From Patent Hold-Up to Patent Hold-Out?

From Patent Hold-Up to Patent Hold-Out?

Marie Barani (Independent Researcher, UK)
DOI: 10.4018/978-1-5225-5320-5.ch007


Patents are an efficient tool for companies contributing to the standardization process to recover investments made in the process and continue participating in future standardization efforts. However, to avoid abusive use of standard-essential patents (SEPs) incorporated in de jure standards, standardization contributors are required to make their SEPs available on fair, reasonable and non-discriminatory terms and conditions (the [F]RAND commitment). This commitment has been created to fairly and adequately reward innovators while at the same time allow access to the standardized technology at (F)RAND terms and conditions; the latter preventing patent hold-up. With the changes in the cellphone market in the last ten years, the content of this (F)RAND commitment has been challenged in courts and in front of antitrust authorities. The question is whether this duty, set up to avoid hold-up, is not used by some implementers to engage in hold-out.
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Standardization aims to define standards, which are technical rules. The process1 is driven by the World Trade Organization (“WTO”)’s principles of transparency, openness, impartiality and consensus, effectiveness and relevance, and coherence (TBT Committee 2000). Firms that may compete at a later stage collaborate by pooling human, financial and/or technical resources to have the best technological solution adopted as next standard. Once the standard has been adopted, it is made public and available to anyone wishing to implement it, whether or not they are a member of the standard-development organization (“SDO”) that has developed the standard. Besides interoperability and compatibility, even between competing devices (EC regulation No. 1025/2012 on standardization), standards in telecommunications also guarantee high performance (Fraunhofer Study 2011).

For the reasons mentioned above, standards are considered as a tool encouraging innovation, technology dissemination and competition. Nonetheless, standardization is closely linked to intellectual property rights (“IPRs”) and competition issues. Companies involved in standardization may hold patents. Unlike standards, which are available on an open and non-discriminatory basis, patents are exclusive rights permitting their holders to block third parties from using the patented invention2. While both aim to encourage innovation, patents and standards can appear incompatible at first sight. Even more so when patents are qualified as “standard-essential patents” (“SEPs”), as no technical alternative to those patents exists to comply with such standard. Accordingly, each product or service implementing the standard without a license will therefore necessarily infringe the SEPs3.

As a result, SEPs in principle confer their holders an increased market power by allowing them to control the standardization process and the downstream market (Shapiro 2001, Farrell et al. 2007). Consequently, in the absence of any safeguard, standardization could lead to behaviors impeding competition, as hold-up or royalty-stacking. Patent hold-up refers to the situation where SEP-holders abuse their bargaining power to extract excessive royalty rates from their SEPs, potentially under the threat of an injunction. Such rates, if they are accepted by the implementer, may hamper the diffusion of the standard, as they could be financially burdensome and restrict access to the standard by implementers: the implementer will either have to accept rates “fair in excess of the patent-holder’s true contribution”, which are similar to a tax on products incorporating the patented technology; or to postpone the sale of products/services incorporating the standard to avoid paying excessive fees or costly litigations (Lemley & Shapiro 2007). Royalty stacking occurs when the cumulative royalty rate for all the patents needed for the standard is excessive: even if each SEP-holder demands a reasonable fee, due to the large number of SEPs to implement, the aggregate royalty rate for all SEPs exploited in the standard may reveal itself excessive and non-bearable (Lemley and Shapiro 2007)4.

Yet, SEPs play an important role in standardization. Companies holding SEPs are those contributing the most to the development of the standard (on contributors, cf. ABIresearch 2013, on SEP-holders, cf. Fraunhofer Study 2011). Since SDOs seek to “balance between the needs of standardization for public use in the field of telecommunications and the rights of the owners of IPR”5, they have enacted IPR Policies to avoid anticompetitive behaviors while adequately rewarding SEP-holders for their contribution to the standard. At the same time, these policies should not lead to a counter-abuse on the implementer’s side.

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