There is no particular proscriptive model for how that process should be determined, let alone the price level. It is obvious, however, that the SEP system has to be based on a price commitment by the seller. The combination of a patent and a standard that grants the holder such market power that, without a price commitment, the market would be distorted and the SEP system would be discarded at some point.
However, what that actual price should be is a far more complicated issue, and one that can lead to inefficient forms of resource allocation, e.
- Standard-essential patents: FRAND commitments, injunctions and the smartphone wars.
- Lessons from Information and Communication Technology.
- Main studies;
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In short, technology creators can be incentivized to develop technologies that are of little relevance to the market if the price mechanism rewards that type of behavior. Getting the prices right is therefore not just an issue of determining what is fair and reasonable; it also informs companies in their decisions about what technologies to invest in and how they strategize to compete in the future.
Obviously, opinions about what FRAND rules actually mean for licensing practices and royalty rates vary among involved stakeholders. Returning to the stylized division of interest between SEP holders and users, we can see that the former group prefers as much pricing discretion as possible, while the latter generally would prefer to reduce pricing flexibility for holders.
It has also been argued that neither FRAND rules nor courts give any significant guidance on the actual royalty rate, or even the basis for calculating royalty rates. Court decisions relevant for royalty pricing and pricing negotiations have acknowledged that FRAND rules intend to resolve market problems caused by asymmetrical information and that they are based on the notion of a price commitment that ensures not just that prices are fair and reasonable, but that they are also non-discriminatory.
The sheer presence of a standard gives a patent holder a price leverage and an opportunity to demand a higher license rate for the patented technology than if it had not been adopted into the standard. However, while it is important to get the basic theoretical concepts right, and acknowledge that there has to be a price commitment for a system of standardization to work especially if the technologies in question are under patents , there are many practical issues to consider. An ex-ante price, for instance, may not be possible to determine — and, from a market perspective, it may not be a good price.
A price that clearly does not reflect the market valuation of a technology will give companies incentives to allocate resources in ways that do not support technological development and growth. If the current trends of determining the ex-ante FRAND rate locks the system into an artificial type of pricing — setting the price before there has been any real market valuation of it — there are clear risks of the price itself distorting the market. However, what complicates the process of determining prices is that the standard itself will represent such a large part of the value of the license that it becomes difficult to get the market to determine prices in an evolutionary way.
Are there alternative ways to approach the issue about what should constitute a price commitment? Recently, there have been approaches suggested that could work as alternative or complementary models to the current approach of a market-driven ex-ante price determination. For instance, the above-mentioned study by the Joint Research Centre has discussed the introduction of a market-corrective practice that would ensure SEP holders that they get a predicted return on investment RoI if the revenues from normal market sales do not cover the cost of developing the technology.
The logic is simple: if the creator of the technology does not get adequately rewarded, it follows that the company will not be incentivized to put resources into research and development that could improve technology and lead to more downstream innovation. This return on investment concept, however, is both principally awkward and impracticable. There is no guaranteed market reward for any investment in a market economy — and if such a guarantee existed, it would distort the market and lead the innovation process in a direction that is unlikely to reflect market demand and consumer preferences.
Furthermore, it is difficult, to say the least, to find a way to objectively assign development costs within a firm to one particular patent — and that challenge gets much bigger if the sum also should be considered legitimate by the buyers. There would be incentives for patent holders to exaggerate investment including research and development costs, which are difficult to objectively evaluate from the outside, similar to intra-firm transfer pricing arrangements, which constantly give rise for legal disputes.
Logically, for such a system to fairly represent the success of a technology creator, any reward in excess of the established RoI metric would have to be redistributed from the patent holder to the users, further reducing the competitive instinct of SEP suppliers. The critical task now is to make the SEP market more transparent and lead market participants sellers and buyers to contract over technologies that are essential to a standard, and the RoI concept stands in opposition to that quest.
Another idea that has been drafted suggests that the royalty could be determined by the end-use of an SEP, and that the value of that end-product should influence the price that a buyer pays for an SEP. Clearly, this has been part of SEP contracts for quite some time and holders, like any other market participant, have set their prices in accordance with how valuable they think an upstream technology is for a downstream product.
Often it has worked smoothly, and as long as a holder is not trying to increase the price when buyers have been locked into using a standard, it should be up to buyers and sellers to determine what the price should be. In a way, inspiration for such an approach can also be drawn from decisions where courts have attempted to determine the value of a patent. However, there is a context to how this idea is now being promoted which makes it awkward and impractical. While courts have sought to determine a fair value for a patent when other market circumstances have not made that possible, that process has not been an exercise prefaced with the intention of ensuring higher rates for the patent holder.
And that is where it differs. The case now for a use-based approach is predominantly about effecting a new form of corporate redistribution where downstream innovators implicitly would be taxed for the purpose of increasing the revenues of the upstream innovator. Importantly, it is partly about trying to leverage the standard itself for the determination of the price and to get the market distribution of income to work more to the benefit of technology contributors.
