8. IPR and Standards in Emerging Economies

8.1 Introduction

As part of its charge, the committee was asked to consider the ways in which intellectual property issues affecting standardization are handled in countries and regions other than to the United States and Europe, the main subjects of this report. In further consultation with the U.S. Patent and Trademark Office, we were asked to focus on three major emerging economies: China, India, and Brazil. Presentations and discussion at the October 2012 symposium made it clear that questions of patents in standards are only beginning to attract attention in India and Brazil. In China, on the other hand, where there has been an explosion of patenting and an active standards development strategy, the issue has received considerably more attention, although China has yet to settle on clear policy directions (Breznitz and Murphree, 2012; Ramakrishna, et al., 2012; Barbosa, 2012).

In all three cases, the economies are growing rapidly, are very large in terms of absolute scale and geographic scope, and all have increasingly important roles in global production networks. Each has a large and growing technical community of scientists and engineers, and a research and development system of growing sophistication but only recently have these begun to have an impact on the innovation capacities of the three economies. Instead, there has been a heavy reliance on imported technologies. But in all three countries we now see national governments making significant new industrial policy commitments intended to foster national innovation capabilities and push their economies up the value chain to higher value-added, more knowledge-intensive production. This is especially true in China where growth in R&D expenditures and patenting activity has outstripped Indian and Brazilian initiatives (Adams, et. al, 2013). The approaches in all three to IPR and standards development should be seen in the context of these broader industrial policy goals, including reforms intended to shape the R&D systems to more fully serve technological innovation.

Unlike Japan’s industrial development and to a lesser extent South Korea’s, where standards development was seen by many observers as strictly a tool of industrial policy, the recent development experiences of China, India, and Brazil are conditioned by their membership in the WTO and the necessary



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8. IPR and Standards in Emerging Economies 8.1 Introduction As part of its charge, the committee was asked to consider the ways in which intellectual property issues affecting standardization are handled in coun- tries and regions other than to the United States and Europe, the main subjects of this report. In further consultation with the U.S. Patent and Trademark Office, we were asked to focus on three major emerging economies: China, India, and Brazil. Presentations and discussion at the October 2012 symposium made it clear that questions of patents in standards are only beginning to attract attention in India and Brazil. In China, on the other hand, where there has been an explo- sion of patenting and an active standards development strategy, the issue has received considerably more attention, although China has yet to settle on clear policy directions (Breznitz and Murphree, 2012; Ramakrishna, et al., 2012; Bar- bosa, 2012). In all three cases, the economies are growing rapidly, are very large in terms of absolute scale and geographic scope, and all have increasingly im- portant roles in global production networks. Each has a large and growing tech- nical community of scientists and engineers, and a research and development system of growing sophistication but only recently have these begun to have an impact on the innovation capacities of the three economies. Instead, there has been a heavy reliance on imported technologies. But in all three countries we now see national governments making significant new industrial policy com- mitments intended to foster national innovation capabilities and push their econ- omies up the value chain to higher value-added, more knowledge-intensive pro- duction. This is especially true in China where growth in R&D expenditures and patenting activity has outstripped Indian and Brazilian initiatives (Adams, et. al, 2013). The approaches in all three to IPR and standards development should be seen in the context of these broader industrial policy goals, including reforms intended to shape the R&D systems to more fully serve technological innova- tion. Unlike Japan’s industrial development and to a lesser extent South Ko- rea’s, where standards development was seen by many observers as strictly a tool of industrial policy, the recent development experiences of China, India, and Brazil are conditioned by their membership in the WTO and the necessary 121

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122 Patent Challenges for Standard-Setting in the Global Economy commitments to the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These obligations require them to attempt to harmonize their IPR and standards regimes with international norms while also opening their economies to greater foreign trade and investment. Arguably foreign investment has contributed significantly to the growth and modernization of these economies, but it has also brought home to them the importance of IPR and standards for shaping the relative and absolute gains from engagements with the international economy. While the absolute gains are readily appreciated, from a relative gains perspective, the greater share of the benefits accrues to the owners of the intellectual property and to those with con- trol over standards. All three countries have been challenged, therefore, to build capabilities for intellectual property creation and standards development in order to alter the terms of the relative gains and capture more value from engagement with the global economy. This objective has inevitably led to questions about the respective roles of the state and industrial enterprises in building those capa- bilities, and about the compatibilities of national technological development efforts with international, especially WTO obligations. The multilateral pressures on emerging economies to conform with inter- national standards, or to manage domestic policy changes subject to global con- straints, may become even stronger as countries join various bilateral and re- gional agreements. Such agreements increasingly embody stronger requirements for intellectual property protection because IP owners in the United States, EU and other advanced nations generally see the WTO rules as inadequate (Maskus, 2012). For example, although the contents of ongoing negotiations remain con- fidential, indications are that the Trans-Pacific Partnership (TPP), a U.S.-led agreement among 12 Pacific Rim countries at various levels of economic devel- opment, will contain rigorous rules constraining the ability of national govern- ments to limit the scope of patent rights. China has not formally joined the TPP talks but is considering its interests in light of its potential exclusion from a ma- jor regional trade grouping. Thus, if China joins there may be additional con- straints on its policy freedom in the area of patent use in technical standards. In the discussion below, we focus first on the Chinese case, returning to the Indian and Brazilian experiences at the end. 8.2 China Although China has a long history of standardization, it is only recently that standards and intellectual property have figured prominently in national policy.1 This prominence derives from China’s accession to the WTO in 2001 1 China joined the ITU in 1920 and rejoined the ISO in 1978. China’s Standardization Law was promulgated in 1989 well before developments in the ICT industries changed the landscape for standard-setting and brought issues of intellectual property to the fore.

