The Troubling Use of Antitrust to Regulate FRAND Licensing

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Douglas Ginsburg, Koren Wong-Ervin, Joshua Wright, Oct 14, 2015

In the last year, we have seen a growing—and troubling—trend as courts and competition agencies around the globe propose and impose antitrust sanctions on holders of standard-essential patents for seeking injunctive relief against alleged infringers and for reneging on their commitment to license their patents on fair, reasonable, and non-discriminatory terms. These new rules, recently adopted in the European Union and in Korea, proposed in Canada and Japan, and favored by some government officials in the United States, are premised upon the erroneous beliefs that (1) patent “holdup” is a widespread problem that results in significantly adverse consequences for competition and innovation and (2) whatever the magnitude of the problem, it requires an antitrust remedy.

Patent holdup occurs when an SEP holder that has made a commitment to license its patents on FRAND terms instead uses the essential nature of its patent to charge an unjustifiably higher royalty than would have been possible before its patent was included in the standard. Proponents of the new rules suggest the risk that ex post royalty rates will be higher than the ex ante rate was or would have been reflects a market failure requiring an antitrust response rather than a problem that could be resolved readily by standard-setting organizations (“SSOs”) themselves or by ordinary remedies for breach of contract. In other words, the underlying assumption is that the SSO process in general, and FRAND licensing in particular, is broken and in need of fixing. The assumption is wrong and the proposed antitrust remedy is likely to do more harm than good.

First, as to the assumption, there simply is no empirical evidence to substantiate the claim that patent holdup is a systemic problem for competition and consumers. In fact, evidence from the smartphone market, which may be the most patent- and standard-intensive market, shows no signs of diminished competition or adverse effects upon consumers. In fact, it shows wireless service prices declining, output growing exponentially, innovation continuing at a rapid pace, vigorous dynamic competition among mobile device manufacturers with meaningful entry over time, and diminishing market concentration. In other words, the empirical evidence does not support the notion that FRAND licensing is somehow broken and in need of fixing. Instead, the thriving nature of the wireless market suggests caution prior to disrupting the carefully balanced FRAND ecosystem.

Second, as for the remedy, imposing antitrust liability for patent holdup and a patent holder’s refusals to issue a license on FRAND terms is not only unnecessary, given that the law of contracts is sufficient to provide optimal deterrence, it is likely to be harmful to both competition and consumers by diminishing the value of patents and hence reducing incentives to innovate and to participate in standard setting.