Obviously, this approach intends to correct the changing fortunes of businesses, where margins often are better in downstream markets and increasingly squeezed in upstream markets. It is thus not a surprising development: given market developments, that no one wants to end up in a market position where other companies in the value chain are better at capturing potential margins.
Creating a way of redistributing revenues backwards through the value chain is an appealing idea if the downstream users are considered to benefit unfairly from the upstream contributor. However, it is difficult to see how a use-based approach could work in practice when the task remains to set the norms for determining the FRAND price — the ex-ante price that discounts from the market value that comes from being part of a standard.
A use-based approach could, in the first place, be discriminatory as users could be charged a differentiated royalty for the same technology. Given the general market development, this could have effects on the competitive relationship between downstream users of the SEP. A key point of FRAND still is to minimize such effects and ensure that downstream competition is not determined by the contract relation that different parties have with an upstream contributor of technology. Hence, an end-use approach would run the risk of undermining the current system of standardization because users would not be able to trust that it ensures stable conditions for competitive neutrality.
This judgment holds even if the discrimination takes place at the level of product classes and not just between companies that are competing head-to-head with similar products. Finally, an end-use approach to establishing a policy-based FRAND rate policy set by SSO, courts, antitrust authorities or market regulators would face the same practical difficulties as determining a FRAND rate based on the return on investment for the patent holder. It is hardly easier to design a credible system for determining the value of an input for the final product than it is crafting a trusted estimate over the costs incurred for developing a patent.
It has been attempted by courts in patent litigations but, even if it is a practice that is necessary when all other alternatives have failed, it is not exactly a straight-forward process. Nor are the outcomes necessarily more advantageous for companies who think they are poorly rewarded for their upstream technologies because, as expressed by opinions by the U. There is a market logic behind the skepticism to a use-based approach. The value of a connectivity standard in an automobile, for instance, differ between brands and models, and over time as products, consumer preferences and market competition change.
Markets can be fickle and the whole point of market-driven innovation is that the hedonic outcome for customers, not the inputs and the costs incurred, determines the value of a good or service. Consequently, a use-based approach would risk resulting in greater costs for those companies that are good at understanding what customers are willing to pay for. What the consequences would be in practice is actually harder to predict.
In sectors where SEPs are important — predominantly ICT — technological development forces rapid changes in products and markets, and what is relevant for the valuation of an SEP at one point could be irrelevant soon after. There is much talk now about the future shape of the IoT market, and expectations about growing connectivity between various products have fueled controversy about the entire SEP system.
Yet this discussion shows that the policy aspects of the SEP system are sometimes distant from market realities. For instance, today there are greater connectivity opportunities for a refrigerator, and those are likely to increase in the future. But what are consumers prepared to pay for the opportunity to get an automatic update when they are about to run out of milk and butter?
Can automated retail delivery be connected to the technology, and assist households in making sure there is food in the refrigerator when they need it? If so, how much would consumers be willing to pay for that service? All these aspects of the market are unknown. And, therefore, there is no objective way of singling out the value of one particular input technology that would not be prone to a very big scope of interpretation, negotiation and manipulation.
Consequently, the use-based approach does not reduce the artificiality associated with determining an ex-ante price for the FRAND royalty. Both approaches would create more problems than they would solve. They would introduce greater uncertainties about the terms of pricing and more frictions between contracting parties that cannot find alternative arrangements that are reasonably reliable. An alternative approach is to change the price setting approach and allow for much greater price variation — or price ranges — in contracts of FRAND-encumbered SEPs.
This view is thought-provoking — for reasons that we will return to soon.
It is difficult, however, to get a laissez-faire or price-range approach to work in a system whose credibility ultimately has to be based on a price commitment by SEP holders. The process of standardization is very likely to lose trust if an upstream input supplier is given big pricing power and when that is already known at the time of the actual setting of the standard. Rather, such approaches take us back to the idea that FRAND rules are actually supposed to mitigate the granting of additional market power to companies that already enjoy exclusivity rights through patents. The market distortions that are likely to follow such market power would provide incentives for users to develop own solutions rather than accepting a standard, and consequently there would be increased technological fragmentation and greater problems of interoperability between products and platforms.
The FRAND concept of fair and reasonable prices may by all means be necessary, but it does not ensure that a royalty is set at a level that reflects market conditions and what, beyond the premium that is caused by a patent being essential to a standard, is a relevant market valuation. While there is a degree of flexibility in negotiations, the point with FRAND rules is that there should not be any significant ex-post changes in royalties. Ex-post prices that deviate from the ex-ante valuation should in principle not be part of the market.