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IPR and Standards in Emerging Economies 123 and the introduction of standards and IP concerns into its national technological development strategies. In joining the WTO, China committed itself to attempt to harmonize many of its standards with international standards and, in the pro- cess of doing so, initiated reforms of its standardization bodies. Thus, the current institutional arrangements, in which the Standards Administration of China (SAC) has responsibility for national standardization within the General Admin- istration of Quality Supervision, Inspection and Quarantine (AQSIQ), dates only from 2001 (see Figure 8-1). Similarly, the national policy focus on standards and IP development as tools of industrial policy is also a largely post-WTO phenomenon, part of Chi- na’s efforts to put together the pieces of a national strategy for technological innovation. Although the Chinese regime had practiced active science and in- dustrial policies since the 1950s, these gradually began to take new forms after 1980 as China faced expanding engagement with the international economy and initiated a series of domestic economic reforms. By the late 1990s, China was attempting to create an innovation system suitable for a market economy and for engagement with globalization, a challenge which became more pressing with WTO accession. China’s experience from the two decades of reform and en- gagement with the international economy after 1980 led it to conclude that con- trol over standards, and the intellectual property contained therein, conferred considerable market power, while being solely an IPR-poor “standards taker” put it at a considerable economic disadvantage especially with regard to royalty payments. Hence, major new initiatives were begun after 2000 to develop na- tional standards and IP strategies (Ernst, 2011; Suttmeier and Yao, 2011). FIGURE 8-1 Central Government agencies for standardization. Source: Adapted from USITO, 2007.

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124 Patent Challenges for Standard-Setting in the Global Economy Unlike India and Brazil China displays a more strategic sense of the im- portance of standards and the incorporation of its own IPR into standards. But, like India and Brazil, it is a latecomer in building a national regime for standards and IP in high technology industries and in learning to negotiate the differentiat- ed terrain characteristic of international standards and IPR regimes.2 Chinese firms vary greatly in their degree of integration into the evolving legal frame- work and their sophistication in managing intellectual property in a standards context. China thus strives to learn lessons from the international system while at the same time attempting to develop national industrial policies incorporating standards and IPR strategies as domestic policy tools. The Chinese government has also attempted to reconcile a strong belief that the government should play a leading role in standardization, with a recog- nition that commercial entities responding to market forces and rapid technolog- ical change play critical roles in shaping standards in the ICT industries. In striv- ing for institutional reconciliation of markets and government, Chinese approaches to standards have also sought to find the proper balance among pro- tecting the interests of private parties who have made investments in technologi- cal development and intellectual property, establishing standards on sound tech- nological foundations, and achieving some sort of equity in the distribution of the benefits of standards development. In developing its standards regime, the judgments reached on how to reconcile state versus market roles in standardiza- tion and achieve that balance among competing needs has not always accorded with the values and experience of foreign governments and companies, and have, at times, left China in an uncomfortable position vis–a-vis foreign stake- holders in established international standardization and IPR regimes (An, 2012). Key institutions SAC has broad policy responsibility for national standards. It is supported in its role by a research arm, China National Institute for Standardization (CNIS), and has a close relationship with the China Association for Standardization (CAS), a nominally non-governmental organization for the dissemination of information on standards, provision of certification, and training of standards officials. Never- theless, industry-level standards are overseen by other entities, the most important 2 The Chinese government has shown a preference for working through the formal in- ternational standards development organizations that involve government representation. It is a long-time member of ITU, having joined in 1920, and rejoined ISO in 1978. It has been less comfortable with the workings of non-governmental standards organizations, although this is beginning to change as it realizes their importance and as Chinese firms and China’s scientists and engineers become more active in standards development work. For instance, China is a founding member of the 3GPP and participates in the M2M net- work, and Chinese experts participate in IEEE, NEMA, and other SSOs.

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IPR and Standards in Emerging Economies 125 of which is the Ministry of Industry and Information Technology (MIIT).3 MIIT has its origins in the former Ministries of Posts and Telecommunications and Elec- tronics, which were merged in 1998 to form the Ministry of the Information Indus- try (MII). In a subsequent government reorganization in 2008, the Ministry’s port- folio expanded to include other industries and was renamed MIIT. Although it is active in standardization for other industries as well, it remains a central player in the development of ICT standards, the area of our concern, and the one which has attracted the greatest international attention. Two key entities under MIIT dealing with ICT standards are the China Electronic Standardization Institute (CESI), first established in 1963, and the China Communications Standards Association (CCSA), established in 2002. CESI, as a former research Institute under the Ministry of the Electronics Indus- try and the more institutionalized body, has its own research facilities, serves as the secretariat for 11 national technical standardization committees, and works with the nominally non-governmental China Electronic Standards Association (CESA). CCSA, also a nominally non-governmental associational entity but hosted by MIIT’s China Academy of Telecommunications Research (CATR), is gov- erned by a council of leading government, industry, and academic figures in the world of Chinese telecommunications. It maintains a Technical Expert Advisory Committee and a Technical Management Committee, both of which draw on expertise from industry, government, and universities. CCSA also operates through a series of technical committees, under which are working groups and sub-working groups. Although nominally specialized into separate communica- tions and information technology domains, the work of CESI and CCSA at times overlaps and, in keeping with inherited traditions of competition between the Ministries of Electronics and Telecommunications, they have been known to compete with one another. As shown in Figure 1, a number of other national level bureaucratic entities are also involved in standardization work. These include the National Develop- ment and Reform Commission (NDRC), Ministry of Science and Technology (MOST), State Council Informatization Office (SCITO), State Administration of News, Broadcasting, Film and Television (SANBFT) (formerly the State Admin- istration for Radio, Film and Television, or SARFT), State Administration for Science, Technology and Industry for National Defense (SASTIND), and Ministry of Public Security. NDRC and MOST play important roles in promoting China’s innovation strategy through subsidies, R&D support, and other policy preferences for standardization and intellectual property development work. SASTIND plays an important role in promoting standards development in military related indus- tries, and SCITO and the Ministry of Public Security have been important in areas of information security standards. SANBFT, supported by a research arm, the 3 China’s standards regime provides for four levels of standards: national, industry, re- gional, and enterprise.

