Printer Friendly

Questioning the FTC's incremental value test and claims of widespread hold-up in technology standards.


In the past decade, a large body of literature and policy statements has expressed concerns over what have been characterized as problems of patent hold-up in the context of standard setting. Some authors go so far as to argue that there is a "seeming consensus that holdup causes serious economic inefficiencies" (1) in standard setting; although this is, at a minimum, the subject of dispute, with prominent voices noting the existence of such hold-up as controversial, (2) and some questioning the lack of any empirical or quantitative evidence of a systemic problem, (3) at least some authors, hearing panelists, and commentators claim that patent hold-up is a serious problem for standard setting that requires attention. (4) Prominent among the latter is the U.S. Federal Trade Commission (FTC), as reflected in its March 2011 Evolving IP Marketplace Report (the IP Report) (5) and its June 2011 Workshop on IP Rights and Standard Setting (FTC Workshop) and collection of commentaries, (6) both of which attempt to summarize the case for why hold-up should be a major concern.

We, however, find the arguments about hold-up by the FTC and similarly focused commentators to be overstated, and suggest that the IP Report is based on highly questionable assumptions, both as to the scope of the alleged problem and as to the efficacy of proposed cures. As it has currently evolved, the debate suggests that there is not even a common understanding of what hold-up actually is. The IP Report and some comments in connection with the FTC Workshop use a definition of hold-up that is not necessarily dependent on deception or patentee misconduct in the standard-setting process, a definition that has been argued to be inconsistent with the common understanding of hold-up, and one that could be seen as the first step to a radical transformation of patent laws and the underlying incentives of such laws, including by limiting patent remedies and the remuneration that would be available to owners of valid and enforceable patents.

We offer the comments in this article with this background. We begin in part II by summarizing the IP Report, its incremental value test, and the key assumptions and definitions--particularly definitions of hold-up and ex ante, with which we have serious disagreement and believe to be erroneous--that underlie the test and the IP Report's other recommendations. In part III, we question why the FTC believes such recommendations are necessary, given the lack of empirical or quantitative proof of widespread hold-up (by whatever definition) and the current availability of legal and commercial remedies and constraints against hold-up if it occurs. We explain the appropriateness of existing legal remedies against hold-up based on deception and breach of fair, reasonable, and nondiscriminatory (FRAND) commitments but we question the need for new and untested remedies in this and other contexts. In part IV, we return to the incremental value test and discuss flaws that we believe exist in its assumptions, logic, and practical utility.

As a preliminary matter, however, we comment that it should be uncontroversial that exclusionary, opportunistic conduct that legitimately constitutes hold-up, as recognized in the economic and legal literature, should be subject to legal redress. And it already is. It should be equally uncontroversial that modifying the common understanding of what constitutes hold-up is inappropriate and suggests a result-oriented policy focus. Notably, many of the FTC's recommendations, which we suggest reflect this latter approach, have already been rejected by Congress in its enactment of the America Invents Act (7) and run counter to other commentary that recognizes the importance of a strong patent enforcement environment to advance competitiveness, job creation, and economic growth generally. (8)


The IP Report follows the FTC's 2003 report titled To Promote Innovation: The Proper Balance of Competition Law and Policy. (9) Both reports examine alleged inefficiencies in the patent system, in the United States and internationally; however, whereas the 2003 report mentions standard setting only in passing, (10) the IP Report focuses significantly on alleged patent hold-up that occurs within the standard setting process; in fact, the IP Report includes an entire chapter on hold-up and calculating reasonable royalties for technologies that are incorporated in industry standards. (11) In addition, the FTC Workshop squarely focuses on hold-up and other alleged problems that the FTC has identified in connection with the use of patents in standards development. (12)

The FTC appears to have been careful to ensure that its official statements in the IP Report and in connection with the FTC Workshop couch discussion of patent hold-up in theoretical or equivocal terms--for example, saying that "one important context in which holdup may have especially severe consequences for innovation and competition is standardized technology" (13)--but overall, the FTC's work gives the impression that hold-up is widespread and severe, and the FTC takes the position that "tools" to prevent hold-up are necessary right now. (14) The FTC's 2003 and 2011 reports, the FTC Workshop, and hearings represent a significant investment of agency resources, and suggest that the FTC believes there is a real problem here, not just an academic curiosity. And, at least some commentators have stated that hold-up, in their view, actually is a severe problem, (15) including in statements made during the Workshop. (16)

Thus, the IP Report begins by recognizing that patents play a critical role in encouraging innovation, but then observes that some activity by patent holders "risks distorting competition among technologies and deterring innovation, especially when driven by poor patent notice and remedies that do not align with the economic value of the patented invention." (17) The IP Report proceeds to discuss a number of issues under three broad topics: the nature of innovation in technology markets and how competition is affected by ex ante and ex post patent licensing transactions; the "competition perspective" on the meaning and importance of patent notice; and a five-part examination of patent remedies from a competition perspective. (18) It then makes thirty-five recommendations for changes to the patent system. Some, such as increasing funding for the U.S. Patent and Trademark Office, (19) are, or should be, relatively uncontroversial. Others, however, would fundamentally and radically alter aspects of patent law and practice, such as recommendations that "[c]ourts should reject the entire market value rule as a basis for awarding a patentee lost profits damages" (20) and "eliminate the question of whether the patented feature was the 'basis for customer demand' from the determination of the appropriate base in a reasonable royalty damages calculation" (21) (hoping this will reduce royalty awards), and "the [International Trade Commission should] consider whether only those licensing activities that promote technology transfer 'exploit' patented technology within the meaning of Section 337 [of the Tariff Act of 1930 (22)] and therefore satisfy the domestic industry requirement." (23)

The full list of the IP Report's recommendations is given in the report's Executive Summary (24) and is beyond the scope of this article. We focus here upon the FTC's promotion of an incremental value test for use in capping recoverable patent damages based on a reasonable royalty, which will necessarily affect the royalties that patent owners will be able to negotiate in licensing discussions both in relation to standards-essential patents and otherwise. The test is set forth in chapter 7, Calculating Reasonable Royalty Damages, and is explained principally in four recommendations:

* "Courts should recognize that when it can be determined, the incremental value of the patented invention over the next-best alternative establishes the maximum amount that a willing licensee would pay in a hypothetical negotiation. Courts should not award reasonable royalty damages higher than this amount." (25)

* "Courts should apply the hypothetical negotiation framework to determine reasonable royalty damages for a patent subject to a [reasonable and nondiscriminatory (RAND)] commitment. Courts should cap the royalty at the incremental value of the patented technology over alternatives available at the time the standard was chosen." (26)

* "To prevent damage awards based on switching costs, courts should set the hypothetical negotiation at an early stage of product development, when the infringer is making design decisions and before it has sunk costs into using the patented technology." (27)

* "Courts should consistently adopt and apply the hypothetical negotiation and willing licensor/willing licensee model as the conceptual framework against which conduct of the damages trial is tested. In particular, courts should recognize that the Georgia-Pacific factors provide only a list of evidence categories. Implementing this recommendation will have practical consequences regarding jury instructions, admissibility of evidence and decisionmaking. ... " (28)

We discuss this incremental value test further in part IV. The test rests on four definitions or assumptions that may surprise the average reader, or even the reader who is knowledgeable about the literature in the area. Those four are as follows.

