Industry standards can be very beneficial to the public good. They can make products more efficient and less costly to manufacture, ensure that products sold by different companies work well together (“interoperate”), increase safety, improve quality and enable further technological innovation. In short, “good standards are good for business, good for consumers, and good for society.”[1] But, because of the nature of standard development and of standards themselves, the process of standardization and of SEP licensing is open to potential abuses.
Most courts and commentators approach SEP licensing issues as if they are primarily patent questions: are the alleged SEPs valid and essential? If so, how much is owed for the infringement and should (or in what circumstances should) an injunction issue? Many courts and commentators also regard SEP licensing as a contract issue: what does the FRAND commitment mean under the rules of the standard setting organization under which the standard was adopted? Who is entitled to benefit from this contractual FRAND obligation and what hoops do they need to jump through to satisfy, or be entitled to benefit from, that contractual obligation?
There is a third prong of the analysis that should be considered in every matter but rarely is - the competition law aspects. The FRAND obligation after all was not unilaterally created by the standard setting organizations out of the goodness of their hearts, but rather is rooted in competition law. The obligation is a codification of existing competition law which requires fair, reasonable and non-discriminatory licensing in order to remedy the very real competition issues posed by the way in which standard development and standard setting occurs.[2]
Let’s go back to the basics. As I said on my cover page when I first started this blog (HOME | SEP Essentials): “The purpose of good standards and standardization is not to enhance the returns of SEP developers, SEP holders or even SEP implementers, but rather to enable consumers to access safe, beneficial and interoperable products and technology.” Competition law is one of the ways to police the standardization and SEP licensing processes in order to help achieve this goal.
Competition laws generally seek to prevent groups of competitors from combining or conspiring together to exclude others from the market or from jointly engaging in activities which unreasonably restrict competition.[3] Under U.S. competition law, there are some activities that are “per se” competition violations. In other words, no matter the actual impact on consumers, competition or the public good, certain activities (including price-fixing, bid rigging or allocating customers or territories between horizontal competitors) are considered to be inherently anticompetitive and thus unlawful restraints of trade.
In the U.S., everything else is analyzed under the “rule of reason” test. The rule of reason test is very similar to weighing the equities for an injunction. When a group of competitors performs activities together, the rule of reason test asks whether they have market power in the relevant market and if so, whether their activities have resulted in an anticompetitive effect. A major factor in determining whether or not joint activities are improper under the rule of reason is whether those activities are, on balance, more harmful or beneficial to consumers.
European competition law similarly restricts groups of competitors (“cartels”) from engaging in activities “which have as their object or effect the prevention, restriction or distortion of competition.”[4] EU law also has a mechanism to balance multiple factors, including the impact on consumers, to determine whether particular activities are anti-competitive. Indeed, one of the main purposes of EU competition law is to encourage companies “to offer consumers goods and services on the most favourable terms.”[5]
Standard development and standard setting almost always involve a group of competitors, often with some of their customers and some of their suppliers, getting together to create a new or improved technology. In other words, standard development and standard setting usually involves a “cartel” that is both horizontal and vertical. This creates a forum in which anticompetitive collusion can occur. Participants can manipulate the standard or the standardization process for any number of improper purposes including to exclude other market participants or other technologies or to unfairly burden competition through the (mis) use of standard essential patents.
“There is no doubt that the members of such associations [standard setting bodies] often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anticompetitive harm.” Allied Tube v. Indian Head, Inc., 486 U.S. 492 (1988) at 500.
Because of that, competition law should always be a critical concern within standard setting and SEP licensing:
The validity of conduct within that process [standard setting] has long been defined and circumscribed by the antitrust laws without regard to whether the private standards are likely to be adopted into law. See supra at 500. Indeed, because private standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits . . .” Id at 506-7.
The competition laws are a safeguard for promoting nonpartisan, procompetitive and pro-consumer standards and these safeguards include the FRAND obligation. The FRAND obligation was not developed in a vacuum and is not simply a contractual obligation with the parameters of the obligation solely determined by the rules of the specific SDO/SSO.
The requirement to license standard essential patents on reasonable and non-discriminatory terms is a mechanism to avoid standard setting organizations being viewed as illegal cartels under competition law. The rules for fair and reasonable licensing were developed by courts and regulators to redress, and to seek to prevent, exclusionary activities and reduce the exclusionary potential of private, consortium-based organizations, which include SDOs and SSOs.[2]
In other words, the FRAND obligation emerged from the anti-trust regulatory environment as a way to reduce the potential for harm from a standard development process or SEP licensing scheme gone awry. It is one way to help ensure that standard development supports fair competition and ultimately benefits consumers. The FRAND obligation exists not only as a contractual obligation within a particular standard organization, but also as an overarching legal doctrine.
Because FRAND is grounded in competition law, even behavior that complies with a particular SSO’s rules is not immunized from this review:
The antitrust validity of these efforts is not established, without more, by petitioner's literal compliance with the rules of the Association, for the hope of procompetitive benefits depends upon the existence of safeguards sufficient to prevent the standard-setting process from being biased by members with economic interests in restraining competition. An association cannot validate the anticompetitive activities of its members simply by adopting rules that fail to provide such safeguards. Id. at 509.
As such, every case involving standards and every SEP licensing request should be reviewed not only from the context of whether the behavior complies with the particular SDO/SSO’s FRAND rules, not only whether it is appropriate under the patent laws, but also whether it comports with the applicable competition laws. Cartels are permitted to operate only when their behavior, on balance, helps competition, is pro-consumer and in the public interest.
Thus, the balance of factors should be reviewed in every matter to determine whether particular actions by particular standard developers or groups of developers, or particular SEP holders or groups of SEP holders, support fair competition and ultimately benefit consumers and society. In other words, it should be part of the basic analysis for every standard, or SEP licensing, related issue to review whether the behavior in question complies with the standard setting organization's bylaws, the patent laws but also the competition laws.
[2] Here is an interesting paper that discusses the history of compulsory licensing as a remedy for competition abuses and explains how that body of law relates to the FRAND licensing obligation. A Brief History of FRAND: Analyzing Current Debates in Standard Setting and Antitrust Through a Historical Lens by Jorge L. Contreras :: SSRN
[3] Of course, competition law also applies to the actions of single entities in some circumstances.