Wednesday, October 16, 2013

Non-SSO Patent Commitments and Pledges symposium: David Balto comments

Posted by David Balto (Law Offices of David Balto)

With phrases like “lock-in” and “hold-up” constantly bandied about you might think that technology companies were engaged in the childhood game of cops and robbers. In a way you would be right, tech companies are playing a game, albeit one generally reserved for the wealthy, in which patents are being used to gain competitive or economic advantages. These companies can play a friendly game in which they make promises to a standard setting organization (SSO) to only license their patents on reasonable and non-discriminatory terms (RAND). Friendly players are playing the long game – their technology is widely adopted based on their RAND commitments and they gain reasonable economic advantages. Tech companies can also play a more mean-spirited game by
guarding their patents closely only to spring them on competitors, either to obtain high royalties or to impose high switching costs.

Both the friendly game and the mean-spirited game have reasonably well established rules. In the friendly game the rule is simply to not break your RAND commitments. A judge will not award an injunction on a RAND encumbered patent where the commitments are ruled to be violated. The President has also signaled a willingness to veto exclusion orders from the ITC on RAND patents. Even Congressman have advocated before the ITC against a company they believed to have violated their SSO based RAND commitment. In the mean-spirited game the only rules are to not to get caught violating the antitrust laws. Players in this game know to be on the lookout for patents owned by other companies and to either invent-around them or to obtain contracts setting terms before
adopting the technology.

However, what happens when a company mixes both games together? In this third game the company does not make commitments to an SSO, but instead makes general non-SSO RAND-like commitments. Based on these commitments, the company’s technology is widely adopted. When the market becomes reliant on the technology the company then asserts its leverage to gain more favorable deals. What are the rules in this game? The rules in an SSO based game are arguably tied to contract and antitrust law. There, the company makes contractual obligations to an SSO which can then be enforced. In a non-SSO situation there are often no underlying contractual obligations, but the competitive concerns are just as significant, if not more so.

A good example of this last game is Microsoft’s licensing of its ActiveSync patent. Microsoft has substantial market power, especially in business markets, for desktop email, contacts, calendar, tasks, and notes through their Outlook software. Microsoft had the opportunity to expand some of
this power into the smartphone market through its ActiveSync technology which allowed synchronization of email and desktop information with smartphones through special Exchange ActiveSync servers. Microsoft made RAND commitments to encourage companies to adopt ActiveSync technology in order to assuage fears of Microsoft having too much power.

Microsoft started to leverage its patent power once ActiveSync was an entrenched technology in the mobile space. Microsoft has in some cases refused to offer ActiveSync as a stand-alone license, instead only offering it as a part of a package with many other patents. Microsoft has also sought, and obtained ITC exclusion orders on the ActiveSync patent. Microsoft is attempting to play a friendly game by giving a RAND commitment but actually playing a mean-spirited game by failing to honor these obligations.

Ultimately, the real losers of this bait-and-switch type of strategy are not the game players but the most important participants – consumers. These games might sting the players, but many of them have so far been able to stay in the game. Consumers on the other hand have to deal with higher costs from increased licensing fees and lowered choices from products being excluded from the
market. For example, forcing handset makers to buy a bundle of patents just to get the ActiveSync technology costs consumers millions of dollars every year in the aggregate.

It is this last type of game which creates the biggest antitrust problem because of the lack of established market rules and the capacity for consumer harm.  The antitrust cops have policed the problem in the SSO context; its now time for them to look at the greater problem.

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