Content uploaded by Michael A. Carrier
Author content
All content in this area was uploaded by Michael A. Carrier on Aug 25, 2014
Content may be subject to copyright.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2017
Commentary
Why Antitrust Should Defer to the
Intellectual Property Rules of Standard-
Setting Organizations:
A Commentary on Teece & Sherry
Michael A. Carrier
†
INTRODUCTION
Standards offer significant benefits, such as enhancing
product interoperability and increasing competition. But
standards may not be utilized where the owner of intellectual
property (IP) that is essential to the implementation of the
standard refuses to license it. Not surprisingly, then, many
standard-setting organizations (SSOs) have adopted rules
restricting their members’ use of intellectual property. These
rules typically require members to search for, disclose, and
license at a “reasonable and nondiscriminatory” rate any IP
(usually patents) that is implicated by the standards.
In their article, Standards Setting and Antitrust,
1
David
Teece and Edward Sherry thoroughly describe the IP rules
adopted by SSOs and they question whether antitrust has a
useful role to play in analyzing these rules. In this response, I
agree with the authors’ conclusion that antitrust should have
only a limited role, but I draw more fully on the jurisprudence
and rationales of antitrust to reach this result.
Part I of this Commentary sets forth Teece and Sherry’s
description of standards and of the IP rules of SSOs. Part II
explores the bases for the authors’ suspicion of a role for
antitrust, in particular, questioning several underpinnings of
their wariness. Part III offers a more developed rationale for a
† Assistant Professor, Rutgers University School of Law-Camden.
1. David J. Teece & Edward Sherry, Standards Setting and Antitrust, 87
M
INN. L. REV. 1911 (2003).
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2018 MINNESOTA LAW REVIEW [Vol 87:2013
limited antitrust role in the assessment of the IP rules of SSOs.
I. THE STANDARD-SETTING LANDSCAPE
Teece and Sherry present a detailed account of the
standard-setting landscape, which focuses on the participants
in, and IP rules of, SSOs.
A. B
ACKGROUND ON STANDARDS AND SSOS
The authors begin by introducing the different types of
standards,
2
and choose for the focus of their article
interoperability standards.
3
Such an emphasis makes sense:
These standards are the most likely to be exclusive and to
implicate intellectual property,
4
and they offer significant
benefits in “avoiding customer ‘lock-in’” and “creat[ing] markets
by enabling firms to achieve scale economies in production.”
5
As a result of their exclusivity and pro-competitive
justifications, interoperability standards pose the greatest
challenge to antitrust.
Teece and Sherry continue their tour of the standard-
setting landscape by distinguishing among the various ways in
which standards are created: through formal, long-lived SSOs,
informal ad hoc consortia of interested parties formed for a
certain purpose, and de facto standards developed as markets
characterized by network effects tip towards one product.
6
They also explain the difference between private standards and
government regulations,
7
and illustrate the danger of the latter
in allowing parties to “co-opt the regulatory process to protect
2. A standard can be defined as “any set of technical specifications which
either does, or is intended to, provide a common design for a product or
process.” 2 H
ERBERT HOVENKAMP ET AL., IP AND ANTITRUST: AN ANALYSIS OF
ANTITRUST PRINCIPLES APPLIED TO INTELLECTUAL PROPERTY LAW § 35.1, at
35-3 (2002).
3. Interoperability standards are also the focus of this paper. In addition
to interoperability standards, Teece and Sherry discuss product gradation
standards (which allow consumers to compare product features) (Teece &
Sherry, supra note 1, at 1914); performance standards (which specify that a
product “must achieve certain performance characteristics . . . in whatever
fashion they can”) (id.); and design standards (“which specify particular
features” that goods must have) (id.).
4. Mark A. Lemley, Intellectual Property Rights and Standard Setting
Organizations, 90 C
AL. L. REV. 1891, 1898 (2002).
5. See Teece & Sherry, supra note 1, at 1914-15.
6. Id. at 1915. In network effects markets, an increase in the number of
users increases the value of the product.
7. Id. at 1916.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2019
their market position against potential competitors.”
8
Delving into the membership of SSOs, the authors parse
the various roles played by the participants. Teece and Sherry
distinguish between technology markets and product markets,
9
and note that patentee manufacturers may play three different
roles: (1) seller in the technology market (which licenses its
patented technology to others); (2) seller in the product market
(which sells the product in the marketplace); and (3) buyer in
the technology market (which licenses other firms’ patented
technology).
10
IP users will outnumber IP owners in SSOs,
according to the authors, because “a patent has only one owner,
but multiple manufacturers may need to use the patented
technology.”
11
As a result, “the demand side of the technology
market” dominates SSOs, which “are likely to adopt procedural
and substantive rules that favor IP users over IP owners.”
12
The authors segment the standard-setting process not only
in terms of membership, but also in terms of timing. Teece and
Sherry emphasize the difference between the ex ante and ex
post bargaining power of the patentee whose technology is
incorporated into the standard. Before the selection of the
standard, the patentee’s power often is limited by the SSO’s
ability to choose among a range of roughly similar
alternatives.