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126 Patent Challenges for Standard-Setting in the Global Economy Academy of Broadcasting Science (ABS), has played a key role in the develop- ment of broadcasting standards and has figured prominently in Chinese efforts to promote convergence in communications networks, often in conflict with MIIT and its subordinate units. Not included in Figure 1 is the State Administration for Industry and Commerce (SAIC), which has a role in administering China’s Anti- Monopoly Law (AML), discussed further below. Not surprisingly, bureaucratic competition among these national level agencies has, at times, made coordinated national efforts on standardization dif- ficult.4 When the standards interests of Chinese and foreign companies and Chi- nese local governments are also factored into the mix, it is clear that reaching common purpose on standards in China is a challenging task. IPR policies for standardization work The importance of IPR issues in standardization began to gain prominence in China after 2000. In 2003, MII introduced a draft policy which attempted to clarify the treatment of patents in standards. The policy did not distinguish be- tween essential and nonessential patents, provided for compulsory patent pool participation in the case of mandatory standards, and imposed on foreign com- panies’ obligations which had the effect of privileging Chinese companies. Not surprisingly, it was not well received by foreign stakeholders operating in China, who were given only limited access to Chinese standardization working groups. Meanwhile, the Audio Video Coding Standard Working Group of China (AVS) attempted to draft a patent policy drawing on what was perceived to be best international practice and which involved participation by foreign compa- nies. In doing so, it solicited input from foreign companies and recruited a leader of the MPEG-4 IPR subcommittee, to chair its IPR working group.5 The AVS approach was recognized as a positive step forward by foreign stakeholders as well as many in the Chinese standards community who viewed it as an innova- tive Chinese response to problems plaguing SSOs elsewhere. Its key provisions require members of the working group to sign an agreement consenting to the AVS IPR policy. Members are required to disclose known related patents and to 4 In one widely noted case, for instance, Chinese efforts to develop its own audiovisual standard (AVS) as an alternative to the MPEG standard were set back by SARFT’s deci- sion to adopt the latter. This decision was subsequently modified in 2012 when, as a re- sult of improved government coordination, SARFT adopted AVS as a broadcast and TV standard. 5 Of the roughly 175 AVS working group members, approximately 30 are foreign companies (Ernst, 2011).The AVS Working Group was organized in 2002 as a response to what were considered to be excessive royalty fees paid by Chinese DVD manufactur- ers using the MPEG-2 standard. Its formation was a result of initiatives taken by the Insti- tute for Computer Science of the Chinese Academy of Sciences and the MII to bring together Chinese experts working on audio and video coding technologies to develop a standard suitable for Chinese conditions, especially the needs of Chinese industry.

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IPR and Standards in Emerging Economies 127 make an ex ante commitment to license on FRAND or FRAND-RF terms, or participate in the AVS patent pool. Contributions to a standard of Chinese-held SEPs have only the latter two options available to them. Members are expected to participate in at least one subgroup, but may choose not to participate if they do not want to make a commitment to license a patent for the standard being developed by that subgroup. The policy also provides for a 90-day review period for assessing the relevance of non-contributed or disclosed patents (AVS, 2008). Left unaddressed in the original formulation were nonmember IPR, legacy pa- tent issues, questions of compulsory licensing, and whether the “reasonableness” component of FRAND should have a defined upper limit (Huang and Reader, 2013). By 2006, guidelines for the operation of an AVS patent pool were an- nounced, including the establishment of a one RMB yuan per unit fee per device for licenses issued in China. The guidelines also provide for the establishment and responsibilities of a patent pool executive council which is composed of 5 representatives of government agencies, 6 members drawn from participating patent holders, 6 members of the Working Group who are users of the standard, the head of the Working Group, and the director of the patent pool management center. The patent pool operates on a not-for-profit basis. (Li, n.d.). Today, AVS is supported by the Working Group, the patent pool man- agement organization, and an AVS industrial alliance that seeks to promote the commercial deployment of the standard. As noted, AVS is seen by many ob- servers as a progressive standard-setting organization that developed an IPR policy at an early stage of its development in an attempt to accommodate private interests and social benefits in an equitable fashion through open and transparent procedures and principles. The AVS policy formed the basis of CESI’s IT Standard Drafting Organi- zations’ IPR Policy Template, first drafted in 2006. The template has now gone through 15 revisions involving a task force which has included representatives from China’s AVS, RFID, and LINUX working groups, and which has also had the counsel of standards officers from leading multinational firms, including Intel, Microsoft and Sun Microsystems.6 In an attempt to emulate international best practices, the template is intended to provide—and has provided—a frame- work for Chinese SSOs in the development of their IPR policies, while also rec- ognizing that different SSOs may craft their policies in response to distinctive needs. The template provides a set of suggested definitions (e.g. “necessary claim”) for key terms in the policies, an explication of the conditions for under- standing IPR contributions to the standardization process, guidance on disclo- sure requirements, and suggested licensing options (FRAND-RF, patent pool, FRAND). 6 CESI Standardization Development Research Center (n.d.), “IT Standard Drafting Organizations’ IPR Policy Template.”

