predatory, or
 

exclusionary conduct, business practices are not "unfair" in violation of § 5 unless those 

practices either have an anti 
 competitive purpose or cannot be supported by an
 

independent legitimate reason. i I
 

In its Analysis, the majority extends the du Pont formulation to the monopolization 

family, asserting that respondent's conduct was "coercive" and "oppressive" and had an "adverse 

impact on prices for autonegotiation technology(.)"12 These assertions are impossible to prove 

on the evidence we have. N-Data asserts that its renegotiation of its licensing terms was 

motivated by nothing other than an independent, business reason - that is, the aim of collecting 

royalties for a new bundle of intellectual propert rights on reasonable and non-discriminatory 

terms. Even ifN-Data were motivated by a desire to strike a better bargain than National made 

several years earlier, that alone should not be considered a competition-related offense. If the 

majority's theory is that the evasion of contractual price constraints trggers liability under 

Section 5 without a concurrent determination that the conduct violates the Sherman Act, then we 

are headed down a slippery slope, and I take no comfort from the majority's representation to the 

contrary. Parties often enter into contractual commitments involving asset-specific investments, 

limiting 

principle that indicates when an action - taken in the standard-setting context or otherwise - wil 

be considered an "unfair method of competition." 

creating the potential for opportnism. The majority has not identified a meaningful 


Pursuing a second theory, the majority invokes consumer protection doctrine to find that 

respondent has engaged in an "unfair act or practice" in violation of Sections 5(a) and (n) of the 13 Section 5(n) provides a clear limitation of 


FTC Act. 
 the Commission's authority: "(t)he 

II ¡d. at 139-140. 

12 Analysis at 5. 

13 In Rambus, the Commission drew upon its experience with the law regarding deceptive acts or 

practices, which has been developed largely in consumer protection contexts, to inform our analysis of 

deception before an SSO as part of an exclusionary course of conduct. Rambus, supra note 3, at 29-30. 

We did so, however, within a framework based on Sherman Act jursprudence, recognizing, inter alia, the 

need to examine competitive effects. ¡d. at 28-31. The majority's extension of our authority over unfair 

acts or practices, which Congress has specifically limited in Section 5(n), raises altogether different 

issues. 

4 
Commission shall have no authority under this section or section 57a of this title to declare 

unlawful an act or practice on the grounds that such act or practice is unfair unless the act or 

practice causes or is likely to cause substantial injury to consumers which is not reasonably 

avoidable by consumers themselves and not outweighed by countervailing benefits to consumers 

or to competition.',14 The evidence simply does not support the requisite findings. 

In particular, finding "substantial consumer injury" here requires the majority to treat 

large, sophisticated computer manufacturers as "consumers." I do not agree with such a 

characterization, and I have serious policy concerns about using our consumer protection 

authority to intervene in a commercial transaction to protect the alleged "victims" here. The 

Analysis accurately states that the FTC has used its authority under Section 5 to protect small 

businesses against unfair acts and practices. We have taken care to exercise this authority 

judiciously, however, to protect small businesses, non-profits, churches, and "mom and pop" 

operations 15 that lack the resources and, in some cases, the experience or understanding to 

defend themselves adequately against fraud. Indeed, certain of these small business owners, 

non-profit volunteers, and clergy had personally guaranteed the contracts at issue. There is a 

clear qualitative difference between these entities and the computer manufacturers that the 

16 majority treats as injured consumers in this matter. 


14 15 U.S.C. § 45(n) (2000). See also International Harvester Co., 104 F.T.C. 949, 1061 (1984). 

15 See, e.g., FTC v. Websource Media, LLC, No. H-06-1980 (S.D. Tex. filed June 12,2006) (unfair 

practice of "craming" unauthorized charges onto the telephone bils of small businesses); FTC v. 

Certifed Merchant Services, Ltd., No. 4:02CV44 (E.D. Tex. filed Februar 11,2002) (unfair practice of 

unilaterally inserting additional pages that describe substantial, undisclosed charges into credit card 

processing contracts with small business merchants); FTC v. IFC Credit Corp., No. 07C3155 (N.D. Il. 

filed June 6, 2007) (unfair practice of accepting and collecting on invalid, fraudulently induced equipment 

contracts with small businesses and religious and other nonprofit organizations). The majority cites to the 

Franchise Rule as another example of the Commission using its Section 5 consumer protection authority 

to protect small businesses from deceptive practices. While the Franchise Rule, which requires certin 

disclosures prior to the sale of a franchise, sometimes protects businesses, it tyically protects individual 

consumers that are purchasing franchises rather than sophisticated corporations. In adopting amendments 

to the Franchise Rule earlier this year, the Commission exempted from the Rule's coverage several 

categories of sophisticated investors. 16 C.F.R. § 436.8(a). 

16 Some may argue that the Commission has already made the policy decision to treat businesses as 

consumers, and that there is no rational distinction between the companies we have protected and large 

corporations. I disagree. Although it is important to draw lines, there is such a vast difference between 

sophisticated corporations, on the one hand, and storefront shops, on the other, that we do not need to 

draw a bright line to distinguish this matter from previous cases the Commission has brought to protect 

small businesses. 

5 
As I stated above, I am not convinced that any part was injured. And certainly the 

evidence does not support the finding that the alleged injur here was "not reasonably avoidable" 

(assuming, of course, that injur can be made out at all). The membership of IEEE includes 

computer networking equipment manufacturers and telecommunications companies. IEEE knew 

that its members sometimes made or attempted to make changes in patent commitment letters, 

and it could have acted sooner to protect its members from potentially adverse changes to 

commitment letters. IEEE also could have objected to Vertical's revisions, but instead it 

accepted and published them without objection. Moreover, any individual company could have 

entered into a binding agreement with National, but none sought timely to accept the 1994 

royalty offer. 

In re Orkin Exterminating Co., Inc.,17 on which the majority relies, is fundamentally 

different from the instant matter. Orkin unilaterally increased its fees for more than 200,000 

consumers, all of whom had signed written contracts that could readily be understood to be 18 If consumers binding and that committed to a lifetime fee strcture that would not increase. 


paid the amount specified in their contracts, Orki's policy was to return the payments. Thus, 

unlike the situation here, Orkin involved both (a) large numbers of 
 individual consumers, and (b) 

widespread injur that the consumers could not reasonably avoid.
 

For all of 
 these reasons, I respectfully dissent. 

17 108 F.T.C. 263 (1986), aff'd, FTC v. Orkin, 849 F.2d 1354 (11th Cir. 1988). 

18 Orkin pamphlets echoed this commitment, promising that the annual fee would "never increase." 

108 F.T.C. at 356. 

6 
EXHIBIT 9
 
CONCURRNG OPINION OF COMMISSIONER JON LEIBOWITZ 

IN THE MATTER OF RABUS, INC. 

DOCKET NO. 9302 

I. INTRODUCTION
 

Rambus's deception of JEDEC and its members injured competition and consumers 

alike. The company exploited the DRA standard-setting process for its own anticompetitive 

ends. JEDEC's members - including Rambus - understood that this information was to be 

gathered and shared to benefit the industry and its consumers as a whole, yet Rambus effectively 

transmogrfied JEDEC's procompetitive efforts into a tool for monopolization. As detailed in 

the Commission's Opinion, such conduct meets all the requisite elements of a Section 2 

violation. 

It would be equally apt, though, to characterize Rambus' s conduct as an ''unfair method 

of competition" in violation of Section 5 of the FTC Act. Section 5 was intended from its 

inception to reach conduct that violates not only the antitrust laws! themselves, but also the 

policies that those laws were intended to promote. At least three of these policies are at issue 

here. From the FTC's earliest days, deceitful conduct has fallen within Section 5's province for 

its effects on competition, as well as on consumers? Innovation - clearly at issue in this case - is 

indisputably a matter of critical antitrst interese In addition, joint standard-setting by rivals has 

long been an "object(J of antitrst scrutiny" for its anticompetitive uses, notwithstanding its great 

potential also to yield efficiencies.4 In this case, Rambus's deceptive conduct distorted joint

15 U.S.C. § 12 (a) (2006). The antitrust laws include the Sherman Act and the Clayton Act (as 

modified by the Robinson-Patman Act). The FTC Act is not an antitrust law. 

2 Cal. Dental Ass'n v. F.T.C., 526 U.S. 756, 772 n.9 (1999) ("That false or misleading advertising 

has an anti competitive effect, as that term is customarily used, has been long established). Cf F.T.C. v. Algoma 

Lumber Co., 291 U.S. 67,79-80 (1934) (finding a false advertisement to be unfair competition)."; F.T.C. v. Winsted 

Hosiery, 258 U.S. 483 (1922) (per Brandeis, J.) (holding that false labeling that misled consumers constituted unfair 

competition against competitors). See also F.T.C. v. Gratz, 253 U.S. 421,427 (1920) (holding that "unfair methods 

of competition" do not apply to practices that were "never heretofore regarded as opposed to good morals because 

characterized by deception, bad faith, fraud, or oppression, or as against public policy because of their dangerous 

tendency unduly to hinder competition or create monopoly"). Notably, the Gratz view of Section 5's scope was later 

abandoned as too narrow. F.T.C. v. R.F. Keppel & Bros., Inc., 291 U.S. 304 (1934). 

3 See generally FED. TRADE COMM'N, TO PROMOTE INNOVATION: THE PROPER 

BALANCE OF COMPETITION AND PATENT LAW AND POLICY (Oct. 2003), available at 

http://www .ftc .gov /os/2 003!l 0/ inn ovati on srpt .pdf. 

4 See, e.g., Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500-01 (1988) (holding 

that "private standard-setting associations have traditionally been objects of antitrust scrutiny" because of their 

potential use as a means for anti competitive horizontal agreements, but that the associations' "potential for 

i 
standard-setting decisions and innovation investments in ways that seriously injured the 

operations of the competitive market to the detriment of consumers; it thereby transgressed the 

policies and spirit of the antitrst laws in all three respects. While respondent's behavior before 

JEDEC might well have been challenged solely 
 as a pure Section 5 violation, Complaint Counsel 

did not litigate this theory before the administrative law judge. Thus, I write separately to discuss 

and reemphasize the broad reach and unique role of Section 5. 

I also address the scope of Section 5 because some commentators have misperceived the 

Commission's authority to challenge "unfair methods of competition," incorrectly viewing it as 

limited, with perhaps a few exceptions, to violations of 
 the Sherman and Clayton Acts.5 Others 

are unclear just how far Section 5 can reach beyond the antitrst laws.6 Regardless of the reasons 

for these cramped or confused views, a review of Section 5's legislative history, statutory 

language, and Supreme Court interretations reveals a Congressional purpose that is 

unambiguous and an Agency mandate that is broader than many realize. 

The Commission, in my view, should place greater emphasis on developing the full range 

of its jurisdiction and making it more clear to the bar, the public, the business community, and 

potential antitrst malefactors what Section 5 embraces and what it does not. Although the 

Commission has not left fallow its Section 5 jurisdiction to challenge conduct outside the 

antitrust laws, neither has the Agency fully exercised or explained it. In discussing Section 5 in 

the context of Ram bus, I hope to encourage the Commission (and its staff) to develop further and 

employ more fully this critical and unique aspect of our statutory mandate. If we do, benefit wil 

accrue both to consumers and to competition. 

II. THE MADATE UNDERLYING SECTION 5
 

A. Legislative History 

procompetitive benefits" has influenced "most lower courts to apply rule-of-reason analysis to product standardsetting by private associations"). See also TIMOTHY J. MURIS, BUREAU OF CONSUMER PROT., FED. 

