Standard setting organizations and F/RAND: 'if it ain't broke, don't fix it'. Or should you?

As of late, the role of standard setting organizations (SSOs) in preventing hold-up has been the focus of a lively debate. The IPR policies of SSOs commonly require members to disclose any standard essential patents they hold, and to commit to licensing them on fair, reasonable and non-discriminatory terms. The F/RAND commitment, however, is frequently described as vague and uncertain, and may be weakened by the SEP holder's recourse to injunctive relief against a willing licensee, during negotiations. The resolution of the uncertainty surrounding F/RAND usually requires a judicial determination, and a long and complex trial, while a preliminary injunction against a third party that is willing to enter into a licensing agreement may yield anti-competitive effects, or be incompatible with the F/RAND commitment.

Joshua Wright (left) at the FTC's swearing-in ceremony

To address both issues, three leading US and EU economists recently suggested that SSOs should introduce new provisions in their IPR policies, (i) implementing a fast and low-cost process to adjudicate F/RAND disputes (arbitration or another ADR mechanism), (ii) requiring SEP holders to specify an acceptable cash price for their essential technologies, and (iii) restricting the use of injunctions and exclusion orders. The use of IPR policies to prevent hold-up had already been advocated in previous studies (here and here), both to attain a better definition of F/RAND commitments (including their transferability in case of sale of a SEP), and to ensure a comprehensive and timely disclosure of essential technologies.

In a speech delivered on September 12, at the Center for the Protection of IP (George Mason University), FTC's Commissioner Joshua Wright discussed the opportunity of modifying the current IPR policies of standard setting organizations, but observed that there is no economical theory or empirical evidence that suggests that introducing stricter terms, or excluding the availability of injunctive relief, effectively prevents hold-up. To the contrary, these modifications could deter participation in SSOs, and possibly result in reverse hold-up. The Commissioner explained that:

Much of the call for SSO contract reform - whether under the guise of possible antitrust enforcement or friendly advice on contract drafting - is based upon the notion that SSOs bear a special responsibility for constraining the market power of SEP holders. Indeed, the possibility of SSOs constraining the exercise of SEP holders’ market power is purported to be the primary benefit of filling gaps in SSO contracts. However, it is unlikely SSO contract reform can bear the burden its proponents place upon it. [...] It is important to recognize that SSOs are not necessarily in a position to constrain license terms for SEPs at will. SSOs compete to attract key players to join and contribute their technology to the standard and can be at the mercy of certain members with essential technologies. However, even assuming arguendo SSO contract terms can constrain market power newly created by adoption of the standard, that situation is clearly not always the case. For some SEPs, the relevant market power will be inherent in the underlying technology and the patents themselves, rather than conferred upon the SEP holder by the SSO as the result of the standard-setting process.

Evaluating the potential consequences of the use of the IPR policies of SSOs to restrict the use of injunctive relief or provide a more accurate delimitation of F/RAND commitments, Wright added that:

Requiring stricter SSO terms might make it less attractive for IPR holders to join the SSO process. The social costs associated with deterring participation in SSOs can outweigh any potential benefits associated with decreasing the probability of hold-up. This would lead to, in the short-term, SSOs more frequently selecting an inferior technology; it could also lead to a dichotomy between competing technologies, which would defeat the purpose of SSOs and deprive consumers of the well-understood benefits of standardization. Over the long-run, these reforms could undermine the very desirable purpose of SSOs, which among other things, facilitate compatibility and interoperability, reduce consumer costs, and advance innovation.

Interestingly, the Commissioner argued that the use of 'less precise contract terms' is fundamental to guarantee the flexibility needed to adapt to quickly changing market conditions, and that the availability and threat of injunctions prevents reverse hold-up and is 'a very important part of the bargaining process and [...] likely part of the benefit of the bargain conceived of by a contributing member of the SSO at the time it decided to participate in the standard'. The Commissioner observed that (i) although rates negotiated under the threat of injunctions are likely to be higher than rates negotiated without the threat of injunction, it does not follow that the former is above F/RAND', (ii) property rights allow the owner to exclude all others, and (iii) no maxim of contract interpretation justifies the idea that, by accepting the F/RAND commitment, SEP holders acknowledged that damages are adequate compensation for infringement. These conclusions unexpectedly conflict with those of several courts and authorities around the world, including the FTC itself. To name just a few:

• the US Department of Justice and US Patent and Trademark Office's Policy Statement of 8 January 2013 ('[a] patent owner’s voluntary F/RAND commitments may also affect the appropriate choice of remedy for infringement of a valid and enforceable standards-essential patent. In some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest');
• the FTC's Statement on the Public Interest of 6 June 2012 ('a royalty negotiation that occurs under the threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment');
• the EU Commission's perspective, as expressed in Google/Motorola, and in the recent Statements of Objections notified to Samsung and Motorola (according to Commission Vice President Almunia, '[w]hen companies have contributed their patents to an industry standard and have made a commitment to license the patents in return for fair remuneration, then the use of injunctions against willing licensees can be anti-competitive');
• several US cases, including Apple v Motorola, Microsoft v Motorola, and Realtek Semiconductor v LSI (a F/RAND commitment 'implies a promise not to seek injunctive relief either domestically [...] or abroad').

In particular, the Commissioner's view rejects Judge Posner's persuasive statement in Apple v Motorola:

I don’t see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898 unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent. How could it do otherwise? How could it be permitted to enjoin Apple from using an invention that it contends Apple must use if it wants to make a cell phone with UMTS telecommunications capability - without which it would not be a cell phone. 

Although Wright rightfully highlighted that there is no guarantee that improving IPR policies could provide beneficial effects, his reasoning on imprecise, but flexible F/RAND commitments, and on the importance of injunctions in the bargaining process, is likely to prove controversial (see Professor Cotter here). It is reasonable to think, however, that even Commissioner Wright would welcome the introduction of a fast and low-cost process to adjudicate F/RAND disputes, as suggested by US and EU economists, a solution that could protect the interests of both SEP holders and licensees. What do readers think? What is the best way to strengthen F/RAND commitments, while preserving the parties' freedom to negotiate?