In reality, however, many holders and implementers are accepting that practice, but developments through courts and authorities — moving in the direction of the ex-ante valuation — may be about to reduce that flexibility. Locking the market to the ex-ante price is awkward. Courts and other institutions respond to litigation claims and give guidance on what general principles like fair and reasonable mean in practice, but their task is not to determine if other developments than the standard have given reason for the royalty to change.
And such changes can go in both directions, as there can be situations when a patent holder is motivated to either cut or increase a royalty. Hence, the merit of this approach is to avoid that markets, and not just individual companies, get locked into using a sub-optimal technology because of failing incentives to encourage new technology and more competition.
The pricing flexibility view is also interesting because, despite FRAND rules and court decisions, the current regime all too often leaves participants in the dark about the FRAND royalties charged by SEP holders to other firms, including firms operating in different positions along the same value chain or in other sectors. Hence, adequately improving price transparency would have to take precedence over attempts to amend or detail the framework for how FRAND-encumbered SEPs should be negotiated.
That latter part follows directly from recent court cases, most notably the decision by the Court of Justice of the European Union in Huawei v. ZTE where judges established the basic pillars of the negotiation framework see for instance Jacob and Milner While it has become obvious through court disclosures over the past years that there is indeed a degree of discrimination as far as royalties are concerned, few proposals that have been suggested so far to address concerns about discriminatory practices.
This is an area where further guidance is needed because protection against discrimination is critical to ensure the competitive neutrality of standards and SEPs. One approach would be to have SSOs giving clarification for how parties should negotiate in good faith and what that entails in practice.
Another approach, currently under consideration in Europe, is to have guidelines issued by regulators on the same matter. A third approach is to establish the equivalent of a license registry or repository where parties to a contract of a FRAND-encumbered SEP would disclose the material conditions of a contract.
Such a change would increase transparency and trust. Importantly, it would also increase the ability of both parties to negotiate legitimate ex-post changes of royalties. Many SEP implementers accept the notion of an ex-post change to the price as long as changes are reasonable and do not discriminate between various buyers.
The problem now, however, is that the obscurity of the SEP market stands in the way for ex-post royalty corrections that reflect other changes than the essentiality to a standard and its lock-in effect on the industry , i. Furthermore, improved transparency in other aspects, and greater demands on all parties to ensure that the SEP contracts concern technologies that are essential to a standard, would additionally support a greater role for the evolutionary market discovery as far as prices are concerned. If it is regularly the case that SEP implementers lack the information to judge whether all the SEPs they are buying licenses for are essential or not, they are hardly in a position where they can engage in an informed dialogue about allowing greater variation of prices for reasons unrelated to the essentiality of the contracted technology to a standard.
Naturally, if the market is considered distorted by multiple layers of non-transparency, the first order of priority is to defend against any misuse of the market power that a standard gives to an SEP holder. Market obscurity reinforces potential problems associated with how prices are determined for FRAND-encumbered patents. While there is no universal formula for how the initial, ex-ante price is determined, the reality is that prices and standard-setting often evolve simultaneously. During a standard-setting process, many technology creators have incentives to patent as much as they can in the territory of the future standard.
It is impossible for everyone at this point to anticipate the market utility and valuation of each patent, and the only thing that seems safe to predict is that a patent that will be essential to the standard will increase revenues. But there is often no real market where a valuation can be discovered. Undoubtedly, this is particularly a concern for those companies that signaled an ex-ante price commitment that is lower than what subsequently would be the real market valuation irrespective of the patent being included in the standard or not.
One conclusion is that more time in the standard-setting process should be given to establishing the conditions for how to set the price — and, thus, to avoid as much as possible the problem of getting the prices wrong. Discussing the price before a standard is defined is an awkward process in a market-based economy, but the standard itself and the FRAND rules that should govern essential patents change the price mechanism to such an extent that corrections are difficult to achieve at a later point.
Many companies participating in the standard-setting process already consider the market aspect of the future standard and have quite an advanced idea about which companies and patents that will be central for the standard to be implemented. It would therefore be natural for the parties involved to engage in a dialogue ex-ante about what the establishment of the standard should mean for the royalty and what factors that could constitute legitimate reasons for ex-post price corrections. In other words, when price and market valuation are such a central part of the market for FRAND-encumbered SEPs to function efficiently, the standard-setting process could improve the evolution of future SEP markets by combining the technical decisions about the standard with transparent discussions about what should constitute the initial price and on what grounds these prices could be amended in the future.
Arguably, an initiative by SSOs to facilitate a discussion between companies about prices follows logically from the opinion by the Court of European Justice in the Huawei v. ZTE case. Under standardization, the lion share of the value of a product will be its essentiality to a standard: technologies that are not essential will be valued completely differently. It follows, therefore, that after a decade of SEP disputes and controversy that have made the SEP system unpredictable for many companies, it is time for SSOs to better facilitate the market for SEPs and not just their technical properties.
