1. Introduction

1.1 The Role of Standards and Patented Technology in Standards

This report addresses the complex relationships among the development of technical standards, their ownership, in part as intellectual property (primarily in the form of patents), and their diffusion into competition. For reasons described below, the report focuses on the information and communications technology (ICT) industry where issues involving these relationships especially rise to the fore because of the importance of licensing essential patented technologies across multiple uses.

Standards are technical specifications that aid the development of certain beneficial features of products and services. To become “standards,” such specifications undergo some process of examination and approval, whether through regulatory systems, private industry bodies, or simple market acceptance by consumers, that recognizes they are sufficiently effective to merit wide adoption. Standards are ubiquitous throughout markets and are adopted for multiple purposes. For example, they exist in agriculture, foodstuffs, and medicines to assure minimum safety and health levels. Emissions standards apply to electricity generation and automobiles to improve air quality, while banks are subject to fiduciary requirements to safeguard financial stability. Standards determine minimum levels of information that must be provided to the public by government agencies and commercial enterprises. Standards also play a useful signaling function, for their adoption signifies compliance with specified performance characteristics.

Standards are developed to resolve various market shortcomings in unregulated markets. These problems may arise from externality costs, such as pollution of air and water, lack of information about the health and safety characteristics of goods and services, and network vulnerabilities in the electrical grid and financial markets. They also reduce transaction costs between technology producers and users in the selection of inputs and products. Without question, the development and adoption of appropriate standards to address such issues help create markets, support the functioning of efficient competition, and raise consumer welfare.

Standards have taken on increasing importance for international commerce. For example, empirical evidence points to the important role standardization plays in supporting international trade by raising consumer confidence in traded goods (Moenius 2004; Clougherty and Grajek 2012). They also support increasing global investment by facilitating information sharing and data trans-



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1. Introduction 1.1 The Role of Standards and Patented Technology in Standards This report addresses the complex relationships among the development of technical standards, their ownership, in part as intellectual property (primarily in the form of patents), and their diffusion into competition. For reasons described below, the report focuses on the information and communications technology (ICT) industry where issues involving these relationships especially rise to the fore because of the importance of licensing essential patented technologies across multiple uses. Standards are technical specifications that aid the development of certain beneficial features of products and services. To become “standards,” such specifi- cations undergo some process of examination and approval, whether through regu- latory systems, private industry bodies, or simple market acceptance by consum- ers, that recognizes they are sufficiently effective to merit wide adoption. Standards are ubiquitous throughout markets and are adopted for multiple purpos- es. For example, they exist in agriculture, foodstuffs, and medicines to assure min- imum safety and health levels. Emissions standards apply to electricity generation and automobiles to improve air quality, while banks are subject to fiduciary re- quirements to safeguard financial stability. Standards determine minimum levels of information that must be provided to the public by government agencies and commercial enterprises. Standards also play a useful signaling function, for their adoption signifies compliance with specified performance characteristics. Standards are developed to resolve various market shortcomings in unreg- ulated markets. These problems may arise from externality costs, such as pollu- tion of air and water, lack of information about the health and safety characteris- tics of goods and services, and network vulnerabilities in the electrical grid and financial markets. They also reduce transaction costs between technology pro- ducers and users in the selection of inputs and products. Without question, the development and adoption of appropriate standards to address such issues help create markets, support the functioning of efficient competition, and raise con- sumer welfare. Standards have taken on increasing importance for international com- merce. For example, empirical evidence points to the important role standardiza- tion plays in supporting international trade by raising consumer confidence in traded goods (Moenius 2004; Clougherty and Grajek 2012). They also support increasing global investment by facilitating information sharing and data trans- 15