13
After adoption, however, the patentee whose
technology is incorporated into the standard gains significant
leverage based on the difficulty of switching to a new standard
and the sunk costs that parties have incurred in implementing
the standard.
14
The voluntary nature of participation in SSOs draws
significant attention from the authors. Participants will
“choose not to participate” if their interests are not protected in
the SSO process.
15
And even if firms do not set the standard,
8. Id. at 1916.
9. Id. at 1926.
10. Id. at 1926-27.
11. Id. at 1929.
12. Id. For a critique of the conclusion that IP users predominate in the
standard-setting process, see infra notes 65-68 and accompanying text.
13. See Teece & Sherry, supra note 1, at 1934-36.
14. See id.
15. Id. at 1942; see also id. at 1971 (arguing that if SSOs impose rules
that are too onerous, firms will not participate); id. at 1948 (stating that
disclosure rules are “likely to deter firms with significant IP portfolios from
participating in an SSO” since “the risk of losing the ability to enforce patents
is likely” to be too great relative to “the gains the firm receives from
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2020 MINNESOTA LAW REVIEW [Vol 87:2013
they still “can get most of the benefits from standardization by
adhering to the standard once set”
16
and suffer only in
“disagree[ing] with the standard ultimately chosen.”
17
Even
worse, the “fundamental asymmetry” between participants and
nonparticipants favors the latter, who are not bound by SSO
rules and who can assert their patents against those practicing
the standard without being bound by the SSO’s search,
disclosure, and licensing policies. “Such an asymmetric
situation provides an incentive for firms not to participate in
the standards-setting process,”
18
the authors conclude.
19
In other instances, however, Teece and Sherry argue the
contrary, conceding that there often will not be an alternative
to participation in the SSO. Leaving the SSO “entails foregoing
any opportunity to affect the SSO’s decision,” which the authors
contend is especially troublesome for parties that are IP users
in addition to IP owners.
20
Consequently, the “‘voluntariness’
of participation in SSOs may be illusory” as firms “may
conclude that they have little practical choice but to participate
in certain SSOs [which] may be ‘the only game in town.’”
21
Other SSO participants may be aware of this internal conflict,
and “may take advantage of the firm’s predicament by setting
onerous rules that adversely affect the IP holders’ interests.”
22
The authors do not reconcile these assertions with their earlier
observations that the primary benefit of the standard can be
obtained even by those outside the SSO.
B. I
NTELLECTUAL PROPERTY RULES OF SSOS
Teece and Sherry next turn their attention to the heart of
participating in the standards-setting process”).
16. Id. at 1948.
17. Id. at 1976.
18. Id. at 1978.
19. The authors ignore the dangerous possibility that closed SSOs
licensing only to their members may prevent nonparticipant competitors of
SSO members from using patents essential to implement the standard. This
neglect leads them to propose various solutions to the “asymmetry” (e.g., a
“two-tiered” membership distinguishing between full participation in standard
setting and observation of the standard-setting process) that do not address
this critical issue. See id. at 1978-79.
20. See id. at 1942.
21. Id. at 1942-43.
22. Id.; see also id. at 1978 (stating that affected firms “naturally want to
‘have a voice’ in decisions that affect them”).
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2021
the article: the intellectual property rules of SSOs.
23
They
begin with rules requiring members to search for IP potentially
implicated in the standard. They note the difficulty of the
obligation to search for relevant patents, which requires the
complex determination of whether a patent reads on a proposed
standard, and which is especially burdensome for the owners of
large patent portfolios.
24
The authors contend that the use of
computerized patent databases eliminates any advantage
possessed by the patentee in searching for potentially relevant
patents and find it more “cost-effective” for the SSO to assume
this function.
25
Such a shift would in fact lift a significant
burden from the patentee. But the authors do not contemplate
that the change would reduce the incentive to search for all
relevant patents since the consequence of a thorough search
would not be (as it would for the patentee) the potential reward
of a patent implicated in a standard, but rather, a liability for
willful infringement.
26
Disclosure obligations are next on the agenda. Teece and
Sherry explain that the obligation to disclose relevant patents
is complicated by the necessity of determining whether a
particular patent reads on the standard, which requires the
uncertain task of claim interpretation.
27
And they argue that a
disclosure policy “is likely to deter firms with significant IP
portfolios from participating in an SSO that has such a
policy.”
28
The combination of SSO policies requiring a duty to
disclose but not a duty to search for relevant patents results in
“willful ignorance,” according to the authors.
29
Licensing rules follow. Teece and Sherry recognize, though
they do not fully explore, the conundrum presented by a
patentee announcing the terms of licensing in advance: limiting
23. Because most SSO policies address patents, Teece and Sherry’s article
(as well as this response) focuses on this form of intellectual property.
24. See Teece & Sherry, supra note 1, at 1944.
25. Id.
26. See Competition and Intellectual Property Law and Policy in the
Knowledge Based Economy: Hearing Before the Dep’t of Justice Antitrust Div.
and Fed. Trade Comm’n, 46 (statement of Mark Lemley),
http://www.ftc.gov/opp/intellect/020418trans.pdf. (April 18, 2002).