First, the IP Report adopts an unconventional definition of holdup. It first states that the term "hold-up" is subject to different meanings, then defines the term, and uses a definition that is exceptionally broad and inconsistent with common understanding:
   "Hold-up" is used throughout this report to describe a patentee's
   ability to extract a higher licensing fee after an accused
   infringer has sunk costs into implementing the patented technology
   than the patentee could have obtained at the time of design
   decisions, when the patented technology competed with alternatives.
   The patentee's ability to extract hold-up value is based on fear of
   an injunction ... and potential damages to the extent they
   overcompensate patentees compared to the ex ante economic value of
   the technology. "Hold-up" is sometimes used in a more narrow sense,
   not intended here, to describe situations in which a patent owner
   fails to disclose his patents to a standard setting organization
   and attempts to license after an industry is locked into using the
   standard. (29)

This definition--"naked hold-up," as we would term it--does not require any malfeasance on the part of the patent owner. As the italicized language makes clear, no fraud, deception, or other conduct beyond the lawful exercise by a patent owner of rights under patent law is required. Accordingly, this definition would define as "held up" a manufacturer that "sunk costs into implementing the patented technology" negligently (for example, having failed somehow to learn of a well-known patent) or even knowingly. Patentee "fail[ure] to disclose" is not required.

Second, the report states that " '[l]ock-in' can make an entire industry susceptible to hold-up," but lock-in is not defined. (30) Lock-in appears to be used in the normal sense of an industry making a commitment to a particular technology, but it is not explained how holdup is different from lock-in, or how lock-in would be different from the ordinary consequence of standard setting when choice of one technology over another is the expected outcome. The FTC's statement that lock-in can make an industry susceptible to hold-up implies that lock-in does not necessarily do so; however, if it is possible for an industry to be locked-in, yet not susceptible to hold-up under the FTC's definition, the IP Report does not explain how.

Third, the IP Report repeatedly refers to an ex ante point, before lock-in, and refers back to that point when discussing the incremental value test and associated hypothetical negotiations. The FTC's definition of ex ante is a point after a patented technology is known, but before the user-potential licensee of the technology has invested in manufacturing and further development. (31)

Fourth, the IP Report does not attempt to make the case that holdup (whether using the IP Report's definition, or any other) is widespread or, indeed, occurs at all in the real world, or has any disruptive effect on innovation, robust standardization or the benefits therefrom, or otherwise on the operation of efficient markets. The IP Report cites no proof of any kind. The FTC also does not attempt to cite to such proof in the materials put forward in connection with the FTC Workshop. As to the topic of hold-up, the IP Report and FTC Workshop are thus theoretical discussions, not factual analyses, and most pointedly (as discussed in part III below) do not establish the existence of any actual social inefficiencies or distortions that might provide a minimal foundation for the transformative recommendations presented.


The FTC's recommendations for "reform" (32) to the patent system are fundamental and lengthy. Serious questions exist about their merit as a logical matter (which we address in part IV), but a more fundamental problem is that the FTC appears to have proposed solutions without first demonstrating that an actual problem exists, much less exists on such a large scale that fundamental reforms are necessary. This is a curious approach for a U.S. antitrust agency whose top officials frequently advise those of other nations that competition analysis and policy must always be "effects based." (33) We would have expected that a discussion of the proposed reforms would begin with evidence of the degree to which hold-up in technology standards has been shown to occur, and, if shown to occur, whether legal and commercial remedies already exist and are sufficient to respond to that hold-up. Only then, if hold-up were severe and current responses were inadequate, would it be appropriate to fundamentally alter the patent system. We respectfully suggest that neither the FTC nor any other proponent of the hold-up concern has engaged in this preliminary showing.

A. Proponents of patent reform should bear, but have not met, the burden to define and demonstrate widespread hold-up

There are three significant problems with the foundations for the claim of patent hold-up: a lack of proof and a question of burden of proof; a lack of clarity as to how hold-up should be defined; and a lack of industry consensus that hold-up is a problem. We address each, in turn.

First, we are aware of no real-world evidence that the use of patented technologies in standards has impeded, either in scope or time, the development of effective standards and the products and services based on them in a way that would justify changes to the patent system. In fact, we are aware of no real-world evidence at all put forth by the FTC on the hold-up questions discussed in the IP Report or the FTC Workshop, and we are aware of only anecdotal evidence put forth by FTC Workshop participants on these questions.

Second, there is a marked confusion over what hold-up should mean. As noted above, the IP Report's definition is broad; it accepts a naked version of hold-up that does not require any malfeasance by a patent holder. Under the IP Report's proposed definition of hold-up, a manufacturer could infringe patented technology negligently, recklessly, or even knowingly, and still be considered held-up. (34) If the IP Report's recommendations were made law, that manufacturer could then invest in its infringing activities and, under the incremental value test, be subject to only a capped royalty with no risk of an injunction being imposed against its infringing conduct, while the patent holder would be limited in the remedies it could pursue.

We are not the first to observe that this definition is problematic. In comments to the FTC Workshop, Professors Epstein, Kieff, and Spulber observed, referencing the work of Oliver Williamson, that hold-up has a "very precise definition in the economic literature," requiring "opportunism," sometimes described as "self-interest seeking with guile." (35) This requirement of patent holder opportunism is important because, without it, the remedies for hold-up can easily tilt too far in the direction of the patent infringer. If opportunism is not required, a patent user would have an incentive to infringe, knowing that, at worst, its royalty would be based on the FTC's incremental value test. This equips infringers with a valuable option, at the cost of patent holders.

Third, it should be emphasized that contrary to the claims of some authors, (36) there is no industry consensus that hold-up under any definition is a major problem in standard setting. Comments to the FTC Workshop are illustrative. As previously observed, some commenters did assert that patent hold-up is a real phenomenon and should be addressed through the type of reforms promoted by the IP Report (although, again, these comments expressed only theoretical conclusions, without offering evidence of hold-up or impeded standards). (37) In contrast, numerous comments stated that hold-up is not a widespread problem and does not merit law or policy changes. Holders of the latter view included licensees and potential targets of patent litigation, licensors, industry analysts, academics, and even standard setting organizations (SSOs) themselves. Such comments were made in the context of the thousands of technical standards that are developed every year. (38) A sampling of such comments includes those by:

* The American National Standards Institute, which reported that only "a relatively small number of questions have ever been formally raised regarding [its] Patent Policy, including issues relating to improper 'hold up.'" (39)

* The Telecommunications Industry Association (TIA) and the Alliance for Telecommunications Industry Solutions (ATIS), the two leading U.S.-based standards development organizations involved in the standardization of all generations of wireless technologies. Commenting on the FTC's construction of hold up, TIA stated that it "has never received any complaints regarding such 'patent hold-up' " and it "believes that the FTC is presuming that 'patent hold-up' is a widespread and fundamental problem, without considering the practical experiences of SSOs such as TIA." (40) ATIS similarly reported that it "has not experienced the hold up problem, nor has any such problem impeded in any way ATIS's standards development efforts." (41)

* The Association for Competitive Technology, which stated that small businesses are "not convinced that there is a wide-spread patent hold-up problem." (42)

The U.S. Chamber of Commerce, which reported that "empirical evidence supporting a concern with a widespread risk of holdup is lacking." (43)

The American Intellectual Property Law Association (AIPLA), which commented that the request for comments relating to the FTC Workshop

[a]ppears to suggest that there may be reasons for substantial concern arising from the incorporation of royalty-bearing patented technologies in technical standards, and that the effectiveness of the voluntary standards development system in the United States has been or may be compromised or requires modification because of the incorporation of such technologies. AIPLA does not share this view. (44)

* And submissions by individual academics and consultants made similar points. For example, law professor Jay Kesan commented that "there is little or no empirical evidence indicating that there is a significant problem with patent 'hold up,'" (45) and Keith Mallinson, a leading wireless industry consultant, reported that "there has been no evidence of 'windfall gains" to patent owners impeding the adoption of any technology based standards." (46)

The current Director of the FTC Bureau of Economics, Professor Joseph Farrell, stated at the FTC Workshop that the absence of proof of hold-up does not mean that there is no problem (47) and may result merely from the silence of consumers. (48) However, this explanation is unsatisfying given the sheer abundance of standards and therefore opportunities for complaint, as well as the evidence of widespread development and introduction of standardized products and services based on patented technology.