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16 Patent Challenges for Standard-Setting in the Global Economy fers among affiliates within multinational firms and among participants in inter- national research networks. In turn, the use of standardized technologies helps achieve economies of scale and scope, both within and across borders. Innova- tion and growth are increasingly dependent on the development and use of ap- propriate standards. Many standards, including those of greatest relevance for this report, ena- ble products designed and produced by different companies to operate and communicate with one another. Such “interoperability” standards, when imple- mented broadly across markets, give rise to beneficial network effects and effi- ciencies. Interoperability standards are important in many industries but particu- larly characterize the information technology, mobile telephone, and consumer electronics sectors. Indeed, standards can effectively create new markets in such sectors. The positive implications for market efficiency and consumer welfare are clear: the world would be more fragmented and unproductive if software and telecommunication technologies could not operate across multiple platforms and devices. Technology developers often rely on patents to commercialize their inven- tions and, ultimately, to support investments in research and development. These investments often produce technologies that are incorporated into standards. Indeed, in many fields of ICT, a substantial share of relevant technology is pa- tented or the subject of patent applications at the time a standard is developed. Thus, the incorporation of patented technologies into ICT technical specifica- tions is virtually inevitable and, by facilitating the benefits of standardization, is ultimately in the public interest. Incorporating these patented inventions can result in a standard with better performance, improved cost effectiveness, or a better match with other design requirements. It is increasingly the case in ICT that some design requirements cannot be met at all without including patented technology. Moreover, the potential to receive royalties for access to patented technology creates incentives for participation in standard-setting and attracts parties that contribute valuable knowledge and technical insights. There is an inherent tension between the interests of inventors, who seek economic returns on their R&D investments, and users of new technology, who want access on affordable terms. This tension is even stronger in the area of standards, which, by their nature, must find widespread acceptance and, if pa- tented, may give rise to two problems for market competition. The first is lock- in, where patented technology that is not readily replaceable must be imple- mented for products to work. The second is potential hold-up, where patent holders seek royalties substantially in excess of the value a technology had prior to its incorporation into a standard.1 In this context, policies and guidelines gov- erning how widely and the terms under which such technologies are licensed are critical for supporting markets in downstream products. 1 See Chapter 3 for extensive discussion.

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Introduction 17 Striking a sensible and efficient balance regarding the management and li- censing of intellectual property, primarily standard-essential patents (SEPs), in ICT standards is a central problem for standard-setting organizations (SSOs), their members, and government authorities. The importance of balance is espe- cially pronounced where there is a critical need for seamless interoperability among software, components and other technologies embedded in microelec- tronic devices, such as cellular telephones, and other technically sophisticated products, and where there are a large number of patents on the relevant inputs. Owners of patents on technologies to which access is required for making these products work certainly have incentives to license their use to implementers of various complementary technologies and products. However, the licensing terms and conditions they set may limit the access of some potential licensees who could otherwise bring successful products to market or may impose costs that impede technology utilization. It should be noted that there are significant amounts of innovation, includ- ing of technologies that enter standards, from open-source approaches. Open- source innovation is common in software and certain segments of microelectron- ics and biotechnological research. Such approaches preclude the assertion of patent rights on new technologies, though there may be other restrictions on licensed use. Open-source is an increasingly relevant source of knowledge for standardization. However, it does not raise the same questions that this report addresses, namely the management of intellectual property rights in the stand- ardization process. Standard-setting organizations (SSOs) play several critical roles in tech- nology and market development. The ultimate objective is to enable competition among rival but interoperable products and services without permitting some participants to block others by inefficiently asserting patents. Thus, their first important task is to ensure the interoperability of technology products and to facilitate the necessary exchange of data through the development of industry standards. Second, these organizations realized long ago that to foster competi- tion they needed to place controls on how member firms manage their SEPs. Thus, they developed intellectual property rights (IPR) policies intended to en- sure reasonable access to patented technology necessary to implement their standards. How SSOs operate varies widely across technologies and regions, as this report will demonstrate. In general, however, they seek to encourage or require member firms to both disclose and license SEPs, whether to fellow SSO mem- bers or non-member companies, under terms generally referred to as reasonable and non-discriminatory (RAND) or fair, reasonable and non-discriminatory (FRAND).2 The purpose of the FRAND framework is to facilitate the licensing 2 What these terms might actually mean is a subject of considerable discussion and controversy, as will be discussed later in the report. It is generally agreed that the terms may be used interchangeably. FRAND is used in this report because it is generally used

