License to Quash Competition?

Can companies harm the competitive process by holding out and refusing licensing demands?

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Motorola's three new Droid Razr smartphones, the Droid Razr M, center, the Droid Razr HD, center, and the Droid Razr Maxx HD, are unveiled at a press conference on Wednesday, Sept. 5, 2012.

Last Tuesday, the Antitrust Subcommittee of the Senate Judiciary Committee held a hearing on a relatively obscure but important element of our high-tech economy: standard setting organizations (SSOs). SSOs are the groups that determine the rules of interconnection between high-tech products, ensuring that those products actually work. At issue in the hearing was whether competitive problems occur when firms that hold intellectual property essential to using a standard (known as standard-essential patents, or SEPs) have an obligation to share that intellectual property.

There are two other critical questions that should also be examined to get the complete picture: Can licensees also harm the competitive process by holding out and refusing licensing demands? And does this problem go beyond formal standard setting to proprietary standards? The answers to both questions are yes.

When a firm that possesses an SEP makes a commitment to share that patent – or license it on a fair, reasonable and nondiscriminatory basis ("FRAND") – and then reneges on that commitment, competitive concerns can arise. Firms that depend upon the standard can be subject to opportunistic conduct. The SEP owner can "hold up" an implementer and demand unreasonable royalties. Appropriately, the Federal Trade Commission (FTC) has been bringing enforcement actions against this conduct for the last 18 years.

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Just last week, the FTC finalized a consent order with Google and Motorola clarifying the regulatory enforcement of FRAND commitments. It is a great first step towards eliminating the opacity, posturing and gamesmanship present in high-tech patent litigation. What is important for the subcommittee and the ongoing debate over standard setting is that the FTC recognized not only the potential problem of "hold up" but the problem of "hold out" – that a prospective licensee may be unwilling to negotiate in a reasonable basis. Under the final FTC consent decree, licensees must commit to accept the independently determined royalty rate. They cannot choose to litigate forever or hold out for an unreasonably low royalty rate.

That was clearly at issue in the Motorola-Apple litigation battle. After Motorola failed to reach agreement with Apple, it filed suit seeking injunctive relief. The FTC determined that Motorola had not done enough to seek a mutually beneficial licensing relationship. However, the FTC also acknowledged that potential licensees must also be bound to negotiating reasonably. 

This was Motorola's assertion in its litigation against Apple – it claimed that Apple rejected any license offer. Apple famously drew a line in the sand in which it proclaimed during the litigation that it would not pay more than $1 per device, regardless of whether the court determined a higher royalty to be appropriate. So there are two sides to licensing disputes and the FTC has seen the need to balance both sides.

Second, it would be a mistake to limit the concerns raised over IP enforcement to SEPs, as significant problems can occur where firms establish de facto standards for their own patents (commonly known as "proprietary standards"). Patent holders can make royalty-free and RAND licensing commitments to promote industry-wide adoption of their technology outside of the standard-setting context. These public commitments work by assuring potential licensees that if they adopt the technology, they won't be held up by unreasonable licensing terms. Just as in the SSO setting, licensees may rely on these commitments to adopt RAND-encumbered technology, including for interoperability purposes. Widespread adoption can create a de facto industry standard around patented technology that is used for interoperability between products and platforms, in the same way that such standards arise from the standard setting context. 

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As a result, the same "hold-up" issues that have concerned enforcement agencies about SEPs also exist with proprietary standards: once widespread adoption has occurred, licensees relying on these patents could face hold-up demands where the patent holder reneges on its licensing commitments. This type of RAND abuse is also a serious competitive concern. Microsoft, for example, obtained an ITC exclusion order last year against Motorola on a patent that is subject to RAND commitments.

Indeed, both the Justice Department and FTC have recognized the competitive importance of licensing commitments made outside of the SSO context. For example, in 2005, the FTC settled an enforcement action against Unocal for its enforcement of its patents outside the context of an SSO. 

SSOs are not the only source of competitive issues in IP licensing and Congress and the antitrust cops need to see the full range of potential problems.

David Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He represents retailers and consumer groups on patent issues. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations including Google. Balto has also published research and authored scholarship for Google on technology policy topics.

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