TRADE COMM'N, STAFF REPORT ON THE STANDARDS AND CERTIFICATION RULE 9 (1983) ("Standard 

setting can be misused to exclude competitors unreasonably, injuring consumers. The Commission can pursue 

anticompetitive restraints as unfair methods of competition, using a rule of reason approach, or as unfair acts or 

practices under the Commission's unfaimess protocol, in each case weighing the benefits and costs of the challenged 

activity."). 

See, e.g., Richard A. Posner, The Federal Trade Commission: A Retrospective, 72 ANTITRUST 

L.J. 761, 765-66 (2005) ("It used to be thought that 'unfair methods of competition' swept further than the practices 

forbidden by the Sherman and Clayton Acts, and you find this point repeated occasionally even today. . . . "). 

6 Antitrust Law Special Comm., Am. Bar Ass'n, REPORT ON THE ROLE OF THE FEDERAL TRADE
 

COMMISSION, 58 ANTITRUST L.J. 53,63-64 n.lI (1989) (observing that "(a)lthough it is well established that 

Section 5's ban on 'unfair methods of competition' permits the FTC to proscribe conduct not reached by prevailing 

interpretations of the Sherman and Clayton Acts, there is a debate about how far Section 5 reaches beyond those 

Acts."). 

2 
Debates regarding the need for, and nature of, a "federal trade commission" roiled for 

more than a decade prior to its creation in 1914.7 These debates involved four of the most 

brillant minds of 
 the time - Roosevelt, Taft, Wilson, and Brandeis - and coalesced into a 

significant issue in the election of 1912.8 One of 
 the flashpoint events that led Congress to act 

was the Standard Oil case, in which the Supreme Court in 1911 adopted "rule of reason" analysis 

for the Sherman Act's prohibition on "restraints of trade.'09 Many within and outside of Congress 

viewed the Supreme Court's reasonableness test as judicial invention - what some more recently 

would term "legislat(ing) from the bench"IO - that threatened both to undermine Congress's aim 

in passing the Sherman Act and to yield inconsistent applications from court to court.1I 

Congress's biparisan reaction was to create an administrative agency with antitrst
 

expertise, an enforcement mandate more expansive than that of the antitrust laws, and the 

strcture and flexibilty to identify, analyze, and challenge new forms of "unfair methods of 

competition" as they developed.12 Legislators in the Congressional debates repeatedly expressed 

these goals. Senator Robinson, for example, indicated that "unfair methods of competition" 

encompassed practices that constituted "unjust, inequitable, or dishonest competition."13 Senator 

Pomerene and Senator Thomas both stated that the proposed Act would authorize the 

Commission to determine whether certain forms of 
 business conduct constituted unfair methods 

of competition, regardless of whether that conduct involved a restraint of trade.14 Senator 

Newlands, the Chairman of the Senate Commerce Committee, responded to concers about this 

process by explaining that "(y)ou can not (sic) take a body of five men, intellgent men, 

7 The FTC's predecessor, the Bureau of Corporations, was created in 1903.
 

Marc Winerman, The Origins of 
 the FTC: Concentration, Cooperation, Control, and 

Competition, 71 ANTITRUST L.J. 1 (2003) (providing the most thorough examination of the FTC's creation and the 

competing forces and philosophies that gave the agency its ultimate form and powers). See also Robert Lande, 

Wealth Transfers as the Original and Primary Concern of Antitrust: The Elliciency Interpretation Challenged, 34 

HASTINGS L.J. 65 (1982); Neil Averitt, The Meaning of 'Unfair Methods of Competition' in Section 5 of the Federal 

Trade Commission Act, 21 B.C. L. REV. 229 (1980). 

9 Standard Oil Co. v. U.S., 221 U.S. 1 (1911). 

10 See, e.g., 140 CONG. REC. 10,109 (1994) (statement of Sen. Thurmond during Senate hearing on 

nomination of Justice Breyer). 

11 See, e.g., 47 CONGo REC. 1,225 (191l) (statement of Sen. Newlands). 

12 Another, related Congressional response, also in 1914, was passage of the Clayton Act, 15 U.S.C. 

§ 12, which, inter alia, contained specific provisions regarding discriminatory pricing, tying, stock acquisitions, and 

interlocking directorates. 

13 51 CONGo REC. 12,153 (1914) (statement of Sen. Robinson). 

14 51 CONGo REC. 12,161 (1914) (statement of Sen. Pomerene); 51 CONGo REC. 12,197 (1914) 

(statement of Sen. Thomas). In Senator Cummins's view, the discretion and judgment of the Commission should not 

even be subject to judicial review. 51 CONG. REC. 12,151 (1914) (statement of Sen. Cummins). 

3 
composed as this body wil be of lawyers, economists, publicists, men engaged in industr, who 

wil not be able to determine justly whether the practice is contrary to good morals or not.,,15 

Section 5 was not enacted merely to mirror the antitrst laws. Senator Cummins, one of 

the bill's main proponents, squarely addressed this issue on the Senate floor when he responded 

to the question, "why, if unfair competition is in restraint of trade, (are we) attempting to add 

statute to statute and give a further remedy for the violation of the (Sherman Act)?" Senator 

Cummins replied that the concept of 
 "unfair competition" seeks: 

to go further (than "restraints of 
 trade") and make some things offenses that are 

not now condemned by the antitrst law. That is the only purpose of Section 5 ­

to make some things punishable, to prevent some things, that can not (sic) be 

punished or prevented under the antitrst law.16
 

Echoing this point, he later described Section 5 as new substantive law that would involve the 

Commission in activities beyond the simple enforcement of antitrst law.17 Many other 

legislators similarly expressed their intent and understanding that Section 5 would extend beyond 

the Sherman ACt.18
 

While the Act's legislative history makes its "sweep and flexibility. . . crytal clear,"19 

the plain language of the statute further bolsters this conclusion. If Congress had wanted Section 

5's reach to be merely coterminous with that of the Sherman Act, it easily could have written the 

15 51 CONGo REC. 12,154 (1914) (statement of Sen. Newlands). Had he made his comment in more 

recent times, Senator Newlands doubtlessly would have phrased it to apply to a body of five men and women. 

16 51 CONGo REC. 12,454 (1914) (statement of Sen. Cummins). Senator Cummins, an 

"insurgent" Republican, was a member both of the Commerce Committee, which prepared the Commission 

bil, and the Judiciary Committee, which prepared the bil that became the Clayton Act. He authored the 

"Cummins Report," which provided critical support for the Commission bil and helped influence its 

. ultimate content. 

17 51 CONGo REC. 12,613 (1914) (statement of Sen. Cummins). 

18 See, e.g., 51 CONGo REC. 14,333 (1914) (statement of Sen. Kenyon, remarking that the proposed 

federal trade commission "can take hold of matters that not in themselves are sufficient to amount to a monopoly or 

to amount to restrain (sic) of trade"); 51 CONGo REC. 14,329 (1914) (statement of Sen. Nelson, stating that the FTC 

Act "can be used in a lot of cases where there is no trust or monopoly"); 51 CONG. REC. 12,135 (1914) (statement 

of Sen. Newlands, observing that although "(a)lI agree that while the Sherman law is the foundation stone of our 

policy on (appropriate business conduct), additional legislation is necessary"). 

19 F.T.C. V. Sperr & Hutchinson Co., 405 U.S. 233, 241 (1972). See also F.T.C. V. Cement Inst., 

333 U.S. 683,693 (1948) ("AIl of the committee reports and the statements of those in charge of the Trade 

Commission Act reveal an abiding purpose to vest both the Commission and the courts with adequate powers to hit 

at every trade practice, then existing or thereafter contrived, which restrained competition or might lead to such 

restraint ifnot stopped in its incipient stages."); ¡d. at 693 n.6 (offering many citations to the Congressional Record). 

4 
statute accordingly. There would have been no logic in doing so, of course, since the Sherman 

Act already existed. 

In drafting Section 5, Congress did not mimic the Sheran Act or try to enumerate a list 

of unfair practices. Rather, the Senate Report explains, Congress left it to the Commission "to 

determine what practices were unfair" because "there were too many unfair practices to define, 

and after writing 20 of 
 them into law it would be quite possible to invent others."20 To ensure 

there would be no misunderstanding, Congress carefully crafted the term "unfair methods of 

competition" to distinguish it from the narrower common-law concept of "unfair competition.,,21
 

Thus, Congress made clear its intent, both to those who would later enforce Section 5 and those 

who would be subject to its strictures, that this provision was not confined to the collection of 

violations then-recognized in antitrust or common law, but rather conferred a broader and more 

adaptable authority on the Commission.22 Now, as more fully developed by the courts and 

Commission, Section 5 permits the FTC to challenge conduct outside the bounds of the antitrst 

law that ( a) violates the policies that underlie the antitrst laws or (b) constitutes incipient 

violations of those laws. 

B. Supreme Court Interpretations
 

The FTC's statutory mandate comes not just from the legislature of almost a century ago. 

For more than 70 years, an unbroken line of 
 Supreme Court opinions has interpreted Section 5 as 

encompassing a broader array of behavior than the antitrut laws.23
 

20 S. Rep. No. 63-597, at 13 (1914) (internal quote omitted). 

21 H.R. Rep. No. 63-1142, at 19 (1914) (Conf. Rep.) ("There is no limit to human inventiveness in 

this field. . . . If Congress were to adopt the method of definition, it would undertake an endless task."); Keppel, 291 

U.S. at 310-12, n.2 (stating that the Conference Committee substituted the phrase "unfair methods of competition" 

for "unfair competition" to ensure that the scope of the FTC Act would not be "restricted to those forms of unfair 

competition condemned by the common law."). 

22 See Keppel, 291 U.S. at 310 ("It would not have been a difficult feat of draftsmanship to have 

restricted the operation of the Trade Commission Act to those methods of competition in interstate commerce which 

are forbidden at common law or which are likely to grow into violations of the Sherman Act, if that had been the 

purpose of the legislation. "). 

23 See Sperry & Hutchinson, 405 U.S. at 244 (commenting that, after Keppel, "unfair competitive 

practices were not limited to those likely to have anticompetitive consequences after the manner of the antitrust laws; 

nor were unfair practices in commerce confined to purely competitive behavior."). Prior to the 1934 Keppel case, 

Supreme Court opinions tended to articulate a narrower view of Section 5's range. See, e.g., F.T.C. v. Raladam Co., 

283 U.S. 643 (1931); Gratz, 253 U.S. 421. Notably, however, even Gratz, which was authored only six years after 

the FTC's creation, emphasized Section 5's use to redress conduct such as that at issue in the present case, namely, 

"deception, bad faith, fraud, or oppression, or (practices that are J against public policy because of their dangerous 

tendency unduly to hinder competition or create monopoly." Id. at 427. 