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18 Patent Challenges for Standard-Setting in the Global Economy of critical patented technologies to designers and implementers of components and final goods. Where multiple technologies may be needed to ensure interop- erability and functionality but are not available, competition, innovation, and the growth of markets may be stunted. For this reason, how firms and SSOs ap- proach licensing of SEPs and other patents recently has attracted the attention of competition authorities in major jurisdictions. Many complex questions arise in this arena. For example, what are the IP disclosure expectations of SSOs and are they mandatory rules or voluntary guidelines? Do SSOs define various licensing practices and requirements and do such practices vary between member and non-member users and implementers? Is there a common understanding of the effects of a FRAND licensing commit- ment? Are there limitations regarding the role of SSOs in defining or enforcing licensing obligations? How do such procedures and policies vary across geo- graphic regions, including in major emerging economies? Finally, although the committee does not address this question directly, how does the recent mush- rooming growth of patents in key industries affect the ability of SSO members to manage and license their intellectual property to facilitate technology use? 1.2 Standards and Patents in ICT and Emerging Technologies This report focuses on such questions in the ICT sector because interoper- ability needs and network economies are critical in this area. Moreover, patent- ing has become more prevalent in this sector in multiple countries, and those patents protect many of the technologies written into standards. Firms seeking to implement standards or develop improved technologies would necessarily in- fringe the patents embodied in those standards unless they have legal access through licensing. The associated questions of selection and disclosure of essen- tial patents included in standards and the terms for licensing them are especially salient in ICT. Despite this focus, the committee invited presentations at its workshop on several emerging technologies, including bioinformatics, synthetic biology, nano- technology, and sustainable (green) building materials.3 The presenters described some parallels with ICT in these fields but reported that, to date, the complex pa- tent issues raised in the ICT field have yet to attract a significant attention in these other fields. For example, the field of bioinformatics has evolved largely within academic and governmental research centers. Numerous standards have been de- veloped for data structures and exchange, primarily in small, academically focused groups. Patent issues have not received much, if any, attention and it does not ap- internationally. Of course, FRAND is not the only licensing framework entertained by SSOs, as noted in the next chapter. 3 See, respectively, invited presentations from Contreras (2012), Torrance and Kahl (2012), Jillavenkatesa,et al (2012), and Contreras and McManis (2012). http://sites.national academies.org/PGA/step/IPManagement/index.htm.

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Introduction 19 pear that patenting has yet occurred with any frequency in this field, although the potential for filings in some subfields such as genetic data structures could in- crease in the future. Synthetic biology, which also originated in the academic research envi- ronment, has attracted the interest of private sector players, who have been ac- tive in patenting synthetic biology inventions. Although the potential need seems substantial, few standards have been developed in the field. The most prominent standardization effort to-date, the “bio-bricks” project that has devel- oped a large and growing catalog of standardized molecular “parts,” has sought to discourage patenting of these fundamental molecular elements. Nanotechnol- ogy is a more mature field and has numerous private sector players. To the ex- tent that standards are being developed, this activity is occurring at large, estab- lished SSOs such as American Society for Testing and Materials (ASTM) International and ISO, which have patent policies in place. Finally, sustainable building materials represent a large commercial mar- ket with numerous sophisticated players. A large number of standards have been developed at a range of SSOs, from small, industry-specific trade groups to large SSOs such as Underwriters Laboratories. In this field, trademarks and certifica- tion marks (so-called “ecolabels”) have played a far greater role than patents, and present their own challenges to participants, regulators and consumers. Despite the relatively low salience of patent issues to date, they have the potential to assume greater importance in each of the fields in the coming years. Accordingly, the committee believes that its findings and recommendations with respect to ICT may have some value to participants seeking to anticipate issues that may be problematic in the future. There are many long-established SSOs, many with IPR policies operating in relatively mature sectors of the economy such as automobiles and aerospace (e.g., Society of Automotive Engineers), electrical machinery (e.g., National Electrical Manufacturers Association), and other manufacturing industry groups (e.g., Society of Manufacturing Engineers). These are not considered in this re- port and there should not be any inference that the committee’s findings and recommendations apply equally to such industries and organizations. 1.3 Background of the Study In 2011, the United States Patent and Trademark Office (USPTO) com- missioned the Board on Science, Technology and Economic Policy (STEP) of the National Academy of Sciences to empanel a committee of experts to study and prepare a report analyzing such questions, with an emphasis on an interna- tional comparison. The committee began its work in November 2011, with an initial meeting at which stakeholders and other interested parties were invited to make statements on the issues. Subsequently, the committee asked a number of experts to prepare presentations addressing specific aspects of SSOs, licensing and related issues. The presentations were made at a public symposium in Octo-

