Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Antitrust Division’s Efforts to Curb Anticompetitive Uses of Standard-Essential Patents Explained at Brussels Conference, (Dec 5, 2012)

By Thomas Long, J.D.

As the number of “essential” patents encumbered by licensing commitments at standards bodies has increased exponentially in recent years, the Department of Justice Antitrust Division is taking steps to reduce the risk that standard-essential patents (SEPs) can be used as weapons to harm competition, according to Fiona M. Scott-Morton, Deputy Assistant Attorney General for Economic Analysis at the Antitrust Division. Scott-Morton made the remark at a presentation delivered today, entitled “The Role of Standards in the Current Patent Wars,” at the Charles River Associates Annual Brussels Conference on Economic Developments in European Competition Policy, in Brussels. The presentation was part of a panel on “Patent Wars, Injunctions, and Hold Up.”

“At the forefront of many of the Antitrust Division’s intellectual property (IP) related enforcement and advocacy efforts are concerns about patents declared by their owners to be essential to a standard that the owner also committed to license on reasonable and nondiscriminatory (or RAND) terms or fair, reasonable, and nondiscriminatory (or FRAND) terms to implementers of the standard,” Scott-Morton said. “One concern is that a patent holder may demand licensing terms that are not consistent with this F/RAND promise, and couple that demand with a threat of an injunction or other exclusionary relief.”

Litigation between competitors, as well as non-competitors, has been driven in part by technical reasons, Scott-Morton said, such as the rise of smart mobile devices. These devices are undergoing an era of platform competition, in which the owner or sponsor of a platform—such as Apple or Google—owns or creates only one piece of the ecosystem, which requires many complementary products to be popular with consumers. Original equipment manufacturers, such as Sony and Samsung, are attempting to develop strategies so they can “thrive in this fiercely competitive space.” According to Scott-Morton, it is critical for players in the mobile devices marketplace to use every possible tool to gain a competitive advantage for their platforms while they have a chance of tipping a platform in their favor or stopping another platform from being tipped against them.

SEPs are special because they achieve their status through the collective action of the standards-setting organizations (SSOs), Scott-Morton explained.

“F/RAND commitments are designed to reduce occurrences of opportunistic or exploitative conduct in the implementation of standards,” she said. “In reviewing these collaborations we ask whether the net effect of the joint activity is good for consumers. If the F/RAND commitments are so vague and ill-defined as to have little meaning, then consumers may not realize all the benefits of the standard, which may be efficient and create new products and services due to the patent holders’ exercise of market power, which may result in higher prices, less product choice and less investment in the overall network.”

Declared SEPs can be a powerful weapon, and there is a risk that they can harm competition, especially when they are “enhanced by over declaration,” Scott-Morton added. The power of SEPs to hold up licensees is especially great because their power derives from a collective decision by competitors.

In order to protect licensees from holdup, Scott-Morton said, the Antitrust Division has encouraged SSOs to:

• Establish procedures to identify proposed technology that involves patents that the patent holder has not agreed to license on F/RAND terms and determine whether that technology should be included in the standard;

• Make it clear that licensing commitments made to the standards body are intended to bind both the current patent holder and subsequent purchasers of the patents and that these commitments extend to all implementers of the standard;

• Give licensees the option to license F/RAND-encumbered patents essential to a standard on a cash-only basis and prohibit the mandatory cross-licensing of patents that are not essential to the standard or a related family of standards, while permitting voluntary cross-licensing of all patents;

• Place limitations on the right of the patent holder who has made a F/RAND licensing commitment who seeks to exclude a willing and able licensee from the market through an injunction;

• Make improvements to lower the transactions cost of determining F/RAND licensing terms; and

• Consider ways to increase certainty that patent holders believe that disclosed patents are essential to the standard after it is set.

“It is in everyone’s interest for the scope of disclosure to be broad before a standard is set in order to maximize opportunities to avoid hold-up after the standard is set,” Scott-Morton noted. “However, recent litigation in the United States has demonstrated that a number of patents declared essential to a standard are not, in fact, essential to that standard because standards-compliant products did not infringe them.”

Holders of F/RAND-encumbered SEPs have voluntarily given up the right to exclude in most circumstances, in exchange for having their technologies included in the underlying standards, she said. “The same bargain does not generally apply to other patents where the owners have not made similar commitments.”

Although she conceded that non-standard essential patents also could be used in anticompetitive ways, Scott-Morton defended the Antitrust Division’s focus on F/RAND-encumbered SEPs.

“I have heard arguments that the Division should be as concerned with commercially essential patents as it is with F/RAND-encumbered standard essential patents,” she said. “First, it is not clear to me what it means to be commercially essential; nor does there appear to be industry consensus on a definition. If it is essential to implement the standard then it should be an SEP.”

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