B. Legal remedies already exist for deception and contractual breach

The foregoing is not meant to suggest that properly considered hold-up has never occurred or cannot occur in the future. Of course it can, but in situations in which competition-damaging patent-related opportunism occurs and where the proper precondition for alleging hold-up exists (as distinct from the type of naked hold-up suggested by the IP Report), the law already provides remedies.

True hold-up may arise when a patent owner intentionally deceives others as to the existence of a patent, and such conduct causes an anticompetitive effect. For example, if an SSO adopted a particular technology based on a patent holder's intentional failure to disclose an essential patent, and the SSO would have adopted an alternative technology but for the deceptive nondisclosure, then a showing of harm to competition could be made.

This is the situation addressed by the D.C. Circuit in Rarnbus. (49) If facts were proven to meet this standard, legal redress is and should be available, including under an antitrust theory, a fraud theory, or equitable principles of estoppel and implied license. The remedy in such cases could be damages (if any had yet occurred), an order limiting the ability of the patent holder to enforce its patents or to obtain a desired royalty, (50) and, in an appropriate case, the possibility of a punitive element to deter such conduct. These are established remedies and do not require speculation about the parties' ex ante view of appropriate commercial terms--the terms to be applied prospectively in the remedy would be those that had been promised, and presumably relied upon, by actual parties. Although there is the risk of false positives from such remedies, those risks are relatively low, in part because fraud must be proven by clear and convincing evidence. The right to deceive actively is not a right granted to patent owners under the Patent Act, and we see no reason that it should be considered necessary for the preservation of innovation incentives. Thus, conceptually, active deception is an easy case.

Indeed, in one context, we also can imagine actionable deception without fraud: If the royalty rate assurance falls away from the patent through a contractual fluke that the parties could not have foreseen, such as may happen in an assignment, the opportunity for anticompetitive rents may be the same as with fraud. This was roughly the FTC's allegation in N-Data. (51) If such a case were proven, it might be appropriate for a remedy even though active deception could not be proven. Whether that remedy was obtained through an antitrust claim, an inequitable conduct defense leading to an unenforceable patent, or some other theory would depend on the facts, but again, this seems to be a scenario in which existing remedies provide the opportunity for effective redress. The terms to be imposed in the remedy would be those that both sides to the original negotiations originally thought they would get, with no speculation required as to what a hypothetical negotiation point should have been. (52)

One might respond that regardless of conceptual simplicity, active deception is difficult to prove in the real world. But the key question is: Difficult compared to what? Fraud and deception are well-known theories and practitioners are well positioned to develop the required factual proof to pursue such claims. Claims based on fraud and deception should be far more familiar, and less difficult to pursue, than application of the FTC's incremental value test, with the latter's requirement to consider an entire industry's hypothetical negotiating conduct. Moreover, the extent to which a party asserting a fraud or deception theory must be put to its proof should be seen as a beneficial attribute of the legal process because it deters the proliferation of unfounded suits asserted for strategic rather than legal purposes.

One also might argue that a specific, prescriptive incremental value remedy might be easier to apply than a more open inquiry under fraud remedies. However, this ease of application must be balanced against the potential for error and distortion of incentives inherent in such one-size-fits-all approaches (a topic we discuss in more detail at part IV).

Competition-damaging patent-related opportunism may also occur if a patent owner breaches a contractual commitment to offer fair, reasonable and nondiscriminatory (FRAND) licensing terms. Breach of contract is an even simpler remedy than that for fraud; the challenge of a FRAND action lies only in determining what "reasonable" should mean. As Brooks and Geradin have shown, "a FRAND obligation leaves wide latitude to private parties negotiating a license[; h]owever, this does not mean that a FRAND commitment has no substance." (53) In brief, Brooks and Geradin propose that "tak[ing] the FRAND obligation seriously as a contract" (54) would subject a FRAND claim to analysis of four main categories of information: (1) the contract language itself; (2) information as to the pre-existing "understanding of the industry" as to what a FRAND undertaking to an SSO meant at the time the FRAND concept was incorporated into the SSO intellectual property policy or other contract; (3) information concerning the actual deliberation and debate by the SSO members at the time the policy was adopted; and (4) subsequent comment and action relating to the meaning of FRAND by the relevant SSO. (55) If reasonableness cannot be determined from other evidence, Brooks and Geradin propose that courts should use a GeorgiaPacific-type approach for determining a "reasonable royalty." (56) We agree. This approach has the virtue of relying first on actual party behavior and then, if at all, using the "hypothetical negotiation" (57) of Georgia-Pacific only in the limited and well-established ways set forth in that case and its voluminous progeny.

A fraudulent FRAND declaration might also state an actionable antitrust claim. As the Third Circuit held in Broadcom Corp. v. Qualcomm Inc., (58)

(1) in a consensus-oriented private standard-setting environment, (2) a patent holder's intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an [SSO]'s reliance on that promise when including the technology in a standard, and (4) the patent holder's subsequent breach of that promise, is actionable anticompetitive conduct. (59)

The availability of deception- and contract-based legal remedies calls into question the need for the IP Report's recommendations in two ways. First, if the focus is on competition-damaging patent-related opportunism (rather than naked hold-up), as we believe it should be, remedies such as the incremental value test are inferior and superfluous to existing remedies. Second, the number of cases brought seeking existing remedies should tell us something about the degree to which hold-up is a real-world problem, and in relation to the thousands of standards developed annually (even assuming only a fraction of them involved patent-related conduct), that number appears to be small even though it has become common practice for an accused infringer to raise some form of standards defense. In addition, we are not aware of any basis on which to conclude that existing remedies are insufficient to provide injured parties with a means for redress. Litigation is, of course, an expensive endeavor, but no more so in the context of standards setting hold-up than in any other circumstances. And, in this context, the interest that the FTC, for example, has shown in enforcement efforts, including under section 5 of the FTC Act, provides an additional avenue for application of existing remedies as compared to other forms of commercial harm.

It should also be noted that Congress, during the deliberations that led to the America Invents Act, rejected an attempt to change patent damage rules and concluded that existing legal remedies continue to be effective, contrary to the FTC's view of the need for the type of reforms proposed in the IP Report. Early versions of proposed patent reform bills would have limited reasonable royalty damages to that portion of the "economic value" of the infringing product or process attributable to the patented invention's "specific contribution over the prior art," but this test, which is essentially the same as the IP Report's "incremental value" test, ultimately was rejected. By 2009, the Senate Judiciary Committee had abandoned proposed changes to substantive patent damages law, concluding that the federal courts could exercise a gatekeeping role over the factors and methodologies for determining damages. In a series of decisions between 2009 and 2011 the Federal Circuit did exactly that in vacating damage awards based on speculative or otherwise unreliable evidence or metrics. (60) Senator Jon Kyl (RAriz.) observed that prior to the Federal Circuit's recent decisions he had "underestimated the courts' ability and willingness to address these problems on their own. And I certainly did not anticipate the speed with which they might do so. ... The present bill appropriately leaves patent-damages law to common law development." (61)

C. Commercial constraints are real and continue to evolve

The significant commercial constraints against patentee misbehavior suggest that systemic reform is not necessary to address patentrelated conduct, particularly in connection with standards development. These inherent constraints may be placed into five categories. The first is patentees' self-interest. Patentees understand that successful standards generate more royalty fees, or other opportunities for reward based on owned patents, (62) than do unsuccessful ones. Royalty demands that take an inefficiently high slice of the available value in a standardized technology (or other patent practices that burden or delay a standard) could retard standardization to an extent counterproductive to patentees' bottom line.