5 
Most recently, the Court in Indiana Federation of Dentists ("IPD") observed that the 

standard for "unfairness" under the FTC Act is, "by necessity, an elusive one, encompassing not 

only practices that violate the Sherman Act and the other antitrst laws, but also practices that the 

Commission determines are against public policy for other reasons.,,24 

The Cour in IFD relied on Sperr & Hutchinson, the Court's most recent, substantive 

analysis of Section 5's history and breadth. In Sperry, the Court answered two critical questions: 

First, does § 5 empower the Commission to define and proscribe an unfair 

competitive practice, even though the practice does not infrnge either the letter or 

the spirit of 
 the antitrst laws? Second, does § 5 empower the Commission to 

proscribe practices as unfair or deceptive in their effect upon consumers 

regardless of their nature or quality as competitive practices or their effect on 

competition? We think the statute, its legislative history, and prior cases compel 

an affirative answer to both questions.25 

Drawing on its review of Section 5's legislative history and other authority, the Court concluded 

that the Commission: 

does not arrogate excessive power to itself if, in measurng a practice against the 

elusive, but congressionally mandated standard of fairness, it, like a court of 

equity, considers public values beyond simply those enshrined in the letter or 

encompassed in the spirit of the antitrust laws .26 

Supreme Cour opinions prior to IFD expressed similar views. In F. T. C. v. Brown Shoe 

Company, the Court stated: 

(t Jhis broad power of the Commission is paricularly well established with regard 

to trade practices which conflict with the basic policies of the Sherman and 

Clayton Acts even though such practices may not actually violate these laws. . . .27 

and fuher quoted F. T. C. v. Motion Picture Advertising Service Company for the proposition: 

(iJt is . . . clear that the Federal Trade Commission Act was designed to 

supplement and bolster the Sherman Act and the Clayton Act. . . to stop in their 

incipiency acts and practices which, when full blown, would violate those Acts. . . 

24 F.T.C. v. Ind. Fedn of Dentists, 476 U.S. 447,454 (1986) (citations omitted). 

25 Sperry & Hutchinson, 405 U.S. at 239. 

26 Id. at 244 (emphasis added). 

27 F.T.C. v. Brown Shoe Co., 384 U.S. 316, 321 (1966) (emphasis added). 

6 
as well as to condemn as "unfair methods of competition" existing violations of 

them.28 

I know of no Supreme Court case in the past 70 years that disagrees with these goals, contracts 

this scope, or disputes the flexibility and elasticity inherent in Section 5.29
 

C. Important Appellate Cases
 

In the early 1980s, courts of appeals rebuffed FTC efforts to apply Section 5 in three 

frequently-cited cases: Offcial Airline Guides, Boise Cascade, and Ethyl.30 Each ofthese cases 

was decided before IFD, with its reliance on Sperr & Hutchinson's reiteration of Section 5's 

breadth. These appellate opinions support the propositions that Section 5 does not condemn pure 

conscious parallelism (i.e., unaccompanied by any "plus factors") or conduct justified by an 

independent, legitimate business purpose. The decision in each, however, turns primarily on an 

evidentiary failure to demonstrate that the challenged conduct constituted an effort to acquire 

market power, tacitly collude, or manipulate price for anti 
 competitive purposes. None ofthese 

cases significantly constrains the FTC's authority to apply Section 5 to violations ofthe policies 

that underlie the antitrst statutes or that cause actual or incipient antitrst injury.
 

In Offcial Airline Guides ("GAG''), the FTC challenged the refusal by a 

monopolist/publisher of airline schedules to include in its compendium schedules of commuter 

airlines. This refusal to deal was discriinatory, unjustified, and injurious to commuter airlines 

in their competition with certificated airlines. The monopolist, however, did not act coercively, 

did not compete in the commuter airlines' market, where the antitrust injury occurred, and did 

not seek or have any prospect of gaining power in that market. Although the court acknowledged 

28 Id. at 322 (quoting F.T.C. v. Motion Picture Adv. Servo Co., 344 U.S. 392,394-95 (1953) 

(emphasis added)). See also F.T.C. v. Texaco, 393 U.S. 223,225-26 (1968). 

29 See, e.g., At!. Ref. Co. v. F .T.C., 381 U.S. 357,369 (1965) ("As our cases hold, all that is 

necessary in § 5 proceedings to find a violation is to discover conduct that 'runs counter to the public policy declared 

in the' Act."); Cement Inst., 333 at 694 ("(A)Ithough all conduct violative of the Sherman Act may likewise come 

within the unfair trade practice prohibitions of the Trade Commission Act, the converse is not necessarily true. It has 

long been recognized that there are many unfair methods of competition that do not assume the proportions of 

Sherman Act violations."); Fashion Originators' Guild of Am. v. F.T .C., 312 U.S. 457,466 (1941) ("Nor is it 

determinative in considering the policy of the Sherman Act that petitioners may not yet have achieved a complete 

monopoly. For 'it is sufficient ifit really tends to that end and to deprive the public of 
 the advantages which flow 

from free competition.' . . . (I)t was the object of the Federal Trade Commission Act to reach not merely in their 

fruition but also in their incipiency combinations which could lead to these and other trade restraints and practices 

deemed undesirable."); Keppel, 291 U.S. at 3 i 2 n.2 (concluding from a detailed review of the legislative history that 

Congress wanted "unfair methods of competition" to confer a broad, flexible mandate that would exceed the "forms 

of unfair competition condemned by the common law"). 

30 Offcial Airline Guides, Inc. v. F.T.C., 630 F.2d 920 (2d Cir. 1980); Boise Cascade Corp. V. 

F.T.C., 637 F.2d 573 (9th Cir. 1980); and E.I. du Pont de Nemours & CO. V. F.T.C., 729 F.2d 128 (2d Cir. 1984) 

(hereinafter Ethyl). 

7 
that FTC determinations as to what practices constitute an "unfair method of competition" 

deserve greatweight,31 it declined to uphold the Commission's order. Rather, it opted to 

characterize the respondent's action as a unilateral refusal to deal protected by United States v. 

Colgate & Company.32 In explaining its decision, the court expressed concern that declaring 

such conduct unlawful would give the Commission too much latitude to substitute its own 

judgment for a respondent's independent business decisions that were taken without any 

anti competitive purpose or prospect. In essence, although the challenged conduct was 

discriminatory and hannful, it did not violate the policies underlying the antitrst laws. The 

opinion does not discuss Section 5's jurisdictional breadth, and the facts of 
 the case are so
 

unusual that the case has little import for that legal issue.33 

Boise Cascade involved the use of an industr-wide delivered pricing system. Industr 

members effected this system by including an artificial freight factor in the price charged to 

customers. The Commission contended that this practice tended to stabilize prices and therefore 

violated the Sherman and FTC Acts. The Ninth Circuit disagreed, however, concluding that the 

use of delivered pricing in this instance was a natural and independent, albeit consciously 

parallel, response to customer preferences. The court found no need to opine whether 

consciously parallel conduct, without more, could ever violate Section 5; it declined, however, to 

hold such behavior ilegal per se where, as here, persuasive evidence of an anticompetitive effect 

was lacking. Although the court acknowledged "the unique features of 
 the FTCA,"34 it held that 

delivered pricing warranted the same legal assessment under both the FTC and Sherman Acts, 

since the relevant case law had been well-developed in both cour and Commission litigation, as 

well as through prior Commission statements and practices on the issue. The court concluded 

that this history had resulted in a requirement that "the Commission must find either collusion or 

actual effect on competition to make out a §5 violation for use of delivered pricing."35 The cour 

31 Official Airline Guides, 630 F.3d at 927 (citing Cement Inst., 333 U.S. at 692-93, and At!. Ref, 

381 U.S. at 367-68). 

32 U.S. v. Colgate & Co., 250 U.S. 300 (1919). 

33 In In re General Motors, 99 F.T.C. 464, 580 n.45 (1982), the Commission declared its position that 

the Second Circuit's decision was incorrect and that "unless it is repudiated by the Supreme Court we hold to our 

interpretation of the case law on arbitrary refusals to deal by monopolists. . .." Nonetheless, a 2003 Commission 

letter observed that "the Commission has not issued a decision (since OA GJ holding that a monopo list violated the 

FTC Act by using unfair methods of competition that affected customers in an adjacent market in which the 

monopolist did not operate." Letter from Fed. Trade Comm 'n, to the U.S. Dep't of Transp. (Jun. 6,2003) (on fie 

with FTC Offce of General Counsel). 

34 Boise Cascade, 637 F.2d at 581. 

35 Id. at 582. Much of this history is based on a series of delivered and base-point pricing cases that 

reached their doctrinal limits in Cement Institute. 333 U.S. at 721 n.I9 (holding that "(wJhile we hold that the 

Commission's findings of combination were supported by evidence, that does not mean that the existence of a 

'combination' is an indispensable ingredient of an 'unfair method of competition' under the Trade Commission 

Act."). See also Triangle Conduit & Cable Co. v. F. T.C., 168 F.2d 175 (7tb Cir. i 948). Shortly thereafter, the 

8 
was clear, however, to confine this requirement to situations involving delivered pricing; 

consequently, it does not materially affect the well-recognized scope of Section 5. 

In Ethyl- perhaps the most misunderstood and frequently mis-cited case regarding the 

scope of Section 5 -. the Commission challenged four producers of gasoline anti-knock 

compounds for their use of delivered pricing, most-favored nation clauses, 30-day advance notice 

to customers of price changes, and anouncement of price increases in the press. The producers 

did not act collusively in adopting and employing these practices; rather, they followed industr 

tradition and responded to customer demand. The FTC concluded that the practices nonetheless 

violated Section 5 because they constituted interdependent conduct that substantially reduced 

competition in the market. The appellate court disagreed, however, because it did not find 

substantial evidence that the challenged practices led to an adverse competitive impact.36 Thus, 

this case, like Boise Cascade, was not decided on grounds of statutory interpretation but 

evidentiary sufficiency.37
 

Despite the outcome, the court engaged in a significant analysis of Section 5 and 

reconfirmed that it extends to conduct that does not fall within the antitrst laws. In paricular,
 

the court noted that "Congress' aim was to protect society against oppressive anticompetitive 

conduct and thus assure that the conduct prohibited by the Sherman and Clayton Acts would be 

supplemented as necessary and any interstices filled."38 Subsequently the court elaborated that: 

(a )Ithough the Commission may under § 5 enforce the antitrst laws, including the 

Sherman and Clayton Acts, it is not confined to their letter. It may bar incipient 

violations of those statutes, and conduct which, although not a violation of the 

Commission declared that the use of base point pricing could violate Section 5, even when not adopted or 

implemented as part of a combination or conspiracy. INTERIM REPORT ON STUDY OF FEDERAL TRADE COMMISSION
 

PRICING POLICIES, S. Doc. No. 27,81 st Cong., 1 Sl Sess. 41 (1949) (hereinafter "Interim Report"). In Congress,
 

however, legislation was introduced to reverse this position, and FTC Commissioners were subjected to 

"demanding" questioning in Senate Committee hearings. The legislation was abandoned only "after a majority of 
 the 

commissioners recanted and testified that Section 5 prohibits only conspiracies to adopt base point pricing." Mary 

Azcuenaga, FTC Comm 'r, Shimmers in the Penumbra 01 Section 5 and Other News, Address Before the 13th Annual 

Antitrust and Trade Regulation Seminar XX (JuI. 9, 1992) at 9- 11 (on file with FTC Office of General Counsel); S. 

Doc. No. 27 at 59-63. 

36 Ethyl, 729 F.2d at 140-41. The court noted that the FTC's majority opinion observed that noncollusive facilitating practices violate Section 5 only where the evidence demonstrates that they substantially lessen 

competition and reveal a "clear nexus" between the practices and the competitive harm. The court found such 

evidence lacking in this case. Id. 

37 For a detailed discussion of the Commission analysis in Ethyl regarding faciltating practices, see 

Donald S. Clark, Price-Fixing Without Collusion: An Antirust Analysis of Faciltating Practices After Ethyl Corp., 

1983 WiSC. L. REV. 887 (1983). 

38 Ethyl, 729 F.2d at 136 (quoting Report of the Conference Committee, H.R.Rep. NO.1 142, 63d 

Cong., 2d Sess. 19 (1914)). 

