The Antitrust Bulletin

This special symposium issue of The Antitrust Bulletin addresses two related issues of competition policy in the digital age. The first is whether patent holders can distort voluntary standard-setting processes in ways that allow them to obtain and exercise market power. Such conduct would lead to higher intellectual property royalties for technologies that are used in standards-based products and higher prices for those products. By changing the returns to innovative activity, for both licensees and patentees, this conduct may also distort the timepaths of technological change. The second issue is what, if anything, should be done to prevent this type of anticompetitive behavior from occurring and what to do when it arises. The articles in this symposium address these issues from a variety of perspectives.

Standards development requires cooperative effort by individuals and firms with divergent interests. Standards development organizations (SDOs) are subject to capture by a single firm or a group of firms. Historically, capture has been viewed through the prism of antitrust law. Patent hold-up can be conceptualized as another form of capture, and whether or not hold-up violates the antitrust laws, it can harm the SDO and impede the commercial adoption of its standards. SDOs have a number of remedies available to them, but an SDO must carefully consider their appropriateness and effectiveness.

Many standard setting organizations (SSOs) promote coordinated industry-wide investments in technologies that may be patented. If these investments are sunk before implementers become aware of the patents, or obtain some assurance of a reasonably priced license, the patentee will have a very strong bargaining position. The resulting hold-up problem may lead to higher prices and reluctance to implement new standards. This article describes steps that many SSOs take (or might take) to mitigate patent hold-up and discusses public policies that can strengthen or weaken the private initiatives of SSOs to deal with the problem of potential hold-up.

This article analyzes unilateral misconduct in standard-setting organizations, including in particular various forms of patent hold-up. The authors identify uncertainties facing agencies and courts reviewing such conduct and describe certain analytical frameworks that agencies can use to determine whether enforcement action is appropriate in a particular case. The article examines three key “unknowns”: whether a standard-setting process was abused or misused in some way; whether such misconduct, if any, had a significant adverse effect on competition; and what remedy, if any, would cure such competitive harm. The authors argue that agencies and courts should protect the reasonable expectations of other participants in the standard-setting process, should adopt a practical approach (a “substantial contribution” test) to problems of causation raised by misconduct in the standard-setting arena, and should favor compulsory licensing as a presumptive remedy in standard-setting cases, reserving others (such as disgorgement) for unusual cases in which compulsory licensing fails adequately to deter or remedy anticompetitive misconduct.

The debate over using antitrust enforcement to prevent patent hold-up remains unresolved. The U.S. Court of Appeals muddied the waters in Rambus, and the European Commission decision clarified only little. The Broadcom v. Qualcomm case offers mere ad hoc solutions for standard setting, leaving trolls untroubled. We suggest a return to fundamentals. “Skillful silence” to lure an industry into a lock-in, creating opportunities for hold-up to extract unfair royalties, serves no procompetitive purpose and is not “competition on the merits.” Antitrust law itself should in certain cases create a “duty to alert” manufacturers to patents that are not subject to a promise to license on FRAND terms (or a ban on concealing them). Excessive pricing after hold-up could also be curbed under Article 102(a) TFEU and in certain cases under section 5 of the U.S. FTC Act, limiting patent damages to ex ante value of the technology. This would untether the law from the particular context of SSOs, addressing hold-up more completely and uniformly.

Many authors suggest that hold-up is a widespread problem in technology standard setting. The FTC appears to accept that view in its 2011 IP Report, and its incremental value test would attempt to mitigate such hold-up. We question the factual and logical foundations of the FTC's approach. By expanding the definition of hold-up beyond the context of deception, breach of FRAND commitments, or other patentee misconduct—for which remedies already exist—and by tying the incremental value test to an ex ante point that occurs after patent holders' investments have been sunk, the FTC risks tipping the balance too far in the direction of infringer-licensees, potentially damaging innovation incentives. The FTC's recommendations, which would effect a radical change in patent law and the incentives underlying it, may be subject to question, especially given that we are aware of no empirical study suggesting that hold-up is a serious impediment to standard setting, much less that it warrants fundamental changes to the patent laws.