Certainly there is a potential collective action problem here, where the owner of the last essential patent has a theoretical ability to harvest a disproportionate share of the royalties, but there are many reasons why such holdouts will inject only minor costs into the process. Among the most important is that the owners of the most valuable patent portfolios have the highest stake in the rapid and wide success of the standard and therefore the most to lose from patent hold-up that injures a standard. Thus, the more important the patent holder, the less that patent holder can gain by hold-up. And if hold-up is attempted by patentees who have the smaller, weaker positions, how significant a problem will that be?

The second factor is reputation. The owners of the largest, strongest patent portfolios are inevitably repeat players in standard setting, as are their potential licensees, and all the major participants are sophisticated firms with long memories. Firms that engage in hold-up or other sharp practices today would find their technology shunned in the future. This would act as a disincentive to hold-up.

The third factor is the need for cross-licenses. Most standards participants are manufacturers as well as licensors and therefore must bargain for licenses "in" at the same time they are attempting to obtain compensation for their licenses "out." Hold-up is a particularly unattractive strategy for such participants, who stand not only to lose royalty revenue on the licenses "out," but also to lose sales revenue (assuming they do not manufacture without a license) or risk infringement damages (if they do), for any period in which licenses "in" are not obtained or the standard is not yet viable.

The fourth factor is the continuing evolution of SSO policies, including the use of more effective disclosure rules. SSOs generally do not require FRAND commitments as a condition of participations but they do increasingly allow each participant to learn what commitments the others have made, and they often provide the opportunity for each participant to make a FRAND commitment on a voluntary basis. Once made, the FRAND commitment generally is a contract that gives rise to rights enforceable in court by would-be licensees.

Moreover, SSOs commonly have intellectual property rights committees, consisting of SSO members, which actively review the SSO's intellectual property rights policies relating to, for example, disclosure and licensing commitments.

The fifth factor is the impact that the availability of FRAND litigation has on FRAND negotiations. Since courts have shown a willingness to treat FRAND claims as justiciable contract disputes, licensing negotiations now occur under the shadow of judicial enforcement, which provides a powerful incentive for the patentee to avoid arbitrary demands. It is no objection to argue that the inexactness of FRAND could permit a patent holder to make an arbitrary demand, since the risks of inexactness are symmetrical: a patent holder could attempt to ask for more than is "fair and reasonable," but infringer-licensees could attempt to ask for less. And the potential downsides to FRAND litigation are asymmetrical in a way that benefits infringer-licensees. A FRAND claim exposes an infringer-licensee to little risk beyond the cost of its own attorney's fees, because an injunction against practicing the standard is unlikely in this context (64) and a loss likely will lead only to paying the same royalty as that proposed before the litigation. The manufacturer may still have the option of walking away from the standard and at least a portion of its total commitment to the technology, whereas the patentee is completely locked in (having already sunk its costs into the research that produced the patent). Moreover, a loss will affect the patentee not only in this one transaction but likely in all of its royalty relationships--a single loss could disrupt the patentee's entire licensing program and abruptly reduce its licensing revenues across the board. In fact, the mere existence of the FRAND litigation option on the infringer-licensee side likely depresses royalty demands on the patentee side; it is even possible that such a one-sided option depresses royalties below the perfectly competitive level. (65) FRAND litigation is very close to a free pass for infringer-licensees, so the fact that so few choose to initiate such litigation is a powerful signal that manufacturers believe their royalty obligations are in fact "reasonable," whatever else they may claim in public.

D. Patent costs, and their effects on competition, appear to be exaggerated

As mentioned, we are aware of no real-world evidence that use of patented technologies in standards has inhibited the development of standards or standards-based products and services, presumably because patents cost "too much," meaning that royalty costs materially retard technology uptake at the manufacturer or consumer level relative to socially optimal levels. Putting aside whether price is an appropriate antitrust issue (we submit that ordinarily it is not), (66) the available evidence suggests that technology uptake is not suffering from obvious stagnation. The following evidence is incomplete and circumstantial, to be sure, but it at least suggests, as an example, that the wireless telephony industry, a leading technologically standardized industry that some commentators have identified as potentially "held-up," (67) in fact appears to be healthy and dynamic. This further reinforces our point that the proponents of the hold-up view should bear the burden of showing in the first instance that a problem really exists.

We are aware of estimates of aggregate royalties for standardized wireless technology that are as high as 30% for 3G wireless technology, (68) and 14.8% for 4G LTE technology, (69) but these estimates may raise unduly severe concerns of royalty stacking. According to one leading wireless industry consultant, actual aggregate license fees for 3G standards-complaint patents range between 3% and 9% of the price of a handset. (70) Also, it is important to note that handset costs represent only a small fraction of a consumer's total cost; for example, handset costs represent only 17% of total consumer costs in the United States. (71) Yet the patent-standardization costs are typically located in handsets. Thus, multiplying the royalty and 17% figures together, one finds that the actual impact of patent-standard costs on consumers could be as little as 0.5% to 1.5% of consumers' total ownership cost for U.S. wireless service, and this assumes that the full licensing cost is passed on to wireless operators and in turn consumers, which is questionable. (72)

Other information is consistent with actual low single digit aggregate licensing costs for handsets using wireless technology. Nokia, for example, publicly announced in 2007 that it paid less than 3% percent aggregate license fees on wideband code division multiple access (WCDMA) handset sales. (73) The disconnect between the academic discussion of royalty stacking and the commercial reality is something of a mystery but may be due to academics' use of published licensing information, rather than actual negotiated rates between licensors and licensees. If so, this is a major flaw in the academic discussion because published rates are biased to be higher than real rates. One possible cause of the discrepancy between actual licensing costs and the much higher estimates noted above is that patent owners have strong incentives to set their published license terms--"rack rates'--relatively high, leaving themselves the ability to negotiate actual terms at a lower level and preserving the ability to most effectively pursue infringement damages based on the rack rate.(74) As a result, estimates of the cost of royalty stacking based on rack rates are likely to be too high.

Another factor is that actual licensing conduct mitigates royalty-stacking concerns because many technology firms license on a reciprocal cross-portfolio basis and, not infrequently, based on nonroyalty bearing grants and cross-grants. Such licensing, which may not involve any direct royalties or other fees, is pursued because owning patents, including standards-essential patents, is seen as important for different purposes, "like securing freedom to operate and signaling [one's] own technological competencies besides generating licensing revenues." (75)

If patent holders were effectively holding up standards implementers, economics suggests that the results should be predictable with respect to standardized products and services: stagnant competition; lack of entry by firms that would need the allegedly monopolized technology; economizing by manufacturers on their technology inputs and by consumers on their purchase of standardized devices; and low consumer surplus, to name a few. Here again, however, evidence at least suggests the contrary to this parade of horribles. In fact, in connection with mobile telephony, evidence indicates that competition is robust and consumer uptake is exploding.

