Friday, April 18, 2008
Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND
Posted by D. Daniel Sokol
Miguel Rato and Damien Geradin (both of Howry though Damien also heads the College of Europe's Competition Law Center) ask Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND?
ABSTRACT: Standard-setting activities play a fundamental role in fostering innovation and competition in a variety of markets. Typically carried out by armies of engineers, they would generally not be expected to fascinate lawyers and economists. But they do - and they have recently received much attention as a result of high-profile cases, complaints lodged with competition authorities and attempts by members of standard-setting organizations to have their rules and procedures modified to prevent allegedly anti-competitive outcomes. This article aims to disprove the growing perception, largely fed by certain interest groups, that current standard-setting procedures generally based on the so-called fair, reasonable and non-discriminatory ("FRAND") licensing regime unduly allow opportunistic holders of Intellectual Property ("IP") embedded in a standard to extract excessive royalties from their licensees. First, we demonstrate that the existing FRAND regime works and that recent proposals to alter it by tilting the bargaining position of IP licensors in favour of licensees are driven by a war of business models. It is shown that such proposals are not only unnecessary, being based on false premises, but would also prove detrimental to investment and innovation. Second, we argue that excessive pricing cases under Article 82 EC should not be pursued except in a very narrow set of circumstances. Given the potential for error of any attempt to determine the competitive price of intangible assets, decisions on the appropriate royalty levels of valuable IP should be left to the market.