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128 Patent Challenges for Standard-Setting in the Global Economy CCSA has also attempted to provide policy guidance through its Intellec- tual Property Rights Policy, introduced in 2007 for trial implementation. It is a somewhat less specific document but also provides disclosure and licensing guidelines. Like the CESI template, it calls for FRAND-RF and FRAND op- tions, but does not provide for patent pools. As a member of 3GPP, CCSA is somewhat constrained in developing IPR policies that deviate from those of 3GPP. These initiatives at the CESI, CCSA and working group levels, should be seen in the context of a broader effort at the SAC level to formulate national policy guidelines. In 2004, SAC published a draft proposal for a patent policy that raised significant concerns among international stakeholders, and led SAC to reconsider its terms. In November 2009, in the face of a growing concern that there was little policy consistency in the SSO approaches to IPR matters, in spite of the CESI and CCSA initiatives, a revised “Proposed Regulations for the Ad- ministration of the Formulation and Revision of Patent Involving National Standards” was issued by SAC. While noting improvements, comments from international stakeholders again called attention to provisions in the draft which seemed to be at odds with provisions found in the policies of international SSOs and which failed to pro- vide adequate protection to the rights of IPR owners, especially with regard to licensing terms and to compulsory licensing in the case of mandatory standards (Willingmyre 2009, 2010). Shortly after the release of the “Proposed Regula- tions,” in January, 2010, SAC’s China National Institute of Standardization (CNIS) released what became known as the “Disposal Rules for the Inclusion of Patents in National Standards.” Although the Disposal Rules were seen as re- moving some of the more troubling provisions of the Draft Regulations, some concerns remained such as a failure to distinguish between essential patents and essential patent claims, ambiguity over differences between patent declarations and actual licenses, and clarifications over disclosure obligations, especially with regard to nonparticipants (Willingmyre 2010). The draft policy again un- derwent a careful review and, as discussed below, a new draft “Regulatory Measures on National Standards Involving Patents (Interim)” was released on December 18, 2012. As noted above, China’s approaches to strategies for standardization and intellectual property development seek to serve Chinese interests in national technological development while striving for consistency with international norms and accommodating the interests of international stakeholders. Some Chinese initiatives have been confusing and troubling in light of international norms. Both the American Chamber of Commerce in China (AmCham) and the European Chamber have regularly expressed their concerns about the evolution of China’s standardization and IP regimes. A recent report from the European Chamber on patenting behavior in Chi- na also addresses a series of issues dealing with standard-setting procedures (Prud’homme, 2012). According to the report, in spite of greater opportunities for participation in Chinese standards organizations, foreign invested enterprises

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IPR and Standards in Emerging Economies 129 (FIEs) are still denied access to some important technical committees. As a re- sult, they “are unable to obtain information on the scope and requirements of patents to implement the standards that are frequently used in mandatory certifi- cation schemes.” It goes on to note that (p. 11-12) European IP holders have continued to experience great difficulties in en- gaging the Chinese telecommunications industry in licensing discussions over “essential” patents, i.e. those containing one or more claims that are critical to the implementation of a technical specification or standard. The report expresses a concern that Chinese approaches to standardization are being used to support indigenous technologies, often by using a standard that reflects the distinctive capabilities of Chinese enterprises. European companies report that they have difficulties in licensing discussions with Chinese counter- parts over the determination of “essential” patents. Foreign stakeholders have also been concerned over the implementation of China’s information security initiative, the Multi-Level Protection Scheme (MLPS), which “... includes do- mestic IP requirements that do not allow foreign companies to build a variety of Chinese infrastructure, whether as part of government procurement or commer- cial initiatives.”7 AmCham has also expressed its concerns about Chinese standardization policies.8 As with the European Chamber, AmCham has been concerned about Chinese initiatives for developing information security standards to the exclu- sion of international companies. It has also commented on Chinese reluctance to recognize as “international standards” those standards developed by U.S.-based firms which have not been approved by ISO, ITU, and IEC in spite of the fact that they are often otherwise globally accepted and meet WTO requirements for international standards. Like the European Chamber, AmCham has also ex- pressed concern about rights of participation in some Chinese technical commit- tees in spite of SAC regulations intended to allow foreign invested enterprises registered in China to participate and vote in technical committees. AmCham also reports that its member companies are often concerned that Chinese standard-setting procedures do not adequately protect proprietary in- formation, including concerns that the copyrights and patents of U.S. SSOs are not adequately protected against infringement.9 AmCham has urged SAC to cooperate more fully with international SSOs in order to bring its IPR policies up to the best international practices, and to work more closely with the State 7 See also the case studies of MLPS and related policies in Ahrens (2012), Ernst (2011), and Ernst and Martin (2010). 8 See various white papers at AmCham China, available at http://www.amchamchina. org/whitepaper. 9 Thus, while foreign companies express a desire to participate more fully in Chinese standards bodies, they are also concerned that participation carries IPR risks.

