Contributions

Always a Monopoly, Never a Monopolist: Why Antitrust is the Wrong Regulatory Scheme for Protecting Competition in Technical Standards

by Ran­di Brown1

When patent hold­ers gain stan­dard-essen­tial sta­tus, should antitrust law treat the monop­oly con­ferred on them like every oth­er monop­oly? At the inter­sec­tion of intel­lec­tu­al prop­er­ty law and antitrust law, juris­dic­tions across the globe have tak­en vary­ing posi­tions on how to treat the dom­i­nant mar­ket posi­tion nec­es­sar­i­ly gained in each patent mar­ket through stan­dard­iza­tion. Because the stan­dard-set­ting process is inher­ent­ly anti­com­pet­i­tive in that it wipes out all oth­er com­pe­ti­tion, intel­lec­tu­al prop­er­ty rights hold­ers risk being exposed to increased antitrust scruti­ny when they seek to enter a stan­dard. Ulti­mate­ly, this Con­tri­bu­tion will argue that the best approach to such monop­o­lies is not to expose them to antitrust scruti­ny, but instead to allow con­tract and patent reme­dies to main­tain the ben­e­fits to com­pe­ti­tion and inno­va­tion afford­ed by stan­dard­iza­tion.

* * * * *

Tech­ni­cal stan­dards are every­where and con­sti­tute the build­ing blocks of inter­na­tion­al trade and tech­no­log­i­cal inno­va­tion. In order for con­sumers to reap the ben­e­fits these stan­dards bring to the mar­ket, a stan­dard-set­ting orga­ni­za­tion (“SSO”) must first eval­u­ate what pieces of intel­lec­tu­al prop­er­ty will best serve the stan­dard and those who will adopt it.2 In doing so, the orga­ni­za­tion “crowns win­ners,”3 from among the com­pet­ing patents, there­by ren­der­ing the los­ing patents effec­tive­ly use­less. The own­er of the win­ning patent, which has been deemed “stan­dard-essen­tial,” makes com­mit­ments to license their tech­nol­o­gy and begins to reap the finan­cial ben­e­fits of being essen­tial to the stan­dard and thus used by all stan­dard imple­menters. Those patents are now con­sid­ered Stan­dard-Essen­tial Patents, or SEPs.4 The los­ing patent hold­ers effec­tive­ly go home with their tails between their legs. As a result of this stan­dard-set­ting, there is no com­pe­ti­tion in the mar­ket for the result­ing patent. Stan­dards gen­er­al­ly con­fer at least some monop­oly pow­er.5 The ques­tion then is what to do about the monop­o­lies this process cre­ates.

Giv­en that antitrust law is con­cerned with pro­tect­ing the com­pet­i­tive process, not indi­vid­ual com­peti­tors, antitrust law should focus not on the patent, but on the down­stream mar­kets in which the patent is licensed.6 In the case of tech­ni­cal stan­dards, the stan­dard-set­ting process has effec­tive­ly end­ed all com­pe­ti­tion, mean­ing that there is no com­pet­i­tive process to pro­tect.7 This argu­ment has not been suc­cess­ful in mov­ing courts away from view­ing the licens­ing of patents as the rel­e­vant mar­ket when ana­lyz­ing com­pe­ti­tion, but it demon­strates the pos­si­ble lim­its of antitrust law’s effec­tive­ness in the mar­ket of patents itself.

On the oth­er hand, while the stan­dard-set­ting process does fre­quent­ly have the effect of elim­i­nat­ing com­pe­ti­tion, com­pe­ti­tion may not stay down for long.8 Com­pet­ing patents can seek stan­dard-essen­tial sta­tus even after a stan­dard has been set, and there may also be com­pet­ing stan­dards address­ing a sin­gle tech­no­log­i­cal need. For exam­ple, 3G, 4G, and LTE are all stan­dards used in pro­vid­ing cell ser­vice. Despite the per­va­sive­ness of 3G, 4G still rose up, and LTE there­from.9 While the indi­vid­ual patents with­in these stan­dards were not direct­ly com­pet­ing to dis­pel mar­ket pow­er in that lim­it­ed mar­ket, the stan­dards them­selves were in direct com­pe­ti­tion, weak­en­ing the posi­tion of any indi­vid­ual SEP hold­er on the whole.

