Intellectual Property and Standard Setting

Author(s):: Koren Wong-Ervin, Joshua Wright
Posted:: 12-2016
Law & Economics #:: 16-48
Availability:: Full text (most recent) on SSRN

ABSTRACT:

Standard setting has become increasingly important to the economy. Voluntary, open, and market driven standard setting promotes research and development investments in "best of generation" technologies that enable and accelerate follow on innovation, competition, and economic growth. Standard development organizations (SDOs) are private organizations that develop technical and other standards through a collaborative and consensus-driven process that balances the varied interests of industry participants, which include both producers and potential users of technology. SDOs provide a platform for industry scientists and engineers to come together and develop technical standards. Because standards may include technology that is the subject of intellectual property rights (IPRs) such as patents, SDOs historically have promoted widespread dissemination of standardized technologies through IPR Policies, which balance the rights of IPR holders with rights to access essential technology. Although SDO IPR Policies vary widely, many policies achieve this balance by seeking to have their members publicly declare any potential standard-essential patents (SEPs) (i.e., patents that are essential to practice a given standard) and to license them on "fair, reasonable, and nondiscriminatory" (FRAND) terms. Most SDOs clearly state that the purpose of the FRAND assurance is to both ensure access to the standardized technology and fairly compensate the contributors to the standard.

The issues and choices regarding specific IPR Policies are best left to individual SDOs and their members to decide, rather than government agencies. SDOs "vary widely in size, formality, organization and scope," and therefore individual SDOs may need to adopt different approaches to meet the specific needs of their members. A government agency's issuance of recommendations may unduly influence private SDOs and their members to adopt policies that might not otherwise gain consensus support within a particular SDO and that may not best meet the needs of that SDO, its members, and the public. This could occur because the SDO believes that failing to adopt the specified policy is not permitted or because failing to adopt the policy could subject the SDO and its members to other legal liabilities. Accordingly, the U.S. Antitrust Agencies have taken the position that they do "not advocate that SSOs [standard setting organizations or SDOs] adopt any specific disclosure or licensing policy, and the Agencies do not suggest that any specific disclosure or licensing policy is required."

However, despite these statements, the U.S. Department of Justice's Antitrust Division (DOJ) recently issued a Business Review Letter on the proposed amendments to the Institute of Electrical and Electronics Engineers, Incorporated's (IEEE's) IPR Policy. In the letter, the DOJ went well beyond its mission of providing a statement of its antitrust enforcement intentions with respect to the proposed amendments, and instead endorsed certain policy choices. Some of its preferred policies include provisions that essentially prohibit patent holders from seeking or enforcing injunctive relief on FRAND-assured SEPs, and provisions that essentially require component-level licensing; the latter is contrary to the long-standing industry practice of end-user device licensing. The IEEE's controversial amendments were highly criticized by SEP holders and others on both procedural and substantive grounds. Recent econometric analysis reveals a biased treatment of substantive comments submitted to the IEEE by members opposed to the controversial revisions. Additional empirical evidence following the amendments shows a slowed rate of development for IEEE standards and numerous major SEP holders refusing to grant letters of assurance (i.e.,assurances to license under certain terms) under the new policy.

Another concerning development is the U.S. Federal Trade Commission's (FTC's) recent consent agreements with Bosch and Motorola Mobility/Google. The former prohibits the company from seeking or enforcing injunctive relief on FRAND-assured SEPs; the latter prohibits the companies from seeking injunctive relief on a worldwide basis except under certain circumstances. Following the FTC's consent agreements, antitrust agencies around the world, including in Canada, China, Korea, and Japan, adopted similar approaches, namely creating competition law sanctions for seeking or enforcing injunctive relief against "willing licensees." These developments represent a fundamental policy shift that threatens to disrupt the carefully balanced FRAND ecosystem without any evidence that the targeted conduct (namely "holdup" by patent holders) is a widespread or systemic problem that has led to higher prices, reduced output, or lower rates of innovation. Indeed, in contrast to the predictions of the theories that such injunctions will have anticompetitive effects, products that intensively use SEPs have seen robust innovation as well as falling prices and increased output when compared to industries that do not rely upon SEPs.