Private and Public Approaches to Patent Hold-up in Industry Standard Setting

• DOI: 10.1177/0003603X1205700103
• Published date: 01 March 2012
• Author: Timothy S. Simcoe
• Date: 01 March 2012
• Subject Matter: Article

Private and public approaches

to patent hold-up in

industry standard setting

BYTIMOTHY S. SIMCOE*

Many standard setting organizations (SSOs) promote coordinated

industry-wide investments in technologies that may be patented. If

these investments are sunk before implementers become aware of the

patents, or obtain some assurance of a reasonably priced license, the

patentee will have a very strong bargaining position. The resulting

hold-up problem may lead to higher prices and reluctance to imple-

ment new standards. This article describes steps that many SSOs take

(or might take) to mitigate patent hold-up and discusses public poli-

cies that can strengthen or weaken the private initiatives of SSOs to

deal with the problem of potential hold-up.

KEY WORDS: Hold-up, standard setting, compatibility, intellectual property.

THE ANTITRUST BULLETIN:Vol. 57, No. 1/Spring 2012 :59

* Boston University School of Management and National Bureau of

Economic Research.

AUTHOR’S NOTE: Many of the ideas in this article were initially developed in

response to a call for comments from the Federal Trade Commission. I thank Stan

Besen and Marc Rysman for valuable comments.

© 2012 by Federal Legal Publications, Inc.

I. INTRODUCTION

Standard setting organizations (SSOs) are forums where firms negoti-

ate over shared design parameters so that independently produced

products can work well together. This process produces many bene-

fits: users may share information or “mix and match” components;

the cost of market entry is reduced; and a division of labor, enabling

specialization in component production and innovation, is promoted.

Although inter-operability can be achieved in other ways, such as

through decentralized technology adoption, which results in de facto

standards, or through the actions of a dominant firm, SSOs are per-

haps the most common path to compatibility.1

Antitrust authorities have generally viewed SSOs as a form of pro-

competitive horizontal cooperation. For example, the United States

Standards Development Organization Advancement Act of 2004 pro-

vides that SSOs be evaluated under an antitrust rule of reason and are

subject to actual rather than treble damages.2However, there is con-

cern among academics, policy makers and practitioners that patent

holders may be able to exploit the cooperative standard setting

process to extract excessive royalties from standards implementers.3

60 :THE ANTITRUST BULLETIN:Vol. 57, No. 1/Spring 2012

1Biddle, White & Woods identified over 500 compatibility standards

used in a prototypical laptop computer and found that eighty percent were

developed by consortia and formal standards developing organizations. Brad

Biddle, Andrew White & Sean Woods, How Many Standards in a Laptop?, avail-

able at http://ssrn.com/abstract=1619440. For a longer discussion comparing

alternative paths to compatibility, see Joseph Farrell & Timothy Simcoe, Four

Paths to Compatibility, in OXFORD HANDBOOK OF THE DIGITAL ECONOMY (Joel

Waldfogel & Martin Peitz, eds., forthcoming 2012).

2Standards Development Organization Advancement Act of 2004, Pub.

L. No. 108-237, 118 Stat. 661 (2004).

3See, e.g., Deborah Platt Majoras, Chairman, Fed. Trade Comm’n, Recog-

nizing the Pro-Competitive Potential of Royalty Discussions in Standard Set-

ting, Remarks at Standardization and the Law: Developing the Golden Mean

for Global Trade (Sept. 23, 2005), available at http://www.ftc.gov

/speeches/majoras/050923stanford.pdf; Brief Amicus Curiae of Economics

Professors and Scholars, In re Rambus Inc., No. 9302 (FTC Feb. 5, 2007), available

at http://www.ftc.gov/os/adjpro/d9302 /040415scholarsamicusbrief.pdf;

Stanley M. Besen & Robert J. Levinson, Standards, Intellectual Property Disclo-

sure, and Patent Royalties after Rambus, 10 N.C. J.L. & TECH. 233 (2009); and Brad