Regard­less of whether one focus­es nar­row­ly on the com­pet­i­tive process in the stan­dard or the broad­er pic­ture of a stan­dard with­in a larg­er tech mar­ket, each SEP is a monop­oly on its respec­tive tech­nol­o­gy and there­fore is with­in the purview of some antitrust or unfair trade prac­tice laws. Some juris­dic­tions treat SEP monop­oly hold­ers with increased scruti­ny;10 oth­ers wise­ly rec­og­nize that these patent hold­ers are not monop­o­lists and are, in fact, more like­ly to be tak­en advan­tage of than be the ones doing the tak­ing.11 Since these monop­o­lists have not engaged in any monop­o­liz­ing to obtain their mar­ket dom­i­nance (their stan­dard was select­ed by a third par­ty), there is no rea­son to believe they will be like­ly to behave anti­com­pet­i­tive­ly in the future.

* * * * *

The best approach for look­ing at these SEP monop­o­lies, is to look at them through the frame­work of the val­ues behind patent law, rather than antitrust law or unfair trade prac­tice law. Patent law is intend­ed to reward inno­va­tion, to com­pen­sate for the research and devel­op­ment that leads to such inno­va­tion, and to allow such inno­va­tion to ben­e­fit the pub­lic at large.12 These val­ues are reflect­ed in our sys­tems for award­ing patents, and in the fact that we rec­og­nize intel­lec­tu­al prop­er­ty at all. Pri­vate indus­try derives sig­nif­i­cant val­ue in intel­lec­tu­al prop­er­ty, and that val­ue comes about as a result of the com­pet­i­tive advan­tage gained from the right to exclude oth­ers from using the fruits of their intel­lec­tu­al labors.13 Stan­dard­iza­tion, how­ev­er, large­ly dimin­ish­es these rights.

The right to exclude oth­ers still exists for SEP hold­ers, but is less­ened by the com­mit­ments they make to license their patents on Fair, Rea­son­able, and Non-Dis­crim­i­na­to­ry (“FRAND”) terms. This com­mit­ment is akin to a con­trac­tu­al oblig­a­tion between the SEP hold­ers and the SSOs, under which imple­menters of SEP tech­nol­o­gy are third-par­ty ben­e­fi­cia­ries. Because this is a con­trac­tu­al oblig­a­tion, con­tract law, which does not police based on mar­ket pow­er, is an ade­quate rem­e­dy when SEP hold­ers engage in anti­com­pet­i­tive con­duct.14 The Court in Ver­i­zon Commc’ns Inc. v. Law Offices of Cur­tis V. Trinko, LLP not­ed that “when there exists a reg­u­la­to­ry struc­ture designed to deter and rem­e­dy anti­com­pet­i­tive harm, the addi­tion­al ben­e­fit to com­pe­ti­tion pro­vid­ed by antitrust enforce­ment will tend to be small, and it will be less plau­si­ble that the antitrust laws con­tem­plate such addi­tion­al scruti­ny.”15 Here, con­tract oblig­a­tions strike the right bal­ance between pro­tect­ing com­pe­ti­tion and avoid­ing overde­ter­rence.16 In par­tic­u­lar, mod­i­fi­ca­tion of FRAND com­mit­ments is work­able under con­tract law as a mat­ter of effi­cien­cy, unlike in antitrust where such effi­cient actions may be deemed patent holdup, a com­pe­ti­tion vio­la­tion. Fur­ther, even a breach of FRAND com­mit­ments may be effi­cient and ben­e­fit com­pe­ti­tion, and such effi­cient breach­es are deterred under added antitrust scruti­ny.

