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A competition law perspective

posted by Marcus Glader on Tuesday, September 1st, 2009 at 1:53 pm

The Commission White Paper on ICT Standardisation – some reflections from a competition law perspective

As other commentators in this forum have already highlighted, the aim of the Commission’s white paper is to large extent unclear. Particularly the introduction and the listed “prominent areas for improvement” appear to reflect a mix of vague policy ambitions (p. 4). If Directive 98/34/EC should be read as constituting “the current EU standardisation policy”, as the Commission suggests (p. 2), the time for an update is probably quite ripe, but then these issues would have deserved a more elaborated treatment.

So what is the Commission nevertheless suggesting? The perhaps most important policy development is that the Commission aims to use standards that emerge from SDOs other than the “traditional” ESOs, and to endorse such standards in EU legislation and policies. Against this background, the Commission’s list of attributes to be observed by ICT standards “associated with EU legislation and policies” is hardly surprising. In fact, many of the listed attributes to be respected by the standardization processes (p. 4) and reflected by the standards themselves (p. 6) reflect competition law principles.

Both in the US and in Europe, standard-setting activities are generally permitted under the antitrust rules due to their efficiency and welfare enhancing properties, provided they fulfill certain requirements. According to the US Supreme Court “private standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits” and subject to procedures that “prevent the standard-setting process from being biased by members with economic interests.”, Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 501, 506-507 (1988)

In the EU, the Commission’s guidelines on horizontal collaboration provide guidance on the competition law analysis of SDO activities. When assessing the competitive impact of a particular standardization project, it is relevant to consider, i.a., the extent to which:

participation in standard setting is unrestricted and transparent;
the SDO is based on non-discriminatory, open and transparent procedures;
parties remain free to develop and commercialise alternative standards or products; and
the standard is accessible to third parties.

As for many types of collaborations between industry participants, potential restrictions on competition depend on the likely impact in the affected markets. For example, when the most important companies in an industry agree on a standard, this may limit or end pre-existing competition between alternative technologies and prevent market access for products that do not comply with the standard in question. For such standards, compliance with the above-mentioned principles will be particularly important from a competition law perspective. In that context, it is probably fair to assume that standards endorsed by EU legislation normally will gain power (at least within the EU) at the expense of potentially competing standards. (See recital 12 of Directive 98/34/EC) The Commission’s suggestion that such standards should comply with competition law principles usually associated with important industry standards probably makes sense.
Furthermore, the Commission’s 1992 communication on intellectual property rights and standardisation provides that “the Commission must ensure that where compliance with a standard or part of a standard is referred to in Community legislation, either as a mandatory requirement or as one which confers a particular status under Community law, the contents of that standard are made available to all interested parties on a fair, reasonable and non-discriminatory basis.” (see footnote 1 below)

As regards IPRs and standards (p. 8f.), the Commission emphasizes that IPR policies should be clear, transparent and balanced, and that procedures for IPR disclosure should be effective. The Commission again emphasizes compliance with the competition rules, but otherwise appears to accept that SDOs will be free to form their own policies. Here, the Commission’s third suggestion under (g) is bit more controversial. While “ex ante” disclosure or negotiations of licensing terms potentially could overcome hold-up problems and improve predictability, it still remains to be seen to what extent the SDOs can make such procedures effective. As suggested antitrust enforcers both in the US and the EU, the idea would be to allow for competition between rival technologies both in terms of quality and price and to have the price “auctioned down to the competitive level before the standard is selected” (see footnote 2 below). Although theoretically attractive this may not always be practical. For example, standardization is often a complicated and on-going process, where technical specifications are developed and technical features added as the standard evolves. Moreover, complex standard may also involve a lot of IPR and patent applications mature into issued patents over time. This would tend to make informed ex ante negotiations difficult and unilateral declarations licensing terms ineffective. Therefore, while SDOs should be encouraged to take these issues seriously, the Commission could only suggest that the SDOs consider particular approaches.