SSOs are effectively creating a market place for technology — and the task now should be to ensure that good markets norms govern the behavior in this market. There are reasons to be optimistic about the future of SEPs. The world economy is at the doorstep of technological developments that would benefit from an SEP system trusted by innovators in up- and downstream markets. Despite growing frictions between various participants in SEP contracts, the reality is that all sides to the equation actually still stand to benefit from an SEP system that delivers on its potential.
For the SEP system to become more credible there is some renovation work required. In a way, that work can be described as finishing the design of the SEP market and put more attention on market practices and developments around the actual patent and standard. The most urgent priority is to establish rules and institutions that gradually will make SEP markets more transparent. The ambition is clear and there is no need to beat about bush: market obscurity should be reduced and practices should conform to the basic norm that the implementer of a standard should be able to easily access information about how precisely a license is essential to a given standard and why users need it for the standard to be implemented.
After all, that is the whole point of using a standard and the vast part of the value of an SEP. Given that this information is largely asymmetric under the current regime, there is no way to achieve this aim without amending FRAND rules with the view of demanding SEP holders to disclose that information and to allow SEP implementers to appeal the essentiality claim. Standard-setting organizations can take various steps to reduce the incentives for companies to over-declare patents as essential and maintain the essentiality claim despite knowing that a patent is non-essential.
However, it is market transparency that is the solution, not necessarily large databases about the technical properties of a patent that will be difficult for many actors to navigate anyway. FRAND rules are regarded as essential to prevent individual companies from gaining and exploiting too much market power. Therefore, ideas that have been proposed for new methodologies to determine the right FRAND price through an RoI or use-based concepts will hardly lead to improvements. Such approaches would increase the uncertainty about the market for SEPs and how prices are determined in the future.
They would distort market allocation of resources to innovators in both up- and downstream markets, and, in the case of certain use-based approaches, encourage discrimination between the users to such an extent that competitive neutrality in downstream markets would be affected. There is a strong case to be made for putting greater focus on how prices are determined ex-ante — before the standard has been decided.
Courts and authorities are already arguing that the relevant methodology for determining the royalty is what the value of a patent would be if it was not essential to a standard. Even though this constitutes more of a theoretical concept, there are good reasons to live up to this approach in practice: the standard is critically important for how much revenues a patent holder can raise through licensing the patent. This approach, however, often leads to the setting of an artificial price that sometime does not reflect the market valuation of a patent irrespective of its role for the standard.
The valuation of a patent would be different if it had not been included in a standard, and that process would have been led by markets. For patents as well as other innovation-based goods and services, it is important to let the discovery process of the market affect their valuation. In a standard that is based on patented technologies, that discovery process is currently stymied from the start by rules that commit holders to a price.
A greater degree of transparency around the standard-setting process can protect the market from getting prices wrong. A greater degree of transparency from the SEP holder would create opportunities to correct prices ex-post when there are legitimate reasons to do so. Improvements can happen in different ways. It is important, though, to maintain the basic pillars of a voluntary SEP system and allow the courts to continue having a central place in establishing market norms.
It is also critical that changes are coordinated globally. The technologies that are covered by the SEP system are invented, patented, sourced and produced globally. If one jurisdiction deviates from the global trend, it will lead companies to allocate resources and compete on the basis of legal arbitrage. Adams, S. Ahmed, K. Biddle B. Collins, B. Fischer, R. Geradin, D. Jacob, R. Milner , Lessons from Huawei v.
Mueller, F. Muris, T. American Enterprise Institute. Nurton, J. Pohlmann, T. Putnam, J. Regibeau, P. Schweizer , M. Shen, D. On its part, Philips did not declare its patent as essential or potentially essential, as intellectual property law did not require the company to do so. Finding that SK Kassetten and several other manufacturers of CD-Rs had failed to seek out a license from Philips, the company sought an injunction and money damages. Invoking Article 82 of the European Treaty, the defendant followed a competition law defence claiming that Philips was abusing a dominant position.
Nevertheless, in this particular case, the District Court The Hague later determined that SK Kassetten could not make use of the Orange Book Defense, as it had not requested a patent from Philips, nor payed any royalties, and that it could therefore not be applied under Dutch law in the case Schweizer In , Microsoft Corp. Motorola held patents essential to the H. Motorola immediately launched a counter suit, claiming that Microsoft had infringed its H. In this case, however, both parties disagreed as to what constitutes RAND royalty rates, leading the court to issue its own page opinion recreating the hypothetical negotiations between the two parties.
At an appeal at the Ninth Circuit court, judges affirmed the decision of the district court. Furthermore, the Ninth Circuit agreed with the district court that enforcing RAND-encumbered patent through injunction violates the duty of good faith and fair dealing , and that Washington law allows damages to include costs of defence against injunctive action. The complaint allegations concerned a number of Motorola patents. Motorola sought several remedies including an injunction prohibiting Apple from importing, marketing and distributing infringing products.
