1 August 2010Copyright

Setting the standards

Standards organisations enable a broad range of companies to work together to contribute and jointly define technology for implementation in downstream products and services, but pose challenges to IP professionals and competition law attorneys alike. Five experts give us their views on this important area of business.

In attendance:

Dan Bart President and CEO, Valley View Corporation
Claire Bennett Lead lawyer, intellectual property and technology group, DLA Piper
Pedro A. V. Bhering Founding partner, Bhering Advogados
Dan Hermele Director of IPR and licensing, Qualcomm Europe
Daniel G. Papst A managing director and owner, Papst Licensing GmbH & Co. KG

Do standards enable IPR holders to make overly high royalty demands?

Dan Hermele: Generally, no.

One needs to carefully distinguish between royalty demands attributable solely to standardisation, if they occur, and royalty demands attributable to the value of the standardised technology as protected by intellectual property laws.

The theory that holders of essential IPR are enabled to make overly high royalty demands—the ‘hold-up’ theory—is based on the premise that sufficiently close alternative technologies existed at the time of adoption of a particular standard, and that standardisation eliminated technology competition between these alternatives and conferred additional market power on the selected technology.

However, two such potential technologies cannot be considered as true alternatives for the purposes of inclusion in a standard unless both are technically and commercially viable, and they satisfy the standards organisation’s requirements. Moreover, standardisation often does not eliminate competition because inter-standard competition exists between rival standards, as well as competition with non-standardised solutions.

The hold-up theory also assumes that essential IPR owners have not disclosed their licensing terms ex ante and, as a result, are able ex post to demand unreasonable royalties from implementers. However, market participants often negotiate away any theoretical risk of hold-up by negotiating licences before implementers make major investments in the new technology.

Claire Bennett: The level of royalty that can be imposed is usually limited by the terms of the standards-setting organisation. For example, the IPR holder may have undertaken to license its IPR on FRAND [fair reasonable and nondiscriminatory] terms and hence the royalty levied must be FRAND in the context of the licence.

In addition, no organisation within the product supply chain benefits if the cumulative royalty burden on an entity that wishes to operate the standard is too high. Where there are viable alternative technologies to the standardised technology, the higher the royalty costs, the lower the take-up of that standardised technology.

Even where there are no viable alternative technologies, higher costs downstream will reduce sales volume. The competitive pressures from viable alternative technologies and in the downstream marketplace therefore have a regulative effect on the level of royalty demands.

Commercial pressures also have a self-regulative effect. Where the IPR holder needs to implement the standards, it may require a cross-licence from other IPR holders. If an IPR holder is viewed to have made excessive royalty demands, this may have a reputational effect, and when it comes to standardising the next iteration of that technology, those involved in that process may well steer away from including technical solutions covered by patents from that entity.

Problems may arise when the IPR holder is less subject to market pressures than other market players. Concerns were raised by the existence of Non Practising Entities, but the market appears to have taken steps to address these.

Daniel Papst: When a patent claim reads on a feature or combination of features of a standard, meaning a product built according to the standard, the patent certainly would be deemed to have a higher value. As with other patent claims, the patent owner has the burden of proof to clearly show that the respective claims do read on the respective products covered by the standard. The defences, especially invalidity and non-infringement, against such claims that allegedly read on the standardadopting product exist equally.

If the patent claims in question prove to be valid over the prior art and are infringed by the respective product, from my point of view, this fact prevails over an argument of standard conformity. Royalty demands are likely to go up if there is no doubt about the validity and infringement. If the proven claims undoubtedly read on features covered by the standard, the market volume affected would seem more easily ascertainable without necessarily influencing the individual royalty demand.

Pedro Bhering: In principle, the terms and conditions set by the IPR holder are valid. Afterall, no one else has taken the risks and costs of developing that new product or service. The agreement must be respected if it does not result in domination of the relevant market or elimination of competition.

