Any article authored by three current or former economists from the world’s most powerful antitrust institutions would merit the free enterprise community’s attention (even if their bylines include the standard disclaimer that their views don’t necessarily reflect the views of their employers). But the context in which a recent Competition Policy International article was released and the message it sends make the piece required reading, especially for those in high-tech industries.
The FOSS Patents blog first flagged the article, Standard Setting Organizations Can Help Solve the Standard Essential Patents Licensing Problem. Its authors are the chief economist at the European Commission’s DG Competition agency; a former chief economist of the Justice Department’s Antitrust Division; and the Director of the Federal Trade Commission’s Bureau of Economics. The article was published in the context of a still-simmering debate over “standard-essential patents” (SEPs), a subject which we’ve addressed here (and here) several times. WLF has also waded into the most recent U.S. government pronouncement on SEPs, FTC’s consent decree with Google, with comments to the Commission.
The two thorniest challenges related to SEPs are: 1) whether SEP holders should be permitted to seek enforcement of their patents through injunction or exclusion order? and 2) what constitutes a “reasonable” royalty for such a patent, so that the patent holder is in compliance with its commitment to the standard setting organization (SSO) that set the underlying standard?
As the three economists note in their article, SSOs — voluntary combinations of companies that normally compete with each other — wield an enormous amount of market power. Antitrust authorities have taken a tolerant view towards such competitor collaboration, Professor Raymond Nimmer of the University of Houston Law Center related in a WLF Working Paper, because, among other reasons, “‘By promulgating standards, producers can increase both horizontal and vertical compatibility.'” (quoting Professor Herbert Hovenkamp). Such benefits, however, may be overcome, the economists intimate in their Competition Policy International article, through SEP holders’ patent “hold up” activities.
In light of SSOs’ unique position and activities, the three authors write that they have “the responsibility to ensure that market power is constrained so that consumers can benefit” from standard setting (our emphasis). They add that “many existing SSO policies are not strong or clear enough to achieve” that goal. What should the SSOs do? They should address the two thorny problems we note above by 1) Creating a process for SEP holders that is “faster and lower cost for determining a F/RAND rate . . . than litigation”, such as arbitration; and 2) Requiring that F/RAND commitments “include a process that SEP owners must follow before they can seek an injunction or exclusion order by the licensor.”
By noting SSOs’ “responsibility” to constrain participants’ market power in the same context as antitrust agencies’ tolerance of competitor collaborations, the officials appear to be nudging the organizations toward more active self-regulation. SSOs have generally been loath to wade into F/RAND license rates and SEP enforcement. However, during concluding remarks at an International Telecommunications Union (ITU) patent roundtable last October, the head of ITU’s Telecommunications Standard Board indicated that the organization would consider designing “high level principles” on rates and injunctions for the benefit of their standard setting process.