Motorola also filed two further complaints for patent infringement against Apple in the U. District Court for the Southern District of Florida. In addition, Apple filed counterclaims in the Southern District of Florida in later in , alleging Motorola infringed several Apple patents in manufacturing and selling several electronics devices.
Apple made six license offers to Motorola. It also allowed both companies to submit their assessments for a consideration by courts. This led the German courts to temporarily suspend the injunction. Starting in , Samsung Electronics Co. In light of the commitments offered by Samsung, the European Commission therefore considered that the legal proceedings should be brought to an end.
Following failed negotiations over the licensing of a patent owned by Huawei to ZTE, Huawei decided to seek an injunction over patent infringement. It was declared essential or potentially essential by Huawei in and has been licensed on FRAND terms to third parties since. Following the inconsistencies to approaches to this issue, the German court referred questions to the European Court of Justice CJEU , which in provided some clarifications, the most important of which is that if a claim of dominant position is made, justifications must be made beyond the simple fact of ownership of an SEP, such as the patent owner refusing to license despite having made FRAND commitment s.
As well as providing a general framework for determining whether there has been abuse of dominance, the CJEU explained that where a prospective licensee is holding appropriate security in the form of a bank guarantee or an amount held on deposit, he can be considered willing to enter into a license contract. Additionally, the CJEU offered a distinction between seeking injunctive relief , which may be considered abuse of a position of dominance, and seeking damages, which would not necessarily.
Ltd, along with Samsung and Google, for the infringement of six of its UK patents, following a dispute during non-technical trials concerning a number of its SEPs. During the proceedings, Unwired Planet offered the licensing of its entire global portfolio including non-SEPs to the defendants, which they refused, denying infringement and questioning the validity and the essentiality of the SEPs. The proposed global rates were 0. Unwired Planet argued that the patentee should be entitled to seek injunctive relief if both parties make FRAND offers, assuming these would imply the adherence to FRAND commitments on the part of the patentee.
The court decided that an SEP holder must agree to license its technology on FRAND terms, and that those licenses must be global for global players, instead of limiting a license to a single jurisdiction on a country-by-country basis , e. In the case of a patent infringement, licensees who refuse to accept valid FRAND terms for a license are liable to injunctions. In the first injunction granted during the proceedings in a case of infringement of an SEP in China, the Beijing IP Court ordered a permanent injunction on Sony and demanded that it pay 9 million 1.
This commitment declaration nevertheless did not specify the patent numbers of the associated SEPs. ZL Although Sony launched invalidation proceedings before the Patent Re-examination Board, the latter upheld the validity of the patent in question in The court had to consider whether the parties had fault in prior licensing negotiation in deciding whether to grant an injunction.
The court had to find whether infringement had occurred and whether the defence of patent exhaustion was applicable in this case. The court affirmed that a permanent injunction is generally available against an unwilling licensee. Panelists suggested several factors, independent of specific SSO rules or practices, that may deter some IP holders from holding up licensees.
First, IP holders that are frequent participants in standard-setting activities may incur "reputation and business costs. And that hurts more than the actual [legal] remedy. People start to mistrust you after that. So it's not really deep penalties. I mean we play too quickly, too fast. Second, one panelist suggested that in some cases a licensor may try to affect the SSO's technology choice by informally indicating the terms under which it intends to license intellectual property incorporated into a standard.
Upon receiving such confirmation, the committee can consider alternative technologies before the standard is set, he noted. Third, an IP holder might enjoy a first-mover advantage if its technology is adopted as the standard. IP holders that produce and sell a product using the standard sometimes may find it more profitable to offer attractive licensing terms in order to promote the adoption of the product using the standard, increasing demand for its product rather than extracting high royalties.
Fourth, IP holders that have broad cross-licensing agreements with the owner of the selected IP might be protected from hold up. Many SSOs have developed policies to mitigate hold up. The provisions of such SSO policies fall, broadly speaking, into two nonexclusive categories: disclosure rules and licensing rules. Disclosure rules require SSO participants to disclose patents and, sometimes, patent applications and other intellectual property or confidential information related to a standard under consideration.
Licensing rules restrict the terms that holders of such intellectual property can demand. Panelists noted that disclosure rules can help avoid hold up by informing SSO members about relevant intellectual property held by those participating in the standard-setting process, thus allowing SSO members jointly to decide whether to incorporate the patented technology in a standard.
The disclosure policies of those that do are diverse. Panelists said that SSO policies to mitigate hold up confer substantial procompetitive benefits. It's really designed to avoid the hold-up situation where they create a standard without knowing that there is intellectual property incorporated into it. Panelists suggested that disclosure rules also have costs and limitations, however.