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20 Patent Challenges for Standard-Setting in the Global Economy ber 2012. In addition, members of the committee engaged in extensive discus- sions over the period to prepare for the drafting of this report. A principal motivation of the USPTO request is the increasing importance of standardization and IPR use for global trade and investment. In one dimen- sion, this reflects the growing prevalence of cross-border activities of SSOs, raising the question of how they manage their IPR policies in an international context. In another context, major emerging economies, especially China, now place greater emphasis on their own standardization bodies and associated poli- cies. Thus, the committee was asked to ascertain the status of standardization in high-technology areas in such economies. Another important context of the study is the growing concern that in some high-technology sectors the system faces increasing difficulties in effec- tively disseminating the use of patented technologies in key standards. The con- cern derives in part from the proliferation of high-stakes patent lawsuits involv- ing SEPs in many countries and requests for injunctions to exclude alleged patent infringers from various national markets. Such episodes raise the question of whether the current system strikes an appropriate balance among the various stakeholders in standards and IPR. There are many indications of the current prominence of these issues. All three branches of the United States government and the European Union have taken an active interest in the relationship between standards and patents. Since our committee began its work there have been hearings in the House of Repre- sentatives and the Senate, appellate and district court and International Trade Commission decisions, interventions by the Federal Trade Commission and two Statements of Objections by the Directorate General for Competition in the Eu- ropean Commission, as well as policy statements issued by the Department of Justice, the Federal Trade Commission, and the USPTO, all involving disputes over SEPs and the effect of a FRAND commitment. In this context, one impetus for the study was a desire for an independent, expert view on how public agen- cies might contribute better to the evolving standards environment to promote competition and growth. 1.4 Statement of Task and Organization of the Report The Statement of Task agreed to by the USPTO and the National Acade- mies directed the committee to: …examine and assess how leading national, regional, and multinational standards bodies address issues of intellectual property (IP) arising in con- nection with the development of technical standards. Through commis- sioned analysis, a public workshop in Washington and a report of the find- ings of an expert committee, the project will first document the policies and practices of different types of standard-setting organizations in differ- ent geographical contexts. The committee will consider policies with re- spect to such matters as: requirements for disclosure of IP essential or rel-

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Introduction 21 evant to the development and implementation of standards, the terms of IP licensing to implementers of a standard, and whether conditions attached to IP incorporated in standards carry over to a new holder in the event of a transfer of IP rights. The study will assess how these policies work in practice and in a legal context and how variations in these policies relate to different types of standards activities, organizations, and fields of tech- nology. Second, the project will evaluate the effectiveness of these poli- cies in reducing conflict between IP holders and other implementers, bal- ancing the interests of firms of different sizes and with different business models, and balancing the interests of producers and consumers. With this statement in mind, the committee set the following objectives for its report:  Identify and survey a representative selection of major SSOs, with operations in different major countries or with members from multiple regions, in order to describe and document their relevant objectives, policies and practices. The results of this survey are summarized in Chapter 2 of the report.  Develop economic and legal analysis of critical issues surrounding management of intellectual property in SSOs, including the use and meaning of FRAND licensing. This discussion is in Chapter 3.  Consider how the policies of SSOs relate to obligations or expecta- tions regarding the disclosure of essential IPR and commitments to li- cense them. This is the subject of Chapter 4.  Review the implications when FRAND-encumbered SEPs are trans- ferred. Issues analyzed include how the FRAND assurance made by a SEP owner is addressed after the transfer, how parties’ rights are af- fected by the exchange, and how SSO policy can help avoid problems associated with patent assignments. Legal cases clarifying the poten- tial issues are reviewed as well, with an emphasis on the United States. This discussion is in Chapter 5.  Comment on the complex issues regarding the issuance of injunctive relief for FRAND-encumbered licensing arrangements of essential IPR. This area has become increasingly contentious, as discussed in Chapter 6.  Relate the activities of SSOs to their interactions with government policy, such as cooperation with prior art searches in patent applica- tions and disclosure and procurement policies. These issues are de- scribed in Chapter 7.  Describe practices and draw lessons from the operations of SSOs in China, India and Brazil to understand the landscape and priorities of key emerging countries. This analysis is presented in Chapter 8.