According to an August 2011 report by Gartner Research, (76) worldwide sales of mobile devices to end users totaled 428.7 million units in the second quarter of 2011, a 16.5% increase from the second quarter of 2010. Sales of smart phones--devices that are more technologically capable and, importantly for this discussion, more expensive than ordinary mobile handsets--were up 74% year-on-year and accounted for 25% percent of overall handset sales in the second quarter of 2011, up from 17% in the second quarter of 2010. Recent entrants such as HTC continue to grow rapidly. And churn and change are quite evident: Nokia and Sony Ericsson are reported as continuing to decline; Samsung, which had faded in the 1990s, is reported to be roaring back; and of course Apple has made large gains. These marketplace developments are shown in table 1.

Churn and change also characterize competition among handsets when measured by operating systems, as shown in table 2. The Android OS continues its meteoric rise, more than doubling year-over-year, and Apple's iOS remains strong. The combined share of iOS and Android grew to nearly 62% in the second quarter of 2011, up from just over 31% in the corresponding period of 2010. (77) According to Gartner Group, these gains come at the expense of Nokia's Symbian and the operating systems of RIM and Microsoft.

These data suggest that contrary to stagnant competition or impeded standardization resulting from patent costs, there has been dynamic entry by disruptive challengers who are growing rapidly in both handsets and operating systems at the expense of incumbents. As a result, consumers now are presented with a degree of competitive options never before seen, all in connection with standardized products and services that rely on perhaps the greatest-ever volume of standards-essential patented technology.

It is also important to note that the methods of competition here appear to be incompatible with a view of wireless technology as excessively priced. Market participants are not acting as if technology is a scarce and expensive good, subject to rationing; instead, handset manufacturers and wireless operators compete vigorously upon technological functionality and features. Put differently, product and service suppliers are rushing to license and distribute innovation, and consumers are rushing to consume it. And consumer behavior suggests that technology-based products and services are priced nowhere near the limit that would deter further innovation or product introduction. Consumers are not buying new mobile telephony products because they have used up their old ones; instead, as reported in the popular press, consumers discard perfectly functional handsets and rush to buy new ones that they do not, in any functional sense, need. The long lines of consumers looking to be early users of each iteration of the iPhone illustrate this phenomenon, notwithstanding the relatively high price for the iPhone relative to competitive products. The same can be observed from suppliers' rush to bring new versions of smart phones and tablets to the market, each incorporating new designs, functions and features as competitively differentiating factors for consumers.

This behavior suggests that consumers recognize that handsets and other wireless devices are cheap relative to their value. In other words, in economic terms, consumers believe that they are harvesting large surplus for themselves. Do these real-world facts prove that wireless telephony patents are competitively priced and that hold-up never occurs? No. One might even argue that the industry could be more dynamic, and that consumers could have even greater surplus, if patent costs were somehow lowered--but such arguments are inherently speculative, and certainly no basis upon which to set competition policy or to reshape the entire U.S. patent system around the IP Report's recommendations. To the extent that real-world evidence exists, it suggests a dynamic and surplus-creating marketplace, and if wholesale change is to be made to the patent system despite this (at a minimum) suggestive evidence, the burden should be on proponents of change to come forward with some reliable evidence to justify altering the status quo. To date, we know of no such evidence, nor an attempt to collect it.

As a final note on the subject of patent prices, we note the position by some that the empirical foundation of the importance of patent royalties to innovation is disputed. (78) The academic debate over this question is beyond the scope of this article but we have three practical responses. First, whatever the academic debate, this question is set-fled as matter of law: the U.S. courts, legislature through the Patent Act, and current presidential administration take the view that royalties matter. (79) Second, the alternative to permitting a patent-royalty business model is a world that would be, perhaps ironically, much less friendly to standards and open licensing: in the absence of royalties, anyone who wished to monetize an invention would be forced to vertically integrate as a product manufacturer and to sue all rivals who use the invention; the incentive to participate in standard setting would be reduced or eliminated; and the competitive deck would be stacked in favor of the largest and, one assumes, most established firms. Third, if the point is merely to determine the "perfectly competitive" royalty, rather than prevent royalties altogether, this is cold comfort: Why would the inefficiencies inherent in any such pursuit of perfection (an economist and a Georgia-Pacific test for every transaction?) be less than in the current system of negotiation?


Even if hold-up were shown to be a significant problem meriting changes to the patent system, the FTC's incremental value test would be a poor response. Because the rationale for the incremental value test is premised on what we believe are confusing and invalid definitions of hold-up and ex ante, we address those first. We then discuss the logical and practical problems of the incremental value test itself.

A. The IP Report's definitions of hold-up and ex ante are invalid

As discussed above in part III.B, the IP Report's use of the term hold-up is inconsistent with the common understanding of the term; that is, competition-damaging patent-related opportunism, usually involving active deception, a breach of a FRAND commitment, or some other independently unlawful and redressable conduct. The FTC notes that" '[h]old-up' is sometimes used in [this] more narrow sense ... to describe situations in which a patent owner fails to disclose his patents to a standard setting organization and attempts to license after an industry is locked into using the standard"; however, the FTC states that such a meaning is "not intended [in the IP Report]."(80) The IP Report instead uses hold-up to mean naked holdup, under which even a manufacturer that sinks costs into implementing the patented technology negligently, having failed to learn that a well-known patent existed, or knowingly, would be described as held up. But it is not clear why the law should protect infringer-licensees who are not the victims of deception or contractual breach, and it is even less clear why the patent system should be reshaped in their favor. The more efficient course--commercially, judicially, or legislatively--would be to allow bad consequences to follow from an infringer-licensee's negligence (or worse), so as to establish incentives for better infringer-licensee behavior in the long run.

If the IP Report's concern is purely about hold-up by nonpracticing entities (NPEs) (or, as the IP Report characterizes a subset of them, patent assertion entities (PAEs)), who typically are less likely to participate in standards (and therefore may not be in a position to deceive or make FRAND commitments), then the IP Report should say so, and whatever recommendations it makes should be limited to that context. Even there, we question whether there is proof that NPEs and PAEs have a material impact on the technology industry, which would merit the attention given to hold-up in the IP Report, particularly in light of the limitations on nonpracticing entity remedies established by the Supreme Court's eBay case(81) and subsequent precedent.

Also, as mentioned above, the point described as ex ante in the IP Report is not in fact ex ante at all. The FTC's definition of ex ante is a point after a patented technology is known, but before the potential infringer-licensee of the technology has invested in manufacturing and further development.(82) At that point, the patent holder (whether the original inventor or an assignee) already will have incurred sunk costs in acquiring the patented technology, including through enforcement and licensing efforts, whereas the licensee has the option to walk away at no or much lower cost. The patent holder, not the licensee, is the most vulnerable party to hold-up at that time. A true ex ante moment would occur before the inventor's development costs, when the discussion between the potentially licensing parties is not "How much will I pay you for your existing invention?" but rather, "If I undertake a risky investment to attempt to solve this technological problem for you, how much will you pay me if I succeed?" In the latter discussion, risks are more symmetrical and the inventor has more negotiating leverage. And, of course, the ability of a hindsight incremental value analysis to confidently predict the outcome of that negotiation, and to substitute the resulting judgment for the parties' actual commercially agreed terms, is questionable.

It is no response to the foregoing point to argue that standard setting often proceeds as an effort to choose among existing technologies, not to choose among potential providers of technologies that are still in the developmental stage. Inventors invest based on series of possible rewards, and in many industries a material portion of the expected return is the hope that the resulting technology will become part of a standard. If a rule were developed that significantly limited the returns to inventors of standardized technologies, the result would be predictable: inventors would perform less development and seek fewer patents during the prestandard period. Once that occurs, standardization would be forced to move to an earlier stage. This would be an inefficient result: Standardization at an earlier stage of technological development increases the risk that the standard will choose a technology that does not work (or will not become available when expected), creating delay and the possibility of a failed standard. Thus, there are good reasons for standard setters to confine their efforts to existing or nearly finished inventions and to share the benefits of the resulting increased certainty with the owners of inventions that become standardized.

