Solutions to Patent Hold-up beyond FRAND: An SOS to SSOs

• Date: 01 June 2014
• Author: Garrett D. Trego,Paul H. Saint-Antoine
• DOI: 10.1177/0003603X1405900202
• Published date: 01 June 2014
• Subject Matter: Article

THE ANTITRUST BUL L E T I N :Vol. 59, N o. 2/Summ er 2014 :183

Solutions to patent hold-up beyond

FRAND: An SOS to SSOs

BY PAUL H. SAINT-AN TOINE*AN D GARRET T D. TREGO **

While standard setting has well-recognized benefits to industry and

consumers alike, the process is also subject to possible abuse by own-

ers of standard essential patents (SEPs), who may through patent

hold-up frustrate the efficient implementation of the standard. Even

when a standa rd-setting o rganizatio n (SSO) require s covenants t o

license on fair, reasonabl e and nondiscrimi natory (FRAND) te rms,

threats of injunctions and other tactics by SEP owners have potential

anticompetitive effects. SSOs may play a useful role, beyond securing

FRAND commitments, in further reducing the prospect of patent

hold-up. While some policymakers and SSOs have embraced ex ante

licensing negotiations as a means to prevent hold-up, there are also

other, non moneta ry solu tions to c onsid er. This art icle sug gests a

number of n onmone tary solu tions, i ncludin g limits o n injunct ive

relief, increased discl osure of prior licensing r ates, and mandatory

ADR, that SSOs may adopt to streamline the licensing of FRAND-

encumbered patents and thus reduce hold-up.

KEY WORDS:SSO, FRAND, hold-up, antitrust, injunction, ADR

© 2014by Federal Legal Publications, Inc.

* Partner, Drinker Biddle & Reath LLP.

** Associate, Drinker Biddle & Reath LLP.

AUTHORS’ NOTE: The views expressed in this article are ours and do not necessarily

reflect those of the firm’s clients.

I. INTRODUCTION

The international system pursuant to which standard setting organi-

zations (SSOs) vet and adopt technical standards applicable to many

of our most popular consumer products—known as de jure stan-

dards—is in need of some help, and the SSOs are in a position to offer

it. Chief among the present problems with the system is the inability

of parties to readily agree on the royalty rates covering the patents

essential to practice the de jure standards (also known as standard

essential patents or SEPs), and the prospect of anticompetitive effects

if owners of SEPs refuse to license their patents on reasonable terms.

An injunction or an exclusion order based on a single SEP has the

potential to block the sale or importation of products incorporating

thousands of different patented technologies.

Few seriously question the value of SSOs, such as the Institute of

Elect rica l and Ele ctron ics En ginee rs (IE EE) and t he Int ernationa l

Telecommunication Union (ITU), to enhance the interoperability of

technical devices and, in the process, spur the globalization of markets

and international competition. Healthy competition between manufac-

turers of smartphones, for example, would not be possible if Apple’s

iPhone could no t interact with t he same wireless network as Sam-

sung’s Galaxy phone. However, at the same time as it enhances com-

petition in the consumer markets, the adoption of de jure standards

necessarily favors some patents and their owners to the exclusion of

others. The winners in the standard setting process—the owners of

SEPs—may acquire enhanced market power and, with it, the ability to

demand exorbitant royalty rates by threatening to deny implementers

of the technical standardsaccess to their essential technology.

As explained below, the SSOs’ traditional solution to this “patent

hold-up” problem has been to require participants in the standard

setting proc ess (1) to disc lose in advance any patents that may be

essential to the de jure standard and (2) to commit to license any SEP

on fair, reasonable, and nondiscriminatory (FRAND) terms.1Typi-

184 :THE ANTI T R U S T BULLETIN:Vol. 59, No. 2/Summer 2014

1When the word “fair” is omitted, commitments to license patents on

reasonable and nondis criminatory terms a re known as RAND obligati ons.

This article will generally refer to FRAND commitments, unless addressing a

RAND commitment in the context of a specific de jure standard.

cally, SSOs have not gone further in getting involved in the licensing

of SEPs or in the determination of what constitutes compliance with

FRAND commitments. For example, the IEEE’s bylaws provide that:

“The IEEE is not responsible for identifying Essential Patent Claims

for which a license may be required, for conducting inquiries into the

legal validity or scope of those Patent Claims, or for determining

whether any licensing terms or conditions provided in connection

with submission of a Letter of Assurance, if any, or in any licensing

agreements are reasonable or nondiscriminatory.”2

This article will examine the potential anticompetitive effects that

remain after owners of SEPs have made FRAND commitments and

what solutions exist to minimize such effects. The focus here will be

on solutions to the problem of patent hold-up that do not involve ex

ante discussion s of royalty rates.3T his article will focus instead on

nonmonetary solutions, such as voluntary restrictions on rights to

injunctive relief, disclosure of past royalty rates and terms, and provi-

sions for mandatory alternative dispute resolution, which can be

inco rpor ated i nto th e byla ws and o pera ting d ocum ents o f SSOs .

Through the implementation of such nonmonetary solutions, SSOs

can play a significant role in solving the ongoing problem of patent

hold-up.

II. BACKGROUND

The development of de jure standards carries with it the prospect

of both substantial procompetitive benefits and significant anticom-

petitive effects. The challenge is to minimize the latter without sacri-

ficing the former. Recent experience has shown that FRAND

commitments may be a necessary but not always sufficient solution to

the problem of patent hold-up.

SO L U T I O N S T O HO L D -U P :185

2See IEEE Standards Ass’n, Standards Board Bylaws 17 (Dec. 2013), avail-

able at http://standards.ieee.org/develop/policies/bylaws/sb_bylaws.pdf

[hereinafter IEEE Bylaws].

3Some SSOs, such as VMEbus International Trade Association (VITA)

and IEEE, have ado pted provisions fo r patent owners to ma ke more rate-

specific assurances about future royalty rates as a way to further combat the

problem of patent hold-up. See infra section IV.