For example, compliance with disclosure rules may slow down standards development, which could be particularly costly in fast-paced markets with short product life cycles. Panelists said that disclosure rules drafted by engineers and business people may reflect their authors' laudable ethos--to work collaboratively toward a standard--but sometimes fail to consider carefully the intellectual property and antitrust issues. In the past ten years, the FTC has brought three cases challenging alleged hold ups based on failures to disclose the existence of IP rights as unfair competition under section 5 of the FTC Act.
After the SSO adopted the standard, Dell allegedly demanded royalties from those using its technology in connection with that standard. The Commission accepted a consent agreement under which Dell agreed not to enforce the patent in question against firms using it as part of the standard. In a recent case, In re Rambus , the Commission determined that Rambus had acquired monopoly power through deceptive, exclusionary conduct in connection with its participation in an SSO.
According to the Commission's opinion, Rambus engaged in a course of conduct "calculated to mislead [SSO] members by fostering the belief that Rambus neither had, nor was seeking, relevant patents that would be enforced" against products compliant with the SSO's standards. One other FTC case resulted in a consent order. In , the FTC filed an administrative complaint against the Union Oil Company of California "Unocal" for allegedly misrepresenting information involving proposed low-emissions gasoline standards in state regulatory proceedings.
According to the complaint, Unocal presented research results in these proceedings that it had represented as non-proprietary, and the state regulating board used these results in setting its standards. At the same time, Unocal was pursuing patent rights to cover these research results. The FTC's complaint asserted that Unocal misrepresented its proprietary interest in the standard until members of the refining industry had spent billions of dollars modifying their refineries to become compliant with the new standards.
Unocal then alleged that the new standards infringed its patents. This conduct allegedly enabled Unocal to charge substantial royalties, costing consumers hundreds of millions of dollars per year.
Under the terms of the settlement, Unocal will not enforce its patents related to the reformulated gasoline standard set by the state board. Even if SSO members are informed about the existence of patented technologies through disclosure during a standard-setting process, hold up over licensing terms may still be a concern. One panelist identified six "ways that patent license terms revealed only after the standard is adopted can generate conflict and impair many parties' abilit[ies] to compete in the affected market. Supporting those who believe that hold up is more widespread than it appears, one panelist said that "[licensees are] not going to come back to the SDO [standard development organization] and complain [about RAND licensing terms].
The SDOs have made it very clear that they don't want to hear about this stuff. For example, the World Wide Web Consortium requires all participants to commit to royalty-free licensing terms. Some panelists endorsed royalty-free licenses as the best means for limiting licensing hold up and for growing markets.
Such might be the case because the intellectual property holder could retain a first-mover advantage and be in the best position to implement the standard, or the IP holder could license its other protected technologies that are complements to those incorporated in the standard.
Neither Agency advocates that SSOs adopt any specific disclosure or licensing policy, and the Agencies do not suggest that any specific disclosure or licensing policy is required. In some cases, market factors, IP disclosures, and commitments to license on RAND terms may not sufficiently mitigate the potential for licensing hold up. These well-defined licensing commitments could be introduced into the standard-setting process through ex ante unilateral announcements of licensing terms by IP holders or through ex ante multilateral licensing negotiations between IP holders and the group of SSO members.
An economist at the hearings noted that "[i]t is efficient [for standard setters] to choose the technology that involves the lowest cost of producing [the] product," so they would likely prefer to be able to combine the selection of technology for a standard with the negotiation of licensing terms for that technology. To illustrate this point, the economist described a stylized setting in which an SSO needed to select one of multiple alternative protected technologies. He explained that, under his simplifying assumptions, one would expect such an auction to result in the SSO selecting the efficient technology, and that the terms of the licensing agreement would reflect the relative benefit of the selected technology.
There was a general consensus among panelists that a more transparent process for setting licensing terms is desirable. Nonetheless, the increased administrative costs and delays associated with such transparency led many panelists to disfavor ex ante discussions for practical reasons, independent of antitrust considerations. Several panelists stated that ex ante licensing negotiations would require firms to completely overhaul how they participate in SSOs.
Currently, firms are typically represented at SSOs by technical experts who focus on selecting the best technology for a standard, not on negotiating licensing terms. Panelists raised concerns about two categories of antitrust liability that could result from ex ante negotiation of licensing terms: 1 naked agreements to restrain trade by intellectual property holders or SSO members, and 2 the exercise of group buying power by those that participate in the standard-setting process.
As discussed above, standard-setting activities were the subject of several U. Supreme Court decisions between the s and s that dealt principally with exclusionary practices and the "capture" of an SSO by a group of competitors. Some panelists extrapolated from the usual antitrust "presumption that when competitors get into the same room together[,] as Adam Smith said, little good can come out of it.
Sham multilateral licensing negotiations certainly may offer an opportunity for SSO members to reach naked price-fixing agreements that lack plausible and cognizable justifications, restraints that the Agencies and courts summarily condemn. Standards set by SSOs, like all types of standards, can promote competition by lowering prices, increasing consumer choice, or improving quality.
