Antitrust and Intellectual Property Issues in Standard Setting

1. Antitrust and Intellectual Property Issues in Standard Setting Presentation to Chinese Government Interagency Delegation March 26, 2009 Evan R. Cox

2. Basic Policy Principles • Standards should be set by private industry • Standards should be voluntary except where health and safety are involved • Standards should preserve scope for competing means of implementation • set minimum, not maximum specifications • specify objective performance criteria rather than specific design (unless physical interoperability issues) • Competing standards should generally be encouraged

3. Basic Policy Principles • Standard setting is generally procompetitive, antitrust complaints judged by rule of reason • Standards do not automatically create market power • “Openness” is a factor in evaluation, but universal participation is not required • No basic difference in analysis between institutional standard setting organizations (SSOs) and ad hoc “consortia” • Role of agencies and courts is to prevent process abuses, not second-guess technical or business outcomes

4. Process Cases • Allied Tube: Violation for steel pipe maker to exploit membership rules by signing up hundreds of new members to vote against proposal to include plastic pipe • Hydrolevel: Violation for group to allow one company to issue false standards interpretations to hurt competitor • Golden Bridge: Potential violation for companies to agree in advance to vote to exclude competing technology without regard to technical merits • Rambus: Alleged violation of patent disclosure policies leading to “patent holdup” • Addamax: No violation in vote to choose one technology over another on technical merits in absence of process abuse • API: No violation in delay in action to include company’s technology that meets technical criteria if membership is balanced, and includes customers as well as competitors, no evidence of anticompetitive intent

5. Basic IP Assumptions • IP policies may only bind voluntary participants - benefits of standards do not justify compulsory participation and licensing • IP policies should ensure an even playing field for implementation by all competitors • IP policies should cover only “essential” patents, and only for purposes of implementing the standard • Royalty policies and rates should be left to competitive forces

6. Royalty Policies • No antitrust policy preference for royalty or royalty free, as long as non-discriminatory • Benefits of royalty free • potentially reduces costs of implementation • avoids disclosure issues (among participants) • but discourages participation of innovative companies, use of “proprietary” technology • Benefits of RAND or FRAND (royalty allowed) • increases participation of innovative companies and use of “proprietary” technology • does not always lead to patent holders charging royalties • but requires disclosure policies and difficulty setting judicial standards for what is “reasonable”

7. Royalty Policies • Non-discriminatory doesn’t necessarily mean same price for all • shouldn’t discriminate between “similarly situated” implementers • different prices for different categories of implementer, e.g., software vs hardware, component versus finished product, etc. • justifications for variations to reflect cross licenses, additional consideration, etc. • founders can charge each other lower rates that reflect contributions

8. Patent Disclosure and Patent Holdup • Patent disclosure policies allow informed choice about use of technologies that might incur royalties • Violations lead to patent “hold up” • may have designed around patented technology to avoid royalties • royalties more likely to be reasonable if clarified before market gets “locked in” • Antitrust authorities intervene on theory that failure to disclose results in wrongful acquisition of monopoly power • Rambus, Unocal, Dell, Qualcomm

9. Patent Disclosure and Patent Holdup • Significant issues: Scope of duty • at what stage of standards development? • essential, or likely to be essential? • does it cover patent applications? • whose knowledge and any duty to enquire within company or conduct portfolio search? • recent trend to consider what participants believed their duty covered, and not just language of policy Rambus, Qualcomm • Remedy – non-enforceability or RAND • would disclosure have resulted in design-around? • or would RAND assurance have been accepted but royalty have been lower before lock-in?

10. Ex Ante Licensing Discussions • Patent disclosure provides incomplete information for design-around decisions • But discussion of royalty rates creates price fixing concerns • Recent DOJ and FTC statements to encourage ex ante disclosure of license terms, but scope for discussion unclear • Limited adoption to date

11. Violation of RAND Commitments • Agencies and courts properly reluctant to judge whether royalty is “reasonable” • No successful challenges to RAND yet • most courts have upheld against challenges to rates, but allegations becoming more frequent • 3rd Circuit approach: was RAND commitment “fraudulent when made” • NData – repudiation of RAND commitment post-transfer • Rambus FTC proceeding • attempted to determine RAND as remedy for non-disclosure • engaged in detailed examination of other licenses to set reasonable royalty • decision mooted when overturned on causation

12. Patent Thickets, Stacking and Pools • Concern about patent thickets and patent stacking, not exclusively a standards problem • cumulative weight of individually set RAND rates could discourage adoption • Patent pools a potential solution to make clear total patent cost of adoption • Antitrust policy approach is to allow pool formation to be market driven and monitor for potential abuses

13. Patent Pool Issues • Business Review Letter principles stress they should be voluntary and non-exclusive • Pools do not need to be open to all participants – 1995 DOJ/FTC IP Guidelines § 5.5 • Important to preserve competition between standards • In re Summit Tech. Inc., No. 9286, 1998 FTC Lexis 29 • 3GPP Business Review Letter • Limiting pools to essential patents and limiting scope of grantbacks to preserve further innovation • Court challenges to cumulative rates set by pools have thus far been unsuccessful • e.g. Matsushita v. Cinram and Wuxi Multimedia v. Phillips

14. Questions? Thank You