Standard-Setting Disputes: The Need for Guidelines

David A. Balto and Daniel I. Prywes⁽¹⁾

The antitrust enforcement agencies are reportedly conducting several investigations into disputes involving the non-disclosure of patents or patent applications to industry standard-setting groups. This problem is also being explored in the FTC/DOJ hearings on intellectual property and antitrust.

We believe that enforcement actions to prevent the anticompetitive abuse of standard-setting processes are important, and necessary in some situations. However, the business community would benefit from the clearer sort of guidance - touching a broad range of standard-setting disclosure issues -- that could be provided through the issuance of FTC/DOJ Guidelines or a Policy Statement.

The antitrust theories underlying the FTC's current investigations are rooted in FTC's 1996 enforcement action in Dell Computer, 121 F.T.C. 616 (1996). In Dell, the standard setting body established a rule requiring disclosure of any IP rights needed to practice a proposed standard. The standard-setting participants came up with a new product that quickly became widely used and commercially successful.

After the standard was adopted and new products based on the standard entered the market, Dell began to assert that these products infringed on its patent, despite having twice certified during the standards-development process that it had no intellectual property rights. If Dell had provided information on its patent claim up front, the participants could have made an informed choice whether to avoid the Dell technology and opt instead for a technology without any IP conflicts. The FTC alleged that Dell's belated assertion of IP rights was an unfair method of competition in violation of Section 5. Dell then agreed to a consent order, under which it would not assert its patent rights against the standard.

Although the Dell enforcement action demonstrated the FTC's concern about improper manipulation of collective standard-setting activity through non-disclosure of patent rights, it failed to answer many questions. For example, the FTC majority stated that the non-disclosure by the Dell representative was "not inadvertent." Although "not inadvertent" may have been an appropriate statement for the level of evidence secured, it did not provide much guidance to standard-setting participants about the scope of their duty (if any) to search for intellectual property rights or to disclose those rights. Moreover, the Dell enforcement action did not suggest what kind of disclosure duty a standard-setting body should impose upon its members.

The response to the proposed enforcement action was unique. Commissioner Azcuenaga authored a 25-page dissent and there were several comments filed by various standard-setting entities. Some comments questioned the lack of clarity in the proposed complaint. Many of the comments expressed concerns that the FTC should not impose disclosure duties that would require expensive patent searches, or otherwise take actions that would stifle or burden standard-setting activity. The FTC enforcement action did not resolve all the questions raised.

From our experience we believe that private practitioners and companies who attempt to counsel in this area face a daunting challenge. There are no Guidelines addressing standard setting, and there is little FTC guidance available of recent vintage. Case law is developing, but most often does not approach the issues from an antitrust or competition perspective. And the Dell decision itself provides a cacophony of disparate voices. At best one can fashion advice made of a patchwork of staff opinions, enforcement actions, and cases.

As the antitrust enforcement agencies consider how to address this area, it should not limit itself to enforcement actions. Like Dell, individual enforcement actions are necessarily limited by the particular facts of the specific controversy. To be sure, case-by-case adjudication provides flexibility and enables the Agencies to impose tailored remedies on law violators. However, it often fails to provide guidance to industry about how it should avoid anticompetitive behavior in the first instance. Given the increasing number of disputes in this area, and the paucity of case law, we believe the agencies should issue guidelines or a policy statement on standard setting to set out broader principles.

We present the following 10 recommendations as to the issues that should be addressed by Guidelines or a Policy Statement and their possible substance:

1. Mandatory Disclosure. Firms that participate in standard-setting groups should be required to disclose patents or patent applications, which the individuals attending the meetings (or their associates monitoring the standard-setting activity) know or reasonably should know might be needed to utilize a proposed standard. This disclosure duty should apply even if the standard-setting group does not have rules expressly requiring such disclosures. If the standard-setting activity involves technology that could be subject to trademark or copyright restrictions, mandatory disclosure should be required as well for those types of intellectual property rights.