In the absence of nakedly anticompetitive restraints by an SSO or by its members, it is appropriate to determine whether an SSO's efforts to reduce opportunities for IP holders to hold up future users of a standard violates the antitrust laws pursuant to the rule of reason. Relying on the rule of reason when analyzing the competitive harm that might arise from implementation of an SSO policy promoting ex ante licensing negotiations is appropriate because ex ante negotiations may mitigate the market power of patent holders created by SSO members when they incorporate a particular technology in a standard that creates or expands a market for that technology.
As one panelist explained, "to talk about per se liability is to disregard the integrative effort that takes place in developing the standard and in creating the demand for the technology. In most cases, it is likely that the Agencies would find that joint ex ante activity undertaken by an SSO or its members to establish licensing terms as part of the standard-setting process is likely to confer substantial procompetitive benefits by avoiding hold up that could occur after a standard is set, and this would be an important element of a rule of reason analysis.
Patent Challenges for Standard-Setting in the Global Economy on Apple Books
Ex ante licensing discussions can thus preserve the benefits of competition that exist by increasing the ex ante knowledge of SSO decision-makers about licensing terms and may improve the quality of their decisions, enabling them to make tradeoffs between price and technical merit that are not possible unless the price of patented technological inputs is known before the standard is set.
This ex ante knowledge may place an upper bound on a patent holder's RAND commitment, and it lowers the risk that users of a standard will face demands for more restrictive licensing terms after the standard is set than SSO members expected when they chose to include the patented technology in the standard. Reducing this risk may speed adoption of the standard in the marketplace. Nonetheless, joint ex ante licensing negotiations may raise competition concerns in some settings. In such circumstances, the ex ante negotiation among potential licensees does not preserve competition among technologies that existed during the development of the standard but may instead simply eliminate competition among the potential licensees for the patented technology.
Some SSOs, and their participants, have hesitated to allow the question of price to be part of the formal standard-setting process in any form. They have allowed neither ex ante unilateral announcements of licensing terms by firms that own the protected technology nor joint discussions about licensing terms between these firms and the SSO members. Because of the strong potential for procompetitive benefits, the Agencies will evaluate joint ex ante activity to establish licensing terms under the rule of reason.
The Agencies' general approach to these issues is outlined below. First, an IP holder's voluntary and unilateral disclosure of its licensing terms, including its royalty rate, is not a collective act subject to review under section 1 of the Sherman Act. Further, a unilateral announcement of a price before "selling" the technology to the standard-setting body without more cannot be exclusionary conduct and therefore cannot violate section 2. Second, bilateral ex ante negotiations about licensing terms that take place between an individual SSO member and an individual intellectual property holder without more outside the auspices of the SSO also are unlikely to require any special antitrust scrutiny because IP rights holders are merely negotiating terms with individual buyers.
Third, per se condemnation is not warranted for joint SSO activities that mitigate hold up and that take place before deciding which technology to include in a standard. Such joint activities could take various forms, including joint ex ante licensing negotiations or an SSO rule that requires intellectual property holders to announce their intended or maximum licensing terms for technologies being considered for adoption in a standard. The Department recently analyzed an SSO's proposal to require member firms to disclose their intended most restrictive licensing terms for patents essential to a standard.
Pursuant to the rule of reason, the Department concluded that it would not take enforcement action if the policy were adopted because the policy preserved competition between technologies during the standard-setting process. If intellectual property holders turn joint ex ante licensing discussions into a sham to cover up naked agreements on the licensing terms each IP holder will offer the SSO, per se condemnation of such agreements among "sellers" of IP rights may be warranted. Similarly, ex ante discussion of licensing terms within the standard-setting process may provide an opportunity for SSO members to reach side price-fixing agreements that are per se illegal.
The Agencies will almost certainly treat as per se illegal any effort by manufacturing rivals to fix the price of the standardized products they "sell" instead of discussing the price of the terms on which they will "buy" a technology input that is needed to comply with the standard. However, such risks are not sufficient to condemn all multilateral ex ante licensing negotiations, particularly given the fact that "[t]hose developing standards already have extensive experience managing this risk. The Agencies do not suggest that SSOs are required to sponsor such discussions during the standard-setting process.
Concerns about legitimate licensing discussions spilling over into dangerous antitrust territory may dissuade some groups from conducting them in the first place. Moreover, it is fully within the legitimate purview of each SSO and its members to conclude that ex ante licensing discussions are unproductive or too time consuming or costly. The Agencies take no position as to whether SSOs should engage in joint ex ante discussion of licensing terms but recognize that joint ex ante activity to establish licensing terms as part of the standard-setting process will not warrant per se condemnation.
Such activity might mitigate the potential for IP holders to hold up those seeking to use a standard by demanding licensing terms greater than they would have received before their proprietary technology was included in the standard. Given the strong potential for procompetitive benefits, the Agencies will evaluate joint ex ante negotiation of licensing terms pursuant to the rule of reason. The two primary types of standards are 1 interoperability standards, which guarantee that products made by different firms can interoperate, and 2 performance standards, which set minimum requirements for all products in a general product category.