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130 Patent Challenges for Standard-Setting in the Global Economy Intellectual Property Office (SIPO) and the National Copyright Administration of China (NCAC) (AmCham, 2012, 2013). Questions about standard-essential patents in China are also shaped by the broader Chinese legal context. This includes provisions of the Patent Law re- quiring compulsory licensing when the “public interest” (largely unspecified) is at stake and in cases where the patent owner fails to “sufficiently exploit” (again largely unspecified) the patent. China’s Antimonopoly Law has also been a mat- ter of concern to foreign companies who fear that they could be held in violation of that law for failing to license technology that may be needed for the innova- tion needs of a third-party, potentially establishing market dominance under Chinese definitions (AmCham, 2012). It is not entirely clear, as of this writing, how fully the newly released SAC “Regulatory Measures on National Standards Involving Patents (Interim)” will address these concerns.10 The “Measures” document is quite brief and states prin- ciples in rather general terms. Its short provisions on disclosure require partici- pants in working groups to declare essential patents, although the provision is vague as to timing and whether full patent searches are expected. Participants are given three licensing options: choose FRAND, FRAND-RF, or state an unwilling- ness to license according to the first two terms. If the last is chosen, the standard cannot be based on the patent(s) in question. This is consistent with similar provi- sions in many western SSO IPR policies. The state reserves the right to suspend the use of the standard in cases where an undisclosed patent has been included in the standard. The provisions called for a transfer of obligations in the event of a change in the ownership of the patent. More specifically, where a patent holder that has made a licensing declaration transfers the declared patent, it must have the transferee agree to be bound by that declaration. Again, this is consistent with sim- ilar provisions in ETSI, ITU and other SSO IPR policies. On the question of mandatory standards, the “Measures” skirt around the question of compulsory licensing by noting that mandatory standards and prin- ciples should not incorporate patented technology. When they do, however, the policy calls for negotiations between the holder of the patent and the state, with a suspension of the publication of the standard until the issue has been resolved. In cases where a mandatory standard does involve patents, the state is expected to publish a text of the standard and information about the IPR for 30 days, dur- ing which time stakeholders are encouraged to submit additional information. The draft “Regulatory Measures” were issued with an invitation for com- ments by stakeholders. As of this writing, a number of foreign groups have submitted views on the draft, including The U.S. China Business Council, the American Intellectual Property Law Association, the American Bar Association, and the Intellectual Property Owners Association. While most stakeholder groups expressed support for the SAC initiative, they also submitted a number 10 An English translation is available at http://sunsteinlaw.com/wp/wp-content/uploads/ 2013/01/2013_01_IP_Update_PRC.pdf.

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IPR and Standards in Emerging Economies 131 of suggestions concerning definitional clarity, disclosure requirements, licensing requirements, and additional procedural transparency. In addition to the new SAC “Regulatory Measures,” there have also been recent reports that CESA and the Electronics Industry Association are anxious to resolve uncertainties about policies for standard essential patents, and are work- ing with the Intellectual Property Center of MIIT on the development of a train- ing program using policy principles developed by ETSI. China’s evolving competition policy is also shaping the ways in which SEP issues are being approached. For instance, the State Administration for In- dustry and Commerce (SAIC) has recently issued a sixth draft for comments on its “Provision of the Administrative Authorities for Industry and Commerce on Prohibition of Abuse of Intellectual Property to Exclude or Restrict Competi- tion,” a document intended to provide guidance for the administration of China’s Antimonopoly Law, and which includes reference to standard-setting practices. In addition, in an important case decided by the Shenzhen Intermediate People’s Court on February 4, 2013, Huawei was awarded $US 3.2 million in damages in two suits against InterDigital. These suits alleged that the latter had used its dominant market position to deny licenses to Huawei on FRAND terms. In the first case, Huawei alleged that InterDigital had a dominant market posi- tion in China and the United States in the market for the licensing of essential patents it owned and abused its market power by engaging in differentiated pric- ing, tying, and refusal to deal. In connection with this suit, the Shenzhen court held that InterDigital vio- lated China’s Antimonopoly Law by (1) making proposals for royalties from Huawei that the court believed were excessive; (2) tying the licensing of essen- tial patents to the licensing of non-essential patents; (3) requesting as part of its licensing proposals that Huawei provide a grant-back of certain patent rights to InterDigital; and (4) commencing a United States International Trade Commis- sion (USITC) action against Huawei while still in discussions with Huawei for a license (InterDigital Annual Report, 2012; Nylen and Swift, 2013). In the second suit, Huawei argued that the FRAND commitments Inter- Digital made to ETSI obligated it under Chinese law to negotiate with Huawei on FRAND terms, and requested the court to determine a FRAND rate for li- censing SEPs to Huawei. The court ruled that royalties for InterDigital patents essential to implementing 2G, 3G, and 4G standards should not exceed 0.019 percent of the price of individual Huawei products, but has not yet made public the reasoning for deciding on this rate (InterDigital Annual Report, 2012). In both the Shenzhen court decision and the SAIC draft, we see how com- petition policy may introduce a policy bias against the interests of rights holders, a bias which would be troubling to some foreign corporations. But they also point to a still evolving situation, calling for the further clarification of the IPR policies of Chinese SSOs.

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132 Patent Challenges for Standard-Setting in the Global Economy Policy and institutional uncertainty Over the past decade, Chinese approaches to standardization, including policies for essential patents in standards, have continued to evolve in ways that show sensitivity to international norms and the interests of international stake- holders, including multinational companies in some circumstances, although in some instances have excluded foreign company participation. At the same time, the commitment to building a standards regime to serve Chinese national inter- ests remains powerful. Thus, the development of policies for standard-essential patents is still a work in progress and continues to reflect the problems of ac- commodating the competing objectives noted at the outset. These problems are made more complex by ongoing institutional uncer- tainty. The recent 18th Congress of the Chinese Communist Party has brought into office a new group of leaders who express optimism over China’s future but also recognize the daunting challenges they face. The new party chairman, Xi Jingping, has celebrated China’s recent progress and referred to China as being in a period of “national revival” or “rejuvenation” (fu xing). National technolog- ical development to enhance national capabilities for innovation is central to this revitalization in the minds of Chinese leaders. Yet in spite of aggressive policies to promote innovation, including rapidly increasing R&D expenditures, there is a widespread disappointment in actual achievements, and a recognition that ex- isting institutions are not serving Chinese aspirations, witness the weak record of producing successful standards and high-quality exploitable patents. In recent months there have been growing discussions of further institutional reform. While detailed reform proposals have yet to appear, it is likely that a number of the institutions involved with standardization and intellectual property policies will be affected. In addition to this institutional uncertainty, approaches to standard- essential patents may also be affected by changing attitudes towards intellectual property. As suggested above, Chinese interests in ICT standardization have been strongly influenced by concerns over licensing fees and the overall eco- nomic benefits redounding to those controlling standards and owning the intel- lectual property. In this sense, China has sought to secure what it considers to be a more equitable access to standards in order to better serve its manufacturing activities; monetizing IP and standards has not been the primary goal (Breznitz and Murphree, 2012). As China’s patent portfolio has expanded, however, so too has its patent litigation and there are signs that it may be moving towards a much greater concern for IP monetization. If so, we may see the further growth of new markets for IP and the emergence of new players such as non-practicing entities (NPEs). These developments would introduce significant new dynamics to issues of standards and IPR policy in China.