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22 Patent Challenges for Standard-Setting in the Global Economy The committee carefully deliberated whether to address issues surrounding injunctions, including exclusion orders issued by trade authorities such as the U.S. International Trade Commission, because they are not explicit in the state- ment of task. Members found it necessary to do so because of the inevitable and close relationships among determination and disclosure of SEPs, licensing con- ditions, and avenues for relief against infringement. A key question facing SSOs and regulators is determining under what circumstances a FRAND licensing commitment is incompatible with injunctive relief. The committee believed that failing to address this question would not fulfill the terms of its task. Similarly, the committee decided early in its deliberations to discuss the question of whether and how national patent offices could fruitfully collaborate with SSOs in issues of prior art, affecting patent quality, and the recordation of patent transfers to enhance transparency in licensing SEPs. While this issue was not mentioned in the statement of task, the committee thought it an important element to discuss in the context of licensing transactions and one that could not be separated from the patent transfer question in any case. The committee acknowledges that the issues involving patents in standard- setting play out in a broader context of national and international policy regard- ing intellectual property rights. These policies are in flux. For example, some member countries of the European Union are working toward a unified patent- ing regime and a single patent court. China, India, and Brazil have recently adopted significant changes in their laws that affect the scope of patents and, at least indirectly, the general conditions of licensing. In the United States, the pa- tent system is changing in response to a variety of perceived problems – low patent quality, long delays in patent examination, excessive litigation and abu- sive tactics on the part of some patent holders. The America Invents Act (AIA), passed and signed in 2011, ushered in the most significant changes in 60 years including enhanced post-grant opposition procedures, new opportunities for third party-submission of prior art, more re- sources for the U.S. Patent and Trademark Office, and adoption of the interna- tional norm for patent priority, first-inventor-to-file. At the same time, U.S. courts have limited the reach of exclusive patent rights in a variety of ways in- cluding ending nearly automatic access to injunctions against infringers,4 raising the standard of non-obviousness,5 and restricting patent eligible subject matter.6 Notwithstanding that these changes are still being implemented and their effects are uncertain, there continue to be calls for reforming U.S. patent law, notably to curb the opportunistic practices of so-called patent assertion entities (PAEs) or patent “trolls.” These firms generally do not practice their patents and 4 eBay v. MercExchange, L.L.C. 547 U.S. 388 (2006). This case is discussed further below. 5 KSR International. Co. v. Teleflex, Inc. 550 U.S. 398 (2007). 6 Association for Molecular Pathology et al. v. Myriad Genetics, Inc. et al. (Supreme Court no. 12-398, 2013).

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Introduction 23 often are not responsible for the inventions that lead to patents. Rather, they ac- quire patents for the purpose of threatening large and small practicing compa- nies, which may or may not be infringing, with lawsuits in order to obtain royal- ties from licenses or monetary settlements or damage awards. According to a recent study by the Obama Administration, lawsuits brought by PAEs have tri- pled in the last two years and now constitute the majority of patent infringement suits (Executive Office of the President, 2013). Claiming that PAE activity dis- proportionately hurts small businesses and deters technological innovation in some sectors, the Administration supports legislation favored by a number of large operating companies to discourage such activity by permitting the courts to impose attorney fees on entities that bring unwarranted lawsuits. The Admin- istration would also force patent owners and applicants to disclose the “real par- ty in interest” to shed light on who benefits from PAE activity. It is quite possible that such reforms, adopted and proposed, will or would reduce some of the pressures underlying the issues addressed in this report. For example, if an outcome of the America Invents Act and recent court decisions is to raise the quality of issued patents—i.e., increase the likelihood that they are truly novel and inventive—then litigation associated with the validity of claimed SEPs could be reduced. Transparency of patent ownership, especially in the case of patent transfers, would enhance the transparency of FRAND licensing com- mitments, as we discuss later in this report. However, while the committee rec- ognizes the importance of a well-functioning patent system, proposing further fundamental reforms was not part of our charge from the U.S. Patent and Trademark Office or the National Research Council. In any case, it would re- quire a committee with a quite different composition of expertise. 1.5 Economic Context Issues of standardization and the associated management of intellectual property in technical standards have taken on ever greater importance in recent decades because of three major and interrelated factors. First is the rapid ad- vance of globalization reflected in the growth of global production and innova- tion networks, both within and across enterprises (Ernst 2006, Maskus 2012). Second is the increasing integration of major emerging economies, such as Chi- na, India, Brazil, and Mexico, into world markets for goods, services, and tech- nology. Third is rapid and even accelerating technological change in key sectors of competition where standardization and interoperability are critical elements of success, notably in the ICT sector. As a result, standards and policies need to evolve and adjust over time to reflect the changing technological environment. All of these factors are transforming and deepening the challenges of ef- fectively managing the development and use of SEPs in an environment of in- tensifying technological competition. Global enterprises increasingly see control over intellectual property, especially in essential architectural and interface standards, as the major determinant of competitive success. Indeed, control over IP offers one primary means of earning returns on increasingly costly research