Pol'y , Amy A. Michael L. Hundreds of collaborative standard-setting groups operate worldwide, with diverse organizational structures and rules. See Apr. They may be called standard development organizations, promoter's groups, joint ventures, special interest groups, or consortia. For ease of discussion, this Report will refer to all these standard-setting groups as SSOs, recognizing that standard-setting organizations vary widely in size, formality, operation, and scope.
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In a "standards war," substitute products with incompatible designs are introduced into a market, and users' purchase decisions ultimately establish one design as the dominant design or de facto standard, in what can effectively be a winner-take-all competition. However, not all competition among incompatible designs results in the establishment of a de facto standard. Markets in which standards wars result in a single standard are typically those in which the network effects are the greatest--i. Mueller, 17 Berkeley Tech. Standards wars offer consumers a choice of products that incorporate alternative potential standards.
During a standards war, however, some consumers may delay purchasing until the de facto standard is chosen because they do not want to be stuck with the costs of moving from a losing standard to the winning standard. Gallini eds. To win a standards war, a firm may have to incur significant costs or limit its assertion of market power in order to establish an installed base of users.
The winner of a standards war, however, may have significant market power, often because it can enforce its patent rights to prevent others from making products that conform to the standard. See, e. See Standard Sanitary Mfg. United States , U. Indian Head, Inc. Soc'y of Mech. Eng'rs v. Hydrolevel Corp. This type of hold up is a variant of the classical "hold-up problem. The hold-up problem indicates the prospect of under-investment in collaborations in which parties must sink investments that are specific to the collaboration, investments that may be costly to redeploy or have a significantly lower value if redeployed outside of the collaboration.
The potential for one party to hold up another party that has sunk investments specific to the relationship may discourage that other party from investing efficiently in the collaboration in the first place.
Chapter 2 : Competition Concerns When Patents Are Incorporated Into Collaboratively Set Standards
For further discussion of the hold-up problem, see generally Benjamin Klein, Robert G. Libecap ed. In the standard-setting context, firms may make sunk investments in developing and implementing a standard that are specific to particular intellectual property. To the extent that these investments are not redeployable using other IP, those developing and using the standard may be held up by the IP holders.
A new study reviews patent policies for leading standards-setting organizations
See Nov. Moreover, this hold up may cause firms to sink less investment in developing and implementing standards. Whether and at what point hold up can occur will vary, depending on a variety of factors. For hold up to occur, the cost of switching to the best alternative standard must be greater than the benefits of switching to the best alternative standard. Daniel G. Collaborative de jure standards sometimes face a market test for acceptance, just as de facto standards do. If a standard chosen by an SSO must compete with rival standards, then the owner of any patented technology necessary to implement the SSO's standard may have little market power.
The opportunity for users of the SSO's standard to move to a rival standard if the royalty rates are too high may limit the owner to a competitive royalty rate. Ex ante, the bargaining positions are very different because, let's suppose, there would be maybe lots of choices. For consumer harm to occur, it is not necessary that hold up result in higher marginal costs for producers. For example, higher lump sum or fixed royalties might discourage entry among firms that would produce the standardized product.
The reduction in competition at the downstream level, and possible reduction in product adoption, might harm consumers. See infra note and accompanying text. Complaint, In re Dell , F. C resolved by consent order, F. In re Rambus, Inc. The term "negotiation" is used in this Chapter to encompass a range of activities relating to the consideration of the price of a technology input for a standard, including disclosure of most restrictive licensing terms, discussion of the relative costs of alternative technology inputs, or negotiation of licensing terms leading to a licensing agreement.
The most direct source of switching costs is the difference between the costs of acquiring new infrastructure to implement a new standard and the salvage value of current infrastructure that is supporting the existing standard but would not be used to support a new standard. In the absence of network effects, this switching cost can be viewed as an upper bound on the extent to which the underlying technology's patent owner can hold up firms using the standard. A second source of switching costs can be network effects such ascompatibility.
It may be impractical tochange the existing standard for one piece of infrastructure if that piece must be compatible with other pieces of infrastructure. Thus, for example, a person wanting to upgrade his word processing software may be locked in to his current software if there is a large benefit to maintaining compatibility with the software of other colleagues. There is a vast literature on network effects and the role of standards in network effects.
For an overview of the literature, see Bertrand V. See generally Dennis W. Nat'l Collegiate Athletic Ass'n v. Tool Works Inc. Ink, Inc. Some of the demand for products that comply with the standard may be for the inherent technical advantages of the invention. A patentee is generally entitled to revenues attributable to this demand. But some of the demand may also be created by the adoption of the standard.
The patentee is not entitled to revenues attributable to this demand.