FROM PRIVATE ORDERING TO PUBLIC LAW: THE LEGAL FRAMEWORKS GOVERNING STANDARDS-ESSENTIAL PATENTS.

Author:Contreras, Jorge L.
Position:Symposium: Intellectual Property and the New Private Law
 
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TABLE OF CONTENTS I. INTRODUCTION 211 II. PRIVATE ORDERING 213 III. PRIVATE ORDERING AND TECHNICAL STANDARDIZATION 214 IV. SDO DUE PROCESS AND PATENTS 216 V. FROM PRIVATE ORDERING TO PRIVATE LAW 218 VI. THE PUBLIC CHARACTER OF STANDARD SETTING 220 A. Historical Roots 220 B. Network Effects and Benefits 222 C. Today: Standards as Public Goods? 224 VII. THE PUBLIC INTEREST AND INJUNCTIVE RELIEF 225 VIII. THE PUBLIC-PRIVATE DIVIDE AND ENFORCEMENT OF SDO COMMITMENTS 227 IX. ANOTHER VIEW OF PUBLIC LAW FOR STANDARDS-ESSENTIAL PATENTS 229 X. CONCLUSION 231 I. INTRODUCTION

Technical interoperability standards such as Wi-Fi, Bluetooth, HTML, and 3G/4G enable smartphones, computers, game players, and other products manufactured by different vendors to communicate and operate within the modern networked infrastructure. The development of these standards, an activity conducted largely within industry associations populated by engineers and product designers, has recently become the subject of considerable legal controversy. In particular, disputes have emerged as private parties have accumulated and asserted patents covering standards against manufacturers of standardized products. This litigation has attracted the attention of antitrust and competition authorities worldwide, and efforts are under way to address perceived abuses of the standardization process through enforcement actions and new governmental regulations. But beneath the myriad doctrinal and economic issues raised by these efforts lies a more fundamental question regarding the appropriateness of governmental action to regulate what could be described as a private activity, though one with potentially significant effects on global product and service markets.

A deep conceptual gulf has emerged between the two camps in this debate. It highlights the basic question whether technical standard setting is best conceptualized as a private activity governed most efficiently by its own internal rules and procedures, or whether it is at root a public activity that should be regulated within the sphere of public law. (1) To a degree, this debate reflects the larger battle being waged today over the nature of patent law and the patent system itself, and whether these are most accurately described as private or public resources. (2)

This Article draws upon recent scholarship, judicial opinions, and agency guidance to frame the debate over the regulation of technical standard setting in terms of private ordering, private law, and public law. The remainder of this Article proceeds as follows: after a general introduction to private ordering structures in Part II, Parts III and IV describe how technical standard setting has evolved as a private sector activity. Part V analyzes the incorporation of standards bodies' rules and norms in private law adjudication among market participants. Part VI shifts the focus to the public benefits that standard setting affords and Part VII describes the recent debate regarding public interest considerations relevant to the issuance of injunctions to block the sale of standardized products. Parts VIII and IX look more broadly at the public character of technical standard setting and ask whether public law mechanisms such as antitrust and competition law should regulate this activity. This Article concludes by proposing a preferred legal framework for addressing behavior and commitments within standard-setting bodies.

  1. PRIVATE ORDERING

    The term "private ordering" refers to the use of rules systems that private actors conceive, observe, and often enforce through extra-legal means. (3) Since Professor Robert Ellickson's landmark study of the unwritten codes that govern cattle ranching in rural California, (4) a sizeable body of legal scholarship has emerged in this area. (5) Commentators have analyzed the private ordering systems of Hassidic diamond wholesalers, (6) Memphis cotton merchants, (7) Japanese organized crime syndicates, (8) the Internet domain name authority ICANN, (9) the New York stock Exchange, (10) credit rating agencies, (11) and many others. While these groups vary dramatically in their composition, goals, and patterns of interaction, they all adhere to a code of internally developed and administered rules and enforcement mechanisms.