27. See Teece & Sherry, supra note 1, at 1946-47.
28. Id. at 1948.
29. See id. at 1949. Mark Lemley’s empirical study of SSO policies
showed that, of the SSOs with written policies governing intellectual property,
24 of 36 imposed a duty to disclose, but only 4 of 36 imposed a duty to search.
See Lemley, supra note 4, at 1904-05.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2022 MINNESOTA LAW REVIEW [Vol 87:2013
ex post holdup but raising the antitrust concern of price
coordination.
30
They offer reasons why “reasonable and
nondiscriminatory” (RAND) terms are often not elaborated.
31
And they address royalty-free licensing, recognizing its
administrative simplicity
32
but lamenting its failure to
adequately compensate the patentee and its use by the
government enforcement agencies.
33
Finally, the authors
discuss nondiscriminatory licensing, focusing on the
complication that arises in the context of portfolio licensing and
cross-licensing, where firms that already have a license to use a
patent wish to avoid paying for a second license after it has
been incorporated into a standard.
34
Throughout Standards Setting and Antirust, the authors
draw on real-world observations. They detail the consequences
of companies sending engineers to SSO meetings—
representatives who often are hostile to patents and are not
aware of their firms’ patent portfolios.
35
They note the
practical difficulty of determining nondiscriminatory terms in
RAND licensing in the context of portfolio-wide cross-licenses
and patent pools.
36
They explain that written SSO policies,
such as those requiring the announcement in advance of
royalty rates, often are ignored and that SSO representatives
disclose “only a tiny fraction” of potentially relevant patents.
37
And they offer case studies, such as the California Air
Resources Board (CARB)/Unocal standard for reformulated
gasoline,
38
and behind-the-scenes detail, such as participants’
likely knowledge of patent applications in the Rambus case.
39
C. ROLE OF ANTITRUST
Teece and Sherry expend significantly less effort
discussing antitrust and the role it can play in the analysis of
30. See Teece & Sherry, supra note 1, at 1953.
31. These reasons include issues such as competence and rapidly
changing technology. See id. at 1956.
32. Id. at 1952.
33. Id. at 1953-55.
34. See id. at 1959-61.
35. See id. at 1928. The engineers’ hostility stems from “seeing IP claims
as ‘getting in the way’ of choosing the ‘best technological solution.’” Id. at 13.
36. See id. at 1959-61.
37. Id. at 1969.
38. Id. at 1918-22.
39. Id. at 1965-66.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2023
SSOs. On four occasions in their article they flag a potential
antitrust concern in the standards process. They recognize
that a patentee, by manipulating the standard-setting process,
can gain market power in the technology market, which can be
employed to obtain a higher price for the use of its technology.
40
They note that “the activities of SSOs can affect non-
participants, and one rationale for antitrust intervention is to
protect the interests of such non-participants from being
adversely affected by decisions in which they did not
participate and or could not exert influence.”
41
They mention
the “obvious examples of manipulation of SSO rules/policies,
such as the ‘stuffing the ballot box’ example of Allied Tube, in
which antitrust intervention may be the only solution.”
42
And
they note that a patentee’s announcement of licensing terms ex
ante offers the potential for collusive, oligopolistic price-fixing
and group boycotts.
43
But they do not follow up on any of these
dangers by exploring the appropriate role for antitrust.
Teece and Sherry devote substantially more attention to
the perils of applying antitrust. Of greatest concern, they
contend that the application of antitrust leads to delay. The
“significant social benefits”
44
yielded by standardization are
halted by “public policies that slow the adoption of standards
[and that] can have very detrimental economic effects.”
45
The
authors “believe that [antitrust] intervention runs a significant
risk of slowing down the standards-setting process, thus
delaying the adoption of new standards and new products made
in accordance with those standards, to the detriment of
consumers and of society generally.”
46
Antitrust intervention also limits clarity, according to the
authors. “Unfortunately, in our opinion, ex post antitrust
enforcement efforts are often likely to reduce clarity and
predictability, rather than enhance it.”
47
The authors are
“concerned” that “antitrust intervention may reduce the clarity
of the rules, thereby making participation in SSOs more
40. See id. at 1975.
41. Id. at 1984-85.
42. Id. at 1985.
43. Id. at 1953.
44. Id. at 1973.
45. Id.
46. See id. at 1984.
47. Id. at 1980.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2024 MINNESOTA LAW REVIEW [Vol 87:2013
risky.”
48
Ex post antitrust intervention also “runs the serious
risk of failing to recognize the ex ante balancing of competing
interests.”
49
Finally, the authors bemoan the use of antitrust as a
scheme for self-help by competitors. A patentee seeking
royalties ex post may find itself confronting alleged infringers
seeking to “use the leverage of the antitrust law to compel the
patent holder to allow them to use the patent.”
50
The authors
worry that “the other SSO members [would be] able to obtain a
compulsory license at a court-ordered rate (or for free), rather
than having to negotiate and pay for a license.”
51
In short, the authors present a thorough version of
standards and SSO rules limiting IP, but a more restricted and
dismissive version of antitrust, one which is focused on the
dangers of applying the discipline.
