Antitrust And Intellectual Property Rights: Assessing The Link Between Standards And Market Power

Previously published in Antitrust, Vol. 21, No. 3, Summer 2007. © 2007 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Tensions over intellectual property rights (IPRs) and antitrust law are certainly nothing new. What is new is the current brand of tensionónot over whether a patent grants a legally-sanctioned "monopoly,"1 but whether standards create market power for patent holders that can be abused even within competitive markets. A number of cases reflect this market-power-standard tension, including Microsoft v. European Commission, Dell, Rambus, Broadcom v. Qualcomm, and Nokia v. Qualcomm.2 Each of these cases covers distinct claims, but they all have one common thread: claims that standards, either de facto or cooperative, augment the market power associated with IPRs and that market power can be abused.

This new strain of cases does not lend itself to cookie-cutter antitrust analysis. In some instances, applying traditional antitrust remedies to intellectual property problems may actually chill innovation or at least reduce incentives to participate in welfare-enhancing cooperative standardization efforts. That does not mean a whole new tool kit for antitrust cases with intellectual property elements, but it does mean considering how the traditional tools might work in the very different settings that involve IP and standards.

In this article, I consider the link between standards and market power and discuss the implications in light of the ever-growing trend for standardization within high technology industries.

The Cases

The European Commission's 2004 decision against Microsoft (now on appeal before the Court of First Instance) turned significantly on intellectual property issues. The Commission found that Microsoft had abused its dominant position by refusing to supply information to competitors concerning certain proprietary communications protocols its Windows Server operating system uses to communicate among Windows-based clients and servers on a local or wide-area network.3 The protocols at issue essentially define how Windows interoperates with other programs, including such items as file and print services. Here the standard (Windows) is a de facto one, as recognized by the Commission, and the intellectual property is, according to Microsoft, embedded in the protocolsósome protected by patent and others by trade secret. The Commission found that this information was indispensable to compete in what it calls the market for "work group server operating systems." Thus, by refusing to supply the information, the Commission found that Microsoft foreclosed competition.

The Commission's remedy directed Microsoft "to disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers."4 The Commission permitted Microsoft to charge reasonable and non-discriminatory (RAND) royalties for licensing the protocols, so long as the royalties did not reflect any "strategic value" arising from Microsoft's dominant position in client or server operating systems. Since the 2004 decision, however, the Commission has demanded that Microsoft demonstrate that the interoperability protocols embody "innovation" with some intrinsic value and are not valuable simply because they have been kept secret. In its March 2007 Statement of Objections, the Commission reached the preliminary conclusion that Microsoft had not demonstrated innovation, and therefore it found that Microsoft's proposed licensing plan was not RAND. Microsoft has countered that its protocols are innovative and its licensing proposal is RAND.

The remaining four cases involve standards set by voluntary standard-setting organizations (SSOs) instead of through non-cooperative competition. With formal standard setting through an SSO, firms choose to cooperate to define a standard or technical specification in order to meet some industry perceived need.

Member firms often propose their own proprietary IP for cooperative standards, and patented inventions are frequently implicated. As a result, the vast majority of formal SSOs, like IEEE (Institute of Electrical and Electronics Engineers) and ETSI (European Telecommunications Standards Institute), request that their members report their patents and other IP that might be interpreted as "essential" for a standard. That is, the standards body asks to be notified if its members hold any IP that they feel might need to be licensed in order to implement the developed standard. SSOs also usually call for all disclosed IP to be licensed on RAND terms to all firms wishing to implement the standard. No SSO appears to have defined what it means by the terms reasonable or non-discriminatory. Actual licensing terms are then left to bilateral negotiations outside of SSO activities, with the understanding that IP holders cannot offer exclusive licenses or refuse to negotiate a license.

The impetus for the disclosure and RAND rules are obviousó firms with downstream operations need to know what to license and with whom to negotiate if they are to implement the standard once it is approved. They also need to be assured that licenses will be available on affordable terms. Knowing these things before a standard is settled can influence which technologies are actually included in the standard.

Despite the presence of these IP policies within SSOs, disagreements have arisen. Dell is just such a dispute stemming from non-disclosure. In the early 1990s Dell participated in the Video Electronics Standards Association (VESA) effort to promulgate a standard for a VL-bus, a cable to carry information between a host computer and peripheral equipment. As part of that participation, Dell's representative to VESA signed a document stating that "to the best of [his] knowledge" the company had no patents, copyrights, or trademarks that would be infringed by the VL-bus standard. But about eight months after the new standard was approvedóand had achieved considerable commercial successóDell informed VESA members that it did indeed have a patent that the standard was infringing and that it intended to seek compensation. The other members of VESA cried foul, and the FTC stepped in alleging "unfair methods of competition" in violation of Section 5 of the FTC Act. In late 1995, the FTC issued a proposed consent decree that precluded Dell from asserting its patent rights for the standard, but not for other applications. In essence, the remedy for nondisclosure was compulsory royalty-free licensing within the confines of the standard.

Rambus is similar to Dell, but the facts suggest that Rambus had more than one motive for participating in the standardsetting efforts.5 Rambus Inc., a firm that develops technologies for semiconductor memory devices, began participating in JEDEC (Joint Electronic Device Engineering Council) in 1991. Rambus did actually disclose one of its patents to JEDEC in 1993, but company email records apparently indicate that it knew it had...