 

2. Early Disclosure. Disclosure of patents or patent applications should be made when the participant learns that the technology in question is being considered for inclusion in a proposed standard or might be needed to utilize a proposed standard.

 

3. No Duty to Search. There is no general duty for participating firms to search their patent portfolios to determine if there are rights bearing on a proposed standard, unless the standard-setting group imposes such a duty. However, a participating firm may not deliberately withhold or insulate information about its patents or intentions from the individuals that directly participate in standard-setting activity or those who supervise or monitor the firm's participation.

 

4. Mandatory Disclosure of Patent Applications Relating to Refinements Made in Standards under Development. Firms that participate in standard-setting groups may not file patent applications based on knowledge of technical refinements or improvements considered for inclusion in a standard, unless the firm has disclosed its intention to do so prior to or concurrently with discussion of those refinements or improvements.

 

5. Permissive Discussion of License Terms. Members of a standard-setting group are permitted to ask the holders of patent rights to disclose the terms under which they are prepared to license their technology to users of a prospective standard. The refusal of an IP holder to commit to licensing terms before adoption of a standard should be a valid basis for rejecting the subject technology.

 

6. Permissive Joint Negotiation of License Terms. Members of a standard-setting group are permitted to advise the holder of patent rights that the group will not incorporate the patented technology into a standard unless the holder agrees to specific terms acceptable to the standard-setting group. The standard-setting group, however, shall not seek licensing terms that are intended to advantage one or more participants in the standards process over other firms.

 

7. Limiting Licensing Conditions. A participant in a standard-setting group may not condition use of its patented technology by the standard-setting group on terms that would be prohibited if the participant were negotiating with a single firm. For example, patent-tying arrangements that are otherwise improper should not be permitted under the umbrella of the standard-setting group's consideration of licensing terms. More generally, the license terms for use of a patent needed to practice the standard should not be linked to any behavior not related to the use of the standard.

 

8. Patent Cross-Licensing. A participant in a standard-setting group that has patent rights being considered for incorporation into a standard must inform the group if it has cross-licensing or other arrangements with other firms that would enable such firms to practice the standard without paying the same license fees or other consideration as other firms.

 

9. Patent Pooling. When a standard-setting group considers the adoption of a standard requiring use of several patents, held by more than one participant in the group, the group should be permitted to discuss and negotiate the terms under which all the patents will be made available to all interested parties for licenses, provided that any patents in the pool are blocking. Moreover, the participants should be required to reevaluate and revise pooling arrangements as circumstances dictate (e.g., a substantial royalty could become anticompetitive over time) and to consider the interests of other industry participants and newcomers.

 

10. Alternative Dispute Resolution. Standard-setting groups should be encouraged to require alternative dispute resolution procedures for resolving disputes about licensing terms. For example, ADR would be useful to determine whether licensing terms offered to one firm are reasonable, non-discriminatory, or otherwise in compliance with assurances given by the patent holder or the standard-setting group's policies.

These suggested Guidelines are merely a starting point. No doubt, they can benefit from further refinement. In particular, care is required to ensure that any Guidelines do not unintentionally permit the collective setting of licensing terms that confer an inappropriate competitive benefit on participating firms at the expense of others.

Standards play a critical role in fostering competition, innovation, and economic growth. In high-tech industries, the old rules do not provide sufficient guidance. The need is there for FTC/DOJ Guidelines. We hope the antitrust enforcement agencies will meet that need.

Endnote:

1. Mr. Balto is a Partner in the worldwide antitrust practice of White & Case LLP. He is the former Assistant Director of the Office of Policy & Evaluation of the Bureau of Competition of the FTC. He has published numerous articles on standard setting including "Standard Setting in the 21^st Century Network Economy," 18 Computer & Internet Lawyer 1 (June 2001). Mr. Prywes is a partner in the Washington office of Pepper Hamilton LLP. His practice focuses on commercial and regulatory litigation and he counsels several standard-setting groups. His article, "Patent Ambushes and Licensing in Computer Standard-Setting Groups," Antitrust Report (March 2001), discusses many of the issues raised by the Dell Computer case and similar litigation.