9 
letter of the antitrust laws, is close to a violation or is contrary to their spirit. In
 

prosecuting violations of the spirit of 
 the antitrst laws, the Commission has, with 

one or two exceptions, confined itself to attackig collusive, predatory, restrictive 

or deceitful conduct that substantially lessens competition.39
 

Section 5's intentionally unparticularized phrase, 'unfair methods of competition" is not, 

therefore, an all-encompassing, unfocused warrant as some would claim. Rather, it is a flexible 

and powerful Congressional mandate to protect competition from uneasonable restraints, 

whether long-since recognized or newly discovered, that violate the antitrust laws, constitute 

incipient violations ofthose laws, or contravene those laws' fudamental policies.40 

III. LIMITING ATTRIBUTES OF SECTION 5
 

Congress had good reasons for leaving Section 5's metes and bounds unspecified. Any 

effort in the name of "guidance" to provide a detailed plat defining its coverage would undermine 

Congress's clear intent to create a statute with sufficient scope, elasticity, and adaptability to 

accomplish its purpose. Thus, the influential treatise, Antitrst Law, obseres, that: ~ 

(i)t is now commonly said that Federal Trade Commission § 5 is not confined by 

the prohibitions of the Sherman Act or the Clayton Act. Indeed, § 5 is not 

confined by antitrst concepts at all. It allows the Commission to condemn 

conduct that is "unfair" in senses "beyond simply those enshrned in the letter or 

encompassed in the spirit of 
 the antitrst laws." Or as the Supreme Court more 

39 ¡d. at 136-37 (citations and footnote omitted). See also F.T.C. v. Abbott Lab., 853 F. 

Supp. 526 (D.D.C. 1994) (relying on Ethyl and Sperry & Hutchinson). 

40 This same period, 1980-1984, also yielded significant FTC efforts to rein in the use of Section 5. 

The most important of these is In re General Foods Co., 103 F. LC. 204, 364-66 (1984). In this case the 

Commission rejected application of Section 5 to an alleged attempt to monopolize where the evidence did not reveal 

a dangerous probability of success, an element that had long been required under Section 2 of the Sherman Act. In 

the Commission's view, the concept of an incipient attempt to monopolize was simply beyond parsing. Moreover: 

(w)hile Section 5 may empower the Commission to pursue those activities which offend the "basic 

policies" of the antitrust laws, we do not believe that power should be used to reshape those 

policies when they have been clearly expressed and circumscribed. 

Id. at 352. The Commission expressly limited its holding in this regard to the dangerous probabilty issue and 

declined to comment whether Section 5 required the same measure of intent as did Section 2 of the Sherman Act. 

Other significant Commission actions from this period that bear on Section 5 jurisdiction regarding competition 

policy enforcement include: In re Kellogg Co., 99 F.T.C. 8 (1982) (summarily dismissing the appeal of an initial 

decision rejecting allegations that non-collusive efforts to maintain shared monopoly control of the ready-to-eat 

cereal market violated Section 5); and In re Exxon Co., 98 F.T.C. 453 (1981) (terminating an investigation into 

shared monopoly in the petroleum industry). 

10 
recently put it, the "standard of 'unfairness' under the FTC Act is, by necessity, an 

elusive one, encompassing not only practices that violate the Sherman Act and the 

other antitrust laws but also practices that the Commission determines are against 

public policy for other reasons." 

We have no general quarrel with these holdings; our own concern is limited to § 5 

holdings that follow "the letter or ... spirit ofthe antitrst laws.41 

My concems here are also confined to matters implicating "the letter or spirit" ofthe 

antitrst laws. Section 5's "standard of unfairness" in this regard may yet stre some as 

"elusive," but it is far from unkowable or unbounded. Congress's mandate is that Section 5 

should supplement and bolster the antitrst laws by challenging conduct that not only violates the 

antitrst laws but that also falls within the "penumbra,,42 of those statutes. Two critical attbutes 

of Section 5 - the limited consequences of a Section 5 violation, and the inherent relationship 

between Section 5's reach and the scope of the antitrst laws - help ensure that respondents find 

enforcement efforts under this mandate to be neither punitive nor overreaching. 

A. The Consequences of a Section 5 Violation Are More Limited than Those
 

Resultingfrom a Violation of the Antitrust Laws 

Section 5 violations involving conduct outside the antitrst statutes entail far more 

limited consequences than do violations of 
 the Sherman or Clayton Acts. The FTC nearly always 

brings such cases as administrative litigation, and violations generally result only in cease-anddesist orders designed to prevent future violations and, on occasion, injunctive measures to help 

preserve or restore conditions for vigorous competition in the market.43 In addition, although the 

Commission may seek disgorgement or restitution in competition matters, it must do so from a 

41 PHILLIP AREEDA, HERBERT HOVENKAMP & ROGER BLAIR, II ANTITRUST LAW ii 302h,
 

p.21 (2d ed.) (Aspen Law and Business, 2000) (footnotes omitted). 

42 Sperry & Hutchinson, 405 U.S. at 244 n.5 (quoting Unfair or Deceptive Advertising and Labeling 

of Cigarettes in Relation to the Health Hazards of Smoking, 29 Fed. Reg. 8324,8355 (Ju!. 2, 1964) (codified at 15 

C.F.R. pt. 408)). See also Chuck's Feed & Seed Co., Inc. v. Ralston Purina Co., 810 F.2d 1289, 1292-93 (4th Cir. 

1987); Mary Azcuenaga, FTC Comm'r, FTC Enforcement: An Idiosyncratic Journey, Address Before the 15th 

Annual Antitrust and Trade Regulation Seminar 5 (Jul. 7, 1994) (on fie with FTC Office of General Counsel); Mary 

Azcuenaga, Shimmers in the Penumbra of Section 5 and Other News, supra note 35; Wiliam E. Kovacic, The 

Federal Trade Commission and Congressional Oversight of Antitrust Enforcement, i 7 TULSA L.J. 587, 625-627 

(1982). 

43 But see e.g., In re Xerox, 86 F .T.C. 364 (1975) (consent order compelling limited royalty 

free licensing of patents for dry paper copier technology). 

11 
court. Moreover, the Agency's policy is to request equitable monetary relief in such matters only 

where the violation is relatively c1ear.44 

The FTC Act contains no provisions for private enforcement. A Commission action 

brought under Section 5 has little value in subsequent "follow-on" treble-damage litigation,45 and 

proof of Section 5 violations, standing alone, provide no basis for seeking criminal penalties 

under the Sherman Act or comparable state provisions. 

Because of 
 these relatively mild consequences, Section 5 can fairly extend more broadly 

than the antitrust laws. This characteristic makes Section 5 especially well designed to apply in 

circumstances where exposing the respondent to treble damage jeopardy might be unfair or 

inappropriate, even though the conduct itself may warrant prohibition. Such circumstances 

might arise in situations involving unseasoned legal or economic theories, innovative business 

strategies, new or complex markets, or a substantially altered regulatory context. 

The FTC Act also provides a right of review in the cours of appeals. Respondents are 

protected from both unfairess and surprise, especially because the review becomes increasingly 

searching as the violation becomes more noveL. As the Second Circuit declared: 

As the Commission moves away from attacking conduct that is either a violation 

of the antitrst laws or collusive, coercive, predatory, restrictive or deceitful, and
 

seeks to break new ground by enjoining otherwise legitimate practices, the closer 

must be our scrutiny upon judicial review.46
 

Although courts sometimes have overtrned Commission determinations or remedies - tyically 

on grounds that the evidence does not establish the offense or the order is broader than necessar 

- appellate courts have almost always reaffirmed the breadth of 
 the FTC's Section 5 

jurisdiction.47 

Finally, the Agency does not enforce Section 5 in a vacuum. Congress also plays an 

active role, especially in oversight regarding the Commission's authority and statutory 

44 FED. TRADE COMM'N, POLICY STATEMENT ON MONETARY EQUITABLE 

REMEDIES IN COMPETITION CASES (2003), available at htto://www.ftc.gov/ow/2003/07/disgorgementfrn.htm. 

See also F.T.C. v. Mylan Lab., Inc., 62 F. Supp. 2d 25,36-37 (D.D.C. 1999) (mem.), aff'd in pertinen t part, 99 F. 

Supp. 2d 1, 4-5 (D.D.C. 1999). 

45 See 15 D.S.C. § I6(a) (1984). "(I)n any action or proceeding brought under the antitrust laws, 

collateral estoppel effect shall not be given to any finding made by the Federal Trade Commission under the antitrust 

laws or under section 45 (i.e., Section 5)." See also Pool Water Prods. v. Olin Corp., 258 F.3d 1024, 1030 (9th Cir. 

2001). 

46 

Ethyl, 729 F.2d at 137.
 

47 See, e.g., id. at 136-137. 

12 
interpretations. FTC offcials frequently appear before Congressional committees or meet with 

Congressional staff to describe or defend its policies or practices. Put differently, there are no 

secrets as to what the Commission is doing or what Congress wants us to do; insufficient, 

excessive, or misdirected zeal commonly invites scrutiny and correction.48 

For example, Congressional reaction to the Cement Institute and Triangle Conduit 

decisions, as well as to the Commission's declaration that base point pricing could violate 

Section 5 even when not part of a conspiracy, induced a majority ofthe commissioners to reverse 

their position on this issue.49 It was also Congressional uncertainty regarding the scope of the 

Commission's Section 5 authority to challenge "unfair acts or practices" that led the Commission 

to issue a "consumer unfairness statement" in 1980.50 Then, in 1994, Congress went further and 

codified this statement, in substance, as Section 5(n) of the FTC Act.51 

Agency offcials have regularly incorporated the lessons of appellate and Congressional 

review into FTC practice, as they should. The Commission has long since put to rest the issues 

at the center of its most controversial Section 5 matters. It has not, for example, held unlawful 

the unilateral adoption or use of delivered or base point pricing since the Second Circuit issued 

its opinion in Ethyl 
 22 years ago. Nor, since that time, has the FTC condemned consciously 

parallel pricing in the absence of evidence of "oppressiveness" or some "plus factor" suggesting 

overt or tacit collusion. The Commission also terminated its two controversial shared monopoly 

matters.52 This history gives me confidence that the FTC wil be equally responsive in the futue, 

even if 
 we employ Section 5 more expansively, as we should. 

48 See Kovacic, 17 TULSA L.J. 587 (1982). 

49 See Boise Cascade, 637 F.2d at 582; see also Cement Inst., 333 U.S. at 721 n.19; Kovacic, 17 

TULSA L.J. at 625-27. See generally Triangle Conduit~ 168 F.2d at 176; Interim Report, S. Doc. No. 27; Azcuenaga, 

Shimmers in the Penumbra of Section 5 and Other News, supra note 35, at 9-11. 

50 Commission Statement of Policy on the Scope of the Consumer Unfairness Jurisdiction, included 

in Letter from Chairman Pertschuk and Commissioners Dixon, Clanton, Pitofsky and Bailey to the Honorable 

WendelI H. Ford and the Honorable John C. Danforth (Dec. i, 1980) (available as appendix to Intl Harvester Co., 

104 F .T.C. 949, 1071 (1984)). This statement was based, in significant part, on Unfair or Deceptive Advertising and 

Labeling of Cigarettes in Relation to the Health Hazards of Smoking, 29 Fed. Reg. 8324,8355 (Jul. 2, 1964) 

(codified at 15 C.F.R. pt. 408), as quoted in Sperry & Hutchinson, 405 U.S. at 244 n.5. The Commission issued a 

companion policy statement regarding "deception" in 1983. Policy Statement on Deception, contained in 

Commission letter on deception to the Honorable John D. DingelI, Chairman, Subcommittee on Oversight and 

Investigations, Committee on Energy & Commerce, Oct. 14, 1983, appended to In re Cliffdale Assoc's., 103 F .T.C. 