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IPR and Standards in Emerging Economies 133 8.3 India Like China, India has been concerned about the benefits flowing to West- ern IP owners and the questions of equity concerning their distribution. Also like China, its standards regime has had to make adjustments in response to WTO imperatives. Unlike China, however, India had, until recently, shown less of a strategic orientation towards developing its own standards and intellectual prop- erty, preferring instead to rely on established international standards, and on international practice for developing policies affecting patents in standards. More recently, though, awareness that its huge market and distinctive social and physical conditions present interesting technological opportunities has prompted much more attention to Indian standards development and the creation of Indian intellectual property. Indian thinking about a more strategic approach to stand- ards development has also been influenced by concerns that imports from China are capturing market share from Indian firms. Further, India’s firms wish to raise quality and save testing and certification costs by complying with trusted stand- ards, while public authorities tend to focus support policies on higher-quality enterprises. This is evident, for instance, in the Government of India National Telecom Policy, introduced in 2012, which focuses not only on a significant expansion of telecom services, but also calls attention to the need to stimulate innovation in Indian industry and develop new strategies for promoting Indian telecom tech- nology. In language reminiscent of Chinese policy discourse, the new Policy calls for numerical targets for the growth and self-sufficiency of the industry, and the creation of “... a roadmap to align technology, demand, standards and regulations for enhancing competitiveness of domestic manufacturing” (Gov- ernment of India, 2012). It calls attention to the importance of procurement pref- erences for “...domestically manufactured telecommunication products...,” and the need to promote indigenous R&D and IPR creation as part of the current 12th five-year plan period. As part of this effort, India should: Develop and establish standards to meet national requirements, generate IPRs, and participate in international standardization bodies to contribute in (the) formulation of global standards, thereby making India a leading nation in the area of international telecom standardization. This will be supported by establishing appropriate linkages with industry, R&D institu- tions, academia, telecom service providers and users. (Government of In- dia, 2012) Key institutions The Bureau of Indian Standards (BIS) is the Indian government’s main in- stitution for standardization. Established in 1987, superseding the Indian Stand- ards Institution established in 1947, BIS operates 14 industry related sectors, each of which is managed by a “division council.” Of greatest relevance to this

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134 Patent Challenges for Standard-Setting in the Global Economy study is the Electronics and Information Technology Division Council (LITD), created in 1977, which includes 21 “sectional committees” covering various fields of IT, including computer communications, networks and interfaces. As with other BIS division councils, LITD committees have attempted to harmo- nize their standards with those in ITU, IEC, and ISO. BIS reportedly has not yet developed its own IPR policies (Ramakrishna, et. al, 2012). Since many of its standards are technically equivalent to interna- tional standards, the BIS position has been to rely on the IPR policies of the in- ternational standards organizations that developed the standard. BIS leaves it to manufacturers wishing to use a standard to negotiate license terms if IPR is an issue. A second important government body is the Telecommunication Engineer- ing Center (TEC) of the Department of Telecommunications of the Indian Min- istry of Communications and Information Technology. TEC has a lead role in the development of standards for telecom equipment, services, and interopera- bility. It maintains regular interaction with ETSI and the ITU and participates in a number of other international standards setting bodies, such as ITU-T, the WiMAX forum, IETF, IEEE, and the like. As with standards bodies under BIS, it appears that TEC also does not have a well-established IPR policy. A good bit of its work is to develop specifications for equipment to be used under Indian conditions, with most of this equipment conforming to ITU standards. Thus, TEC looks to the IPR policy of the ITU in developing its standards and specifi- cations. TEC is also supporting the development of a new national telecom standards development organization, called for in the National Telecom Policy. In May 2013, the establishment of a new Telecom Standards Development Soci- ety of India (TSDSI) was announced with membership drawn from diverse stakeholders including manufacturers, service providers, research and academic institutions and government organizations (Department of Telecommunications, 2013). In addition to these two mainline governmental institutions, two non- governmental standards bodies should be noted. The Global ICT Standardization Forum for India (GISFI), founded in 2008, seeks to provide greater coherence to ICT standardization in India in such emerging fields as energy, telemedicine, wireless robotics, and biotechnology, and to integrate more fully Indian ICT standards initiatives with international trends. Its members include Indian and foreign firms and Indian research institutions, but it seeks participation from the full array of stakeholders.11 It maintains working groups in the areas of infor- mation security and privacy, future radio networks, the Internet, cloud and ser- vice-oriented networks, green ICT, and spectrum. In December 2011, GISFI 11 Corporate members include Niksun, NEC, Ericsson, Tejas Networks, Motorola, Tata Consultancy Services Limited, Huawei, Nokia Siemens Networks, Veriserve, and Sam- sung. For a complete list, see http://www.gisfi.org/membership.php.

