Antitrust Law Daily Wrap Up, ANTITRUST NEWS: FTC Commissioner Wright urges restraint in reforming standard setting organizations’ patent policies, (Sep 16, 2013)

By Tobias J. Gillett, J.D., LL.M.

FTC Commissioner Joshua D. Wright delivered a speech September 12 before the Center for the Protection of Intellectual Property’s Inaugural Academic Conference on “The Commercial Function of Patents in Today’s Innovation Economy” at George Mason University School of Law, in which he opposed attempts to reform standard setting organizations’ (SSOs) contracting process involving stand-essential patents (SEPs) and to impose antitrust remedies.

Wright opened his speech, entitled “SSOs, FRAND, and Antitrust: Lessons from the Economic of Incomplete Contracts,” by observing that incompleteness and ambiguity in contracts have long been considered “a predictable and efficient result given the costs associated with identifying all contingencies that might arise during the life of the contractual relationship.” He contended that the conclusion “that SSO contracts are inherently inefficient due to their incompleteness,” particularly with respect to Fair, Reasonable and Non-Discriminatory (F/RAND) commitments and the availability of injunctive relief, did not follow “from the relevant economic principles or … the available empirical evidence.”

Wright described the benefits of the standards set by SSOs in increasing their value to consumers and reducing their cost to produce. He noted that standards could also be set through a “standards war” in which firms compete to have their technologies become the standard, but that an initial standard could provide significant benefits from a higher success rate in launching a news network and introducing technologies to the marketplace, “greater realization of network effects,” protection of buyers against being stranded, “enabling competition within an open standard,” and avoiding the costs to firms in establishing an installed base of users in a “standards war” setting. However, he observed that critics had suggested such standards could reduce “ex ante competition and consumer choice” and promote “proprietary control over a closed standard,” particularly emphasizing the potential for patent hold-up.

Patent hold-up involves the holder of a SEP exploiting the patent to extract higher royalties from companies seeking to incorporate the patented technology in their products. However, Wright observed that the level of precision in SSOs’ policies regarding F/RAND commitments was “a selection made by sophisticated parties informed by a number of tradeoffs,” and that flexibility could be “an important source of economic value.”

“The fact that a patent holder or licensee may ex post be able to take advantage of contractual incompleteness or ambiguity to ‘hold-up’ its transacting partner does not imply that the contract is inefficient ex ante or that it emerged from a defective contracting process,” Wright stated.

The incompleteness of SSOs’ contractual arrangements did not necessarily indicate that the arrangements were more inefficient than alternative arrangements, Wright contended. Identifying all possible contingencies and responding to them would require “much costly effort,” transactors’ reputational capital could reduce the need for court-enforced terms, and more specific terms could impose costs from additional negotiation and rigidity of court enforcement.

Wright then proceeded to address whether ex post opportunism in SEP licensing represented a market failure in SSO contracting. He observed that the terms of SSO contracts “exhibit rich variation,” indicating that they responded to the differing market forces and competitive needs faced by the SSOs. According to Wright, the terms also “reflect[ed] the many different way SSOs seek to attract valuable technology contributors as well as adopters to their standards.” In Wright’s view, SSO members enter into contracts that they believe strike “the optimal balance between the cost of more precise terms and the probability and cost of hold-up,” and “incompleteness and ambiguity in SSOs’ IPR policies is an intended and key design feature of SSOs.” Moreover, the potential reputational costs to firms of engaging in patent hold-up help deter firms from engaging in such conduct.

The SSO contracting process would be unlikely to result in externalities resulting in insufficient internalization of the costs, because SSOs would have incentives to strike a balance between the interests of both contributing and adopter members, according to Wright. Licensees would not simply pass on the costs to consumers, and would therefore care about increased royalty rates, because very few end-use products had a completely inelastic demand curve permitting manufacturers to entirely pass on higher rates to consumers. Wright rejected the view of SSOs as collaborations among competitors, describing them instead as “a playground for competition among competitors” for incorporation of their technology into standards. To the extent that participants abuse the standard setting process to exclude competitors from the market, the antitrust laws would already deal with that kind of collusion.

Wright contended that proposed reforms to SSO contracting would be at least as likely to cause “harm than good for competition and consumers.” Imposing stricter SSO terms could reduce the incentives for IPR holders to join the SSO process, depriving consumers of the benefits of standardization derived from it. More flexible terms could also respond better to rapidly changing markets.

The ability to obtain an injunction would be accounted for in the process of setting a standard, and “[e]x post interpretation of F/RAND commitments to preclude injunctive relief can deprive the parties the benefit of their bargain, undercompensate patent holders relative to ex ante expectations, and reduce incentives to innovate and the commercialization of innovation.” Moreover, weakening the ability of patent holders to obtain injunctions could lead to “reverse hold-up,” as implementers lose their incentives to negotiate in good faith with patent holders. Further, just because a rate negotiated with the threat of an injunction is higher than a rate negotiated without that threat does not mean that the rate with the threat would be above the F/RAND rate.

“Antitrust enforcement remains available in cases of true anticompetitive price-fixing or deceptively manipulating standards,” Wright concluded. “In the absence of robust empirical evidence to suggest that SSOs’ adaptation of their IPR policies over time have been inadequate in minimizing the probability of hold-up, there is little reason to bring to bear the blunt weaponry of antitrust rules and remedies to micromanage the competitive process in the name of improving SSO contracts.”

News: Antitrust FederalTradeCommissionNews