Balancing Competition Law and Standard-Setting: US Efforts and Future Directions

1. Standard-Setting, Competition Law and the Ex Ante DebatePresentation to ETSI SOS Interoperability III MeetingSofia Antipolis, France21 February 2006 Gil Ohana Cisco Systems Legal Department

2. What We’ll Cover • Competition Law and Standard-Setting • Ex Ante and Competition Law • US Outreach Efforts by Ex Ante Supporters • Possible Future Directions for ETSI and Other SDOs

3. 1 Competition Law and Standard Setting

4. “Typically, private standard-setting associations … include members having horizontal and vertical business relations. [M]embers of such associations often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anticompetitive harm. Agreement on a product standard is, after all, implicitly an agreement not to manufacture, distribute, or purchase certain types of products. Accordingly, private standard-setting associations have traditionally been objects of antitrust scrutiny.”Allied Tube & Conduit v. Indian Head Corp., US Supreme Court (1988) Standard-Setting and Competition Law

5. Standard Setting and Competition Law • SDO IPR policies address two different competition law concerns in standard setting: • Patent-holder gaining market power by failing to disclose patent or refusing to license disclosed patent on FRAND terms • Depends on FRAND commitment being meaningful constraint on patent-holder’s legal right to charge licensees whatever it wants (Broadcom v. Qualcomm) • “Group boycott” among participants with collective market power who extort cheap licenses from holder of valuable patents • Where participants have market power, patent-holder cannot be compelled to license as condition of participating (Federal Trade Commission Sanitary Engineering Decision (1986), EU ETSI Investigation, 1993-94)

6. 2 Ex Ante and Competition Law

7. Ex Ante and Competition Law • SDO IPR policies shaped by competition law concerns • Prohibitions on disclosure and negotiation of actual license terms within working groups • FRAND substitutes for statement of actual terms • Disclosure and negotiation happen outside standards process • Bilateral process (contributor and prospective licensee) • Makes real-time comparison of technology substitutes difficult

8. Ex Ante and Competition Law ― Disclosure • Ex ante proponents encourage SDOs to re-think role competition law concerns play in shaping SDO IPR policies • Wide range of interpretations patent-holders give to FRAND increases uncertainty participants and implementers face in creating standards and commercializing standards-compliant products • Ex ante proponents respond by urging SDOs to adopt rules that at least permit disclosure of detailed license commitments in standards forum • Proponents believe that benefits of disclosure of licensing terms in standard-setting outweighs minimal competition law risks that disclosure may raise

9. Ex Ante and Competition Law ― Negotiation • Ex ante proponents encourage SDOs to re-think role competition law concerns play in shaping SDO IPR policies • SDOs uniformly prohibit negotiation of licensing terms within standards bodies • Ex ante proponents suggest that SDO prohibition be re-examined in light of guidance from competition agencies that joint negotiation with suppliers does not necessarily raise competition law concerns

10. 3 US Outreach Efforts by Ex Ante Supporters

11. US Outreach Efforts by Ex Ante Supporters • Context: State of Play as of Early 2005 • DG Competition, European Commission’s competition regulator, addresses ex ante issue in ¶ 225 of Technology Transfer Block Exemption Guidelines • Issue raised in US during 2002 Federal Trade Commission / Department of Justice Intellectual Property Hearings, but discussion not followed by guidance from US agencies

12. US Outreach Efforts by Ex Ante Supporters • Response by ex ante proponents: • Approach US agencies, encourage them to offer guidance to SDOs and participants regarding agency enforcement intentions relative to ex ante disclosure and negotiation of licensing terms • Guidance needed to help SDOs and participants make realistic assessment of competition law risks associated with adoption of ex ante rules • Meetings with both Federal Trade Commission and Justice Department Antitrust Division scheduled for June 2005 • IEEE, leading SDO in computing and networking, participates as observer

13. US Outreach Efforts by Ex Ante Supporters Even before meetings, Hewitt Pate, head of Antitrust Division of Justice Department, addresses ex ante issue: “Some standards development organizations have reported to the Department of Justice that they currently avoid any discussion of actual royalty rates, due in part to fear of antitrust liability. It would be a strange result if antitrust policy is being used to prevent price competition. There is a possibility of anticompetitive effects from ex ante license fee negotiations, but it seems only reasonable to balance that concern against the inefficiencies of ex post negotiations and licensing hold up.” Hewitt Pate, “Competition and Intellectual Property in the U.S.: Licensing Freedom and the Limits of Antitrust”, available at http://www.usdoj.gov/atr/public/speeches/209359.htm

14. US Outreach Efforts by Ex Ante Supporters Following meetings, FTC Chairman Majoras addresses issue in September, 2005 speech: • “First, a patent holder’s voluntary and unilateral disclosure of its maximum royalty rate … is highly unlikely to require antitrust scrutiny.” • * * * • “[J]oint ex ante royalty discussions that are reasonably necessary to avoid hold up do not warrant per se condemnation.” Deborah Platt Majoras, “Recognizing the Pro-Competitive Potential of Royalty Discussions In Standard Setting”, available at http://www.ftc.gov/speeches/majoras/050923stanford.pdf

15. 4 Possible Future Direction for ETSI and Other SDOs

16. Future Directions for SDOs • Statements from US enforcement officials, like ¶ 225 of European Commission’s TTBER Guidelines, should offer SDOs some comfort that: • SDO adoption of rules permitting ex ante disclosure of royalty rates is exceedingly unlikely to raise competition law concerns • SDO adoption of rules permitting joint negotiation of royalty rates does not necessarily violate competition law rules

17. Future Directions for SDOs • Now that agencies on both sides of Atlantic have offered high level guidance, more specific agency examination of ex ante issue awaits SDO adoption of ex ante rules • US agencies have formal process for seeking advice, but invoking process may require SDO to enact ex ante rules before seeking guidance • Discussions over adoption of ex ante rules underway at IEEE and other US SDOs

18. Future Directions for SDOs • SDOs, participants and others involved in ex ante discussion should approach agencies with realistic expectations: • Because agencies will not bless ex ante categorically, ex ante proponents will cling to argument that adoption of ex ante rules will necessarily create competition law concerns • Agency statements can, however, help SDOs realistically assess competition law risks and weigh them against benefits ex ante has for standards-development process • Competition agencies cannot address questions SDOs and participants face regarding impact of ex ante rules on standards process • Just as standard-setting is global, agency guidance needs to come from leading competition law regulators in US, EU, and elsewhere

19. Questions Questions