Tuesday, October 15, 2013

Non-SSO Patent Commitments and Pledges symposium: Robert G. Harris comments

Posted by Robert G. Harris
(University of California, Berkeley & Charles River Associates)

Over the past decade, we have witnessed dramatic growth in the number of (1) SSO’s/SDO’s; (2) standards sanctioned by those SSOs; (3) patents declared essential to those standards (SEPs); and (4) SEPs practiced by interconnected, interoperable, integrated devices such as smartphones.   

Not surprisingly, these developments—and the “patent wars” incited by them—have caused antitrust enforcement agencies to devote significant attention to identifying and mitigating the potential anticompetitive uses of SEPs, i.e. patent holdup against competitors.  Though there are legitimate concerns about overly restrictive policies toward SEPs (e.g. prohibiting the use of injunctions, which may encourage holdouts by potential licensees), there are valid antitrust concerns about the opportunistic use of “lock-in” that occurs during standard-setting and adoption.

Unfortunately, antitrust enforcers have paid much less attention to a related problem, namely the anticompetitive abuse of standards that are established outside of a collaborative standard-setting process.  As such standards are often referred to as “de facto,” I will refer to de facto standards-essential patents as “DEPs.” 

Evidence indicates a growing incidence in the use of DEPs.  As noted by Professor Contreras in a companion post, “parties have increasingly made voluntary public patent commitments in settings outside of SDO-based standards development, but which are characterized by a similar desire for interoperability and inter-vendor compatibility.”  As noted by other symposium contributors, DEPs present many of the same antitrust concerns as SEPs, and should be accorded the same treatment by enforcement agencies. 

This post will address one type of de facto standards that is especially problematic for competition, namely when a firm with market power in one or more product markets uses that market power to establish a de facto interoperability or compatibility standard for the industry.  Because competitors must comply with that standard to ensure interoperability of its products, they can be subject to holdup in the licensing process. When interoperability or compatibility is necessary for commercial success in a product market and/or related markets, the potential for the market-dominant firm to use patents against its competitors is substantial.

These competitive concerns will most commonly arise where a dominant firm has sufficient market power in one ore more product markets to establish a de facto standard, but must make assurances to competitors and other adopters that it will not use its DEPs against them.  Precisely because the dominant, standard-setting firm has market power, rational industry players would have legitimate concerns about market power, and seek reassurances of continuing availability to DEP licensing on reasonable terms.  In other words, the dominant firm makes commitments very similar to those made by participants in SSOs, including licensing competitors on reasonable terms. 

Note that, as in the case of SEPs, there is a “fundamental transformation” in the bargaining power of DEP-holder and licensees once the de facto standard has been adopted by the industry: competitors have invested in product design, production facilities and other sunk costs, making them increasingly subject to holdup by the DEP-holder as lock-in deepens. 

Perhaps most importantly, those commitments may induce competitors to refrain from investing in alternative technologies that could emerge as a competitive alternative to the products of the dominant firm.  For these reasons, DEPs should be subject to at least the same level of enforcement scrutiny as SEPs.

Furthermore, antitrust enforcers should recognize that DEPs can cause even greater anticompetitive harm than SEPs precisely because of the inherent differences between SSO- and de facto standard setting.  SEPs are established in a collaborative process in which no single firm has market power (indeed, a main reason for the collaboration is that no single firm can establish a standard).  As standard-setting is a “multi-period game,” reputational effects among collaborators can restrain opportunism by SEP-holders. 

In contrast, when a de facto standard is established by a dominant firm, it can use DEPs to
protect its market power in the very product markets that enabled it to establish the standard, creating a “positive feedback loop” that enables it to develop successive versions of the standard based on subsequent developments and patents.  What is positive for the dominant firm is, unfortunately, very negative for competition.  Moreover, the dominant firm can use its control over the de facto standard and DEPs to protect itself from competition, or, in the worst case, extend its dominance to related product markets.

Thus, once commitments have been made by the dominant firm to establish a de facto industry standard, and other firms have relied upon those commitments in the adoption of that standard, the DEP-holder should be required to (1) offer licenses to those who seek one (i.e. there is no longer a “right to exclude”); (2) offer those licenses at “fair, reasonable and non-discriminatory” royalty rates (i.e., the patents are “RAND-encumbered); and (3) offer licenses to the DEPs on a stand-alone basis (i.e. may not bundle DEPs into a portfolio that includes non-standard-essential patents). 



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