David F. Smutny

Partner
Antitrust & Competition
Read full biography at www.orrick.com

David Smutny leads Orrick's Washington, D.C., Litigation Business Unit and is the firm-wide Deputy Practice Group Leader for the firm's Antitrust and Competition Practice Group. He has extensive experience in antitrust litigation, counseling and government investigations. His antitrust practice spans a variety of industries, including: telecommunications and media, computer software and cloud-based services, wood products, petroleum refining and distribution, healthcare, biotechnology/pharmaceutical, defense procurement, advertising, banking and securities.

Prior to joining Orrick, Mr. Smutny was a Shareholder at Heller Ehrman LLP and served for many years as a Trial Attorney in the U. S. Department of Justice's Antitrust Division. While at the DOJ, he led or played a central role in a variety of merger, civil non-merger and criminal grand jury investigations and litigation in the telecommunications, multi-channel video, media, healthcare and financial industries. He also managed the Department's competition policy efforts under §271 of the Telecommunications Act of 1996. Additionally, during his tenure with the DOJ, Mr. Smutny served as a Special Assistant United States' Attorney in the U.S. Attorney's Office for the District of Columbia where he tried 21 criminal cases.

Apart from his antitrust experience, Mr. Smutny has also represented one of the nation's largest consumer products companies in connection with a comprehensive brand integrity and trademark litigation effort designed to combat unlawful trademark and product counterfeiting.

Some of Mr. Smutny's notable representations include:

Private Litigation

  • In re A2P SMS Antitrust Litigation (SDNY): Represent business text messaging services provider in consolidated class action alleging an industry-wide antitrust conspiracy among wireless carriers, downstream messaging service providers and the CTIA trade association.
  • In re Certain Handheld Electronic Computing Devices, Related Software, and Components Thereof (USITC 2011-12): Represented Microsoft before the U.S. International Trade Commission in obtaining dismissal on summary determination of an antitrust "patent misuse" affirmative defense relating to Microsoft's patent licensing program for distributors of Android-based devices.
  • MiniFrame Ltd. v. Microsoft Corp. (SDNY): Represent Microsoft in antitrust monopolization lawsuit filed by maker of "PC sharing" software.
  • BanxCorp, Inc. v. Lending Tree LLC, et al. (SDNY 2010): Represented MSNBC Interactive News in obtaining dismissal of lawsuit alleging an industry-wide antitrust conspiracy among Bankrate, Inc. and major news and financial information websites in the market for Internet bankrate table listings.
  • Hood v. Microsoft Corp. (Mississippi 2009): Represented Microsoft in parens patriae lawsuit filed on behalf of the State of Mississippi alleging monopolization of markets for PC operating systems and productivity applications software.
  • Daisy Mountain Fire Dept. v. Microsoft Corp. (Arizona 2008): Represented Microsoft in defending against antitrust class action filed on behalf of Arizona governmental entities alleging monopolization of markets for PC operating system and productivity applications software.
  • Comes, et al. v. Microsoft Corp.,No. CL 82311 (Iowa 2006-07): Member of trial team that defended Microsoft in a four-month antitrust class action trial in Iowa state court alleging monopolization of markets for PC operating systems and productivity applications software.
  • Real Networks v. Microsoft Corp. (2005): Represented Microsoft in competitor action alleging antitrust violations relating to PC media player software and functionality.
  • Burst v. Microsoft Corp. (2005): Represented Microsoft in action alleging antitrust violations relating to PC media player software and functionality.
  • Gordon, et al. v. Microsoft Corp., Case No. 00-005994 (Minnesota 2004): Member of trial team defending Microsoft in a two-month antitrust class action trial in Minnesota state court alleging monopolization of markets for operating system and productivity applications software.
  • Lingo, et al. v. Microsoft Corp.; Cities & Counties of San Francisco, et al. v. Microsoft Corp. (California): Represent Microsoft in antitrust class actions filed in California state court by consumers and governmental entities alleging monopolization of markets for PC operating systems and productivity applications software.
  • 3M Antitrust Litigation (EDPA 2003): Represented 3M Corp. in class action antitrust lawsuits filed in the U.S. District Court for the Eastern District of Pennsylvania brought by direct and indirect purchasers involving Sherman Act § 2 allegations relating to 3M's bundled rebate discount programs.
  • Philip Morris USA Trademark Litigation (2003): Represented Philip Morris USA in connection with a comprehensive domestic brand integrity and trademark litigation effort, involving successful lawsuits in dozens of federal courts around the country against retailers and suppliers selling counterfeit Philip Morris product.