II. REMOVING THE EXCESS BAGGAGE IMPOSED ON
ANTITRUST
Antitrust should play only a limited role in standard-
setting activity, but this is for reasons different than those
offered by the authors. This section removes the excess
baggage that Teece and Sherry impose on antitrust, thereby
allowing a more focused analysis on the structure of, and
rationale for, the discipline.
The baggage takes three forms. First, the authors place
48. Id. at 1984.
49. Id. at 1985. The authors’ argument that the SSO is in a better
position than the antitrust authorities “to strike a better balance of the
competing interests of the various SSO participants” is substantially less
convincing after they concede that “the existing policies often appear to be a
matter of historical accident and are not likely to reflect a well-thought-out or
‘optimal’ degree of diversity.” Id. at 1984 n.228 (discussing results of empirical
survey conducted by Mark Lemley). The concession also weakens their
assertions (1) that the IP policies reflect “political compromise” within the SSO
and (2) that the SSOs “did not believe that the issue was important enough to
carefully consider the range of alternative policies.” Id.
50. Id. at 1980.
51. Id. The authors do not compare the relationship between the court-
ordered rate and the RAND rate. More fundamentally, Teece and Sherry do
not consider why a court might legitimately accept an argument that
compulsory licensing is appropriate. Examination of this issue would show
that such a remedy typically should not apply, and that any severe
anticompetitive effects that might warrant compulsory licensing, see infra
notes 72-73 and accompanying text, assuages any concern that antitrust is
enlisted solely as a self-help sword by competitors.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2025
too much emphasis on the goal of speed in the antitrust
analysis of SSOs. Second, they do not sufficiently engage the
antitrust statutes and case law, which inform the
determination of the proper role for antitrust. Third, they
argue against the application of antitrust because of an SSO
playing field unfairly tilted towards IP users and away from IP
owners. None of these three arguments is necessary, and each
of them unnecessarily weakens the hand of antitrust.
A. “T
HE NEED FOR SPEED”
52
If the goal is speed, antitrust will not win. Nothing in its
apparatus is conducive to speed. Litigation is lengthy, and
court rulings frequently are mooted by the swirling winds of
technological change. But the purpose is not always speed.
Antitrust promotes competition goals even at the cost of delay.
Framing the issue of the proper role for antitrust in terms of
delay sets up a contest antitrust is doomed to lose.
53
Teece and Sherry concede that there “clearly is a legitimate
role for antitrust policy in connection with standards setting.”
54
As noted above, they recognize the power of a patent holder to
gain market power by manipulating the standard-setting
process; they claim a role for antitrust “to protect the interests
of [] non-participants”; and they note that antitrust might be
the only solution for “obvious examples of manipulation of SSO
rules policies.”
55
It is unclear, however, how their version of
antitrust could address anticompetitive acts since the
application of antitrust in each instance would slow down the
SSO.
The authors correctly observe that many industries with
interoperability standards are characterized by short product
52. Id. at 1973.
53. Of course, Teece and Sherry’s wideranging article covers more than
just “the need for speed.” See supra Part I. But the focus on speed will
determine the role for antitrust. Antitrust cannot play a role when
“intervention runs the risk of delaying the adoption of standards, thereby
reducing the economic gains from standardization and reducing social welfare
generally.” Id. at 1986; see also supra notes 43-45 and accompanying text.
Nor does the analysis change when the focus shifts backward to the prospect
of antitrust intervention delaying the standard-setting process. While this
could conceivably postpone the beneficial process of setting standards in some
cases, such a result is the inevitable consequence of any antitrust role in the
analysis of SSO activity.
54. Id. at 1985.
55. Id.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2026 MINNESOTA LAW REVIEW [Vol 87:2013
generations.
56
But the proper role for antitrust might in fact be
able to recognize, without completely deferring to, the speed of
innovation. For example, market power will often be less
durable in industries with rapid product innovation: the
Schumpeterian gale of creative destruction threatens to topple
the very “monopolists” it sweeps into power. Consequently,
antitrust might refrain from acting not because it is powerless
to act in the face of the speed of the industry but because the
fluid and dynamic nature of innovation minimizes the
likelihood of market power. Courts also could consider speed in
their analysis of the pro-competitive justifications explaining
standard-setting rules: policies that foster competition and that
limit holdup in a rapidly changing industry deserve deference.
In short, traditional antitrust analysis should be able to
accommodate the speed of innovation, and must be applied so
that activity with significant anticompetitive effects does not
receive immunity.
57
B. LIMITED ANTITRUST CONSTRUCT
Teece and Sherry’s focus on speed is made easier by their
insufficient engagement of the structure and jurisprudence of
antitrust. Antitrust has a more multivaried dossier than the
one-dimensional version offered in their article, which stands
naked of any references to statute, case law, or rationale, and
which takes on a caricature of a role.
Antitrust in the article is one-size-fits-all. On numerous
occasions, the authors advocate a limited role for antitrust
because one-size solutions fail to take into account all of the
nuanced rules of various SSOs.
58
They even devote a section to
the Problems with ‘One Size Fits All’ Policies.
