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FTC Seeks Input on Patent Holdup in Standards Development

Note: Andrew Updegrove maintains The Standards Blog where he examines how standards are developed, and their impact on business, society, and the future.  For more information, please visit The Standard Blog at ConsortiumInfo.org

At intervals, the Federal Trade Commission (FTC) and Department of Justice (DoJ) have undertaken public initiatives intended to support the standards development process from the antitrust perspective.  In each case, I’ve found the regulators to be open minded and genuinely interested in understanding the marketplace.  Often, the goal of their information gathering efforts is to later issue guidelines that encourage good behavior, and make clear what they consider to be over the line.  The result is that it makes it easier and safer for stakeholders to participate actively in the standard setting process.  Regulators in the European Union follow the same practice.

Last week, the FTC announced a new standards development process fact-finding effort, this time announcing a workshop intended to help them better understand whether “patent holdup” is causing a problem in the marketplace.  It’s open to the public, and you’re free to submit written comments as well.

“Patent holdup” refers to the situation where the owner of a patent requires the payment of more than “reasonable and non-discriminatory” royalties or other fees from implementers of a standard.  When the owner of the patent wants to maximize the yield, it will wait until the standard has already become widely adopted, and therefore difficult or impossible to change (to render it non-infringing) without great expense.  When this happens, commentators refer to a “submarine patent,” because the hostile party takes everyone by surprise when it suddenly emerges onto the scene.

Regulators are particularly interested in such situations, because once a standard has become widely adopted, the owner of such a patent acquires monopoly power over the market for those products.  It can charge as much as it wants, or only grant licenses to some parties, or charge some parties more than others.

Unfortunately, there’s nothing that can be done if a company innocently realizes that it happens to own a patent that has already been implemented by hundreds of vendors.  It can start demanding royalties, or sell the patent to someone else whose business model is to demand first, and sue later.

But there is something that can be done if the patent owner is a member of the standard setting organization (SSO) that developed the standard in question, because the owner can be made to agree to the terms of the SSO’s intellectual property rights (IPR) policy as a precondition to being allowed to become a member.

Because there’s nothing an SSO (or a regulator) can do if the patent owner isn’t a member, most of the focus is therefore on how an SSO can best run its process in order to prevent members from launching a submarine patent attack.  Unless an SSO’s IPR policy is clear and consistently enforced, thought, a member might get away with such a practice anyway, as Rambus, a semiconductor patent licensing firm, did more than a decade ago, giving rise to an endless string of public and private law suits against it.

The FTC went to great time and expense trying to convict Rambus, alternatively losing, winning and finally losing through a long string of proceedings that I’ve covered at length over the years (a summary is here).  European regulators had a go at it, too, ultimately settling with Rambus.  Perhaps it is this experience as much as anything that is leading the FTC to announce a workshop that will explore three methods for preventing patent holdup by members of an SSO:

  1. patent disclosure rules of standard setting organizations;
  2. commitments given by patent holders that they will license users of the standard on reasonable and non-discriminatory (“RAND”) terms; and
  3. ex ante licensing negotiations by patent holders, before the standard is adopted.

The Commission intends to examine these issues from practical, economic and legal perspectives, and under antitrust, contract, patent and consumer protection law .

The first item refers to the practice already followed by just about all SSOs: requiring members of working groups to disclose any “necessary claims” (i.e., patent claims that would be “necessarily infringed” by an implementation of the draft standard) before it is finally adopted.  That way, if the patent owner intends to withhold a RAND license, the working group can try and “design around” the necessary claim.

The second item is a bit less straightforward than it appears, because there is no hard and fast definition of what “reasonable and non-discriminatory” means, and companies periodically sue each other over this commitment.  But the terms that a patent owner charges one implementer are almost always confidential, so how does one vendor know whether its been discriminated against, or not?  Similarly, if two big companies already have a cross license agreement in place, and no money changes hands, is a little company discriminated against if it has to pay a license fee?  And so on.

The third question involves the most controversial practice, because “ex ante discussions” refers to disclosure of licensing terms by the owner of a necessary claim before a draft standard is finally adopted.  If such disclosure is required, then there’s the possibility that a different kind of antitrust violation might occur, with the other members of the group trying to bargain the patent holder down.  In this case, the market power is working unfairly in the other direction – the many against the one.  As a result, those few SSOs that do require (VITA) or permit (IEEE) ex ante licensing term disclosure sought regulatory review of their intended processes before they launched them.

If these topics are of interest, you can find more details on my Consortiuminfo.org blog detailing how to participate and/or send in comments in advance.  Hopefully, we’ll see some interesting guidance from the FTC some time after the workshop is held.

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