Thus, standards may enable IPR holders to set royalties in accordance with their own business strategies. When suggesting and even requiring commitment to FRAND terms, standards organisations play a fundamental role in stopping patent owners abusing the market power they gain with essential IPRs.

Dan Bart: This premise does not necessarily follow. Normally, the patent monopoly would grant the IPR holder the right to exclude others from infringing its patents, and to charge whatever compensation it chose to and to discriminate in deciding which companies it might choose to license or not. The RAND/FRAND LoA [letter of assurance] restricts those rights a patent holder would normally have.

Now, because of the SDO [Standards Developing Organisation] IPR policy, the IPR holder may have given a promise not to discriminate and to charge reasonable compensation rates, including royalties, as part of the negotiated patent licences.

In return for ‘sharing’ its patented technology (including making it available to its competitors), the patent holder may receive reasonable compensation from implementers of the standard in a non-discriminatory manner. The patent laws were designed in part to stimulate innovation and investment in the development of new technologies, which can be shared at reasonable rates with all those wishing to implement a standardised solution to an interoperability or functionality challenge.

In the US, the competition enforcement authorities have enforced such promises given to an American National Standards Institute (ANSI)-accredited SDO. It would be counterproductive for an IPR holder to charge high royalty rates that no licensee would accept, since that means the deployment of the standard and its technology would fail in the market and the patent holder would not be paid.

The technology and thus the royalties on the underlying essential IP provide the most income if it is widely deployed in standardised products. It is also important to recognise that not all patent holders have the same business model or use their IPR strategically in the same way when it comes to standards.

But what constitutes ‘fair, reasonable and non-discriminatory’ terms and conditions, including, in particular, royalty terms?

Pedro Bhering: The problem is the vagueness of FRAND terms. To date, precedents from the Brazilian courts and administrative authorities on this specific issue are still scarce. Brazilian Antitrust Law does not favour compulsory licensing of IPRs, but it prevents acts that unduly bar the use of IPRs, such as non-exploitation or even inadequate use of patents or know-how in Brazil.

As an example, I could mention the commercialisation of patented products at levels that do not satisfy the demand of the internal market, thus resulting in higher prices for the end consumer. Such acts may be deemed as indications of violation of competition rules, except when non-use is justified for legitimate reasons.

Licensors must be able to obtain a reasonable return on their risky investments in R&D. The key issue here is what constitutes a ‘reasonable return’. Returns that are much greater than the costs of development and production may indicate a violation of the competition rules.

Dan Bart: Once the SDOs have a LoA on file, they leave it up to the parties involved to work out their licensing terms for the essential IP. Very often, a licensee will want a customised licence that covers more than just the patent holder’s essential patent claims. There may be other IP cross-licensing opportunities, and also other commercial terms that the two parties agree meet their combined needs.

These bilateral negotiations are largely successful, as evidenced by the limited quantity of litigation, considering the thousands of ICT standards that exist today.

“Licensors must be able to obtain a reasonable return on their risky investments in R&D. The key issue here is what constitutes a ‘reasonable return’. Returns that are much greater than the costs of development and production may indicate a violation of the competition rules.”

The ANSI Patent Policy, which generally applies to the development of all American National Standards, was derived with the objective of finding a balance between the rights of the patent holder, the interests of competing manufacturers seeking to implement the standard, the consensus of the technical experts from different stakeholder groups on the desired content of the standard, the concerns and resources of the SDO, the impact on consumer welfare and the need to avoid unnecessary strictures that would discourage participation in the standards development process.

The discussion of licensing issues among competitors in a standards-setting context could significantly complicate, delay or derail standards-setting efforts. Moreover, it may risk the SDO and participants becoming targets of allegations of antitrust conduct.

Daniel Papst: The underlying licensing terms are supposed to be ‘fair’. Taking a look at antitrust law, fair terms would mean terms that are not anticompetitive and that would not be considered unlawful if imposed by a dominant company in the relevant market. Terms that may be considered breaching such a commitment include:

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