59
But just like
the need for speed, the focus on one size determines the
outcome. Few are in favor of one-size rules. Antitrust
nonetheless can offer more than one-size rules. Just the asking
of the question whether one-size-fits-all antitrust should limit
SSOs determines the answer: no.
Antitrust takes on a caricature one-size persona in part
56. See id. at 1973.
57. There also may be room for expedited judicial consideration, such as
the district court employed in the Microsoft proceeding.
58. See Teece & Sherry, supra note 1, at 1941, 1964, 1978, 1983-85. For a
discussion of the random, rather than deliberate, nature of the diversity of
SSO rules, see supra note 49.
59. See Teece & Sherry, supra note 1, at 1983-85.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2027
because the authors do not develop the statutory
(supplemented by judicial) construct of antitrust. Sections 1
and 2 of the Sherman Act and even the terms monopolization
and agreement make their appearance only in one footnote,
which asks: “Is the concern one of a conspiratorial agreement
under section 1 of the Sherman Act, or monopolization or
attempted monopolization under section 2 of the Sherman Act?
If so, presumably the challenger must establish the other
elements of any such claims.”
60
Of course, the challenger “must
establish the other elements” of the claims. But paying more
attention to these causes of action would have provided a more
grounded explanation of the difficulties facing antitrust in
analyzing SSO activity.
61
For example, a paradigmatic danger of standard setting
occurs where the owner of a patented input necessary for the
implementation of the standard refuses to license it on
reasonable terms after the standard is adopted. The authors
recognize that a patentee’s ex ante announcement of licensing
terms triggers antitrust concern and that the absence of such
clarification would leave the licensing terms with “little
‘teeth.’”
62
But rather than engaging in any comparative
assessment of the potential anticompetitive effects of
oligopolistic price fixing and group boycotts, on the one hand,
and the pro-competitive justifications of reducing the likelihood
of ex post holdup by providing clear licensing terms, on the
other, the authors avoid the issue. Instead, they turn to what
they consider the “significant difficulty” that involves the effect
of the adoption of the standard on the bargaining position of
the parties.
63
60. Id. at 1981 n.219. This excerpt is followed by a paragraph discussing
section 5 of the FTC Act and its inapplicability to private causes of action. Id.
61. An encyclopedic treatment of the application of the antitrust
construct to SSOs is not necessary and, in any event, has been provided by the
valuable treatise Intellectual Property and Antitrust, H
OVENKAMP ET AL.,
supra note 2, ch. 35. But a fuller explication at least would have provided a
context within which to analyze the IP rules of SSOs. For example, it could
have situated the analogue much closer to a pro-competitive arrangement that
remedies some of the excesses of the patent system and that promotes
innovation than to anticompetitive cartel-like activity by which parties that
collectively have market power injure competitors.
62. Id. at 1953.
63. Id. at 1954.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2028 MINNESOTA LAW REVIEW [Vol 87:2013
C. A
DECK STACKED AGAINST IP OWNERS
Teece and Sherry contend that the deck is stacked against
IP owners. SSOs are characterized by a “societally inefficient
attitude towards IP,”
64
rules that favor users rather than
owners, and engineers with a bias against patents.
65
“[P]olicies
that further burden IP and IP holders will only exacerbate the
problem” of insufficient reward for IP holders and so antitrust
must tread warily when making public policy.
66
On a number
of grounds, the stacked deck metaphor does not persuade.
As an initial matter, it is unclear how stacked the deck
really is. As Teece and Sherry recognize, many firms take on
the roles of both IP owners and users in the standard-setting
process.
67
Because many parties will not know ex ante if they
will be IP owners or users, a “veil of ignorance” may prevent
them from adopting policies that would significantly favor
either category.
68
Moreover, even though “a patent has only
one owner,” the likelihood of multiple patents reading onto a
particular standard increases the number of IP owners that
would tend to be present in the SSO.
69
Nor is it obvious that IP owners only lose from rules
restricting IP. Interoperability standards often implicate
numerous patented inputs. The combination of a reasonable
royalty and the assurance that more, even if not all, parties
with essential patents will license their IP may be more
valuable than a patentee’s unfettered right to receive
maximum royalties where there is a greater likelihood that
other patentees refuse to license their inputs and threaten to
hold up the standard or file infringement litigation.
70
Holdup
64. Id. at 1932. The authors claim that SSOs “act in a socially inefficient
fashion when determining whether to adopt a standard on which a firm has a
patent.” Id. at 1929 (emphasis omitted). Such a claim, however, is
unsurprising and proves too much: every private entity seeks to maximize
private reward and cannot be expected to maximize societal welfare. Of
course, the view is different from the vantage point of a government
enforcement agency, which would be more likely to treat a royalty as a
transfer payment rather than a private cost. Id. But even on this point, Teece
and Sherry concede the “major caveat” that the transfer payment imposes
social loss after taking into account rent-seeking behavior. Id. at 1932 n.77.
65. Id. at 1932.
66. Id.
67. Id. at 1926.
68. See Lemley, supra note 4, at 1946; cf. JOHN RAWLS, A THEORY OF
JUSTICE 11 (rev. ed. 1999).
