Intellectual Property and Standard Setting

• Pages: 95-137

95

CHAPTER IV

INTELLECTUAL PROPERTY AND

STANDARD

SETTING

The increasing importance of standard setting organizations (SSOs)

in the economy, and the prevalence of intellectual property that covers

standard

-compliant products, has created a number of new challenges for

competition policy. Market adoption of standards that call for standard-

compliant products to use intellectual property rights raises the potential

for market power. In certa

in contexts, this situation may lead to what has

been called “patent holdup”—the ability of a patent holder to exercise

market power, such as by obtaining royalties higher than the competitive

rate or excluding competitors. The existence of many independe

nt

property rights incorporated into a single standardized product raises the

potential for “royalty stacking,” which may lead to increased overall

licensing rates and transactional costs. Conduct designed to exploit

patent holdup may raise antitrust issues. Measures taken by firms and

SSOs in response to potential holdup and stacking concerns may

themselves raise antitrust issues.

This chapter begins by describing the economic issues that arise in

the context of intellectual property rights and standard setting, including

a description of patent holdup, royalty stacking, and certain SSO rules

designed to address these issues. The chapter then discusses several

antitrust issues involving intellectual property and standard setting, such

as refusals to include technology in the standard, refusals to license

technology necessary to produce standard-compliant products, deception

in the standard-setting process, SSO rules requiring intellectual property

holders to declare licensing rates before adopting a technology into a

standard, and patent pools.

A.

The Economics of Intellectual Property and Standard Setting

Modern analyses of the antitrust implications of the intersection of

intellectual property and standard setting start with an understanding of

the economics of both. Each affects economic welfare but often in

different ways. Antitrust analyses in this area must therefore often

grapple with competing claims regarding the overall impact of specific

conduct. A thorough understanding of the underlying economics is

therefore essential.

96

Handbook on the Antitrust Aspects of Standard Setting

1.

Economic Benefits of Including Property Rights in Standards

a.

The Economics of Intellectual Property

The economic issues related to intellectual property rights and

standards are related to a broader policy debate regarding inte

llectual

property rights. Intellectual property rights incentivize the creation of

inventions, ideas, and original works.1 They facilitate the sale and

licensing of intellectual property by defining the scope of property right

protection and lowering transaction costs. They encourage the

dissemination of ideas. And they produce incentives to develop

alternative technologies, improvements to original inventions, and the

development of derivative uses for inventions.

The primary focus of the economic literature has been on the

incentive function of intellectual property.2 This function is illustrated

by considering the sale of ideas in the absence of enforceable intellectual

property rights. The sale of an idea requires disclosure to the potential

buyer

. In the absence of enforceable intellectual property rights, the

potential buyer—now with knowledge of the idea—has little incentive to

purchase or license the idea. This possibility deters the seller from

disclosing the idea in the first place. Enforceable property rights solve

this problem by allowing the seller to disclose the idea without fear that

the idea will be legally appropriated without compensation. The inventor

can anticipate the ability to appropriate the returns from investment in

produc

ing the idea, which serves as an incentive to invest in producing

and to disclose the idea in the first place.

A second and related focus of the economic literature is the optimal

tradeoff between these incentives and the ability to use the idea.3

Because

the use of an idea by one person does not prevent others from

also using the idea (i.e., ideas are public goods), static (or short-

term)

economic efficiency is likely increased by widespread use of the idea.

The creation of incentives to produce inventions and other ideas through

property rights may result in above-marginal cost pricing of ideas. This

use of intellectual property rights to generate incentives may thus

inefficiently (from the static welfare perspective) limit use of inventions

or ideas. In other words, there is a tradeoff between the creation of

1. See generally W

ILLIAM

M.

L

ANDE

S

& R

ICHARD

A.

POSNER, T

HE

E

CONOMIC

S

TRUCTURE OF

I

NTELLECTUAL

P

ROPERTY

L

AW

(2003).

2.

Id.

at 9

-

10.

3.

See, e.g.

,

id.

at 11.

Intellectual Property and Standard Setting

97

incentives to develop ideas with short-term economic efficiency.4 The

tradeoff is most acute when intellectual property rights confer significant

market power to the holder of these rights.

A third focus of the economic literature is the function of intellectual

property rights in facilitating transactions by lowering transaction and

information costs. Well-defined intellectual property rights facilitate

both the licensing and sale of ideas and inventions.5 Well-defined rights

also allow others to avoid infringement of intellectual property rights by

using noninfringing substitutes or by entering a licensing agreement with

the owner.6 When intellectual property rights are not well defined, the

y

may raise transaction and information costs.

7

b.

The Economics of Standards

The economic goals of standard setting are complex. Standard

setting involves important benefits and costs. Two primary types of

standards are those that set minimum performance levels and those that

facilitate interoperability.8 The former type of standard often serves to

inform consumers and facilitate quality assurance by ensuring that

products meet a minimum level of performance or quality.

Interoperability standards guarantee that products made by different

companies are compatible with other products that incorporate the

standard,

9 generating significant consumer benefits when the standard is

widely adopted. Interoperability can also reduce the costs of production

4. This use-creation tradeoff explains in general why limitations on both the

scope and length of intellectual property rights are appropriate.

See

generally

Edmund W. Kitch, Elementary and Persistent Errors in the

Economic Analysis of Intellectual Property, 53 V

AND

.

L.

R

EV

.

1727

(2000).

5. See, e.g.

,

ABA

SECTION OF A

NTITRUST

L

AW

, I

NTELLECTUAL

P

ROPERTY

AND

A

NTITRUST

H

ANDBOOK

98

-

99 (20

07).

6. See, e.g., F. Scott Kieff, Property Rights and Property Rules for

Commercializing Inventions

, 85

M

INN

.

L.

R

EV

.

697, 736

-

47 (2001).

7.

See,

e.g.

, J

AMES

B

ESSEN

& M

ICHAEL

J.

M

EURER

, P

ATENT

F

AILURE

: H

OW

J

UDGES

, B

UREAUCRATS

, AND L

AWYERS

P

UT

INNOVATORS A

T

R

ISK

(2009);

M

ICHAEL

A.

H

ELLER

, T

HE

G

RIDLOCK

E

CONOMY

(2008); Michael

A. Heller & Rebecca A. Eisenberg, Can Patents Deter Innovation? The

Anticommons in Biomedical Research

,

280

S

CIENCE

698 (1998).

8.

U.S.

D

EP

’T OF J

USTICE

& F

ED

. T

RADE

C

OMM

’N, A

NTITRUST

ENFORCEMENT AND I

NTELLECTUAL

P

ROPERTY

R

IGHTS

: P

ROMOTING

INNOVATION AND C

OMPETITION

33 (2007), available at

http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.

9. See, e.g., Carl Cargill & Sherrie Bolin, Standardization: A Failing

Paradigm, in S

TANDARDS

AND

P

UBLIC

P

OLICY

296

(Shane Greenstein &

Victor Stango, eds., 2007).