Fur­ther, patent law right­ly gov­erns the actions of a SEP hold­er which fall out­side of the FRAND com­mit­ments. Where there is no applic­a­ble FRAND com­mit­ment, a SEP hold­er has the right to refuse to license or deal, which pro­tects intel­lec­tu­al prop­er­ty rights.17 This right of exclu­sion is the very right con­ferred through patent, and it is what gives patent hold­ers the abil­i­ty to extract prof­its from their inno­va­tions, encour­ag­ing such inno­va­tion in the first place. Patent law can pro­tect SEP hold­ers from abus­es by would-be-licensees who infringe on their rights, and can pro­tect SEP imple­menters by cre­at­ing a dis­crete and coher­ent prop­er­ty right they can license at the val­ue of the tech­nol­o­gy.

The use of con­tract and patent law to cor­rect­ly bal­ance com­pet­i­tive aims and our val­ue of inno­va­tion is per­fect­ly accept­able with­in antitrust law due to the net pro­com­pet­i­tive effect of stan­dard­iza­tion. Look­ing to anti­com­pet­i­tive con­duct alone fails to account for the eco­nom­ic ben­e­fits passed on to con­sumers.18 There will be reme­dies for breach­es of FRAND under con­tract law which con­tem­plate these eco­nom­ic effi­cien­cies and sanc­tion con­duct to the degree which most ben­e­fits con­sumers.19 Even if there is some anti­com­pet­i­tive con­duct which would not be addressed by con­tract law, it is best to err on the side of pro­tect­ing patent rights, which pro­mote inno­va­tion and par­tic­i­pa­tion in stan­dards.      

Pro­tect­ing SEP hold­ers from increased scruti­ny leads to ben­e­fits felt down­stream by con­sumers. This is true because stan­dards facil­i­tate inter­op­er­abil­i­ty by estab­lish­ing a uni­form set of build­ing blocks for a giv­en tech­nol­o­gy. Cus­tomers feel the ben­e­fits of low­ered costs, increased con­sumer choice, effi­cien­cy, and high­ly val­ued tech­nol­o­gy.20 By pro­tect­ing SEP hold­ers from unneed­ed antitrust scruti­ny, we rec­og­nize the val­ue of the patent deemed stan­dard-essen­tial, and reward par­tic­i­pa­tion in the stan­dard by patent hold­ers who have inno­vat­ed. Giv­en the ben­e­fits con­ferred by stan­dards, it is cru­cial that courts make par­tic­i­pa­tion in these stan­dards prof­itable and ele­vate the val­ues of patent pro­tec­tion, rather than impos­ing antitrust reme­dies. Patents are the right to exclude oth­ers from your tech­nol­o­gy.21 With FRAND com­mit­ments, we remove sig­nif­i­cant ben­e­fits to that right. Try­ing to pro­tect com­pe­ti­tion through a con­ven­tion­al antitrust scheme has the poten­tial to elim­i­nate the remain­ing ben­e­fits, with­out ade­quate­ly rec­og­niz­ing the impor­tance of inno­va­tion.

In addi­tion, look­ing to the mar­ket pow­er held by SEP hold­ers in the SEP fails to rec­og­nize the down­stream com­pe­ti­tion ben­e­fit­ing con­sumers. For exam­ple, one stan­dard in the tech world is JPEG. JPEG is a method of com­press­ing dig­i­tal images with­out los­ing pic­ture qual­i­ty. The JPEG stan­dard defines how an image is com­pressed and decom­pressed, but not the file for­mat itself.22 Despite stan­dard­iza­tion, mul­ti­ple down­stream file for­mats exist and can com­pete with one anoth­er. JPEG itself stands for Joint Pho­to­graph­ic Experts Group, which is made up of a cross-sec­tion of mem­bers of two stan­dard-set­ting orga­ni­za­tions, ISO and ITU.23 JPEG is a great exam­ple of both con­sumer ben­e­fits and encour­aged inno­va­tion. Because of the uni­for­mi­ty of JPEG as a for­mat, pho­tos com­pressed in this way are able to be opened by hun­dreds if not thou­sands of types of soft­ware. Con­sumers can take and save JPEG images and open them with Pho­to­shop, Win­dows Pic­ture View­er, Snapseed, and so forth. Fur­ther, inno­va­tion has not been stymied in the stan­dard itself. One fear with stan­dard­iza­tion is that a lack of com­pe­ti­tion in the SEP will result in stag­na­tion in that space. Instead, because tech­nol­o­gy pro­gress­es and inno­va­tion down­stream can encour­age or even require stan­dards to inno­vate, JPEG has inno­vat­ed on a num­ber of occa­sions and is in the process of doing so today.24

