SSO RULES, STANDARDIZATION, AND SEP LICENSING: ECONOMIC QUESTIONS FROM THE TRENCHES

Roger Brookes, Cravath discusses SSO RULES, STANDARDIZATION, AND SEP LICENSING: ECONOMIC QUESTIONS FROM THE TRENCHES.

ABSTRACT: Despite a widespread assumption that SEP-driven “holdup” in patent-dense standardized industries requires changes to SSO rules and governmental corrective intervention, the empirical record shows intensive investment, commercial success, and competitiveness throughout that most patent-dense of industries, cellular telephony. Existing rules have not resulted in economically unreasonably cumulative royalty levels, nor in “holdup” that has identifiably impeded the uptake of any new technology. The article offers hypotheses about the causes of this disconnect between theory and the real world, and cautions that inadequately considered changes imposed on SEP licensing systems may have unintended harmful results. Existing SSO patent licensing rules are the result of truly ex ante negotiations among industry participants of differing interests that must cooperate to create new value. A diverse sequence of investments is necessary for the creation of a commercially successful standard; the effect of any proposed change to SEP licensing rules on each class of necessary investor must be carefully considered. Rather than promising assured returns for all participants, standardization changes the nature and allocation of risk, potentially increasing the risk facing pre-standardization investors while decreasing the risks facing post-standardization investors. Even the mechanisms available to resolve disputes concerning SEP licensing can have substantive impact; the introduction of the possibility of antitrust remedies for violations of what began as contractual FRAND undertakings strongly changes bargaining power in license negotiations, and hence reduces incentives to invest in basic R&D. In studying all these issues, models built around the development and licensing of a single invention may have little relevance to industries characterized by portfolio licensing.