It has been almost 15 years since the Dell consent decree placed firms on notice regarding their obligations to disclose essential patents in the standard setting process. In the wake of Dell, there has been a huge surge in IPR disclosures. But it is does not seem that all of this disclosure has resolved the uncertainty surrounding IPR in standards. Since Dell, there have been controversies over: what types of IP must be disclosed, and at what stage of the standards process (Rambus); whether commitments are binding on subsequent patent owners (N-Data); and what is meant by a promise to license on Fair Reasonable and Non-Discriminatory terms (Qualcomm).
One way to circumvent much of this uncertainty would be for IPR holders to state up front the price (or perhaps a maximum price) at which they would be willing to license their patents in order to implement a standard. This idea is typically called “ex ante” disclosure, since it would generate information about prices before a standard was certified, and hopefully alleviate the “ex post” holdup problem at the heart of recent antitrust actions. The ex ante policy has two clear virtues: it could promote price competition between technologies before a standard becomes locked in, and it offers a clean alternative to the murky (F)RAND promise.
Yet standards organizations have not rushed to embrace the ex ante idea. Initially, many cited fears that ex ante could expose them to antitrust liability. But statements from antitrust authorities suggested those fears were mis-placed.
Two standards organization have adopted elements of the ex ante policy after receiving positive Business Review Letters from the U.S. Department of Justice. VITA members must now declare the maximum royalty rates and most restrictive non-royalty terms that a member company will request for any patent claims that are essential to implement a standard. At the IEEE, members can choose to state a maximum royalty rate as part of their disclosure, but are under no obligation to do so. (A quick look at the IEEE’s disclosure web site <http://standards.ieee.org/IPR/index.html> reveals that it is not an especially popular option.) Both policies explicitly prohibit joint negotiations over royalty rates within a committee.
While VITA, and perhaps IEEE, have started to experiment with ex ante, it remains reasonable to ask why so few standards organization have moved in the same direction, given the apparently increasing rate of litigation — antitrust and otherwise — under the current system. One possibility is that many of their members are opposed. Some firms view standards as a way to push the market towards a proprietary technology. Under this view, those with perhaps the strongest incentive to participate in standards development may also have the most to lose from committing to a low price ex ante. More generally, major out-licensors may view ex ante policies as a move towards more transparency in licensing practices, and be generally opposed to such a shift. In some cases, the nearly total absence of data on royalty rates might limit entry into downstream markets where these firms often complete.
A second possibility is that SSOs remain genuinely fearful of the antitrust implications of moving to an ex ante policy. The policies of both VITA and IEEE are very explicit that there should be no discussion of prices within a committee (though the IEEE boldly allows discussion of the “relative costs and benefits” of alternative technologies). The Business Review Letters are also careful to note that efforts to use the disclosure process as a cover for downstream price-fixing would be per se illegal, as would attempts to use disclosures as a means of rigging licensing terms. But the same letters clearly indicate that the Department of Justice would apply a rule of reason to policies that allow for joint negotiation of royalty rates.
How much should we worry about anti-competitive outcomes under joint ex ante negotiations? I suspect these dangers are not especially severe. When there are many complementary patents, it is well known that joint price setting can enhance efficiency. Since standards committees typically include both licensors and licensees, joint pricing within an SSO seems less worrisome than patent pools, which routinely win antirust approval. And for substitute patents, joint negotiations seem like a more efficient way to assess trade-offs between the price and quality of alternative solutions than a series of unilateral bids (which could easily dissolve into a game of brinkmanship).
Nevertheless, existing theories offer relatively little guidance on the costs and benefits of providing a stricter ex ante mandate, or allowing more flexibility for debate and discussion about ex post pricing. And it is certainly possible to imagine anti-competitive outcomes, such as agreements to “carve up” a standard among patent holder who have over-lapping portfolios of substitute patents. Thus, it is hard to say whether wide-open licensing negotiations within an SSO would resemble an auction where accepting the “low bidder” maximizes consumer surplus, the proverbial smoky room where prices are fixed, or an opportunity for downstream implementers to exercise collective bargaining power. Among the factors that might influence the likelihood that joint negotiations are pro-competitive are rules requiring a “balance of interests” among members of a standards committee.
The title to this post asks how much ex ante is enough? At this point, with few models to guide us, and few standards organizations actively experimenting, no one knows. But it is not too soon to begin thinking about the costs and benefits of variations on this promising, but surprisingly untested, idea. For it is a safe prediction that, as with disclosure after Dell, even a widespread move to ex ante disclosure will not end the controversy that arise over IPR in standards.