Notably, the Unit­ed States recent­ly moved to an approach that focus­es on impos­ing antitrust lia­bil­i­ty on imple­menters and SSOs, rather than SEP hold­ers. Cur­rent Unit­ed States Assis­tant Attor­ney Gen­er­al for the Antitrust Divi­sion, Makan Del­rahim, expressed the view in a speech this past Novem­ber, that the risk of anti­com­pet­i­tive con­duct is greater from imple­menters than from SEP hold­ers.25 This is because, as a result of the FRAND com­mit­ments, buy­ers are able to hold out for low­er prices. More­over, he not­ed that the SSOs would also be scru­ti­nized more close­ly, as these orga­ni­za­tions are made up of com­peti­tors who have the pow­er to col­lude and deval­ue the intel­lec­tu­al prop­er­ty rights.26 Per­haps most impor­tant­ly, he not­ed that “patent hold­ers can’t vio­late the antitrust laws by prop­er­ly exer­cis­ing the rights that patents con­fer.”27 In this, he includ­ed the right to refuse to license, call­ing the FRAND com­mit­ments con­trac­tu­al in nature rather than an aspect of com­pe­ti­tion law.28

View­ing the monop­oly that exists in all SEPs as pos­ing antitrust prob­lems results in three neg­a­tive con­se­quences. First, it dis­cour­ages stan­dard par­tic­i­pa­tion, as antitrust scruti­ny can be incred­i­bly cost­ly to inno­va­tors. This is espe­cial­ly true for star­tups and young com­pa­nies who are able to get a foothold through stan­dard­iza­tion but may not be able to afford a fight against the weight of the FTC. In addi­tion, stan­dard par­tic­i­pants will risk dou­bly los­ing val­ue in their patents, as FRAND com­mit­ments rep­re­sent a sig­nif­i­cant decrease in bar­gain­ing pow­er on their own and poten­tial for antitrust lia­bil­i­ty increas­es the costs for SEP hold­ers mean­ing­ful­ly.29 Sec­ond, antitrust scruti­ny above and beyond a con­tract rem­e­dy is inef­fi­cient as it doesn’t rec­og­nize what may be an effi­cient denial of a license. Con­tract law rec­og­nizes what is known as “effi­cient breach,” where­by a par­tic­i­pant may breach a con­trac­tu­al oblig­a­tion so long as they pay for it because the over­all net costs are less than the costs of the breach.30 A breach of FRAND may be effi­cient, and thus should be allowed so long as a con­tract rem­e­dy exists. Third, by adding scruti­ny for SEP hold­ers, the val­ue of the under­ly­ing tech­nol­o­gy and patent rights decreas­es. IP rights are found­ed on the basic view that cre­ation should result in an abil­i­ty to exclude.31 Call­ing the SEP hold­er a monop­o­list would dimin­ish if not elim­i­nate this right, as exclu­sion would be deemed anti­com­pet­i­tive.32 A sys­tem which rewards patent hold­ers rather than sanc­tion­ing their basic rights reflects the val­ue of inno­va­tion in soci­ety. Patents reward inno­va­tors by allow­ing them to prof­it from their inven­tions. With­out prof­itabil­i­ty, com­pa­nies will not invest the huge amounts of cap­i­tal nec­es­sary to the research and devel­op­ment process.

