Patents abuse in standards-setting to be targeted by European Commission

The European Commission has announced an aggressive campaign to prohibit abuse of patent dominance in the creation and implementation of standards.  Backing its enforcement rhetoric with a high-profile investigation, the Commission seeks to prevent enterprises whose IP has been selected as an industry standard from imposing “anticompetitive” royalty rates on firms seeking to rely on an industry standard.  For the Commission, an anticompetitive abuse is avoided only if the IP rights holder employs “fair reasonable and non-discriminatory” (FRAND) terms in its licensing arrangements.  Such a policy goal, in my view, will be easier to articulate than implement.

Antitrust policy has long recognized the value of industrial standards.  They can open markets by stimulating competition.  Such a standard can provide opportunities for relatively low cost and efficient entry.  Entry challenging incumbents can stimulate product development and lower transaction costs.

These consumer welfare goals may be subverted if adoption of a standard has the opposite effect of restricting, denying or increasing the cost of market access.  Enforcement officials, particularly in the US and the European Union, have long worried about standards based on IP rights potentially giving the rights holder the ability to exercise market power.  Their concern has been both about the “patent ambush” but as well the patent lock-in/lock-out consequences.

Patent Ambush

One concern – the patent ambush – has prompted efforts to make sure that industry organizations adopt transparent procedures in the standards-setting context so all potential market players understand in advance the economic as well as the technical implications of choosing one particular standard over another.  Such process openness must be combined with procedural fairness as well. 

In the US, deception and lack of transparency in the standards setting process can raise antitrust issues where market dominance/market power is achieved through deception/exclusion.  By assuring transparency, the organization can minimize the potential for a so-called patent “lockout” or “lock-in.”

Once a standard is adopted, it can become indispensable.  If the standard is based on IP rights of a patent owner, use of those patent rights can likewise be indispensable for those who would use the industry standard.  A major concern is that the IP rights owner whose patent has been adopted as an industry standard may thereafter be able to exact license royalties based not on the economic value of the technology in competition with other technologies but on the monopoly rents which the IP rights holder can exact. 

Market power

Unlike the US, which may, depending on the circumstances, condemn the creation of dominance (as monopolization), the European Union’s competition principles prohibit the “abuse” of dominance, not its creation.  Nevertheless, the exercise of market power in such standard setting circumstances has increasingly been characterized as abusive by the European Commission.  For the Commission, questions of access and the terms of such access are high enforcement priorities of the European Commission.

Thus, on 10 February 2012, Joaquin Almunia, Vice President of the European Commission warned in a speech on industrial policy and competition policy against the increasing “strategic use of patents.” This is particularly problematic where patents have become “essential” to comply with an industry standard, like a safety standard, he said.

“Standards are the best tool to promote interoperability of devices or to define safety or quality benchmarks … universal interconnections and seamless communication. Once a standard is adopted, it becomes the norm and the underlying patents are indispensable.  Owners of such standard essential patents are conferred a power on the market that they cannot be allowed to abuse  Standardization processes must be fair and transparent … We must also ensure that once they hold standard essential patents, companies give effective access on fair, reasonable and non-discriminatory terms,” Almunia said.

Abuse of dominant position

The Commission’s enforcement requirement for FRAND terns was not in any sense empty enforcement rhetoric.  Indeed the European Commission had announced during the previous week that it had begun an investigation to determine whether Samsung’s enforcement of telecommunication patents was an abuse of a dominant position in violation of Article 102 of the Treaty on the Functioning of the European Union, as well as a breach of its commitment to the European telecommunications standards organization to grant FRAND terms to companies seeking to use the standard.

While such a Commission call for fairness and transparency has much appeal, there are serious potential issues in implementing such terms in practice.  In point of fact, standard setting is often a very dynamic and contentious and adversarial process.  There are, whatever level of transparency may exist, intense rivalries and conflicts of interest among companies holding patents that may be candidates for adoption of a standard.  There is, as well, equally contentious rivalry among companies which, depending on the circumstances may be interested in using the standard.  Indeed, there are extremely complex and often highly opaque questions of valuation that may affect what is a fair and reasonable royalty rate and equally difficult questions related to the issue of non-discrimination.

The European Commission needs to proceed with great care if it is to strike the right balance in this important enforcement area.  It must balance a number of competing interest including, among others, the rights of the IP holder to receive fair value for its invention, the rights of potential licensees who depend on access to an industry standard and the obligation of the standard setting organization to structure its procedures in a way most likely to promote the consumer welfare benefits on cost- effective product development and increased competition that can result from industry standards.

By Howard W. Fogt of Foley & Lardner LLP, Washington and Brussels