B. The test itself contains logical and practical flaws

Turning now to the incremental value test itself, as set forth in the IP Report, we identify certain flaws of logic and practical application. As quoted in greater length in part II, the IP Report states that "the incremental value of the patented invention over the next-best alternative establishes the maximum amount that a willing licensee [should] pay in a hypothetical negotiation[,]" (83) and "[c]ourts should cap the royalty at the incremental value of the patented technology over alternatives available at the time the standard was chosen." (84) Further, the IP Report states that, "[t]o prevent damage awards based on switching costs, courts should set the hypothetical negotiation at an early stage of product development, when the infringer is making design decisions and before it has sunk costs into using the patented technology." (85) It is easy to see the appeal of the concept. If two roughly substitutable patents held by different owners already existed, a skillfully bargaining licensee that had not yet committed to either patent could--if the owners were unconcerned with future implications--bargain the owner of the superior technology down to a price equivalent to the incremental value of that patent versus the other. Having already obtained a patent, the innovator's costs are sunk, and it will be keen to obtain whatever marginal licensing revenue it can, no matter how small; this is the tendency that the incremental value test attempts to use against innovators. Why not attempt to re-create such a bargaining environment after a standard has been set?

It turns out that the "why not" has everything to do with the incentives of inventors to create technology that may become standardized--in other words, whether to sink such costs at a time when the innovators do have a choice--and to participate in SSOs. Layne-Farrar, Llobet, and Padilla (86) point out that the incremental value test begins from two key presumptions: first, that the innovations required for the standard already exist; and second, that the innovators have already chosen to participate in the relevant SSO. These assumptions do not necessarily fit any significant technology standard setting in a static view of the world--invention and joining often continue through the early stages of standard setting efforts, and sometimes even through late stages--and it certainly does not fit a dynamic view.

Technology innovators tend to be good at understanding long-term risks, and they tend to be repeat players in standard setting. They will understand the strategic error of entering a patent negotiation (in this case a hindsight hypothetical negotiation but a negotiation nonetheless) having given up their leverage. They will therefore preserve that leverage by avoiding early-stage development and avoiding early joining of SSO efforts, either of which might subject them to the incremental value rule. As Layne-Farrar et al. point out, such delay harms SSO members and efficiency in general, and knowing this, sophisticated SSOs will induce innovators to resume early-stage invention and participation by promising innovators some additional return, such as that a chosen technology will receive a royalty that is greater than the mere hindsight-viewed post-standardization increment of its value. If government prevents such a negotiated solution through a mandatory incremental value test, however, inefficiency will persist.

There are further practical barriers to the incremental value test. It is particularly poorly suited to portfolio licensing, yet that is precisely the type of licensing that is most common in the technology standard-setting context. To again use wireless technology as an example, there have been many thousands of patents declared by hundreds of companies as potentially essential to 2G, 3G, and now 4G wireless standards. To efficiently access these patents, firms typically engage in extensive portfolio licensing and cross-licensing, thus realizing efficiencies and broad operating freedom from threats of infringement suit.

Portfolios often contain patents on many different aspects of technology, as disparate as battery management and signal clarification. How would the incremental value test be applied under such conditions? Attempting the test on a patent-by-patent basis would not work because there can be no data on individual patent alternatives, and determining the retrospective incremental value of an entire portfolio as against an unbounded set of potential alternatives is likewise an impossible task. And the passage of time will inject further confusion because the perception of value for a patent and its alternatives can change dramatically over time as the result of market developments, new and competing and complementary technologies, and further investment by the parties and third parties. (87) The opportunity for error and undercompensation of inventors is significant, and the threat of such error would be expected to depress or delay innovation, leading to harm. To describe the situation colloquially, the FTC might trust courts or its own administrative law judges to fairly compensate patent holders through this hindsight exercise, but patent holders may not.


We attempt in this article to show that the discussion of hold-up involving patents in the standards development context has gone astray. As pointed out, even the concept of hold-up has been redefined in some leading commentary to suit what appears to be a result-oriented goal. The calls for reform of the patent system in the IP Report and in commentary in connection with the FTC Workshop are radical yet are based on questionable presumptions and definitions and proceed from only theoretical and anecdotal proofs of a real problem. In contrast, observable evidence--although admittedly incomplete--suggests no systemic distortion of the standards development process, or of competition and innovation relating thereto. To the extent there have been instances of competition-altering, patent-related opportunistic conduct, remedies have been pursued readily, and where claims are proven, relief already is available.

Technology standard setting currently appears to be succeeding more than satisfactorily, and technological and competitive advancement are proceeding at a brisk pace. Seeking the type of systemic overhaul reflected by the IP Report might be considered antithetical to this success and might appropriately be reconsidered.

(1) George S. Cary et al., The Case for Antitrust Law to Police the Patent Holdup Problem in Standard Setting, 77 ANTITRUST L.J. 801, 809 (2011).

(2) E.g., Bruce H. Kobayashi & Joshua D. Wright, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup, 5 J. COMPETITION L. & ECON. 469, 470 (2009) (calling the existence of a hold-up problem in standard setting "one of the most controversial issues in antitrust policy"); see also Einer Elhauge, Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?, 4 J. COMPETITION L. & ECON. 535 (2008) (concluding that Lemley & Shapiro overstate patent hold-up and royalty stacking).

(3) E.g., FRAND Roundtable, GLOBAL COMPETITION REV., Apr. 2008, at 25, 26-29 (comments of Damien Geradin).

(4) See, e.g., Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 1991, 1992-93 (2007); Cary et al., supra note 1. s FTC, THE EVOLVING IP MARKETPLACE (Mar. 2011), available at [hereinafter IP REPORT].

(6) See FTC, Request for Comments and Announcement of Workshop on Standard Setting Issues, 76 Fed. Reg. 28036 (May 13, 2011) [hereinafter FTC Request for Comments]; FTC, IP Rights in Standard Setting, [hereinafter FTC Workshop].

(7) Pub. L. No. 112-29, 125 Stat. 284 (Sept. 16, 2011), available at

(8) E.g., Executive Office of the President, National Science & Technology Council, A Policy Framework for the 21st Century Grid: Enabling Our Secure Energy Future (June 2011), available at files/microsites/ostp/nstc-smart-grid-june2011.pdf.


(10) Id. at 43.

(11) IP REPORT, supra note 5, at 191.

(12) See FTC Request for Comments, supra note 6, and FTC Workshop, supra note 6.

(13) IP REPORT, supra note 5, at 191 (emphasis added).

(14) The impression is reinforced through statements by FTC staff, the resources the FTC dedicates to the issue, and the fact that while the FTC formally titled its June 2011 effort Workshop on IP Rights and Standard Setting, its banner graphic on the Workshop home page states in bold letters, Tools to Prevent Patent 'Hold-Up'--tellingly, not merely "tools to examine patents in standard setting" or "alleged hold-up." As of this writing, this graphic appeared at

(15) See Cary et al., supra note 1, at 809 (collecting commentary and alleging a "seeming consensus that holdup causes serious economic inefficiencies").

