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Anne Layne-Farrar, May 06, 2008
In the ongoing debate over intellectual property (IP) within standard setting, the issue of patent holdup has loomed large. Under holdup, a firm that has a patented technology which is included in a standard can use the fact that negotiating a new standard around another technology may be difficult, time-consuming, and expensive. In this case, the patent holder may be able to extort more in licensing fees than its patent is worth, or in other words, may be able to “holdup” the licensee by charging just less than the costs of switching to another standard. One proposal aimed at solving the holdup problem is for the members of the standard-setting organization (SSO) to jointly negotiate licensing terms before any decisions are made about which technologies to include in the current standard. The patent holders for all candidate technologies would negotiate licensing deals ex ante, but only those chosen would then have contracts to enforce ex post. While joint negotiations over prices are typically taboo because of antitrust price-fixing concerns, the joint ex ante negotiation proposal for standards gained agency support in the United States in early 2007 when, in a joint report, the U.S. Department of Justice and U.S. Federal Trade Commission announced that they would evaluate such negotiations under the rule of reason, as opposed to considering them per se illegal. Before we can understand whether or not the joint negotiation proposal would be beneficial and achieve its goal of preventing holdup, it is important to understand the motivations behind the proposal.