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24 Patent Challenges for Standard-Setting in the Global Economy and development (R&D) investments. At the same time, it is important that im- plementers around the world have access to these standards to promote product- level competition and procure consumer benefits. Yet they may be developed by SSOs with different rules or implemented in countries subject to varying IPR and competition policies. These pressures explain the need for increasingly so- phisticated approaches to managing SEPs in standardization. Innovation is at the core of both national and enterprise-level strategies for competing in global markets in order to encourage growth and job creation (OECD, 2012). Intensive investments in research and development (R&D) were, until recently, largely confined to institutions and firms headquartered in a small number of advanced economies. Today, however, R&D expenditures exceed 1.5 percent of GDP (a previously high benchmark) in dozens of nations, including China, Korea, and Singapore, where the growth of such investments has been par- ticularly rapid.7 At the firm level, these increases have emerged both within na- tional enterprises and through international investments in R&D performed by affiliates of multinational companies. The latter trend in particular demonstrates the globalization of innovation efforts through research networks (OECD, 2008). Distributing R&D among affiliates can reap several competitive advantages, in- cluding reduced personnel costs, enhanced intellectual diversity, greater access to local fiscal subsidies and markets, and higher sales of products and technologies developed for local or regional markets (Ernst, 2006). Investments in R&D aim to produce new process technologies and higher- quality varieties of goods and services. A central component of this research is the development of technical standards, which exist and are often updated in virtually all industries. Standards often build on scientific knowledge from re- search in biology, informatics, mathematics, physics, and other basic sciences, explaining why universities and public research laboratories’ such as the Na- tional Institute of Standards and Technology (NIST) in the United States, inter- act with standards organizations. Many technologies, such as those in software and electronic communications, emerge from research in engineering work at both grant-supported laboratories and private firms, requiring cooperation and collaboration among these institutions to achieve standardization. In this context, two types of R&D investments are fundamental for the commercialization of technologies in several industries. First is the development of a new process technology or product itself, which is largely a private affair though it may be based on the outcomes of knowledge generated via publicly supported basic science. Second is the specification of standards that these tech- nologies and products must meet in order to enter the marketplace. Standards are developed by a complex mixture of private and public inter- ests. They may be the result of individual firms discovering and promoting a workable specification that achieves customer acceptance. Indeed, standards 7 Data are from World Bank, World Development Indicators. See http://data.worldbank. org/data-catalog/world-development-indicators.

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Introduction 25 development has become an important field of corporate strategy in some indus- tries. Standards are also developed by SSOs, which consist of representatives of private and, often, quasi-public entities. They may also be set by government agencies, whether to address a clear market failure or to promote local industri- al-development objectives. Governments may regard the standard-setting pro- cess as an integral part of national competitiveness and innovation strategies. More broadly, public authorities may be involved in standards development and diffusion because of the recognized benefits they entail. For example, early in 2013 the European Union put in place a new regulation addressing the benefits of standards under recognized rules.8 Within this complex framework firms and SSOs act collaboratively to en- hance efficient standardization. Indeed, standards selection often involves diffi- cult engineering decisions to achieve compatible specifications across a variety of complex technologies, while ensuring that any promulgated norms are com- patible with user needs. Thus, especially in industries with multiple competing technologies it is necessary to have extensive upfront technical and management consultations to arrive at the most appropriate standards, the fundamental pur- pose of SSOs. Often the technologies entering standards are patented. Thus, central to this management of standards is the specification of guidelines and rules for the licensing of standard-essential patented technologies. At the same time, there may be numerous opportunities for firms to en- gage in exclusionary practices or exploit market power. These problems are like- ly to be most significant where technologies entering a standard are patented and essential for use, innovation is cumulative, and there are important network ef- fects and interoperability needs. The main competitive concerns of this type, arising from the combination of standardization and the assertion and enforce- ment of patents, are addressed in detail in this report. Through their IPR policies regarding disclosure, licensing, and transfers of patents, SSOs could, in princi- ple, effectively diminish such problems. Where these policies are inadequate for this purpose, however, competition authorities and the courts play an important role. Thus, in this report the committee offers guidance for both SSOs and pub- lic agencies. 1.6 Standardization in the ICT Setting For the past two decades the information and communications technology (ICT) sector has represented one of the most dynamic commercial markets and most active arenas for standards development. In particular, the convergence of products and services in the Internet and cellular communications sector has transformed the daily lives much of the world’s population and spawned indus- tries in every part of the world with aggregate economic activity approaching $2 8 See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:316:0012:0033: EN.pdf.