* * * * *

Stan­dard-Essen­tial Patents may be monop­o­lies by default, but those who hold them should not be deemed monop­o­lists with­out added anti­com­pet­i­tive effect down­stream. Because stan­dards result in more com­pe­ti­tion down­stream, con­tract and patent law effec­tive­ly pre­vent harm to com­pe­ti­tion with­out deter­ring inno­va­tion or fail­ing to remu­ner­ate research and devel­op­ment. In order to pro­tect the IP rights of inno­va­tors and encour­age their par­tic­i­pa­tion in tech­ni­cal stan­dards, courts should apply the doc­trines of con­tract and patent law rather than antitrust law in eval­u­at­ing SEPs and the FRAND com­mit­ments made to become stan­dard-essen­tial.

 

Notes:

1. Ran­di Brown is a 2L at New York Uni­ver­si­ty School of Law. This piece is a com­men­tary on the 2018 prob­lem at the Glob­al Antitrust Invi­ta­tion­al Moot Court Com­pe­ti­tion in Wash­ing­ton, D.C., host­ed by Antonin Scalia Law School, George Mason Uni­ver­si­ty. The issue in the prob­lem dealt with whether or not there was suf­fi­cient mar­ket pow­er and a breach of a FRAND com­mit­ment by a Stan­dard-Essen­tial Patent hold­er to result in antitrust or unfair trade prac­tice lia­bil­i­ty. Com­peti­tors were asked to cite to the laws and poli­cies of mul­ti­ple nations world­wide, as the prob­lem was sit­u­at­ed in a non-exis­tent nation, and to argue the ben­e­fits and detri­ments of the schemes advanced in these coun­tries. The views expressed in this piece do not nec­es­sar­i­ly reflect the views of the author. Rather, this arti­cle is a dis­til­la­tion of one side of the argu­ments made by the team at the Glob­al Antitrust Invi­ta­tion­al Moot Court Com­pe­ti­tion.
2. See gen­er­al­ly Anne Layne-Far­rar & Koren W. Wong-Ervin, Stan­dard-Essen­tial Patents and Mar­ket Pow­er (George Mason Law & Eco­nom­ics Research Paper No. 16–47, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2872172.
3. Id. at 1.
4. See Com­pe­ti­tion Directorate–General of the Euro­pean Com­mis­sion, Stan­dard-Essen­tial Patents (June 2014), http://ec.europa.eu/competition/publications/cpb/2014/008_en.pdf.
5. See Ruben Schellinger­hout, Stan­dard Set­ting from a Com­pe­ti­tion Law Per­spec­tive, Com­pe­ti­tion Pol­i­cy Newslet­ter 4 (2011), http://ec.europa.eu/competition/publications/cpn/2011_1_1_en.pdf.
6. See Unit­ed States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (“[T]o be con­demned as exclu­sion­ary, a monopolist’s act must have an ‘anti­com­pet­i­tive effect.’ That is, it must harm the com­pet­i­tive process and there­by harm con­sumers. In con­trast, harm to one or more com­peti­tors will not suf­fice.”)
7. See gen­er­al­ly Layne-Far­rar, supra note 2. See also Joshua Wright, SSOs, FRAND, and Antitrust: Lessons from the Eco­nom­ics of Incom­plete Con­tracts, 21 Geo. Mason. L. Rev. 791, 794 (2014).
8. See gen­er­al­ly Layne-Far­rar, supra note 2.
9. See gen­er­al­ly The Evo­lu­tion of Mobile Tech­nolo­gies, Qual­comm (2014), https://www.qualcomm.com/media/documents/files/the-evolution-of-mobile-technologies-1g-to-2g-to-3g-to-4g-lte.pdf (last vis­it­ed Mar. 16, 2018).