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IPR and Standards in Emerging Economies 135 cooperated with the ITU in sponsoring a workshop on standards and intellectual property rights. GISFI maintains an IPR policy based on that of ETSI, but having its own features as well. The policy seeks to reduce economic and legal risks to stake- holders and to balance the interests of rights holders and the needs of the public. It calls for timely disclosure but does not obligate members to engage in patent searches. When SEPs are brought to the attention of GISFI, its Director General is expected to request from the patent owner an irrevocable commitment to grant licenses on FRAND terms. The owner is also expected to make reasonable ef- forts to notify a new assignee of GISFI standards commitments in the event of a transfer. In the event that the patent owner refuses to license, GISFI will explore the availability of alternative technologies for the standard. If an alternative technology does not exist, and if the patent owner is a member of GISFI, the Director General will ask for a reconsideration of the licensing decision, and if the decision is upheld, a written explanation of the owner’s decision not to li- cense within three months of the request. The explanation, and supporting in- formation, will then be sent to the GISFI General Assembly for consideration. If the patent owner is not a member, the Director General shall contact the patent owner requesting an explanation for the licensing decision and requesting recon- sideration. If the decision not to license is upheld, the matter will be referred to the General Assembly for reconsideration, with counsel, of whether the patent in question is essential for the standard. In cases where a license is not available after the publication of the standard, the Director General will again take the initiative to contact the patent owner with requests for an explanation and recon- sideration. Thereafter, the matter will again be referred to the General Assembly for review, with members urged to use their good offices to find a solution. A second non-governmental organization of interest is the Development Organization of Standards for Telecommunications in India (DOSTI), a private SDO committed to the development of telecom standards suitable for Indian conditions. It currently has eight working groups and a mem- bership that includes both Indian entities and foreign companies.12 DOSTI maintains an IPR bearing a resemblance to that of GISFI. It also calls for timely disclosure but carries no obligation for full patent searches. Owners of SEPs will be requested by the DOSTI Director General to grant ir- revocable licenses on FRAND terms. In the event of transfers, the patent owner is expected to notify the assignee of any commitments made to DOSTI. The 12 Members currently include Cellular Operators Association of India (COAI), Associ- ation of Unified Telecom Service Providers of India (AUSPI), Tejas Networks, TCOE India, CEWiT, Ericsson, Qualcomm, Nokia Siemens Networks, IIT Bombay, IIM Ah- medabad.

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136 Patent Challenges for Standard-Setting in the Global Economy DOSTI policy provides for cases where transferability is disputed, including the conduct of an IPR policy search if requested by the Department of Telecommu- nications. In the event of non-availability of licenses, the DOSTI Executive Council will consider whether an alternative technology is available. If not, work on the standard will be discontinued and the Director General will ask the members to reconsider. If the decision not to license is maintained, the member will be asked to submit in writing the reasons for refusing to license within three months, after which the matter will be referred to the Executive Committee. In cases where the IPR owner is not a DOSTI member, the policy calls for efforts to be made through direct DOSTI contacts and through the good offices of members to have the owner reconsider or present in writing the reasons for refusing to license. If there is no reconsideration or if the owner refuses to re- spond within three months, the matter is referred to the Executive Committee for its consideration. This may lead to the referral of the matter to the appropriate working group to consider a technological workaround or to the Department of Telecommunications for appropriate action, including perhaps the non- recognition of the standard. The DOSTI policy also provides for IPR owned by DOSTI itself, including FRAND licensing provisions (Ramakrishna, et. al, 2012). Most recently, the government of India announced the development of the Telecom Standards Development Society, India (TSDSI).13 TSDSI will bring together stakeholders from industry, academia, and government organizations in “…an autonomous body which will drive consensus regarding standards to meet national requirements.” e-Government and information security Due to its diverse and often incompatible legacy government information systems, the government of India faces significant challenges in providing for effective e-government services. In its efforts to modernize e-government, it has introduced an open standards policy which includes a mandatory royalty-free approach to licensing, and requirements that the standard have a technology neutral specification and be adapted and maintained by a not-for-profit organiza- tion. In the event that an open standard meeting these conditions is not available, the policy also provides for interim standards, the IPR of which can be licensed on a FRAND basis, and which relaxes the not-for-profit organization require- ment (Government of India, 2010). The e-government policy also includes guidelines for information security. It establishes an e-Governance Security As- surance Framework based on ISO 27001 consistent with the U.S. Information Security Program for Federal Information Systems (Ramakrishna, et. al, 2012). 13 http://www.tta.or.kr/include/Download.jsp?filename=externalDocument/GSC17-PLEN- 84_India_s_Statement_at_GSC_Korea.docx.