In conclusion, it would have been welcome if the Commission took the opportunity to provide a more comprehensive evaluation of ICT standardization and current EU policies, and to explain in detail what its suggested changes imply and how they will be enforced. Nevertheless, it is difficult to get either excited or alarmed by what the Commission suggests.

Footnotes

October 27 1992, COM (1992) 445 final. para 6.3.2. For important industry standards, the availability of essential IPR on FRAND terms is a requirement under Article 81(3) EC:“To avoid elimination of competition in the relevant market(s), access to the standard must be possible for third parties on fair, reasonable and non-discriminatory terms.” EC 2001 Horizontal Collaboaration Guidelines, para 174. See also the EC 2003 Technology Transfer Guidelines, paras 152, 167, 226.
Ceilio Madero Villarejo and Nicholas Banasevic, European Commission, ”Standards and Market Power”, Global Competition Policy, May 2008, p. 5.

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Mattias Ganslandt says:

Marcus, The main value of EU legislation (and any other set of international rules) is to regulate the behavior of national governments and their agencies. It would accordingly be more important for the Commission to propose regulation that applies to the legislation and public procurement in Member States. I am worried that national goverments have an incentive to pick winners (imposing standards or using their leverage in procurement) and to impose conformity rather than interoperability.
Marcus Glader says:

Mattias – To some exent, yes. However, even if several of the attributes reflect competition law principles, under the competition rules they may apply to greater or lesser extent in an individual case (depending on the nature of the SDO, the standard and the market impact). By making these attributes part of the eligibility criteria for inclusion of a standard in EU legislation, the policy maker would provide a general incentive for SDOs to comply.
Mattias Ganslandt says:

The fact that most of the “attributes” follow from competition law suggests to me, given the extra-territorial application of antitrust rules, that the lists proposed by the Commission may be redudant? /Mattias
Niklas Lindblom says:

It is increasingly clear that the Commission’s white paper is hard to interpret; the aim and rational of the reform need to be clarified. You make a good point that if the Commission is in fact dedicated to updating European ICT policy, it should have put more effort in elaborating the need for such from the very beginning.

In debates on standardization, the issue of Intellectual Property Rights (IPRs) is always present. I believe this is a good thing as IPRs play a central role throughout the entire standard developing process.

Opinions on IPR protection and reimbursement often get polarized since there most certainly is no single answer to the question of how IP should be licensed. FRAND terms or royalty-free licensing both have their advantages.

What makes the IPR question so hard to answer is the trade-off between giving monopolized power to the standard’s IP holder and encouraging innovation by letting IP holders reap the fruits of their labor. On the one hand, one could argue that letting IP holders impose high levels of licensing fees may have discriminatory effects; on the other, forcing standard developers to offer their technology for free could seriously harm the incentives to innovate new efficient standards.

Market success for a certain standard offers the holder of essential patents a certain power. To some extent, the IP holder is put in a monopoly position and, if not restricted, high licensing fees can be set for usage of the standard. If no alternatives to the standard are available this will have discriminatory effects on the market. Claims are raised that this issue can only be resolved by strictly allowing royalty-free IPR to be incorporated in standards.

In my opinion, since there are few IPR-free standards it would be a mistake to limit standardization to free-IPR technology. Allowing IP holders to benefit from licensing fees is imperative to encourage innovation and establish dynamic competition. Granted, fees should be restricted in order to avoid such market distorting effects as previously mentioned, but this can be done, as the Commission suggests, through e.g. a FRAND approach or ex ante disclosure of royalty rates.

The holders of IPRs need to be appropriately compensated when the technology is used. I believe this protection of innovation to be fundamental in the drive towards new technological evolution. As long as the royalties are kept on a reasonable level, competition between comparable standards will be based on quality and continue to spur development of new standards.

The answer to how IPRs should be handled will most likely be found in the gray-zone between licensing on FRAND terms and royalty-free standards. It is reassuring that the Commission has come to this realization.

A competition law perspective

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Marcus Glader

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