Standard-Setting and the Failure of Price Competition

Abstract

Standard-setting organizations (SSOs) play a role of immense importance in high technology markets. The interoperability facilitated by these entities produces scale efficiencies, bypasses the wasteful competition associated with 'winner takes all' markets, allows the introduction of open standards free from proprietary control, and charts a navigable path through the infamous patent thicket. Yet, for all these benefits, SSOs display a dearth of ex ante royalty competition between purveyors of competing technologies.

Given the threat of ex post hold-up by intellectual property holders, the loss of price competition that would yield binding ex ante contractual commitments is a serious one. The cost, however, is not inevitable. SSOs could spur rivalry between holders of substitute technologies in numerous ways, many of which would readily capture the efficiencies of open market price competition. Nevertheless, such entities invariably prohibit their members from discussing royalties in any way. The cause: An unlikely villain in the form of antitrust. Fearing liability for discussing price, SSOs instead require royalty-free (RF) or reasonable and non-discriminatory (RAND) licensing by its members. The idea, of course, is that a binding ex ante commitment to license others at no more than a 'reasonable' royalty rate will temper the ensuing market power bestowed on an IP-holder whose rights are infringed by a chosen standard. Thus, one would expect RAND licensing to serve a critical function in the SSO process.

Unfortunately, the RAND concept is defunct, illusory, lacking in any semblance of objectivity, and emasculated in part by its lack of enforceability. In short, RAND is an inefficacious substitute for ex ante royalty-specific constraints. Given that the majority of IP-holders will require some compensation for the infringement of their rights by a collectively established standard - thus rendering RF licensing ill-suited to many situations - the failure of RAND to impose a meaningful constraint on ex post monopoly lock-in is a serious shortcoming.

This Article contrasts the SSO with alternative standard setting processes, examines the importance of price competition in network effect driven markets, and asks how intellectual property and antitrust policy should seek to address the critical failure of RAND licensing. In particular, there is a pressing need for reduced antitrust oversight with regard to royalty negotiation. Having established this normative foundation, the Article traces recent steps taken by the legislative, judicial, and executive branches to remedy the problem and compares these measures with the social optimum. Ultimately, it concludes that RAND licensing should be discarded as an SSO practice. In this regard, the 2008 decision of the D.C. Circuit in Rambus, Inc. v. FTC is highly notable, certainly for its undermining of the Third Circuit’s 2007 holding in Qualcomm, but more fundamentally for its status as a squandered opportunity.