10. See, e.g., In re Alleged Abuse of Mar­ket Dom­i­nance of Qual­comm Incor­po­rat­ed., KFTC Deci­sion No. 2017–0-25, Jan. 20, 2017 (S. Kor.); Huawei v. Inter­Dig­i­tal (Yue Gao­fa Min­san Zhougzi), No. 305, 306 (Guang­dong Interm. People’s Ct. 2013) (Chi­na).
11. See, e.g., Assis­tant Attor­ney Gen­er­al Makan Del­rahim, Remarks at the USC Gould School of Law’s Cen­ter for Transna­tion­al Law and Busi­ness Con­fer­ence (Nov. 10, 2017) (tran­script avail­able at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-usc-gould-school-laws-center).
12. See Christo­pher R. Leslie, Patent Tying, Price Dis­crim­i­na­tion, and Inno­va­tion, 77 Antitrust L.J. 811, 811 (2011).
13. See id. at 811–12.
14. See Ben­jamin M. Miller, FRAND-encum­bered SEPs and Injunc­tions: Why Sec­tion 5 of the FTC Act is an Inap­pro­pri­ate Rem­e­dy, 16 Colum. Sci. & Tech. L. Rev. 452, 458 (2015); Joshua D. Wright & Dou­glas H. Gins­burg, Com­ment on the Cana­di­an Com­pe­ti­tion Bureau’s Draft Updat­ed Intel­lec­tu­al Prop­er­ty Enforce­ment Guide­lines 8 (George Mason Law & Eco­nom­ics Research Paper No. LS 15–14, 2015), https://ssrn.com/abstract=2655754 (not­ing that when a “SEP hold­er attempts to rene­go­ti­ate or devi­ate from the orig­i­nal FRAND com­mit­ment made in gocod faith,” that con­duct “is prop­er­ly ana­lyzed under con­tract, not antitrust law.”).
15. 540 U.S. 398, 399 (2004).
16. See Bruce H. Kobayashi & Joshua D. Wright, Fed­er­al­ism, Sub­stan­tive Pre­emp­tion, and Lim­its on Antitrust: An Appli­ca­tion to Patent Holdup, 5(3) J. Com­pe­ti­tion L. & Econ. 469, 509 (2009) (not­ing the com­par­a­tive advan­tage of con­tract law in reg­u­lat­ing SEP hold­ers’ FRAND com­mit­ments over antitrust).
17. See Jorge Padil­la & Koren Wong-Elvin, Port­fo­lio Licens­ing at the End-User Device Lev­el: Ana­lyz­ing Refusals to License FRAND-Assured Stan­dard-Essen­tial Patents at the Com­po­nent Lev­el 2 (Oct. 16, 2016), https://ssrn.com/abstract=2806688.
18. See id.
19. See id.
20. See Con­sumers and Stan­dards: Part­ner­ship for a Bet­ter World, ISO, http://www.iso.org/sites/ConsumersStandards/2_benefits.html (last vis­it­ed Mar. 16, 2018).
21. 35 U.S.C § 154.
22. About JPEG, JPEG, https://jpeg.org/about.html (last vis­it­ed Mar. 5, 2018)
23. Id. ISO and ITU are two stan­dard set­ting orga­ni­za­tions.
24. Id.
25. Assis­tant Attor­ney Gen­er­al Makan Del­rahim, Remarks at the USC Gould School of Law’s Cen­ter for Transna­tion­al Law and Busi­ness Con­fer­ence (Nov. 10, 2017) (tran­script avail­able at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-usc-gould-school-laws-center).
26. Id.
27. Id.
28. Id.
29. See Miller, supra note 14.
30. Gre­go­ry Klass, Effi­cient Breach, in The Philo­soph­i­cal Foun­da­tions Of Con­tract Law 362–387 (Gre­go­ry Klass, George Let­sas & Prince Saprai eds., Oxford: Oxford Uni­ver­si­ty Press 2014).
31. 35 U.S.C § 154.
32. See Broad­com Corp. v. Qual­comm Inc., 501 F.3d 297 (3d Cir. 2007); Huawei v. Inter­Dig­i­tal (Yue Gao­fa Min­san Zhougzi), No. 305, 306 (Guang­dong Interm. People’s Ct. 2013) (Chi­na).