Government Investigations/Litigation

  • Represent Louisiana-Pacific Corporation before the U.S. Department of Justice in connection with LP's proposed $1.1 billion acquisition of Ainsworth Lumber Co., Ltd.
  • Represent consumer electronics company and service provider in matter before the U.S. antitrust agencies.
  • U.S. v. AT&T, Inc. and Centennial Wireless Corp. (DDC 2010): Appointed by the Court to serve as outside general counsel to Trustee managing wireless telecommunications divestiture assets from merger as an independent competitive entity pending identification and transition to a new owner.
  • U.S. v. Verizon Communications, Inc. and Alltel Corp. (DDC 2009): Appointed by the Court to serve as outside general counsel to Trustee selected to manage certain "hold-separate" wireless telecommunications merger assets pending further ruling of the Court.
  • Federal Trade Commission v. Paul L. Foster, Western Refining, Inc., and Giant Industries, Inc., No. 1:07-cv-00352-JB-ACT (DNM 2007), motion for emergency relief pending appeal denied, No. 07-2131 (10th Cir. 2007), appeal dismissed, No. 07-2131 (10th Cir. 2007): Successfully represented Western Refining through merger trial and appeal in an action brought by the FTC to enjoin Western's acquisition of Giant Industries.
  • European Commission Internet Browser and Interoperability Investigations (2008-09): Represented Microsoft in responding to antitrust complaints relating to abuse of dominance and software interoperability.
  • KFTC Media Player Investigation(2005): Assisted Microsoft in responding to antitrust issues raised by the KFTC under Korean competition law.
  • JFTC Licensing Investigation (2004): Assisted Microsoft in responding to antitrust issues raised by the JFTC under Japanese competition law.
  • Represented multi-channel video programming distribution company in matter before U.S. DOJ Antitrust Division.
  • Represented telecommunications services provider in matter before U.S. DOJ Antitrust Division.
  • Represented pharmaceutical company in connection with a merger investigation by U.S. and European regulatory agencies.
  • Represented defense industry manufacturer of combat munitions in connection with a joint antitrust/procurement audit investigation by the U.S. DOJ Antitrust Division, and the Department of the Army relating to a procurement teaming agreement.
David Smutny

Patent Licensing in the Cloud: Antitrust Issues

It is well established in the United States that a patent holder generally has broad discretion to determine how it uses or licenses it patents. The U.S. Supreme Court’s bottom-line principle expressed in Trinko—that companies are free to refuse to deal with anyone—applies to intellectual property as is does to other property rights.1 As the U.S. DOJ and FTC have expressed, “the unilateral right to refuse to grant a patent license is a core part of the patent grant.”2 And as patent holders generally are free to refuse to license their patents, they also generally are free to impose any restrictions they wish on licenses that they do grant.3

This general rule holds as well in the rapidly growing and changing cloud computing industry. Nevertheless, the antitrust laws do impose some limits on a patent holder’s rights, and as a result patent licensing and litigation have become significant competitive issues in the technology industry in recent years. Companies licensing patents in the cloud should be aware that certain licensing practices in the cloud might have anti-competitive effects that could trigger antitrust concerns. This article reviews, at a high level, whether the nature of cloud computing raises special antitrust risks, and if so, when a company should consider further review of its licensing practices.

A. An Overview of Cloud Computing
Cloud computing is the provision of data or applications on demand, over the web, to remote users. The cloud can best be viewed as a “stack” consisting of five layers—hardware, virtualization, infrastructure as a service (“IaaS”), platform as a service (“PaaS”), and software as a service (“SaaS”):

Cloud

Each layer depends on interface and protocol interoperability to those above and below it for the cloud to work properly. For example, when a user opens a photograph in her Facebook account on her smartphone, she is using a SaaS application (the Facebook app) to retrieve data (the digital photograph file) stored in remote hardware (the Facebook servers) that are collectively managed by virtualization software and an operating system. If the remote hardware fails, then neither the SaaS application nor the data can be retrieved, and the user experience collapses.

Within each broad layer is an abundance of potential product and technology markets that are similarly codependent: servers and mainframes with connected storage devices and networking gear; server, mainframe, and cloud operating systems; video compression and streaming software; search engines; webmail; online advertising; and others. Surrounding these is an overlapping series of products (and potential markets) such as smartphones, tablet computers, PCs, set-top boxes, and game consoles. Many, and likely most, of the underlying technologies in these markets are subject to intellectual property protections.

To recoup investments and obtain cost predictability, players at all levels in the cloud rely on patent licensing, frequently in the form of cross-licenses and portfolio licenses that provide a form of “patent peace” to the parties. The licensing practices are particularly important to the heavyweight patent holders that compete across multiple markets in the cloud. One player that competes in several cloud-related markets, IBM, perennially has been one of the top two patent holders in the world. Apple, Microsoft, Amazon, Hewlett-Packard, and Oracle/Sun also possess significant patent portfolios and compete with one another within the cloud industry. And recently, Google appears to be scrambling to catch up.