110, 174 (1984). 

51 15 U .S.C. § 45 (n) (2006).
 

52 In re Kellogg Co., 99 F .T.C. at 269 (summarily dismissing further appeal); In re Exxon Co., 98 

F.T.C. at 461 (dismissing the complaint without prejudice). 

13 
B. Section 5's Scope Is Hinged to That of the Antitrust Laws
 

As noted previously, when using Section 5 to enforce competition policy, the 

Commission and courts have largely confined Section 5's reach beyond the antitrust laws to 

incipient violations of those laws, and violations of 
 those laws' underlying purposes. Because 

each of these categories finds its touchstone in the antitrst laws themselves, the application of 

Section 5 is necessarily hinged to the goals, inteipretations, and analysis of conduct pursuant to 

those laws. These sources influence both the content and constraints for "unfair methods of 

competition," just as they provide both sense and substance for the Sherman Act's equally nonspecific phrase, "restraint of trade." 

The economic principles and analysis that guide application of the antitrst laws also
 

guides competition policy enorcement under Section 5, notwithstanding the statutory 

differences. As the antitrst laws expand, shift, or contract, so too does Section 5 adjust and
 

adapt. For example, antitrust analysis has lessened its concern with firm size and market 

concentration in recent decades and focused more on consumer welfare, innovation, and 

efficiency. Section 5 jurisprudence has traveled the same path, sometimes leading and 

sometimes learning. il my view, despite the important differences in breadth and effects, 

competition policy enforcement under Section 5 appears on balance to be as wise and wellreasoned - no more and no less - as under the antitrust laws. 

Section 5's connection with the antitrt laws has led the Agency to rely on antitrt
 

jurisprudence - the cases, principles, and associated economic analysis - as its most significant 

source of guidance. The Supreme Court articulated the nature of this reliance more than 40 years 

ago in Atlantic Refining Company, when it observed that: 

(i)t has long been recognized that there are many unfair methods of competition 

that do not assume the proportions of antitrst violations. Federal Trade Comm'n 

v. Motion Picture Advertising Service Co., 344 U.S. 392, 394 (1953). When 

conduct does bear the (centrl competitive) characteristics of recognzed antitrst 

violations it becomes suspect, and the Commission may properly look to cases 

applying those laws for guidance.53
 

Or, as the Fourth Circuit expressed more recently: 

In the area of anti 
 competitive practices, the FTC Act functions as a kind of 

penumbra around the federal antitrst statutes. An anti 
 competitive practice need 

not violate the Sherman Act or the Clayton Act in order to violate the FTC Act. 

However, the scope of the FTC is nonetheless linked to the antitrst laws. . . . The 

53 Atl. Ref, 381 U.S. at 369-70. 

14 
federal (sic J Trade Commission itself looks to antitrst principles in deciding 

whether § 5 of the FTC Act has been violated.54 

Section 5 does not replicate the antitrst laws; the relationship between the provisions is better 

described as complementary rather than as congruent. il many instances, Section's 5's unique 

coupling of 
 broad scope with modest consequences may prove to be the most apt enforcement 

tool. The critical connection between Section 5 and antitrst law and analysis, however, helps 

ensure that Section 5 remains in harmony with the laws it was designed to bolster and support. 

iv. THE ELEMENTS OF A SECTION 5 VIOLATION 

Ifwe are to use Section 5 to enforce competition policy in a manner consistent with the 

intent of its framers, I suggest that there should be two requisite elements for a violation. The 

first is that the respondent must have engaged in identifiable, culpable conduct. The second is 

evidence of actual or incipient injury to competition. 

Conduct. The conduct aspect of this test ensures that the respondent recognizes - or 

should have recognized - in advance that its conduct was inappropriate. This requirement is met 

where the respondent engages in actions that are "collusive, coercive, predatory, restrctive, or 

deceitful,"55 or otherwise oppressive, and does so without a justification grounded in its 

legitimate, independent self-interest.56 Unlike Section 2 of 
 the Sherman Act, which requires 

proof of specific intent to prove the offense of attempted monopolization,57 stand-alone 

applications of Section 5 do not require that element to establish an unfair method of 

competition. Nonetheless, firms are almost always aware of, and intend, the anti 
 competitive 

implications of the tyes of conduct that would be suffcient for a Section 5 violation. 

Significantly, although "unfair methods of competition" is not limited to the categories of 

conduct noted above, Rambus' s conduct in this matter could easily have been characteried as 

fallng within several ofthem.58
 

54 Chuck's Feed, 810 F.2d at 1292-93 (citations omitted). 

55 Ethyl, 729 F.2d at 137.
 

56 See generally Boise Cascade, 637 F.2d at 573 (finding independent, legitimate reasons for Boise 

Cascade's use of a delivered pricing system). 

57 In contrast, Section 2 does not require a showing of specific intent to prove 

unlawful monopolization; for this offense, proof of general intent to engage in the challenged anticompetitive 

conduct will suffce. U.S. v. Grinnell Corp., 384 U.S. 563,570-71 (1966); Berkey Photo, Inc. v. Eastman Kodak 

Co., 603 F.3d 263274 (2d Cir. 1979). 

58 Significant information regarding the Commission's prosecutorial policies is available not only 

through the Commission's cases, but also its consent agreements and the testimony, speeches, and public 

communications of FTC offcials. 

15 
Iniury. Section 5 does not require proof of an actual injur to competition. Rather, 

established precedent holds that: 

a showing of an actual anticompetitive effect is unnecessary to prove a violation 

of Section 5 because that section was designed to stop (in) their incipiency acts 

and practices that could lead to violations of the Sherman or Clayton Acts.59 

For conduct within the penumbra of the antitrt laws, it is suffcient if 
 the competitive injury is 

only suspected or embryonic. While conduct violating Section 5 must bear a realistic potential 

for causing competitive harm, more manifest injury should not be required. 

Other Section 5 standards. Other formulations of Section 5's requirements are worded 

differently, yet they are stringly similar in substance. For example, the Second Circuit stated in 

Ethyl that: 

(i)n our view, before business conduct in an oligopolistic industr may be labeled 

"unfait' within the meaning of § 5 a minimum standard demands that, absent a 

tacit agreement, at least some indicia of oppressiveness must exist such as (1) 

evidence of anti 
 competitive intent or purpose on the part of the producer charged, 

or (2) the absence of an independent legitimate business reason for its conduct. If, 

for instance, a seller's conduct, even absent identical behavior on the part of its 

competitors, is contrary to its independent self-interest, that circumstance would 

indicate that the business practice is "unfair" within the meaning of § 5. In short, 

in the absence of proof of a violation of the antitrst laws or evidence of collusive,
 

coercive, predatory, or exclusionary conduct, business practices are not "unfair" in 

violation of § 5 unless those practices either have an anticompetitive purpose or 

cannot be supported by an independent legitimate reason.60 

In essence, the Second Circuit held that a Section 5 cause of action may be predicated on: (a) 

evidence of tacit agreement, or collusive, coercive, predatory, or exclusionary conduct;61 or (b) 

59 In re Coca Cola Co., 117 F.T.C. 795, 970 n.25 (1994) (citing Sperry & Hutchinson, 405 

U.S. at 244, and In re Dean Foods Co., 70 F.T.C. 1146,1289-90). The FTC also expressly "disagree(d) 

with respondent's legal premise" that it must demonstrate "an anticompetitive purpose or effect to find a 

violation of Section 5 where there is no violation of the Clayton or Sherman Acts." ¡d. at 915. 

60 Ethyl, 729 F.2d at 139-40. See also Abbott Lab., 853 F. Supp. at 536 (quoting, with 

apparent approval, the footnoted passage from Ethyl). The holding in Boise Cascade, 637 F.2d at 577, is 

not inconsistent with the quoted view. Boise Cascade's holding that the FTC must demonstrate that the 

parallel pricing system helped to fix or rigidify market prices if proof of overt collusion is lacking merely 

reflects the court's view that a Section 5 challenge to non-collusive parallel pricing requires evidence 

suggesting that the conduct injured competition. 

61 "Restrictive" and "deceitful" conduct probably also belong in this listing as well, since the court 

included them when noting the categories of conduct ("collusive, predatory, restrictive, and deceitful") to which the 

Commission has usually confined its Section 5 efforts, and the types of conduct ("collusive, coercive, predatory, 

16 
evidence of an anticompetitive intent or pui:ose; or (c) lack of an independent, legitimate reason 

for the conduct. Any of these characteristics wil suffice as a predicate. Although Ethyl does not 

expressly require actual or incipient injury to competition, each of the three indicia mentioned 

above raises the prospect that the challenged conduct wil harm competition. 

Elaborating in a footnote, the cour observed that "( t )he requirement (of oppressiveness) 

is comparable to the principle that there must be a 'plus factor' before conscious parallelism may 

be found to be conspiratorial in violation of 
 the Sherman Act.,06i As examples, the court 

suggested that this "plus factor" requirement could be satisfied by conduct that "is contrary to the 

defendants' independent self-interest," that reflects a "strong motive on a defendant('s) part to 

enter an alleged conspiracy," or that may 
 result in the "artificial standardization ofproducts.'063 

The appellate court in Ethyl was discussing conduct in oligopolistic markets. 

Nonetheless, factors such as the ones mentioned - the list is not exhaustive - can help flag 

"unfairness" in other situations as welL. Conduct contrary 
 to a firm's legitimate, independent 

self-interest has frequently been a hallmark of predatory or exclusionary conduct by a dominant 

firm.64 The presence of 
 "oppressiveness" or an "anticompetitive intent or purose," may help 

distinguish anticompetitive from vigorously competitive conduct.65 Conduct that leads to the 

artificial standardization of products - often due to misuse of the standard-setting process - may 

serve to deter entry, exploit rivals, secure market power, or preserve dominance.66 

restrictive, or deceitful") beyond which, efforts to apply Section 5 tend to be more novel and therefore to warrant 

more searching scrutiny on appeIlate review. Ethyl, 729 F.2d at 136-137. 

62 Id. at 140 n.IO. 

63 ¡d. (citations omitted). 

64 Brooke Grp. Ltd. v. Brown & Wiliamson Tobacco Corp., 509 U.S. 209 (1993) (observing that 

predatory pricing is unlikely, because it is contrary to a firm's independent self interest except when it has the abilty 

to recoup its investment in the strategy); James Hurwitz & Willam E. Kovacic, Judicial Standards 01 Predation: 

The Emerging Trends, 35 V AND. L.REV. 63 (I982) (examining theories of predatory pricing and circumstances when 

pricing below various measures of cost wil be contrary to a firm's legitimate self-interest and thus warrant legal 

condemnation). 

65 In Official A irlines Guide, the court was swayed by the appeIlant s apparent lack of an 

anticompetitive motive or purpose for its refusal to deal, since OAG did not compete in the market where its conduct 

had its anticompetitive impact. 