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IPR and Standards in Emerging Economies 137 India in transition The growing importance of India in the global ICT industries, based on its market size and the growing technological capabilities of the Indian technical community, is, as in China, leading to new attention to standards and intellectual property rights. This has affected not only the behavior of Indian stakeholders, but has also led to the growth of standard-related activities involving interna- tional standards bodies and corporations as well. IEEE, for instance, has estab- lished a “standards interest group” (SIG) for India with the goal of stimulating greater Indian involvement in the IEEE global standards process (IEEE, 2011). GISFI has been active in working with ITU. Interestingly, the Chinese firm Huawei, which has an active presence in India and is a GISFI member, recently sponsored a joint ITU-GISFI workshop on “Bridging the Standardization Gap.” It is notable that explicit attention to the development of an IPR policy for standardization is found more in India’s nongovernmental SSOs than in the gov- ernment standards agencies. Indian approaches to the development of policies for IPRs in standards have tended to follow those of established international standards bodies, and this is likely to continue. As indicated in the National Tel- ecom Policy, however, there seems to be a growing appetite for government supported indigenous Indian standards development efforts incorporating Indian intellectual property. India is thus at an interesting transitional point where the reconciliation of emerging Indian industrial policy objectives and harmonization with international practices are likely to face new challenges. 8.4 Brazil Like India and China, Brazil is an important emerging economy committed to moving up the value chain through greater attention to enhancing technological capabilities.14 Also like India, however, it has shown less of a strategic orientation towards standards and IPR development than China and its standards regime is only gradually coming to grips with issues such as defining and licensing SEPs. It appears, as of this writing, that Brazil does not have any well-developed policies for dealing with IPR in standards (Barbosa, 2012). Key institutions Brazil’s National System of Metrology, Standardization and Industrial Qual- ity (SINMETRO) and its patent and trademark office (INPI), are both part of the Ministry of Development, Industry and Foreign Trade. The SINMETRO system includes the National Council of Metrology, Standardization and Industrial Quali- ty (CONMETRO), the National Institute of Metrology, Standardization, and In- dustrial Quality (INMETRO) and the Brazilian Association of Technical Norms 14 A key development was the passage of the 2004 Brazilian Innovation Law.

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138 Patent Challenges for Standard-Setting in the Global Economy (ABNT), which serves as Brazil’s main organization for standardization. ABNT is a private organization but since 1940 has been officially recognized as the national standards body and receives public as well as private funding. It develops stand- ards through its own technical committees and also accredits sectoral standardiza- tion bodies. SINMETRO and ABNT policies call for the use of international standards to the extent possible and as references for local work on standardization and technical specifications. Although Brazil has yet to develop explicit policies for IPR in standards, the relationships between standard-setting and intellectual property are becoming more prominent. Brazil’s 2010 public procurement law, for instance, allows for the consideration of technology and industrial policy objectives in procurement decisions, including purchasing decisions in support of the development of nation- al standards in ICT and the promotion of open standards for e-government.15 The Brazilian patent office, INPI, plays a role in IPR in standards issues. It is empowered to analyze and approve license payments, including those related to standards. Under Brazilian law, patents can only be transferred to new assign- ees following specific action by the Patent and Trademark Office. Competition policy and the role of the Competition Administrative Court (CADE) are also significant in how IPR in standards is treated, especially with regard to patent pools and royalty rates (Barbosa, 2012). 8.5 Conclusions and Recommendations In a global economy where intellectual property has become an increas- ingly valuable asset, it is not surprising that key emerging economies are taking the creation, protection, and utilization of that asset to be matters of national and corporate importance. Likewise, the growing strategic importance of technical standards is also attracting national and firm-level policy attention. We should not be surprised, therefore, that the role of intellectual property in standard- setting will assume a more central place in the evolution of the policy and legal systems of these three emerging countries as it clearly already has in China. Given the growing size and importance of these economies, the ways in which they approach the development of their domestic IPR and standards regimes will have important implications for the norms and institutions by which internation- al standardization and IPR affairs are governed. In each of the countries reviewed, we see interesting tensions between tendencies toward harmonization with international norms and practices and tendencies towards more techno-nationalist agendas supporting the protection of national industries and the building of national champions. This tension is per- haps most evident in China, where a sense of the strategic importance of stand- ards and IPR is more developed, but it is certainly evident in the evolving indus- trial policies of India and Brazil as well. 15 Brazil, like China, has not joined the WTO Government Procurement Agreement.

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IPR and Standards in Emerging Economies 139 In short, these three emerging economies are all working towards national regimes for managing the relationships between IPR and standards in ways that serve national interests but which also accord with international best practices. The integration of these objectives, in the first instance, will be affected by the evolution of government-industry relations, especially with regard to the role of the state, as opposed to industrial enterprises, in taking the lead in standard- setting activities. This question, in turn, is a function of a deeper set of issues involving political traditions and state-society relations which are beyond the scope of this report. But, in addition, the evolution of these national regimes will also be strongly influenced by the development of the intellectual property as- sets which stakeholders in these countries bring to domestic standard-setting and international standardization activities. The weak patent portfolios that, until recently, have been characteristic of most firms in these countries have ensured that they have in effect been “standards takers” rather than “standards makers.” As technological development proceeds and domestic patent portfolios expand we can expect that this situation will change, and with it, more robust approach- es to standardization will emerge along with more focused attention to the treatment of standard-essential IPR. In all three countries reviewed, the development of a modern technical standards regime is still a work in progress. This is true even for China, where its learning curve is notably steep and it has shown a far more robust approach to building a national standardization system than has India or Brazil. While there are limits to how much the U.S. government can contribute to the devel- opment of these standards regimes, the fact that they are all in varying stages of formation suggests that there are possibilities for mutually beneficial interac- tions, especially with regard to education, training and raising awareness as to the importance of developing IPR policies in the early stages of building SSO capabilities. As the AVS case illustrates, an awareness of international practices combined with good counsel from knowledgeable foreign experts can lead to the development of positive policies and procedures which avoid pitfalls experi- enced by others. Recommendation 8:1 The U.S. government, should explore ways to promote awareness of the importance of developing IPR policies at an early stage of the development of SSOs in these and other emerging economies, and should, in conjunction with non-governmental standards entities, explore ways to offer training programs for those working to develop their organizations and the policies needed for suc- cessful national standardization. Recommendation 8:2 In the meantime, agencies of the United States government, such as the United States Patent and Trademark Office, the Office of the United States Trade

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140 Patent Challenges for Standard-Setting in the Global Economy Representative, and the National Institute of Standards and Technology should closely monitor and report on continuing developments in these countries and oth- er major emerging economies regarding standard-setting and the management of intellectual property.