It is important that members of standard setting organisations (SSOs), owners of standard essential patents (SEPs) and licensees of such patents understand the antitrust issues that surround standards and standard setting, as well as the impact of these antitrust issues on the scope and enforcement of intellectual property rights (IPRs).
Standards and Standard Essential Patents
Standards define the technical or quality requirements with which current or future products, production processes, services or methods must comply. They are the product of voluntary collaborations between patent owners, businesses, authorities and other interested third parties that seek to develop, promote or commercialise a technology. Standards can be either developed and endorsed by an SSO or they can be driven by the market, i.e., spontaneously brought about through industry-wide adoption of the technology or system. Examples of standards include HDMI, 3G and DRAM technologies.
Standards generally provide considerable benefits for suppliers, customers and end users by securing interoperability. This leads to greater compatibility between products developed by different brands and promotes the market the standard sits in.
Standards usually involve specifications that require the use of proprietary technologies that are protected by IPRs. SSOs tend to establish specific IP policies that regulate the rights and obligations of the participants in the standard in respect to their own or third parties’ IPRs. Of particular concern in this context are SEPs, i.e., patents that are essential for the implementation of the standard. As any party adopting the standard will inevitably need to use patents that have, or will have been, identified as essential, an SSO’s IP policy will usually state under what terms IPR holders can participate in the standard and the conditions under which the underlying IPRs ought to be made available. The policy will also frequently require participants to disclose any patents that are related to the standard in question. In cases where their IP is included in the standard, they will also be required to commit to providing licenses on fair, reasonable and non-discriminatory (FRAND) terms. Alternatively, an SSO’s IP policy could be based on certain reciprocal non-challenge commitments.
Disagreements or infringements in relation to patents are traditionally subject to IP litigation. IP-focused disputes that relate to the implementation of a standard have increasingly attracted the scrutiny of antitrust authorities.
Participation in an SSO may therefore trigger exposure to competition law issues, in particular when competition law compliance has not been strictly observed.
Establishing an SSO
Antitrust authorities concentrate on standardisation agreements because they inherently involve competitors engaging in collective decision-making. By providing the means of bringing together businesses that compete across an industry, the standard-setting process facilitates the opportunity for collusive behaviour, deception, increase in market power and other activities that regulators are vigilant about.
The applicability and relevance of the limits and restrictions of antitrust law are not, however, straightforward. For example, at different stages of the standard’s life cycle, companies participating in the standard-setting process may initially prefer practices that differ from a simple standardisation agreement. Specifically, at the start of the project—when neither the technology nor the product has any market presence— firms are first and foremost concerned with the promotion of the technology. As a result, they are likely to opt for restrictive agreements or patent-pooling agreements that would achieve that end, thus generating a set of rules different to those that would be applicable when the standard has been widely adopted.
Some general guidance in relation to the behaviour of members and participants in an SSO has been provided in the European Commission’s guidelines on horizontal cooperation agreements. These provide that
Where participation in standard-setting is unrestricted and the procedure for adopting the standard in question is transparent, standardisation agreements which contain no obligation to comply with the standard and provide access to the standard on fair, reasonable and non-discriminatory terms will normally not restrict competition within the meaning of Article 101(1).
The EU antitrust regulator is therefore of the view that the unwanted effects of standard setting may be significantly reduced by the SSOs themselves, through the adoption of appropriate IPR policies in advance. In practice, this means that failure by the SSO to anticipate certain antitrust risks could potentially result in the imposition of fines or disruptions to the commercialisation of the technology in question.
Traditionally, in order to prevent misuses of IPRs, IP owners are required to adhere to FRAND terms. The exact definition of FRAND is, however, rather vague and subject to fact-specific interpretation. Furthermore, FRAND requirements have not prevented significant disputes from arising in connection with the licensing of SEPs.
Of particular concern is the fact that standard- setting initiatives normally involve not only single IPRs, but also entire bundles of intangible assets, such as rights that are complementary, substitutable, strong and weak, and rights relating to the design, the technology or the process, etc. FRAND commitments and FRAND licenses must cover and relate to all these IPRs.
Against this background, chief economists from the US Federal Trade Commission, the US Department of Justice and the EU Directorate General for Competition recently agreed on a set of non-binding suggestions that should facilitate a more pro-competitive, standard-setting landscape, and should help to clarify SSO’s IPR policies. Clarification is certainly required in order to reduce disputes over IPRs and SEPs, and to help markets for standardised products work more efficiently, thereby benefiting innovation and stimulating competition.
Specific Market Power Issues
Once a standard is adopted by the industry, the owner of the SEP potentially would be able to use the resulting market power to create a patent hold-up. This occurs when the SEP owner imposes disadvantageous licensing demands and conditions, such as excessive royalties, upon firms practicing and participating in the standard. The SEP owner is able to do this when the participating companies have already invested substantial resources in developing or manufacturing their own products based on the standard in question and would be seriously disadvantaged by a withdrawal from the standard.
Other common issues include royalty stacking and patent ambushes. Royalty stacking occurs when the standard contains several complementary IPRs, each owned and priced by a separate company. Separate and individual valuations and pricing strategies by the IP owners results in a total price for the final product that is higher than if all IPRs were controlled by a single agent. This ties in with the issue of FRAND pricing.
A patent ambush occurs when a company promotes a technology without disclosing that it owns, or will own, the IPRs for it. The risk is that, after the technology has been chosen by the industry, i.e., when other businesses have invested enough resources into the standard to make it essential, the firm can then reveal its previously undisclosed IPRs and demand payment or block implementation of the technology.
These examples may all come under the remit of antitrust regulators, thereby potentially opening owners of SEPs to considerable antitrust exposure.
The influence of antitrust law on the patent wars and patent litigation cannot be underestimated. Competition law affects the way patent holders can use and enforce their patents and has consequences for any patent litigation. In light of relevant precedents and policy considerations by EU and US antirust regulators, the message to SSOs seems to be rather clear: The authorities see SSOs as having the general responsibility to design and institute clear rules to reduce the risk of potential competition problems. Participants in SSOs are therefore expected to facilitate competition and innovation through policy mechanisms put in place in advance. Prevention is better than cure.
Because IPRs can be the subject, the means or the result of anti-competitive practices, standard-setters, licensors and licensees all have to take into account antitrust rules and they way that these interplay with the underlying IP rights.