66 See, e.g., Alled Tube, 486 U.S. at 500-01. In the present case, Rambus's deceptive conduct 

artifcially misdirected JEDEC's standard to one that feIl within the respondent's secretly expanded patent claims, 

contrary to the organization's clear goals to avoid standards that would subject members to substantial royalty 

payments. The FTC has also challenged misdirection of standard-setting efforts in In re Union Oil Co. of Cal., 2005 

WL 2003365 (2005) (consent resolving both Unocal's proposed merger with Chevron and a separate administrative 

case alleging that Unocal misrepresented to the California Air Resources Board that Unocal's research regarding 

low-emissions gasoline was non-proprietary) and In re DeIl Computer Corp., 121 F.T.C. 616 (1996) (consent 

regarding FTC's allegation that Dell Computer failed to disclose its patent rights to the Video Electronics Standards 

Association despite the group's "affirmative disclosure requirements."). 

17 
The Areeda treatise offers a comparable formulation. It recommends that: 

(tJhe Commission should feel free to "enjoin" any unjustified behavior that tends 

to impair competition and is capable of 
 being differentiated adequately from 

permissible behavior.67
 

I agree. 

In sum, where there is no identifiable, culpable conduct, there is no violation. "Culpable" 

in this respect does not require specific intent or actual antitrst injury. It must, however, display 

suffcient anti competitive attbutes - e.g., oppressiveness, lack of an independent business
 

justification, anticompetitive intent, predation, collusion, deceit, a tendency to impair 

competition - to warrant characterizing it as unfair, and be at least potentially injurious. Where 

such qualities are present, it is neither inappropriate nor unwise to find Section 5 liability.68 

v. RAMBUS'S CONDUCT
 

Such anti 
 competitive attbutes are clearly present here and, sadly, in abundance. Indeed, 

Rambus's attempts to deceptively subvert JEDEC's laudable standard-setting efforts is precisely 

the tye of 
 behavior that Congress envisioned would fall within Section 5's mandate. 

In considering the application of a "stand-alone" Section 5 cause of action to this 

behavior, it is not necessary 
 to restate the Commission's findings regarding Rambus's deception 

since these have been detailed elsewhere in the Commission Opinion. Nonetheless, a brief 

review of some of the most salient facts demonstrates that finding liability under a "stand-alone" 

Section 5 cause of action would have been fully appropriate in this matter. 

Rambus's conduct occured in the context of a stadard-setting effort involving rivals. il 

most situations involving direct competitors, .one might expect, and even encourage, bare67 AREEDA, HOYENKAMP, & BLAIR, supra note 41, at ii 302h3. The treatise offers this 

statement in criticizing the concepts of "incipient violations" and "policy violations" of 
 the antitrust laws, as they are presented in Brown Shoe, 384 U.S. 316, which expressly does not require proof of anti 
 competitive effects. Although I find these categories useful and well supported in Section 5's history, I agree that the 

use of Section 5 to enforce competition policy should require at least the tendency to impair competition. 

68 The Commission, on occasion, has used Section 5 in recent years to address conduct beyond 

the scope of the antitrust laws, usually in the context of invitations to collude. See e.g., In re Valassis 

Communications, Inc. (FTC File No. 051 008) (Mar. 16,2006), available at 

http://www.ftc.gOv/os/caselist/05I008/05I008.htm. In my view, of course, Section 5 offers far greater potential and 

should be used more fully. While this concurrence discusses the limiting attributes of Section 5 and the predicates of 

a violation, it does not attempt to prescribe future generic or specific applications of the statute. That, hopefully, wil 

be done by the Commission in future cases. 

18 
knuckled competition, including strategies based on secrecy, misinformation, and misdirection.69 

But standard-setting is not a tyical "everyone for himself' competitive situation. It is one in 

which collaboration can yield a valuable result - in this case, the establishment of a useful 

foundation for future, competitive and inovative efforts. But it is also a setting in which a 

participant's deceptive strategies can usurp the group's efforts - and industr-wide force 

supporting them - to serve its own anticompetitive ends. Participants must play by the rules if 

the joint goal is to be achieved. If competition policy permits easy subversion of these joint
 

efforts, however, then there is little justification in the first place for risking the collaboration 

among rivals that effective standard-setting often requires. From a competition policy 

perspective, standard-setting efforts such as JEDEC's are "high risk/igh gain" activities. They 

can be particularly valuable, on balance, if procedures ensuring fairness are adopted and followed 

in good faith.70 

In this instance, Rambus violated any reasonable conception of good faith and fairness, 

and the proximate, competitive impact of its conduct is clear. Rambus misled the standardsetting body with regard to its own intellectual propert interests, while simultaneously 

participating in JEDEC to lear about the organization's developing standards. Based on this 

wolf-in-sheep's-clothing pose, Rambus was in a position to, and did, amend its own patent 

claims in order to secretly convert what was intended to be an openly available industr-stadard 

into a private source of revenues. 

For example, early during its participation in JEDEC, Rambus's JEDEC representative, 

Richard Crisp, leared what technologies were being considered for the SDRA standard. Crisp 

related that knowledge to Rambus' s patent counsel, and together they considered how to amend 

Rambus's patent claims so that they would cover the emerging JEDEC standard. Rambus even 

assigned an engineer to provide technical assistance and ensure the amendments would do their 

job. Rambus continued to use the knowledge gained at JEDEC to amend its patents in this 

manner. As noted in a December 1992 Rambus planing document, Rambus sought to "get a 

copy ofthe SDRAM spec and check it for features we need to cover as well as featues which 

violate our patents.'m Crisp's September 1995 statement to Rambus management fuher sums 

up Rambus's strategy. He urged that Rambus: 

should redouble our efforts to get the necessary amendments completed, the new 

claims added and make damn sure this ship is watertight before we get too far out 

to sea.72
 

69 Berkey Photo, 603 F.2d at 281 (2d Cir. 1979). 

70 Alled Tube, 486 U.S. at 500-01.
 

71 See supra, Commission Opinion, at 36-39. 

72 CX 837 at 2. 

19 
Rambus's patent strategy relating to the JED EC standard clearly had the imprimatur of its 

management. This strategy was known to senior executives at the company in 1992, 

implemented by an executive vice president, and approved by its CEO GeoffTate.73 Finally, 

Rambus's 1996 withdrawal 
 letter further misled JEDEC members by omitting the only issued 

patent that Rambus believed covered JEDEC's DRAM standards, and including a patent that 

Rambus knéw (or should have known) was entirely irrelevant,4 

Rambus did not merely take advantage of the knowledge it gained at JEDEC to ensure it 

would cover the relevant DRAM standards in its own patent applications; it also did so in direct 

contravention of JEDEC's broadly-acknowledged purpose: to create consensus-based standards 

that reflect the interests of all of its members.75 JEDEC participants' testimony at tral 

consistently emphasized the wish of JEDEC members to either avoid patented technologies or to 

secure protections against the unrestricted exercise of 
 patent rights.76 Even Richard Crisp 

understood that "(t)he job of JEDEC is to create standards which steer clear of 
 patents which 

must be used to be in compliance with the standard whenever possible.,,77 

While the Commission does not object to covert maneuvers and non-disclosure in tyical 

head-to-head market competition, Rambus's end run around the standard-setting process goes too 

far. It undermines the policies ofthe antitrst laws that seek to promote useful innovation and 

permit joint efforts by rivals that may enhance competition and effciency. As such, Rambus' s 

conduct would be an unfair method of competition in violation of Section 5 of the Federal Trade 

Commission Act. 

Indeed, Rambus' s behavior epitomizes what Senator Robinson in 1914 viewed to be the 

essence of unfair competition, namely "oppression or advantage obtained by deception or some 

questionable means. . . .".78 Or, turning to more modem expressions, Rambus's behavior 

contravenes "public values beyond simply those enshrned in the letter or encompassed in the 

spirit of the antitrust laws. "79 It likewise rus afoul of the Second Circuit's statement in Ethyl 

that the Commission's role under Section 5 is to "protect society against oppressive 

73 See supra, Commission Opinion, at 37-42. 

74 CX 887 (withdrawal letter); CX 5013 at 2 (Rambus memorandum noting that the
 

'327 patent covered dual edged clocking).
 

75 See, e.g., Becker, Tr. 1152; J. Kelly, Tr. 1784-85; CX 2767 at I. 

76 See, e.g., Sussman, Tr. 1333; Landgraf, Tr. 1693-94; G. Kelley, Tr. 2393-96; 

Lee, Tr. 6598. 

77 CX 903; Crisp, Tr. 2941-42. 

78 51 CONG. REC. 12,248 (1914) (statement of Sen. Robinson). 

79 Sperry & Hutchinson, 405 U.S. at 244. 

20 
anti competitive conduct."80 Indeed, that court expressly noted that one attibute of 

"oppressiveness" could be the "artificial standardization ofproducts."81 It is fair to say 
 that, 

through its deceptive and exploitative conduct, Rambus effectively co-opted JEDEC's standardsetting process and rendered the JEDEC outcome "arificial." 

VI. CONCLUSION
 

Rambus's abuse of JEDEC's standard-setting process was intentional, inappropriate, and 

injurious to competition and consumers alike. The Commission Opinion finds that these 

deceptive practices violate Section 2. Even if 
 this conduct did not violate the Sherman Act, it 

would have fallen within Section 5's broader province had this claim been argued at triaL. 

As for our future enforcement efforts, the framers ofthe FTC Act gave the Agency a 

mandate - one unique to the Commission - to use Section 5 to supplement and bolster the 

antitrst laws by providing, in essence, a jurisdictional "penumbra" around them. The framers 

also gave the FTC deliberative processes for examining suspected incipient or policy violations 

of the antitrst laws, and provided remedial measures dedicated more to protecting and restoring 

competition than to punishing malfeasors. Although the Agency has not ignored its 

Congressional mandate entirely, we need to build on this foundation and further develop this 

aspect of our enforcement responsibility - and to use all the arrows in our jurisdictional quiver to 

ensure that competition is robust, innovative, and beneficial to consumers. 

80 Ethyl, 729 F.2d at 136. 

81 Id. at 139 n.IO. 

21 
EXHIBIT 10
 
Federal Trade Commission
 

Section 2 and Standard Setting: 

Rambus, N-Data & The Role of Causation 

1. THOMAS ROSCW
 

COMMISSIONER, FEDERAL TRADE COMMISSION
 

LSI 4th Antitrst Conference on Standard Setting & Patent Pools
 

Arlington, V A 

October 2, 2008 

I had prepared some general remarks on the antitrst issues in standard setting and patent 

pools. But I wil 
 leave it to others to discuss the competitive benefits and risks of those 

practices. You are fortnate to have some great panelists here today and I know they plan on
 

covering many of the issues outlined in my presentation. That gives me the libert to focus on 

two Commission matters that have attacted a great deal of attention this year - Rambus and NData. Specifically, I wil discuss the role of causation in these cases. Why? Because causation 

is important to understanding not only my vote in N-Data but also, I believe, the D.C. Circuit's 

decision in Rambus. I suggest that the Cour's analysis of causation, which was squarely 

contrar to its teaching in Microsoft, is the most fundamental reason that decision was flawed. 

The views stated here are my own and do not necessarily reflect the views of the 

Commission or other Commissioners. I am grateful to my attorney advisor Kyle Andeer for his 

invaluable assistance in preparing this paper. 
As demonstrated by our enforcement actions in Dell Computel-, UnocaP, Rambus4, and 

most recently N - Data5, single firm conduct in the standard setting context has been a priority for
 

the Commission for over a decade. In these and other matters, we have focused on allegations 

that a standard setting paricipant has manipulated the process so that its proprietar technology 

is incorporated into the standard. Often referred to as "patent hold-up" problem, a competitive 

problem may arise if 
 the standard setting organization is deceived about the participant's 

intellectual propert ownership interest and the standard confers market power. 

