Standard setting, intellectual property rights, and the role of antitrust in regulating incomplete contracts

• Date: 01 January 2015

STANDARD SETTING, INTELLECTUAL PROPERTY

RIGHTS, AND THE ROLE OF ANTITRUST IN

REGULATING INCOMPLETE CONTRACTS

J

OANNA

T

SAI

J

OSHUA

D. W

RIGHT

*

Standard-setting organizations (SSOs) are of growing importance as an in-

stitution for coordinating and facilitating the economic activities of intellec-

tual property rights holders. SSOs thus foster economic benefits of

standardization and of commercializing innovation. Market adoption of stan-

dards that call for standard-compliant products to use intellectual property

rights (IPRs), however, raises the potential for the creation of market power.

The existence of many independent property rights incorporated into a single

standardized product also increases transaction costs and the potential for co-

ordination problems. Strategic behavior exploiting these issues may raise anti-

trust concerns; however, the various measures SSOs and their members adopt

in response to these problems—including SSO contractual provisions—can

also raise competition policy concerns.

Many have emphasized the potential for patent holdup involving standard-

essential patents (SEPs) as a necessary cost of the SSO process, leading to

higher royalties to licensees that are in turn passed on in the form of higher

consumer prices. An increasing number of modern antitrust disputes contem-

plate a broad role for competition law in supplementing defects in the SSO

contracting environment, including the important controversy as to whether

and under what circumstances an SEP holder seeking injunctive relief violates

the antitrust laws.

* Joanna Tsai is Economic Advisor to Commissioner Joshua D. Wright, Federal Trade Com-

mission. Joshua Wright is Commissioner, Federal Trade Commission, and Professor (on leave),

George Mason University School of Law. The views expressed herein are our own and do not

represent the views of the Commission or any other Commissioner. We thank Tim Geverd and

Julia Rubicam for valuable research assistance and Jeffrey Macher and participants at the Tele-

communications and Public Utilities Group Session at the American Economic Association An-

nual Meeting for comments on an earlier draft.

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OURNAL

[Vol. 80

SSOs have proven to be dynamic institutions. In response to threats of pat-

ent holdup, many have adopted and modified a number of contractual provi-

sions to reduce its incidence. Most have also made changes to SSO policies to

compete for membership. One major category of SSO contractual innovations

to mitigate patent holdup involves patent disclosure rules. A second category

is IPR licensing terms, such as the Fair/Reasonable and Non-Discriminatory

(F/RAND) commitment. SSO IPR policies that govern the conduct of, and

relationships between, SSOs and their members are enforceable contractual

commitments. Contract law thus lies at the heart of enforcing SSO commit-

ments.

1

A fundamental challenge to identifying the role, if any, that antitrust

law should play in regulating SSO contracts is to understand the responsive-

ness of the SSO contracting process to changes in the threat of patent holdup.

In other words, is the SSO contracting process efficient?

A number of competition enforcement agency officials around the world

have already declared SSOs’ IPR policies inadequate and contract law insuffi-

cient to deter patent holdup. They allege SSO IPR policies are either not

strong enough or not clear enough and,

2

in either case, suggest further regula-

tory involvement may be necessary to cure the inefficiencies. Some competi-

tion enforcement agency officials propose specific improvements to current

SSO IPR policies—that is, they propose new or modified contract terms to

reduce ambiguity or incompleteness. Some academic commentators and prac-

titioners have joined the competition agency officials in calling for an ex-

panded role for antitrust law to deter patent holdup, to facilitate efficient SSO

contracting, and to solve the SEP licensing problem.

3

These criticisms and the

various policy proposals that flow from them require the premise that SSO

contracts are inefficiently incomplete rather than an efficient outcome reflect-

ing the costs and benefits of adding greater specificity to SSO contracts.

1

See Herbert Hovenkamp, Competition in Information Technologies: Standards-Essential

Patents, Non-Practicing Entities and FRAND Bidding,in I

NTERNATIONAL

A

NTITRUST

L

AW

&

P

OLICY

: F

ORDHAM

C

OMPETITION

L

AW

2012, 439, 457 (Barry Hawk ed., 2013). On the role of

equity in solving problems of opportunism in the SSO context, including the doctrine of equita-

ble estoppel and the granting of injunctions, see Henry E. Smith, Property as Platform: Coordi-

nating Standards for Technological Innovation, 9 J. C

OMPETITION

L. & E

CON

. 1057 (2013).