69. Teece & Sherry, supra note 1, at 1929.
70. This conclusion is less likely for royalty-free licensing.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2029
affects IP owners as well as IP users.
But even assuming, arguendo, that IP owners “lose” to IP
users in influence in setting SSO policies does not necessarily
alter the role of antitrust. Any effect that the SSO has on the
patented product must be considered not in a vacuum, but in
the context in which it occurs. Adoption of a technology as a
standard will often grant significant power, which does not
stem solely from the technological superiority explaining the
issuance of the patent. A patent incorporated into a standard
receives not only a twenty-year right to exclude but also
additional reward in the form of market power resulting from
its use in the standard.
71
The patentee likely gains far more from the incorporation
of its patented product into a standard (even if it is limited to
RAND terms) than it “loses” from IP users’ greater influence.
Does this balance mean that antitrust should play a more
active role than it otherwise would? Well, only if this were the
proper equation. But it is not. Instead, the focus should be on
the anticompetitive and pro-competitive effects of the SSO rule.
The deck stacked against IP, the sole goal of speed, and the
undeveloped view of antitrust unnecessarily restrict the role of
the discipline. Even if the proper role for antitrust is in fact
limited, it deserves more texture than the authors provide.
III. THE PROPER ANTITRUST TREATMENT OF SSO
RULES RESTRICTING IP
Section 1 of the Sherman Act, which targets agreements
among competitors, provides the framework for analyzing the
proper role for antitrust treatment of the IP rules of SSOs.
72
These rules will almost always be lawful under section 1
because of their lack of anticompetitive effects and their
significant pro-competitive benefits.
A. SSO
S, IP, AND ANTICOMPETITIVE EFFECTS
For several reasons, SSOs adopting standards implicating
71. Teece and Sherry recognize this point. See Teece & Sherry, supra note
1, at 1936 (arguing that adoption of a standard may allow a patentee “to
extract not only the gains from using its patented technology vis-à-vis other
alternatives, but also a portion of the gains from standardization generally”).
72. Although there is a role for section 2 in other types of SSO activity, IP
rules adopted by SSOs composed of many competitors who typically lack
monopoly power will more naturally be considered under section 1.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2030 MINNESOTA LAW REVIEW [Vol 87:2013
intellectual property typically will lack significant
anticompetitive effects. First, the SSOs differ from other
potentially suspicious arrangements in offering significant pro-
competitive benefits such as enhancing interoperability and
resolving patent bottlenecks. Therefore, their existence and
the policies they adopt (such as rules limiting IP) should never
receive per se condemnation
73
and should always be analyzed
under the “rule of reason.”
74
Second, and relatedly, SSOs do not resemble a collection of
horizontal competitors that conspires to raise price or to reduce
output. The primary concern of section 1 is to prevent
competitors from entering into agreements that unreasonably
reduce competition. SSOs generally do not implicate this
concern.
75
Any sharing of information among SSO members is
not for the purpose of comparing sensitive business
information,
76
but rather to reduce the likelihood of holdup.
Additionally, the timing of activity, by which IP rules are
enacted before the standard is adopted, lessens the likelihood of
a cartel.
77
Third, the limited importance of setting the standard in
relation to the benefit of practicing the standard reduces
antitrust concern below the level confronting other collections
of horizontal competitors. Even the outsider that is not a
member of the SSO and that does not participate in the setting
of the standard will be able to practice the standard. Other
than the case in which a closed SSO licenses only to members
of the group,
78
membership in the SSO is not necessary to
practice the standard.
79
The situation thus differs from the
73. If the organization is only a sham for cartel-type activities, such
analysis would not apply.
74
Courts applying the rule of reason consider not only the anticompetitive but also the
pro-competitive effects of agreements.
75. Any fear that standardization reduces product differentiation is not
significant in the context of interoperability standards, the absence of which
will often lead to fewer products in the marketplace.
76. See Am. Column & Lumber Co. v. United States, 257 U.S. 377, 399-
409 (1921) (holding that trade association members that shared sales
information, production information, and inventory data and that received
reports identifying past and future production of competitors violated section
1).
77. See Lemley, supra note 4, at 1952.
78. See supra notes 76-77 and accompanying text.
79. According to Teece and Sherry, SSO membership may even be a
detriment since outsiders are able to practice the standard without being
subject to the disclosure and licensing rules imposed on members of the SSO.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2031
typical case of collusion among competitors, where the excluded
party receives no benefit from the arrangement.
Fourth, because of the operation of the patent system and
the nature of innovation, the outsider often has influence far
beyond its market share. Where the outsider holds a patent
that reads onto the proposed standard, it must provide its
permission before the SSO can invoke the standard. Products
in industries characterized by interoperability—such as
semiconductors and computer software—typically contain
hundreds or thousands of patented inputs. Each owner of an
essential patent implicated in the product can block the
implementation of the standard, thus increasing the influence
of the outsider. In contrast, the typical firm with minimal
market power that is excluded from an arrangement among
competitors that collectively possess market power lacks such
influence.
The primary concern raised by SSOs adopting standards
based on intellectual property is a concerted refusal to deal
with competitors. This might occur where closed SSOs, made
up of members that collectively have market power, enact a
rule that has a significant adverse effect on competitors. An
obvious example would involve the licensing of IP only to SSO
members, thereby injuring competitors outside the SSO.