B. Antitrust Risks in the Cloud
Cloud computing represents a disruptive “paradigm shift” potentially comparable to the emergence of the Internet and the personal computer. As such, the cloud presents opportunities for companies to leverage rapid technology change to challenge previously dominant competitors in once-unassailable markets. And like the Internet and the PC before it, the cloud promises tremendous potential efficiency and innovation benefits for consumers and the economy. This virtually guarantees that competition authorities around the world will closely watch cloud-related markets for potential antitrust violations. For patent licensors, some of the most important antitrust risks include: (1) market power and tipping points; (2) tying and package licenses; and (3) standards setting and patent pools.

(1) Market Power and Tipping Points

As described above, the cloud consists of multiple intersecting and overlapping markets. As a result, cloud computing may present scenarios where a company that has market power in one cloud market can use that market power to foreclose competition in adjacent markets. This is especially the case because of the need for interoperability between technologies in the cloud. A company that holds patents covering protocols and other links between a monopoly product and products in another market can expect greater scrutiny of its licensing practices. This is especially the case in jurisdictions, such as the European Union, where monopoly leveraging is a more viable claim than in the United States).

Like other technology industries, the cloud also presents risks of tipping points, where one company’s product becomes an accepted standard. This potential for market tipping can be exacerbated by the presence of network effects or high barriers to entry, just as in more mature technology markets. Providers that operate across multiple cloud markets—and especially providers that are dominant in one or more markets—therefore should carefully review licensing practices to avoid being accused of leveraging market power in one area of the cloud into another area of the cloud.4

(2) Tying and Package Licenses

Another, related risk arising from the multiple layers of cloud markets is that of anti-competitive tying or bundling. Generally, a distinction exists between patent-to-product tying and patent-to-patent tying. In patent-to-product tying, the patent owner “uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor.” U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1189-90 (Fed. Cir. 2005). Courts have found such licenses to constitute antitrust violations or patent misuse, and companies should be wary of any such conditions in patent licenses. See, e.g., United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int’l Salt v. United States, 332 U.S. 392, 395 (1947); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868-69 (Fed. Cir. 1997).

By contrast, in most cases, companies may offer a license to a portfolio (or package) of patents without undue concern about potential antitrust risk. See Philips, 424 F.3d at 1190-91. However, package licenses can raise antitrust issues if a company that owns rights to essential patents forces licensees take a license to non-essential patents, and that coercion forecloses competition from commercially viable alternative technology. Id. at 1194. Therefore, patent holders who offer package licenses including both essential and non-essential patents should carefully review portfolio licenses, bundles, and package licenses to ensure that they do not present such risks.

(3) Standards Setting and Patent Pools

As with other technology industries, the need for interoperability in the cloud means that companies often must conform to industry standards to be serious providers of products or services providers. Where this is the case, special issues may arise. Most standards-setting organizations require participants whose patents read on an adopted industry standard to promise to license their patents on terms that are “reasonable and nondiscriminatory” (“RAND”). Any such promise places an immediate limitation on what is otherwise freedom to license on terms the patentee desires. Antitrust risks, as well as other contractual or tort law risks, may flow from undertaking a RAND obligation if those obligations are not fulfilled.5 In addition, similar issues may arise in the context of patent pools, where bundles of patents from different patent owners are collected in one pool for licensing subject to the kinds of commitments the DOJ has required in approving patent pools.6

* * *

In sum, companies can expect that the licensing practices that are increasingly commonplace in cloud computing, as elsewhere, likely are pro-competitive and in line with well-settled legal principles. However, the importance of the cloud and its nature mean that antitrust authorities will closely watch any licensing conduct in the cloud. In addition, any licensing that implicates more than one potential product market—especially where a patent owner has a monopoly in one market—could prompt greater scrutiny. In such cases, patent owners in the cloud should carefully review licensing strategies for potential antitrust risks.
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1 See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“[A]s a general matter, the Sherman Act ‘does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’”) (citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919)).

2 U.S. DEP’T OF JUSTICE AND FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007) (“JOINT ANTITRUST/IP GUIDELINES”), at 6.

3 See General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 127 (1938) (“The practice of granting licenses for restricted use is an old one. So far as it appears, its legality has never been questioned.”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 706 (Fed. Cir. 1992) (“Restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all of part of the patent grant.”).

4 Because companies in the cloud frequently acquire businesses in adjacent markets or decide later to enter previously uncontested adjacent markets, an “Aspen Skiing” scenario may arise in this context. For example, a company that licenses software to hardware providers, and then enters the hardware business itself, should be wary of changes to existing licensing practices that could be viewed as anti-competitive attempts to foreclose hardware competition. See JOINT ANTITRUST/IP GUIDELINES at 28 (liability could attach “when a patent owner refuses to continue to license under circumstances paralleling those in Aspen”); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

5 See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F. 3d 297 (3d Cir. 2007).

6 See, e.g., JOINT ANTITRUST/IP GUIDELINES at 65-85; Letter from Thomas Barnett to William Dolan and Geoffrey Oliver, Oct. 21, 2008 (RFID patent pool), available at http://www.justice.gov/atr/public/busreview/238429.htm.