2

See, e.g., Kai-Uwe Kuhn, Fiona Scott Morton & Howard Shelanski, Standard Setting Orga-

nizations Can Help Solve the Standard Essential Patents Licensing Problem, CPI A

NTITRUST

C

HRON

., Winter 2013, Vol. 3., No. 1 (Special Issue), at 1, 4–5; Renata Hesse, Deputy Assistant

Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Remarks as Prepared for the ITU-T Patent

Roundtable, Six “Small” Proposals for SSOs Before Lunch (Oct. 10, 2012) [hereinafter Hesse,

Six “Small” Proposals for SSOs], available at www.justice.gov/atr/public/speeches/287855.pdf;

Renata Hesse, Deputy Assistant Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Address at

ANSI Intellectual Property Rights Policy Committee Meeting, The Antitrust Division and SSOs:

Continuing the Dialogue (Nov. 8, 2012), available at www.justice.gov/atr/public/speeches/

288580.pdf.

3

See, e.g., George S. Cary et al., The Case for Antitrust Law to Police the Patent Holdup

Problem in Standard Setting, 77 A

NTITRUST

L.J. 913 (2011).

2015]

A

NTITRUST IN

R

EGULATING

I

NCOMPLETE

C

ONTRACTS

159

In this article we explore conceptually and empirically that presumption.

We also document and analyze changes to eleven SSO IPR policies over time

and show that SSOs and their IPR policies appear to be responsive to changes

in perceived patent holdup risks and other factors. We find the SSOs’ re-

sponses to these changes are varied, and that contractual incompleteness and

ambiguity persist across SSOs and over time, despite many revisions and im-

provements to IPR policies. We interpret the evidence as consistent with a

competitive contracting process and with the view that contractual incom-

pleteness is an intended and efficient feature of SSO contracts. We conclude

by exploring the implications of these findings for identifying the appropriate

role of antitrust law in governing ex post opportunism in the SSO setting.

I. STANDARD-SETTING ORGANIZATIONS

AND THE ECONOMICS OF IPR POLICIES

A. SSO

S

’ R

OLE IN

F

ACILITATING

I

NNOVATION

, C

OMMERCIALIZATION

,

AND

C

OMPETITION

SSOs have long played a crucial role in our innovation-driven economy,

and this fundamental role has only intensified over the last few decades. SSOs

develop, support, and set interoperability and performance standards, among

others, which help to facilitate the adoption of new technologies.

4

By the early

2000s, hundreds of collaborative SSOs existed worldwide. They are com-

prised of firms, large and small and anywhere in between, and include mem-

bers that contribute as well as members who adopt and implement technology.

SSOs also span across a variety of industry and technical categories, including

aeronautics, life sciences, telecom, and electronics.

5

Standards can increase the value of products for consumers and can enable

firms to produce them more efficiently.

6

Interoperability standards, for exam-

ple, ensure that products manufactured by different companies are compatible

with one another and can also reduce companies’ costs of production by mak-

ing it less costly for them to acquire technical information and simplify prod-

uct design. For consumers, standards facilitate interoperability from a wide

adoption of the standards, which in turn can help to protect consumers from

4

See, e.g., U.S. D

EP

’

TOF

J

USTICE

& F

ED

. T

RADE

C

OMM

’

N

, A

NTITRUST

E

NFORCEMENT AND

I

NTELLECTUAL

P

ROPERTY

R

IGHTS

: P

ROMOTING

I

NNOVATION AND

C

OMPETITION

(2007), available

at www.ftc.gov/sites/default/files/documents/reports/antitrust-enforcement-and-intellectual-prop-

erty-rights-promoting-innovation-and-competition-report.s.department-justice-and-federal-trade-

commission/p040101promotinginnovationandcompetitionrpt0704.pdf.

5

For a list of SSOs and standards in a variety of fields, see Standard Setting Organizations

and Standards List, C

ONSORTIUM

I

NFO

.

ORG

, www.consortiuminfo.org/links.

6

See, e.g., U.S. D

EP

’

TOF

J

USTICE

& F

ED

. T

RADE

C

OMM

’

N

,supra note 4, at 33 (footnote

omitted); Bruce H. Kobayashi & Joshua D. Wright, Intellectual Property and Standard Setting,

in ABA H

ANDBOOK ON

A

NTITRUST

A

SPECTS OF

S

TANDARDS

S

ETTING

95 (2d ed. 2010).