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26 Patent Challenges for Standard-Setting in the Global Economy trillion per year.9 The Internet and cellular communications industries had sepa- rate origins and until recently followed separate development paths. However, they have converged rapidly in the past five years and it is likely that by now, the majority of devices accessing the Internet use wireless communications. Computers, tablets, phones, and televisions increasingly share these capabilities. With the ability to connect devices anywhere in the world to one another, the Internet and cellular networks rely heavily on interoperability standards devel- oped by SSOs. These standards almost inevitably incorporate patented technolo- gies. The technologies embodied in today’s complex microelectronic products, such as a smartphone, are governed by hundreds of standards, developed by many SSOs, each with its own culture, governing principles, and specific pro- cesses. Indeed, the heterogeneity of practices across SSOs is striking. The fol- lowing paragraphs describe briefly four multinational SSOs with diverse charac- teristics.  The Third Generation Partnership Project (3GPP) formulates standards for cellular communications. It is a consortium of six national and re- gional standards organizations, referred to as “organizational partners,” in Europe, the United States, Japan, Korea, and China. Individual members, which are companies associated with one or more of the or- ganizational partners of 3GPP, contribute to producing the standards. Partner SSO policies govern.10  The Institute of Electrical and Electronics Engineers Standards Associ- ation (IEEE-SA) publishes standards in many categories. Several de- vices implementing IEEE standards for wireless local area networks (Wi-Fi) and Bluetooth communications are critical components of complex computers and smartphones. IEEE-SA has individual and cor- porate members and is part of the IEEE, a transnational professional as- sociation.  An important source of standards governing Internet communications is the Internet Engineering Task Force (IETF). Its goal is “… to make the Internet work better by producing high quality, relevant technical doc- uments that influence the way people design, use, and manage the In- ternet.” Reflecting the organic, bottom-up evolution of the Internet, IETF activities are open to anyone and there is no formal membership or membership fee. 9 Chetan Sharma estimated worldwide mobile service revenues to reach $1.5T in 2012 and iSuppli projected 2012 factory revenues for mobile communications equipment to reach $376 billion. 10 Because there is no independent 3GPP IPR policy, this organization was not includ- ed in the survey described in Chapter 2.

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Introduction 27  The International Telecommunication Standardization Sector (ITU-T) of the International Telecommunication Union (ITU), another source of communications-based standards, is the United Nations specialized agency for standardization in information and communication technol- ogies. The ITU currently has a membership of 193 countries and over 700 private-sector entities and academic institutions. Currently, one of the most prominent ITU-T standards, called “Recommendations,” is the H.264 standard for video compression. The rapid evolution of ICT technologies and the growth of ICT markets are fueled by intense activity in these and other SSOs described in this report and hundreds more. The work of each SSO is generally conducted by technical committees within the organization that are responsible for individual standards. For example, 3GPP has four Technical Specification Groups, further subdivided into 17 working groups. The IETF's standards development work is organized into eight areas, subdivided into more than 100 working groups. Each SSO has a unique background, technical scope, and rules regarding membership and participation. Similarly, each SSO has its own set of proce- dures for introducing, adjusting, approving, publishing and revising candidate standards.11 This diversity is also reflected in the way the SSOs treat intellectual property related to candidate standards and adopted standards. Each SSO (in the case of 3GPP, each of its organizational partners) has its own policy regarding disclosure of essential patents, licensing commitments, and in some cases, trans- fer of essential patents. Although standards creation and revision is in large part an engineering discipline, the outcomes of the engineering efforts are strongly influenced, and in some cases mandated by laws, regulatory practices, and judicial systems of the jurisdictions of the SSOs and places where the standards are implemented. Until recently, the sources of standards and the markets for products and ser- vices that implement the standards have been concentrated in regions with high- ly developed economies. However, ICT markets in these regions are beginning to saturate and most of the near-term growth is likely to come from emerging markets, most prominently, China, India, and Brazil. Although they differ from one place to another, the laws, regulatory practices, and judicial approaches to standards are relatively well-established in economically developed countries. By contrast, these practices are still evolving in emerging markets, including those studied by the committee—China, India, and Brazil. Among these three countries, China has implemented the most extensive set of institutions and pro- cedures and Brazil the least. 11 As noted in Chapter 2, however, the large majority of standards bodies accredited by the American National Standards Institute (ANSI) simply adopt the ANSI IPR policy as their own, with little variation.