80
This
scenario warrants antitrust scrutiny, and courts and the
enforcement agencies should examine the market power of the
parties and any justifications for the conduct. Otherwise, the
IP rules of SSOs do not implicate antitrust concern.
81
See Teece & Sherry, supra note 1, at 1978.
80. Lemley, supra note 4, at 1946-47.
81. Mark Lemley would also carve out a role for antitrust scrutiny where
SSOs “cap the total fees that will be paid to license all patents.” Id. at 1947.
He cites the example of the 3G patent platform, which endeavors “to limit
maximum royalties” for 3G mobile communication services. Id. Lemley’s
concern is that capping the fees paid to IP owners “depresses the total price to
be charged for innovation.” Id.
The 3G patent platform may not be as dangerous as Lemley intimates,
however: the asymmetric power of each patentee seller prevents some of the
dangers of a pure monopsony. Even if SSOs were to impose explicit maximum
royalty caps, their voluntary nature ensures that they would only be able to
affect the members of the organization. A patentee with a patent essential to
the implementation of the standard could refuse to join the SSO, refuse to
license its patent, and thereby hold up the standard. As a consequence, even
an SSO possessing significant market power has less control than is present in
other types of arrangements because of the importance of every essential
patent that reads onto the standard. Any maximum royalties set by the SSO,
therefore, will not necessarily equal the total royalties where patentees with
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2032 MINNESOTA LAW REVIEW [Vol 87:2013
B. SSO
RULES RESTRICTING INTELLECTUAL PROPERTY
SSO search, disclosure, and licensing rules do not have
direct adverse effects on competition, such as harming
consumers or raising price. Rather, they have significant pro-
competitive justifications.
Search rules merely require SSO members to search for IP
that might read on a standard, an obligation that does not lead
to anticompetitive effects.
82
Disclosure rules provide useful
information to members deciding on a standard. In particular,
they inform the members of the SSO of the intellectual
property that would be implicated by the selection of certain
standards. Disclosure rules, again, differ from information-
sharing arrangements that have warranted antitrust
scrutiny.
83
For rather than abetting the sharing among
competitors of sensitive price information that reduces
competition, the information produced by such rules prevents
the strategic hiding and ex post exploiting of IP, activity that
serves no legitimate purpose.
Licensing rules are even more critical in avoiding the
holdup problem of patentees imposing onerous licensing terms
after the adoption of the standard. They thus offer a significant
pro-competitive justification by avoiding a potential bottleneck
and contributing to the creation of a product that might not
otherwise exist. Such rules bear some resemblance to other
types of activity that have received substantial antitrust
patented inputs necessary for the implementation of the standard do not join
the SSO.
Moreover, there are benefits to the 3G Patent Platform that promise to
encourage innovation, even if royalties are reduced. Patentees that join the
SSO receive “an authoritative . . . endorsement of the strength of each patent
holder’s portfolio of Essential Patents.” UMTS
INTELLECTUAL PROP. ASS’N &
3G PATENT PLATFORM P’SHIP, 3G PATENT PLATFORM FOR THIRD GENERATION
MOBILE COMMUNICATIONS SYSTEMS § 6.1.2 (2002), available at
http://www.3gpatents.com/3g3p/9977qwebsite.pdf. The SSO also promises to
“reduce the costs and thus the price . . . of providing licenses.” Id. § 5.
Reducing the likelihood of holdup from other patentees and of
infringement litigation often will have the net effect of increasing the royalties
received by patentees. And in the end, the SSO recognizes that “it is
impossible to guarantee participation of any patent holder or, for example,
patent holders whose sole interest is to maximize their licensing revenue.” Id.
§ 6.2.1.
82. Of course, a very broad obligation to search might dissuade potential
patentees from entering the organization, but this does not constitute
anticompetitive effect.
83. See supra note 76 and accompanying text.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2033
deference: (1) a blanket music license allowing the sale of rights
to hundreds of copyrighted musical compositions, thereby
reducing transaction costs
84
and (2) cross-license agreements
and patent pools, which resolve patent bottlenecks among
owners of blocking patents that otherwise could unilaterally
prevent the practice of a product with multiple patented
inputs.
85
Even the promulgation of specific licensing terms
should be sanctioned. “Reasonable and nondiscriminatory”
does not give precise notice of its content and does not prevent
ex post holdup. More detail might. Moreover, such
announcements have not, to date, appeared to foster collusion
among patentees in the royalties they have charged.
C. P
RO-COMPETITIVE BENEFITS OF IP-BASED SSOS
Intellectual property-based SSOs offer real pro-competitive
justifications. Interoperability standards enable firms to use a
common platform and enhance competition in the marketplace.
They contribute to a greater realization of network effects and
prevent buyers from being stranded in a product that loses the
standards war.
86
And they clear bottlenecks and create
markets that might not otherwise exist.
87
The IP rules of SSOs
contribute to these benefits by reducing the likelihood of holdup
by patentees.