(16) See FTC Workshop, supra note 6, Comments of Cisco and RIM at 1 (June 17, 2011), available at [hereinafter Comments of Cisco and RIM]; id., Comments of Broadcom at 2 (Aug. 5, 2011), available at [hereinafter Comments of Broadcom]; id., Comments of Cisco, HP, IBM & RIM at 4 (Aug. 1, 2011), available at [hereinafter Comments of Cisco, HP, IBM & RIM]; id., Comments of Verizon at 1 (Aug. 5, 2011), available at [hereinafter Comments of Verizon].

(17) IP Report, supra note 5, at 3.

(18) Id. at i.

(19) Id. at16.

(20) Id. at19.

(21) Id. at 25.

(22) 19 U.S.C. [section] 1337 (2011).

(23) IP REPORT, supra note 5, at 30.

(24) Id. at 7-30.

(25) Id. at 22.

(26) Id. at 23.

(27) Id. at 22.

(28) Id. at 21.

(29) Id. at 191 n.61 (emphasis added); see also FTC Request for Comments, supra note 6 (defining hold-up slightly differently, as "a demand for higher royalties or other more costly licensing terms after the standard is implemented than could have been obtained before the standard was chosen," but not mentioning deception or other malfeasance by the patent holder).

(30) See, e.g., IP REPORT, supra note 5, at 28.

(31) Id. at 39-40 & n.43. The term "ex ante" appears sixty-three times, including in the title of the first chapter.

(32) "Reform" is the FTC's preferred term; see, e.g., IP REPORT, supra note 5, at 161, 163 (chapter subtitles regarding Damages Reform).

(33) E.g., Luke M. Froeb, Director, FTC Bureau of Economics, Effects-Based Analysis: Mergers and Vertical Restraints, Address to the British Institute of International and Comparative Law (Dec. 6, 2004), available at

(34) See supra part II.

(35) FTC Workshop, supra note 6, Comments of Richard Epstein, F. Scott Kieff, & Daniel F. Spulber at 18 (Aug. 5, 2011), available at

(36) See, e.g., Cary et al., supra note 1, at 809 (asserting "seeming consensus" as to hold-up).

(37) See Comments of Cisco and RIM, supra note 16, at 1; Comments of Broadcom, supra note 16, at 2; Comments of Cisco, HP, IBM & RIM, supra note 16, at 4; Comments of Verizon, supra note 16, at 1.

(38) FTC Workshop, supra note 6, Comments of U.S. Chamber of Commerce at 4-5 & n.5 (Aug. 5, 2011), available at [hereinafter Comments of U.S. Chamber of Commerce] (citing Statement of the United States by the USPTO to the World Intellectual Property Organization Patent Committee Meeting 2 (Mar. 2008). See also FRAUNHOFER INST. FOR COMMUNICATION SYSTEM AND DIALOGIC, STUDY ON THE INTERPLAY BETWEEN STANDARDS AND INTELLECTUAL PROPERTY RIGHTS 11 (Apr. 2011) ("there are several hundred thousands of standards available world-wide"), available at standards/files/standards_policy/ipr- workshop/ipr_study_final_report_en.pdf.

(39) FTC Workshop, supra note 6, Comments of American National Standards Institute at 12 (June 10, 2011), available at

(40) Id., Comments of TIA at 4 (June 14, 2011), available at

(41) Id., Comments of ATIS at 1 (June 14, 2011), available at

(42) Id., Comments of Association for Competitive Technology at 4 (Aug. 5, 2011), available at

(43) Comments of the U.S. Chamber of Commerce, supra note 37, at 8.

(44) FTC Workshop, supra note 6, Comments of AIPLA at 2 (June 14, 2011), available at

(45) Id., Comments of Kesan at 2 (June 14, 2011), available at

(46) Id., Comments of WiseHarbor at 8 (June 12, 2011), available at See also Id., Comments of Microsoft Corp. at 16 (June 14, 2011), available at (there is "little evidence that 'patent hold-up' in the standards context is a real problem"); Id., Comments of InterDigital at 2 (Aug. 5, 2011), available at ("based on our firsthand experience participating in industry standards, we do not believe that the current policies and practices of the various standards organizations in the wireless industry lead to unreasonably high prices to consumers, or otherwise result in market distortion"); Epstein, Kieff & Spulber, supra note 34, at 14 ("The success on the ground bears out the theoretical insight that hold-ups are not a serious threat to collaboration over and around standards.").

(47) Joseph Farrell, Director, FTC Bureau of Economics, Closing Remarks, FTC Workshop, Transcript at 239, available at ("[W]e can't assume that the presence of a dispute means the presence of a problem. We also can't assure that the absence of a dispute means the absence of a problem.").

(48) Id. at 239-41.

(49) Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). See also II HERBERT HOVENKAMP, MARK D. JAMS & MARK A. LEMLEY, IP AND ANTITRUST 35.5, at 35-45 (Supp. 2007) ("An antitrust plaintiff must establish that the standard-setting organization would not have adopted the standard in question but for the misrepresentation or omission. This causation requirement is needed because the failure to disclose the existence of a patent to a standard-setting organization will not affect the competitive marketplace if the standard-setting organization would have approved the standard even if it had known about the patent.").

(50) See Opinion of the Commission on Remedy, In re Rambus Inc., FTC Docket No. 9302 (Feb. 5, 2007), available at, rev'd, Rambus, 522 F.3d 456. If the FTC had proven deception (contra the D.C. Circuit's decision), then the remedy imposed by the FTC--a compulsory licensing order that re-creates the but-for world using Georgia-Pacific factors (see id. at 19 nn.115-16 and accompanying text), similar to the approach used in fair, reasonable, and nondiscriminatory (FRAND) contract cases (see infra note 52)--would have applied.

(51) Statement of the FTC, In re Negotiated Data Solutions LLC, FTC File No. 0510094 (Jan. 23, 2008), available at

(52) If it could be proven that such a patent holder acted in bad faith, some additional remedy (fees, costs, or actual damages) might also be applied as a deterrent, but it should be remembered that ordinary contract disputes normally are not subject to punitive remedies.

(53) Roger G. Brooks & Damien Geradin, Interpreting and Enforcing the Voluntary FRAND Commitment, 9 INT'L J. IT STANDARDS & STANDARDIZATION RES. 1 (2011), available at

(54) Id. at 4.

(55) Id. at5 & 6-10.

(56) See Georgia-Pacific Corp. v. U. S. Plywood Corp., 318 F. Supp. 1116, 1118 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir. 1971) (establishing a framework for determining a "reasonable royalty" award in patent infringement litigation).

(57) Id. at 1132.

(58) 501 F.3d 297 (3d Cir. 2007).

(59) Id. at 314.

(60) See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed Cir. 2009);, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010); Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011).

(61) 157 CONG. REC. S1, 373-74 (daily ed. Mar. 8, 2011).

(62) Many patent owners engaged in standards development do not seek royalties or other monetary compensation. Rather, some patents are licensed royalty-free in return for licenses to other parties' patents. Patent owners also may use their portfolios for defensive purposes and may not even seek licenses for their standards-essential patents if the standard allows them to advance their manufacture and sale of standards-compliant products that include technology owned by other downstream competitors.

(63) For example, the American National Standards Institute's intellectual property rights policy permits members to refuse to grant FRAND commitments as to particular patents. See American National Standards Institute, Essential Requirements [section] 3.1 (Jan. 2010), Standards%20Activities/American%20National%20Standards/Procedures,%20Guid es,%20and%20Forms/2010%20ANSI%20Essential%20Requirements%20and%20Related/ 2010%20ANSI%20Essential%20Requirements.pdf.

(64) We are aware of no case in which a court considering a FRAND contract action, or a defense to patent litigation on the grounds that a FRAND commitment was not honored, has entered an injunction against the practice of a technological standard.