I. The D.C. Circuit's Decision in Rambus: A Move Away from U.S. v. Microsoft?
 

This won't surrise anyone but let me say at the outset that I think the D.C. Circuit got it 

wrong in Rambus.6 I, for one, hope that the Commission wil fie a petition for certiorari with 

the Supreme Cour later this Fall. Before I turn to the role of the causation let me briefly discuss 

two sub silentio concerns the cour of appeals seemed to have with the Commission's final order 

and decision. 

the blame for the hold-up problem 

rested with the standard setting organization, JEDEC. The problem it seemed was not whether 

Rambus engaged in a deceptive course of conduct designed to manipulate the outcome ofthe 

First, the opinion seemed to suggest that much of 


2 Dell Computer Corp., 121 F.T.C. 616 (1996). 

In re Union Oil Company of California, FTC Dkt. No. 9305 (2004) available at 

http://www .ftc. gov/ os/ adjpro/ d9305/index.shtm. 

4 In re Rambus, FTC Dkt. No. 9302, Liability Opinion (2006) available at
 

http://www.ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf; rev'd, Rambus Inc. v. 

Federal Trade Commission, 522 F.3d 456, 468 (D.C. Cir. 2008). 

5 In re Negotiated Data Solutions, LLC, Dkt. No. 051-0094 (2007) available at
 

http://www.ftc.gOv/os/caselist/0510094/index.shtm. 

6 Rambus, 522 F 3d 456. 

2
 
standard setting process. The D.C. appellate panel instead faulted the standard setting 

organization and suggested that JEDEC could have avoided the problem posed by Rambus with 

better patent disclosure policies. For example, the cour echoed the Federal Circuit's observation 

that "JEDEC's patent disclosure policies suffered from a 'staggering lack of defining details."'7 

With the benefit of twenty-twenty hindsight, the court observed that "one would expect that 

disclosure expectations ostensibly requirng competitors to share information that they would 

otherwise vigorously protect as trade secrets would provide 'clear guidance' and 'define clearly, 

what, when, how, and to whom the members must disclose.",g 

Second, I also think the cour believed that the Commission's approach would extend the 

reach of Section 2. More specifically, the cour relied on the Supreme Cour's decision in 

NYNEX Corp. v. Discon, Inc.9 According to the cour, the Supreme Court held in that case that 

although deceptive conduct bya monopolist designed to exploit its monopoly power might be 

tortious, it would not constitute monopolization or attempted monopolization in violation of 

Section 2.10 Indeed, the D.C. Circuit seemed to suggest that the exploitation of 
 monopoly power 

was a good thing, declaring that "high prices and constrained output tend to attact competitors, 

not to repel them.',11 As numerous other commentators have noted, the cour's reading of 

NYEX was unwaranted because the defendant in that case acquired monopoly power lawfully 

7 Id. at 468. 

g Id. (quoting and citing Rambus Inc. v. Infineon Technologies AG, 318 F.3d 1081,
 

1102 (Fed. Cir. 2003)). 

9 NYEX Corp. v. Discon, Inc., 525 U.S. 128 (1998). 

10 Rambus, 522 F .3d at 466. 

11 !d. 

3 
wheras the Commission found that Rambus' s acquisition of that power was unlawfuL. 

Moreover, the cour's latter observation seems to conflict with the views ofthe framers of 

Section 2 respecting the merits and demerits of monopoly power. 

Yet the cour's holding was not based on the first of these two concerns. Nor can it be 

said that it was based exclusively on the second concern or the reasoning of the district court in 

the Qualcomm case where the judge there held that deceptive conduct in a standard setting 

context could not injure competition as a matter oflawY No, the clearest key to understanding 

the appellate decision is causation. 

The Commission carefully analyzed the link between the exclusionar conduct and the 

creation of Ram bus's monopoly power. In Rambus, there were two links in the causal chainthe first was the adoption of the standard by the standard setting organization and the second was 

the adoption of 
 the standard by the marketplace. The Commission found that Rambus's conduct 

caused JEDEC to unkowingly adopt standards that read on Rambus's patents. That in turn led 

the Commission to conclude "that a properly informed JEDEC may have selected a substitute 

technology suggests a causal 
 link between Rambus's deceptive course of conduct and JEDEC's 

decision making process.',13 The second link in the causal chain was the adoption of the standard 

by the marketplace. The Commission found that the market was likely to gravitate around a 

single standard given the strong need for interoperability with complementar products.14 Thus, 

12 Broadcom Corp. v. Qualcomm Inc., 2006 u.s. Dist. LEXIS 62090 (D.N.J. 2006) 

rev'd 501 F.3d 297 (3d eir. 2007). It is far from clear, however, that the D.C. Circuit's decision 

did not create a circuit split. It certainly can be read that way. 

13 Commission Liability Op. at 77. 

14 !d. at 77-79. 

4
 
monopoly power accrued to Rambus only after the manufactuers had fully bought into the 

standard and begu to implement it. 

hi these cases, it is often diffcult to definitively say what the world would have looked 

like "but for" the bad acts. The Rambus case was no different. The Commission in its liability 

decision, at the outset of its causation discussion, identified two possible outcomes in a 

hypothetical world free from Rambus's deceptive conduct: "JEDEC either would have excluded 

Rambus's patented technologies from the JEDEC DRAM standards, or would have demanded 

RAND assurances, with an opportnity for ex ante licensing negotiations."ls The Commission 

did not opine which outcome was more likely. On the one hand, as I say, it did hold that the 

standardization of Rambus' s technologies was not inevitable.16 On the other hand, the 

Commission did not rule out the possibility that JEDEC may have standardized Rambus' s 

technologies evert if it had known about its patentsY 

The D.C. Circuit opinion focused on the questions whether Rambus's deceptive course of 

conduct enabled it to avoid a RAND commitment, and whether that was an antitrust violation. 

Relying on NYNEX, the court concluded that it was not an antitrst violation. I don't agree with 

the court's analysis or its conclusion. A RAND commitment would have checked Rambus's 

IS Commission Liability Op. at 74; see also hi re Rambus, FTC Dkt. No. 9302, 

Commission Remedy Op. at 12 (Feb. 5, 2007) available at 

htt://www .ftc.gov / os/adjpro/ d9302/0702050pinion.pdf. 

16 Commission Liability Op. at 81-96 (Rambus had argued that JEDEC would have 

adopted its technologies even had full disclosure been made because its technologies were 

superior to alternatives.). 

17 Rambus, 522 F 3d at 463 ("the Commission expressly left open the likelihood that 

JEDEC would have standardized Rambus's technologies even ifRambus had disclosed its 

intellectual propert."). 

5 
monopoly power. It would have also signaled the marketplace that JEDEC's standard required a 

licensing agreement from Rambus. Manufactuers and others practicing JEDEC's standards 

would have had to decide whether they would implement a standard that required such a license. 

At the time the first JEDEC DRA standard was published it was not the only alternative, and 

one canot say that the market would have inevitably adopted JEDEC's standard if it was subject 

to a Rambus license. JEDEC's standards enjoyed widespread acceptance in part because the 

market believed they were relatively costless in terms of licensing. Like I said, I think the cour 

got it wrong in its analysis of this question, but more importantly I think the question is beside 

the point.
 

Let me explain. Assume for the sake of argument that the cour was right and that 

"JEDEC's loss of an opportity to seek favorable licensing terms is not. . . an antitrst harm.,,18 

That means the cour was confronted with two possible scenaros - one in which it was wiling 

to assume was an antitrst violation, and another, in which the cour concluded there would not 

be an antitrst violation. As I said, in its liability decision the Commission did not say which 

scenario or outcome was more likely. Nor do I think the law required the Commission to make 

that determination. To understand the Commission's analysis, one must first look to Microsoft, 

for that decision served as our touchstone. 

The lin between anti 
 competitive conduct on the one hand and the creation or acquisition 

of monopoly power as a basis for Section 2 liabilty is little explored in the case law and 

commentar. Microsoft is one of the few cases to analyze the issue head-on.19 In Microsoft, as 

18 Id. at 467. 

19 United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). 

6 
I'm sure you remember, the monopoly maintenance claim rested on the theory that Microsoft 

sought to destroy Netscape and Java because they posed a potential threat to its operating system 

monopoly. However, the threat was nascent, and the theory that Netscape and Java would 

matue into a competitive alternative to Windows was fairly speculative. In its appeal, Microsoft 

argued that the governent had failed to demonstrate that Microsoft's campaign to destroy 

Netscape and Java had caused it to maintain its operating system monopoly.20 The D.C. Circuit, 

sitting en banc, rejected Microsoft's argument. It was wiling to infer a causal connection 

between Microsoft's exclusionary conduct and its continuing monopoly position in the operating 

system market. 

The D.C. Circuit in Microsoft refused to require the governent "to reconstrct the 

hypothetical marketplace absent a defendant's anticompetitive conduct.,,21 Instead, it was 

wiling to "infer causation" if exclusionar conduct "reasonably appearr s J capable of making a
 

significant contribution to creating or maintaining monopoly power.',22 The cour explained that 

it drew this inference because "to some degree the defendant is made to suffer the uncertain 

20 See Brief 
 for Defendant-Appellant at 115, United States v. Microsoft, Nos. 

00-5212,00-5213 (D.C. eir. 2001) ("plaintiffs relied on a speculative chain of causation 

consisting of at least three steps: (i) Netscape would successfully develop Navigator into a 

platform that exposed enough high quality APIs to allow ISVs to wrte full-fledged applications; 

(ii) large numbers ofISVs would write applications that relied solely on APIs exposed by 

Navigator (or other middleware like Sun's Java technologies) without making calls to the 

underlying operating system, thus eliminating the 'applications barer to entr'; and (iii) the
 

business of 
 providing Intel-compatible PC operating systems that provide low-level support for 

this middleware-essentially an operating system kernel-would be sufficiently attactive 

commercially to entice new entrants into the market, even though the principal value of an 

operating system would have 
 been usured by the middleware layer."). 

21 Microsoft, 253 F.3d at 79.
 

22 Id.
 

7
 
consequences of 
 its own undesirable conduct.,m The court did not hold that in the hypothetical 

but for world that Navigator and Java would have evolved into a threat. It merely said that it 

was possible (and left unsaid that it was also possible that they would have simply fizzled out).24 

A lesson to be drawn from Microsoft is that uncertainty cuts against the defendant when it comes 

to causation. . . at least when it comes to liability. 

Like Microsoft, the "but for" world in Rambus was uncertain. In both cases, one could 

reasonably find that the conduct may have caused the defendant to acquire or maintain its 

monopoly power. Of course, at the same time, it was also possible that the defendants in those 

cases would have acquired or maintained their monopoly power even absent the anticompetitive 

behavior. The question is who bears the brunt of that uncertainty. In Microsoft, the D.C. Circuit 

said it was the defendant. Seven years later, in Rambus, the same cour said it was the 

governent plaintiff. 

So far I've limited my discussion to the Commission's liabilty decision. Let me take a 

moment to address the significance of 
 the remedial opinions. The D.C. Circuit read the 

Commission majority's remedial decision to opine that a "RAND" outcome was more likely 

here, and that clinched its decision that a Section 2 violation could not be found.25 However, its 

23 Id. 

24 Indeed, the D.C. Circuit noted that the District Cour explicitly did not adopt the 

position that Microsoft would have lost its position in the operating system market but for its 

anticompetitive behavior. United States v. Microsoft, 253 F.3d at 78 and 107 (citing the Distrct 

Cour's Findings of 
 Fact , 411, "There is insufficient evidence to find that, absent Microsoft's 

actions, Navigator and Java. . . would have ignited genuine competition in the market for Intelcompatible PC operating systems."). 

25 Rambus, 522 F .3d at 464 ("the Commission made it clear in its remedial opinion 

that there was insuffcient evidence that JEDEC would have standardized other technologies had 

it known the full scope of Ram bus's intellectual propert."). 

8 
conclusion ignored the difference in the analysis between liability and remedy. Ironically, it was 

a difference the D.C. Circuit itself emphasized in Microsoft. There, the cour held the burden on 

a Section 2 plaintiff seeking a strctural remedy is heavier in terms of causation than the burden 

on the plaintiff at the liability stage of the proceedings.26 Indeed, Rambus itself acknowledged 

the point when it argued that "the burden to justify a remedy that would restrct Rambus's ability 

to license its patents is heavier than the burden to establish liability."27 The Commission heeded 

these admonitions in analyzing Complaint Counsel's royalty-free licensing proposaL. It held that 

Complaint Counsel's proposal for royalty-free licensing was a structual remedy that required 

"special proof' that it was necessar "to restore the competitive conditions that would have 

prevailed absent Rambus's misconduct."28 

A majority of 
 the Commission found that Complaint Counsel had failed in its proof.29 

Along with Commissioner Harbour, I dissented on this point. Both of 
 us felt that there was 

"strong evidence. . . that if JEDEC had been aware of 
 the potential scope of Ram bus's patent 

portfolio, it would have adopted standards that would have avoided Rambus's patents.,,30 Based 

26 Microsoft, 253 F.3d at 80 ("Microsoft's concerns over causation have more 

purchase in connection with the appropriate remedy issue, i.e., whether the cour should impose 

a strctual remedy or merely enjoin the offensive conduct at issue"); Id. at 107 ("In devising an 

appropriate remedy, the Distrct cour also should consider the strength of the causal connection 

between Microsoft's anticompetitive conduct and its dominant position in the OS market."); see 

also Massachusetts v. Microsoft, 373 F.3d 1199, 1233 (D.C. Cir. 2004). 

27 Brief of 
 Respondent Rambus Inc., Addressing Issues Relating to Remedy at p. 7 

(Sept. 2006) available at htt://ww .ftc.gov / os/ adjpro/ d9302/0609l5rambusremedvbrief. pdf 

28 Remedy Op. at 10. 

29 Id. at 16.
 

30 In re Rambus, FTC Dkt. No. 9302, Statement of 
 Commissioner J. Thomas Rosch, 

Concurrng in Part and Dissenting in Part from the Commission Opinion on Remedy (Feb. 5, 

9
 
on that finding, we would have imposed a royalty-free licensing remedy. If that had been the 

majority opinion, arguably the D.C. Circuit would have upheld the Commission's decision. But 

like I said earlier, I thin the cour missed the point in its analysis. The question, at least in 

terms of liability, is not whether a "but for" world with a RAND assurance was an antitrst 

violation. Based on the commentary and the D.C. Circuit's own landmark decision in Microsoft, 

the fact that the Commission found that at least one potential outcome in a "but for" world would 

have been a violation should have been suffcient. Nor should the analysis turn on the 

Commission majority's remedy decision as to which outcome was more likely. Microsoft made 

it clear that when the issue is whether or not a strctural remedy is appropriate, the brunt of 

uncertainty is borne by the plaintiff, not the defendant, and there must be "special proof' of the 

causal link. The D.C. Circuit's decision in Rambus is a potentially dramatic shift away from 

Microsoft and towards a much more demanding standard in terms of establishing causation. 

II. N-Data
 

Let me tu to another standard setting matter that has attacted a great deal of attention 

this year - N-Data. In a consent decree that was finalized just last week, the Commission 

condemned a breach of a licensing commitment made to a standard setting organization and 

subsequently relied upon by the market as both unfair method of competition and an unfair act 

or practice. Although I am sure many of you are familiar with the matter, let me briefly sketch 

out the facts. 

The case involved proprietary technology that was included in the IEEE's Ethernet 

standard. In 1994, the IEEE standard setting body voted to include National Semiconductor's 

2007) available at http://ww.ftc.gov/os/adjpro/d9302/070205roschstmnt.pdf. 

10 
NWay technology in the Ethernet standard. The decision was made, at least in part, because 

National offered to license its technology for a onetime paid-up royalty of$1000 per licensee to 

manufactuers and sellers of 
 products that use the IEEE standard. Several years later, National 

transferred the patents to a third part for use in applications that did not implicate the IEEE 

Ethernet standard. The third part was fully aware of the licensing commitment and made no 

effort to enforce the patents against firms practicing the IEEE standard or change the terms of 

the licensing commitment. N -Data acquired the relevant patents in 2001. By that time, virtally 

every computer in the United States read on the IEEE Ethernet standard and the patents 

conferred potentially significant monopoly power. Soon after its acquisition ofthe patents, NData sought to renegotiate the terms of a licensing commitment with IEEE and impose the new 

terms on dozens of firms practicing the IEEE Ethernet standard. That's when the Commission 

stepped in. As I said, a majority of the Commission condemned N-Data's conduct as both an 

unfair method of competition and an unfair act or practice. 

I felt N-Data's conduct was an "unfair act or practice" under the Commission's Orkin 

decision, which was upheld by the Eleventh Circuit.31 There, you wil recall, the Commission 

(and the Eleventh Circuit) found an unfair act or practice when Orkin unilaterally breached a 

contract, resulting in the exploitation of consumers who could not adequately defend themselves. 

I also believed it was appropriate to condemn N-Data's conduct as an unfair method of 

competition based on my reading of the relevant case law. 32 The Supreme Court in FTC v. 

31 Orkin Exterminating Co. v. FTC, 849 F.2d 1354 (lIth Cir. 1989). 

32 Commissioner J. Thomas Rosch, "Perspectives on Thee Recent Votes: the 

Closing of the Adelphia Communications Investigation, the Issuance of the Valassis Complaint 

& the Weyerhaeuser Amicus Brief," before the National Economic Research Associates 2006 

Antitrst & Trade Regulation Seminar, Santa Fe, New Mexico at 5-12 (July 6,2006) available at 

11 
Sperry & Hutchinson Co. endorsed an expansive reading of the "unfair method of competition" 

prong of Section 5.33
 

To be sure, both of 
 these prongs of Section 5 are subject to limiting principles, as 

subsequent appellate decisions have made clear. One limiting principle relates to the nature of 

the conduct. In OAG, the Second Circuit held that such a violation could not be found where the 

respondent "does not act coercively."34 I felt the standard setting context in which the conduct 

occured here was critically important. N-Data's efforts to exploit the power it enjoyed over 

those practicing the Fast Ethernet standard satisfied this requirement because the market lacked 

any practical alternatives. I felt that this form of patent hold-up was inherently "coercive" and 

"oppressive" with respect to firms that were practically locked into a standard. 

The second limiting principle relates to the effects of the conduct. Although the Supreme 

Cour has made it clear that the respondent's conduct need not violate the letter (or even the 

spirit) of 
 the antitrst laws to fall under Section 5, that does not mean that conduct can be 

considered an unfair method of competition if it has no adverse effect at all on competition. I 

felt that requirement was also satisfied here, given the importance of the breached commitment 

to the ex ante competition that precedes the adoption of a standard like the standard at issue in 

that case.
 

htt://www .ftc.gov /speeches/rosch/osch- NERA -Speech-Julv6- 2006. pdt
 

33 FTC v. Sperr & Hutchinson Co., 405 U.S. 233, 239 (1972); see also FTC v. Ind. 

Fedn of 
 Dentists, 476 U.S. 447, 454 (1986). 

34 Offcial Airline Guides v. FTC, 630 F.2d 920, 927 (2d Cir. 1980) ("OAG"); see
 

also E.!. Du Pont v. de Nemours & Co. v. FTC, 729 F.2d 128, 139-40 (2d Cir. 1984) ("Ethyl"). 

Similar to OAG, the Second Circuit held that "at least some indicia of oppressiveness must 

exis .... .
 . t ")


12 
The third limiting principle relates to the ability of the "victims" of the conduct to defend 

themselves. The commitment here extended not to a single firm, but rather to an industry-wide 

standard setting organization. Indeed, in the standard-setting context - with numerous, injured 

third parties, big and small, who lack privity with the patentee and with the mixed incentives 

generated when members must decide whether to pass on royalties that raise costs market-wide ­

contract remedies may prove ineffective, and Section 5 intervention may serve an unusually 

important role. Indeed, the SEC reporting requirements, which would require the biggest 

businesses to acknowledge that they were potential infrngers, and hence subject to multiple 

damages and attorney fees if 
 they planned to defend infringement claims by N-Data, tended to 

inhibit even those firms from defending themselves as easily they could if they faced mere 

breach of conduct claims. 

The Commission did not allege that N-Data's conduct violated Section 2 of 
 the Sherman 

Act. Speakig only for myself, I did not believe the facts supported a viable Section 2 claim. 

The facts in N-Data were different from those of 
 the Commission's earlier standard setting cases. 

For example, unlike in Rambus, there were no allegations of 
 misconduct or anti-competitive 

behavior at the time the standard was adopted by the IEEE. Nor were there any allegations of 

anticompetitive behavior that led the market to subsequently implement IEEE's standard. The 

conduct in the case - the breach of 
 the licensing commitment - did not cause N-Data to either 

acquire or maintain its monopoly power. The monopoly power exploited by N-Data was 

conferred by the standard setting organization and the subsequent marketplace adoption of the 

standard. 

Put different, it might be argued that N-Data's renege on the original commitment made 

13 
by National Semiconductor constituted an "exclusionary" act or practice. However, I doubted 

that the renege could be considered "exclusionar" in any meaningful sense of that term. It had 

nothing to do with the ex ante competition that occured before the standard at issue was 

adopted, and it could not be said that there was any causal connection between that act or 

practice and the adoption of the standard (which allegedly produced monopoly power in the 

"autonegotiation technology market.") That act or practice occured years after the standard was 

adopted and the market was "locked in" to the technology. 

III. Concluding Remarks: What's Next?
 

So what's next for the Commission? First and most immediately there is a decision to be 

made on whether to pursue an appeal in Rambus. As I said earlier, I personally support a 

petition for certiorari in Rambus. I think the D.C. Circuit's decision is wrong and given the fact 

that it rests on important legal principles respecting causation in Section 2 cases. I think its 

implications are much broader than the standard setting context. The petition is due in midNovember and it is my hope that the Solicitor General weighs in to support us on this important 

effort. 

Second, the Commission wil have to decide whether it wil continue to prioritize these 

cases if 
 the D.C. Circuit's decision is allowed to stand. Again, personally I continue to favor 

aggressive enforcement in this area. To be sure, in futue cases, the Commission wil have to 

focus even more attention on causation. The added burden may add some challenges but the 

stakes are high. It is important to remember that the costs wil be borne by consumers. A patent 

holder engaged in deceptive or manipulative conduct that enable it to captue a market standard 

may distort the competitive process and injure consumers. Standard setting in some industres 

14
 
may eliminate competition but we are wiling to sacrifice that competition because it also 

promises great effciency. However, if 
 we allow firms to manipulate or distort the process then 

we risk the very effciencies we are looking to captue. 

Third, I think it is safe to say that Section 5 is on the table. N-Data may only be the 

beginng. The Commission is holding hearings on uses of 
 Section 5, and at least one of 
 the 

panels wil consider Section 5 in the standard setting context. I hope you wil offer your 

comments on the future scope of Section 5. 

15