Standard-essential patent owners should be required to try to settle licensing disputes out of court in a bid to restrict the affects of litigation on market innovation, three prominent economists have said.
In a paper for the Competition Policy International (CPI) think tank, Kai-Uwe Kühn, Howard Shelanski and Fiona Scott Morton expressed concern about the bargaining power of standard-essential patent (SEP) owners when they come to negotiate licensing terms (5-page/266KB PDF) with users of the patented technology.
Kühn is the chief competition economist at the European Commission, Shelanski is director of the US Federal Trade Commission's (FTC's) Bureau of Economics and Scott Morton is professor of economics at Yale and the former deputy assistant attorney general for economic analysis for the antitrust division within the US Department of Justice.
Standard setting organisations (SSOs) should reform their policies on intellectual property (IP) rights in order to bind companies involved in developing new standards, in as strong terms as possible, to license the use of patents essential to the operation of that standard on fair, reasonable and non-discriminatory (FRAND) terms, they said in their CPI paper.
The commitments set by SSOs should require SEP owners to seek to resolve disputes over licensing terms out of court, at least in the first instance, the economists said.
"A F/RAND commitment should include a process that is faster and lower cost for determining a F/RAND rate, or adjudicating disputes over F/RAND, than litigation," Kühn, Shelanski and Scott Morton said. "The expensive nature of litigation creates frictions in the market for ideas, is a high transaction cost for licensees, and renders this market less accessible for smaller firms.
Each SSO can consider alternatives (even if leaving litigation as one possible option) that it thinks will work well for its members and technologies."
"The types of solutions we have in mind, without meaning to suggest that any one is the right solution in any particular instance, include arbitration and alternative dispute resolution within the SSO. These procedures could be made more efficient by the SSO defining, for example, the specification of the base to which a royalty should apply or other factors that would simplify the assessment as to whether a particular licensing offer is F/RAND. The goal we have in mind is that a third party, such as a judge or arbitrator, should be able to quickly and cost-effectively determine whether an offer is F/RAND," they said.
Standards are agreed technical specifications to ensure that a single technology is used across an industry, often with the goal of achieving interoperability of products regardless of the manufacturer. Companies can opt to send experts to help develop standards but, in return, most standards setting organisations insist that companies agree to license any intellectual property they own that is essential to implementation of that standard on FRAND terms.
Kühn, Shelanksi and Scott Morton said that SEP licensors should be forced, under the SSO's IP rights policies, to "specify a cash price" for its technology in order for third-parties to be able to review whether the licensing terms being offered are FRAND.
"Determining if a complex package of crosslicenses satisfies F/RAND is difficult for a third party," the economists said. "If the licensee has the option to choose a F/RAND cash price, but instead chooses to cross-license, then clearly it is better off."
The economists said SEP owners should not be allowed to seek an injunction against users of its technology who they believe are infringing on its patent rights without first adhering to a set dispute resolution process set by SSOs. The SSOs should outline how resolution to disputes over FRAND rates, patent validity, standard "essentiality" or patent infringement could first be achieved before injunctions could be sought, they added.
"Reducing the ability of licensors to threaten to exclude a product from the market will reduce the ability of the licensor to extract royalties above the F/RAND rate and other significant licensing conditions from willing licensees," they said. "The essence of the F/RAND commitment is that the firm has voluntarily chosen to accept royalties rather than pursue a business model based on exclusion. This suggests that there can be no irreparable harm from the use of the SEP. Limits on the use of injunctions or exclusion orders are therefore appropriate."
The economists said that there was a need for SSOs to reform their IP rights policies because of the "market power" SEP owners enjoy and can leverage when engaging in licensing negotiations with users of the technology. They expressed concern about SEP owners that threaten litigation against users of SEPs that fail to adhere to "onerous" licensing demands. This practice of 'hold-up', they said, can discourage innovation and disadvantage consumers.
"These are welcome and sensible recommendations," patent law specialist Deborah Bould of Pinsent Masons, the law firm behind Out-Law.com, said. "It will be interesting to see whether and how the EU Commission and the US FTC take them on board in their ongoing FRAND related investigations into Samsung and Google/Motorola. It may however, realistically, prove difficult for SSOs to reach consensus over implementing the recommendations and changing their IP rights policies accordingly."
The European Commission recently issued its preliminary view that Samsung's court action against Apple over SEPs relating to 3G mobile and wireless technology had breached competition rules. The Commission issued a statement of objections against Samsung after it said the South Korean company had not adhered to its commitment to license use of the technology on FRAND terms. The Commission declined, though, to offer guidance on what license terms would be considered to be FRAND.
The EU's Competition Commissioner Joaquín Almunia previously called on industry to develop new rules that elaborate on the FRAND principles in order to guarantee "the proper functioning of the standardisation system."
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