    Professor Barak Richman has observed that private ordering systems arise under two general sets of conditions. (12) The first is when private rules and enforcement are required because state-sponsored mechanisms (e.g., courts) are unavailable to enforce commitments among the actors. (13) The second and more relevant scenario involves private ordering that arises when state-sponsored enforcement mechanisms may be available, but private rules and enforcement are preferable because of the nature of the parties, commitments, and other circumstances. (14) For example, private actors generally develop and enforce the rules of professional sports leagues, including both the rules of the games themselves and the manner in which teams and players interact, subject only to challenge under criminal, antitrust, and other overarching legal regimes. (15) This allocation of rulemaking to the private sector is sensible as there is often no extrinsic legal basis to decide how to reward achievements in a game (e.g., baskets, goals, touchdowns), how many players should constitute a team, or how many teams should be permitted to compete in the league. In the commercial context, governments often allocate pseudo-regulatory functions to private associations and organizations. Examples include the credit rating authority assigned to Standard & Poor's and Moody's and the establishment of public accounting standards by the Financial Accounting Standards Board ("FASB"). (16) Commentators have identified various systemic efficiencies that the allocation of such rulemaking functions to the private sector can achieve. (17) To establish legitimacy, it is also important that private rule makers, as surrogates for state actors, observe certain minimum standards of due process and procedural fairness. (18)

  2. PRIVATE ORDERING AND TECHNICAL STANDARDIZATION

    One area in which private ordering structures are prominent is technical standard setting. While government agencies set some standards promoting health and public safety, market participants develop the majority of technical interoperability standards in voluntary associations known as standards-development organizations ("SDOs"). (19) In the United States, the delegation of standards-development activity to the private sector represents a conscious national policy. (20) The requirement that federal agencies adopt, whenever possible, standards developed by private sector "voluntary consensus standards bodies" has since 1980 been embodied in OMB Circular A-119 (21) and reflects Congressional direction under the National Technology Transfer and Advancement Act of 1995 (22) ("NTTAA"). While standardization activity outside the u.s. is not so explicitly delegated to the private sector, private sector actors, by default, lead much standardization activity throughout the developed world, even in SDOs that have more formal governmental ties. (23) Thus, by and large, the rules that govern technical standardization are the subject of private ordering among market participants.

    These rules comprise formal written policies as well as informal norms, understandings, and practices. As discussed below, informal norms serve both to inform how to understand and interpret an SDo's formal rules and to shape the interactions and relationships of SDo participants in areas that formal rules do not address. (24)

  3. SDO DUE PROCESS AND PATENTS

    To the extent that SDOs have adopted formal rules, they often relate to the standardization process itself (i.e. the mechanics of proposing, debating, and approving new standards). Many SDOs began to implement such rules in response to high-profile U.S. antitrust lawsuits that exposed blatantly anticompetitive conduct by SDO participants. (25) In the wake of these cases, many SDOs began to impose "due process" requirements on their proceedings. Today both OMB Circular A-119 (26) and the accreditation requirements of the American National Standards Institute ("ANSI") (27) establish due process requirements for SDOs. These requirements generally ensure that SDO standard-setting processes are open, balanced, transparent, consensus-based, and subject to appeal. (28)

    In recent years, one of the most contentious areas of SDO rule-making has concerned intellectual property, particularly with regard to patents that are deemed to be "essential" for a product to comply with a standard (so-called "standards-essential patents" or "SEPs"). There is a large and varied theoretical literature concerning the potential effects that SEPs may have on markets for standards-compliant products. (29) One of the principal areas of debate concerns whether SEP owners can and do "hold-up" the market by demanding excessive royalty rates after a standard has been widely adopted and manufacturers have made substantial capital investments in the standardized technology (thus becoming "locked-in"). (30) Another potential issue is "royalty stacking," which can become a threat, as the Court of Appeals for the Federal Circuit explained, "when a standard implicates numerous patents, perhaps hundreds, if not thousands," each of which bears a royalty that must be paid by product manufacturers and which "may become excessive in the aggregate." (31)

    Many sDos have adopted policies designed to mitigate the threats of patent hold-up and stacking. These policies fall into two general categories: disclosure policies and licensing policies. (32) Disclosure policies require SDO participants to reveal SEPS that they hold, generally prior to the approval of a relevant standard. Licensing policies require SEP holders to grant manufacturers of standardized products licenses on terms that are...

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