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Dennis Carlton, Allan Shampine, Aug 12, 2014
Standard setting organizations have for many years asked members to commit to license patents essential to use of standards on Fair, Reasonable and Non-discriminatory terms. Because SSOs have not defined explicitly what FRAND means, courts and regulators have been forced to interpret it. We have previously written on how standard setting that incorporates patents can lead to complicated situations in which the patent owner, sometimes in collaboration with rival firms, can exploit the market power that is created by being designated a standard essential patent. We have also shown how the non-discriminatory prong of FRAND can be interpreted so as to mitigate the inefficiencies that can result when patent owners try to exploit their market power conferred by the standard-setting process.
Here, we discuss the availability of appropriate benchmarks for implementing the non-discriminatory provision. While any benchmark provided by a license to a “similarly situated” firm can be used to prevent competitors from being disadvantaged relative to one another, it is preferable to use benchmarks that do not include “hold-up” where a patent holder charges an excessively high royalty. The general theoretical concern with hold-up in the context of standard setting is that, while a firm may have alternatives to using a patented technology prior to a standard being set, once a patented technology is included in the standard the firm may no longer find those previous alternatives to be commercially feasible. The patent holder may be able to exploit the elimination of those alternatives and “hold up” the firm. That is, hold-up can potentially occur when the standard-setting process eliminates competing alternatives, thus creating or enhancing the market power of a patent holder.
This enhancement of market power may also occur when a licensee makes sunk investments specific to the standardized technology before it negotiates a license, thus worsening its bargaining position…There are three categories of license that are likely to provide benchmarks that are substantially protected against hold-up. We discuss each of them.