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28 Patent Challenges for Standard-Setting in the Global Economy 1.7 Stakeholders in Standard-Setting There are a variety of interested actors involved in setting standards and managing and licensing intellectual property in ICT and other sectors, raising questions about finding the appropriate balance among them. The most obvious stakeholders are members of SSOs, including for the most part companies that manufacture products or market services that use the standards, companies that operate networks that practice the standards, firms that develop or acquire tech- nologies purely for licensing, and in some cases academic institutions and gov- ernment agencies. Many SSO members own patents they consider to be essential to implementation of the standards. Patent owners may have diverse motivations and strategies for utilizing their intellectual property. Some use these assets pri- marily for defensive purposes, such as to establish a form of détente or enable voluntary cross-licensing of patents among companies, supporting their “free- dom to operate” in the marketplace. Others use their patents to generate a stream of royalty revenues; acquire patents to exercise the right to exclude others from using their technologies, as authorized by patent laws; or view patents as assets that help enable financing or entry into new markets where competitors have patent portfolios as well. Many firms have acquired patents for several, or per- haps all, of these and other reasons, following different business models. There are also many entities that are not members of SSOs but are strong- ly influenced by the intellectual property policies of those organizations, includ- ing owners of essential patents, implementers of standards, and end users. These categories encompass individuals, companies, universities, and governments. For example, in the United States federal agencies are required to adopt private- sector standards under the National Technology Transfer Advancement Act, signed in 1996 (104 P.L. 113; 110 Stat. 775), and Circular A-119 of the Office of Management and Budget (OMB), revised in 1998 (OMB 63 FR 8546, 1998), whenever possible. Further, it is becoming increasingly common for enterprises to acquire large portfolios of patents, many of which may be SEPs, to gain their implicit economic value. A few recent examples of companies that have obtained large bundles of patents from their original owners are Google, owner of patents ac- quired by purchasing Motorola Mobility, IPCom, purchaser of patents from Bosch, and the Rockstar Consortium, composed of Apple, Microsoft, EMC, Ericsson, BlackBerry, and Sony, that purchased Nortel’s patents during that company’s bankruptcy proceedings. Such acquisitions raise questions about the transferability of prior licensing commitments. 1.8 International and Multilateral Issues The committee was asked to address geographical variations in practices and policies, with a view toward identifying their effectiveness in reducing con- flict among stakeholders in this area. In this regard the report focuses on three salient features of the global system. First, as described in Chapter 2, there is

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Introduction 29 considerable heterogeneity in practices across SSOs that are located in different major economies. Keep in mind, however, that the most prominent SSOs in ICT are trans-boundary institutions, with membership from multiple locations and uniform rules applied to those members. This sets up an interesting hierarchy of organizations among those that arguably are more national in scope and the ma- jor international SSOs, creating opportunities for both collaboration and discord. Second, a meaningful distinction exists between the government policies of the established industrialized economies and those of many emerging coun- tries. The mature industrialized countries—the United States, members of the European Union, Japan, and to a large extent South Korea—generally share a common policy environment that relies on private sector organizations to devel- op and implement technologies through decentralized market competition, alt- hough university and government research laboratories are important as well. The situation in key emerging economies is different. Chinese authorities, for example, tend to view standards setting as a centralized, top-down process that may achieve a variety of objectives, including domestic industrial policy and inbound technology transfer. Thus, although Chinese representatives are active in many international SSOs, the government also emphasizes and guides the development of domestic standards in key technologies. In short, China ap- proaches domestic standards-setting more as an element of public policy and management than the province of the country’s enterprises. For their part, India and Brazil are only beginning to develop their standards policies in ICT and it is too soon to know which approach they may follow. Third, the committee asked whether there are significant differences in laws and court opinions across jurisdictions regarding key elements of IP man- agement in SSOs and firms. Such differences could arise, for example, in the areas of understanding the meaning of FRAND commitments, injunctive relief, transferability of licensing commitments, and public recording of patent trans- fers. In this context, the committee believes there is scope for greater communi- cation and collaboration among SSOs and the patent offices of major economies, and among courts to reduce legal dissonance. To the extent that differences in laws and public policies regarding SSOs pose significant difficulties for cross-border trade one might support efforts at international policy or law harmonization. This might be achieved through re- formulating the Agreement on Technical Barriers to Trade (TBT) or the Agree- ment on Trade-Related Aspects of Intellectual Property Rights (TRIPS) at the World Trade Organization (WTO) or through additional undertakings on IP standards at the World Intellectual Property Organization (WIPO). The commit- tee chose not to pursue this line of inquiry, believing that it is unclear that there are sufficient problems with the current international system to justify recom- mending multilateral negotiations that are difficult to initiate and conclude in either venue, and in any case would involve broader issues of trade policy out- side the committee’s statement of task (Maskus, 2012). Thus, in the near term we see little role for the WTO or WIPO in this context, though further study of the potential for such involvement in the longer term is warranted. In all likeli-

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30 Patent Challenges for Standard-Setting in the Global Economy hood, greater societal benefits are available from simply restricting or eliminat- ing nationalistic policies and practices that unduly reduce competition and inno- vation, a role for national authorities.