(65) By the "competitive level," we mean competitive in a dynamic environment with sophisticated repeat players who face the decision whether or not to incur sunk costs. In such an environment inventors will not invest if they have too large a chance of obtaining an inadequate return on their inventive investment. With respect to patented technologies created by firms that depend on royalties, therefore, expected royalties must be positive in the aggregate. This would be in contrast to one conceptualization of a static world, where all research is sunk cost, two inventions already exist, and the inventions are considered equivalent. In that static would, the perfectly competitive price of each will approach zero. But such a simplistic static world is inapplicable in the context of patents. First, it assumes equivalence of patents, when a fundamental requirement of patentability is novelty. Second, it would eliminate the critical aspect underlying patent law, which is recognized by a dynamic perspective, i.e., the positive effects of incentivizing continual investment and reinvestment in innovation, which in turn leads to overall social gains.

(66) See Pac. Bell Tel. Co. v. linkLine Commc'ns, Inc., 129 S. Ct. 1109, 1120-21 (2009) (antitrust courts are ill-suited "to act as central planners, identifying the proper price, quantity, and other terms of dealing" (quoting Verizon Commc'ns v. Law Offices of Curtis V. Trinko LLP, 540 U.S. 398, 408 (2004))); see also Town of Concord v. Boston Edison Co., 915 F.2d 17, 25 (1st Cir. 1990) (Breyer, C.J.) ("antitrust courts normally avoid direct price administration, relying on rules and remedies... that are easier to administer"); U.S. DEP'T OF JUSTICE & FTC, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS; PROMOTING INNOVATION AND COMPETION 83, 85 (April 2007) (antitrust agencies "generally will not police the 'reasonableness' of pool royalty rates"), available at

(67) See Comments of Broadcom, supra note 16, at 2-4; see generally Comments of Verizon, supra note 16. Lemley & Shapiro, supra note 4, at 2026.

(69) Eric Stasik, Royalty Rates and Licensing Strategies for Essential Patents on LTE (4G) Telecommunication Standards, Royalty Rates For Telecommunications, LES NOUVELLES, Summer 2010 at 114, available at online/september-2010/2011/05/02/royalty-rates-and-licensing- strategies-for-essential-patents-on-lte-(4g)-telecommunication-standards (on file with authors).

(70) See Keith Mallinson, Patent Licensing Fees Modest in Total Cost of Ownership for Cellular, IP FINANCE, June 12, 2011, available at fees-modest-in-total.html.

(71) Id. at15.

(72) See generally W. KIP VISCUSI, JOHN M. VERNON AND JOSEPH E. HARR1NGTON, JR., ECONOMICS OF REGULATION AND ANTITRUST 258-59 (2001). It might be argued that such costs would be lower absent hold-up. But this argument would be speculative. Speculation should not be sufficient to provide support for the type of systemic changes proposed by, for example, the IP Report. In addition, these figures suggest that even if hold-up was a problem, its elimination would provide only an incremental static gain. Harvesting a small static gain at the potential cost of dynamic harm should give policy makers pause: as Judge Easterbrook has stated, a policy that reduces prices today becomes a "calamity" if it comes at "the expense of reducing by I percent the annual rate at which innovation lowers the cost of production." Frank H. Easterbrook, Ignorance and Antitrust, in ANTITRUST, INNOVATION, AND COMPETITIVENESS 119, 122-23 (Thomas M. Jorde & David J. Teece eds., 1992).

(73) Press Release, Nokia, Nokia Has Paid Less than 3 Per Cent Gross Royalty Rate for WCDMA Handsets (Apr. 17, 2007), available at than-3-per-cent-gross-royaltyrate-for-wcdma-handsets.

(74) See Georgia-Pacific Corp. v. U. S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir. 1971) (for determining a reasonable royalty, factor # 1 looks to comparable license rates of the patentee).

(75) FRAUNHOFER INST., supra note 37, at 12.

(76) Press Release, Gartner Inc., Gartner Says Sales of Mobile Devices in Second Quarter of 2011 Grew 16.5 Percent Year-on-Year; Smartphone Sales Grew 74 Percent (Aug. 11, 2011), available at

(77) Id. tbls.1 & 2.

(78) See generally Michael J. Meurer & James E. Bessen, Do Patents Perform Like Property? (Boston Univ. School of Law Working Paper No. 08-08, 2008), available at

(79) See, e.g., Executive Office of the President, supra note 8, at 28 ("the ability to monetize innovation via patents is often critical to driving companies and entrepreneurs to develop and commercialize new technologies, and a balanced and effective intellectual property system must provide appropriate incentives to innovate and protect intellectual property from theft and abuse").

(80)IP REPORT, supra note 5, at 191 n.61.

(81) eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006) (rejecting automatic permanent injunctions in patent cases).

(82) IP Report, supra note 5, at 39-40 & n.43. The term ex ante appears sixty-three times, including in the title of the first chapter.

(83) Id. at 22.

(84) Id. at 23.

(85) Id. at 22.

(86) See Anne Layne-Farrar, Gerard Llobet & Jorge Padilla, SSO Participation and the Role of Incremental Value Licensing (2011), available at /abstract=1904959, which summarizes the authors' longer paper, Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts (2011), available at

(87) See Comments of Epstein, Kieff & Spulber, supra note 34, at 41--43.


* Partner, Bingham McCutchen LLP, New York.

** Partner, Bingham McCutchen LLP, Washington, DC.
Table 1 Worldwide Mobile Device Sales to End Users by Vendor (in
thousands of units)

                                 2Q11                    2Q10
                     2Q11        Market      2Q10        Market
Vendor               Units       Share (%)   Units       Share (%)

Nokia                97,869.3    22.8        111,473.7   30.3
Samsung              69,827.6    16.3        65,328.2    17.8
LG                   24,420.8    5.7         29,366.7    8.0
Apple                19,628.8    4.6         8,743.0     2.4
ZTE                  13,070.2    3.0         6,730.6     1.8
Research In Motion   12,652.3    3.0         11,628.8    3.2
HTC                  11,016.1    2.6         5,908.8     1.6
Motorola             10,221.4    2.4         9,109.4     2.5
Huawei Device        9,026.1     2.1         5,276.4     1.4
Sony Ericsson        7,266.5     1.7         11,008.5    3.0
Others               153,662.1   35.8        103,412.6   28.1
Total                428,661.2   100.0       367,986.7   100.0

SOURCE: Gartner Research, August 2011

Table 2 Worldwide Smartphone Sales to End Users by Operating System
(in thousands of units)

                                 2Q11                   2Q10
Vendor               2Q11        Market      2Q10       Market
                     Units       Share (%)   Units      Share (%)

Android              46,775.9    43.4        10,652.7   17.2
Symbian              23,853.2    22.1        25,386.8   40.9
i0S                  19,628.8    18.2        8,743.0    14.1
Research In Motion   12,652.3    11.7        11,628.8   18.7
Bada                 2,055.8     1.9         577.0      0.9
Microsoft            1,723.8     1.6         3,058.8    4.9
Others               1,050.6     1.0         2,010.9    3.2
Total                107,740.4   100.0       62,058.1   100.0

Source: Gartner Research, August 2011
COPYRIGHT 2012 Sage Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2012 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:The Use and Abuse of Voluntary Standard-Setting Processes in a Post-Rambus World: Law, Economics, and Competition Policy
Author:Taffet, Richard S.; Wellford, Hill B.
Publication:Antitrust Bulletin
Date:Mar 22, 2012
Previous Article:Learning from Rambus - how to tame those troublesome trolls.
Next Article:Guest editor's introduction.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |