This is a speech by US Department of Justice Assistant Attorney General Makan Delrahim regarding the appropriate approach to standard-setting organisations (SSOs) (and FRAND). As you may or may not know, he is a registered patent lawyer—the first head of the Antitrust Division to be so, so it is unsurprising that he has strong views on the topic. He seems to favour letting IP law run its course unimpeded (or, as he puts it: “Antitrust enforcers should . . . strive to eliminate as much as possible the unnecessary uncertainties for innovators and creators in their ability to exploit their intellectual property rights, as those uncertainties can also reduce the incentives for innovation.”), and only have antitrust intervene exceptionally (‘In case anyone is inclined to misunderstand my comments, let me clearly state that there is an important role for antitrust scrutiny in the standard setting context.’)

As he colourfully puts it: ‘Once upon a time, and in their best mode, [SSOs] were dominated by engineers aimed at the common goal of finding the most efficient technological solution to an industrywide problem. Over the years, the SSO process has worked best when participants endeavored to determine which technology, or combination of complementary technologies, would become the “winner” for a standard with limited concern over who the winner was, or how the winner would choose to license its IP rights. (…) Industry standards have exploded over the past several decades, and today they play a vital role in many sectors of the economy.  By allowing products designed and manufactured by many different firms to function together, interoperability standards create enormous value for consumers and fuel the creation and utilization of new and innovative technologies to the benefit of consumers.

The question, then, is what role should competition enforcement play as regards SSOs. His position is that: ‘Despite the benefits SSOs confer, the regulation of the interactions and licensing practices within an SSO through the misapplication of the antitrust laws threatens to disrupt the free-market bargain, which could undermine the process of dynamic innovation itself.

Concerns with how holders of SEPs can hold-up potential licensees for higher royalty fees led to antitrust intervention in the context of FRAND. However, AAG Delrahim considers that a bigger risk is hold-out. Standard setting typically occurs against the backdrop of negotiations between innovators – who develop technologies through private investment and own IP rights – and implementers – who hope to market and use the technology through a license and pay the IP holder a royalty.  The hold-out problem arises when implementers threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met (this last form also being known as ‘reverse hold-up).

In other words, AAG Delrahim argues that creating incentives for innovators is more important that remedying the concerns of implementers – or, in other words, that IP rules should take precedence over competition concern (As he puts it:  “many of the proposed “solutions” to the hold-up problem are often anathema to the policies underlying the intellectual property system envisioned by our forefathers”.) From his point of view: ‘There is a growing trend supporting what I would view as a misuse of antitrust or competition law, purportedly motivated by the fear of so-called patent hold-up, to police private commitments that IP holders make in order to be considered for inclusion in a standard.  This trend is troublesome.  If a patent holder violates its commitments to an SSO, the first and best line of defense, I submit, is the SSO itself and its participants. (…) A patent holder cannot violate the antitrust laws by properly exercising the rights patents confer, such as seeking an injunction or refusing to license such a patent. (…) ’

Instead of antitrust, other remedies should be deployed: ‘in a breach of contract action, a party can litigate the facts regarding what constitutes a “reasonable” or “nondiscriminatory” rate or commitment.  If there is a violation of a reasonableness standard, the factfinder can decide it, like they do in other instances of contract violations (…) a violation by a patent holder of an SSO rule that restricts a patent-holder’s right to seek injunctive relief should be appropriately the subject of a contract or fraud action, and rarely if ever should be an antitrust violation.’ He criticises Judge Posner’s decision in Apple v Motorola, and argues that:  ‘We should not transform commitments to license on FRAND terms into a compulsory licensing scheme.’

Antitrust intervention may instead be justified if SSO members engage in collusive activities – e.g. to use SSOs as a means of excluding particular competitors or products, or when implementers act together within a standard-setting organization to impose anticompetitive licensing terms. As a result: ‘The Antitrust Division will therefore be sceptical of rules that SSOs impose that appear designed specifically to shift bargaining leverage from IP creators to implementers, or vice versa (…) I therefore urge antitrust enforcers to take a more humble approach to the application of antitrust to unilateral violations of SSO commitments and to take a fresh look at concerted actions within SSOs that cause competitive harm to the dynamic innovation process.

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