88
Further affirming the pro-competitive benefits of SSO
rules, the industries in which SSOs have developed are those
84. See Broad. Music, Inc. v. Columbia Broad. Sys., 441 U.S. 1, 5 (1979).
85. See, e.g., Letter from Joel I. Klein, Assistant Attorney General,
Department of Justice to Gerrard R. Beeney, Esquire, Sullivan & Cromwell
(Dec. 16, 1998), http://www.usdoj.gov/atr/public/busreview/2121.htm (DVD
patent pool); Letter from Joel I. Klein, Acting Assistant Attorney General,
Department of Justice to Gerrard R. Beeney, Esquire, Sullivan & Cromwell
(June 26, 1997), http://www.usdoj.gov/atr/public/busreview/1170.htm
(discussing the MPEG pool).
86. See Carl Shapiro, Setting Compatibility Standards: Cooperation or
Collusion?, in E
XPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY:
INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY 81, 88 (Rochelle Cooper
Dreyfuss et al. eds., 2001).
87. This might be the case where consumers delay investing in a product
in a network effects market until they are confident that such product will
succeed and that they will not be stranded in the product that loses the race.
88. Moreover, the private resolution of such potential bottlenecks through
SSOs is preferable to de facto standardization, because the presence of
multiple firms in an SSO ensures that they “can compete to offer products
incorporating the standard” after selection, thereby increasing output and
lowering prices. See Mark A. Lemley, Antitrust and the Internet
Standardization Problem, 28 C
ONN. L. REV. 1041, 1064-65 (1996).
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2034 MINNESOTA LAW REVIEW [Vol 87:2013
with the greatest potential for bottlenecks, patent thickets, and
thwarted innovation. Mark Lemley has shown that SSOs have
concentrated “in precisely those industries where the
unconstrained enforcement of patents could be most damaging
to innovation,” namely, computer software, Internet,
telecommunications, and semiconductors.
89
In these
industries, the presence of multiple patented inputs in products
increases the risk of holdup. Just as ominous, the industries
are marked by “cumulative innovation,” with one generation’s
patented invention based on those of previous generations.
90
The clearing of patent thickets and fostering of cumulative
innovation and new markets through SSOs offers perhaps the
most powerful benefits for competition and innovation.
91
Significant to begin with, the pro-competitive benefits of SSO
rules are magnified even further in removing the potentially
explosive landmines of the patent system.
92
These pro-competitive benefits are obvious when we return
one last time to the paradigmatic example of a patentee
announcing to the members of the SSO the terms of RAND
licensing before the adoption of the standard. Even if the
patentee and its competitors are members of the SSO and
collectively possess market power, the activity should be
upheld.
93
Anticompetitive effects on price and innovation will
be minimal, and the pro-competitive justifications of preventing
holdup and allowing standardized products to come to market
are significant, especially in industries that would otherwise be
subject to patent thickets and holdups. Adherence to platitudes
of “reasonable and nondiscriminatory” licensing does not mean
much where the details are left vague and are the subject of
dispute after the standard has been adopted. The clarity of
89. See Lemley, supra note 4, at 1954.
90. See Suzanne Scotchmer, Standing on the Shoulders of Giants:
Cumulative Research and the Patent Law, 5 J.
ECON. PERSP. 29, 29 (1991).
91. For arguments that innovation is the most important economic
efficiency and should count as the most powerful pro-competitive justification,
see Michael A. Carrier, Resolving the Patent-Antitrust Paradox Through
Tripartite Innovation, 55 V
AND. L. REV. (forthcoming 2003); Michael A.
Carrier, Unraveling the Patent-Antitrust Paradox, 150 U.
PA. L. REV. 761, 800-
15 (2002).
92. The presence of SSOs in industries with the greatest potential for
bottlenecks warrants antitrust deference in a way that deference on account of
the balancing of “competing interests” the authors claim is undertaken by
SSOs does not. See Teece & Sherry, supra note 1, at 1985.
93. This example assumes an open SSO. For the dangers of closed SSOs
excluding competitors, see supra notes 76-77 and accompanying text.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2003] WHY ANTITRUST SHOULD DEFER 2035
SSO rules is not used to foster collusion, price fixing, or
boycotts, but rather to eliminate ambiguity and prevent
holdups at the point where the patentee has significant
leverage. For these reasons, antitrust should defer to nearly all
SSO rules restricting IP.
CONCLUSION
Teece and Sherry are correct that standard-setting activity
is beneficial and that antitrust cannot have more than a limited
role in policing the IP rules of SSOs. But this conclusion can be
reached without resort to notions of one-size-fits-all antitrust,
an overriding objective of speed, and the relative influence of IP
owners vis-à-vis IP users in SSOs. It can comfortably be
grounded in the heart of antitrust: in the lack of significant
anticompetitive effects and in the presence of powerful pro-
competitive justifications. Although there is a role for antitrust
in the analysis of SSO rules, long-settled antitrust
jurisprudence dictates that it is only a limited role.
CARRIER MINNESOTA LAW REVIEW ARTICLE - FINAL (2).DOC 7/19/2005 2:20:05 PM
2036 MINNESOTA LAW REVIEW [Vol 87:2013
