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POLICYFORUM
Technological standards are ubiqui-
tous, whether they allow consumers to
communicate seamlessly across wire-
less networks or manufacturers to procure
goods across complex global supply chains.
These standardsshaped by standard-setting
organizations (SSOs) and participating engi-
neers, academics, lawyers, and executives
in turn shape how new technologies evolve,
specifying rules for how standard-compliant
products must work and interact with other
components. This standardization process is
under tremendous stress. Many disputes roil-
ing courts and administrative bodies around
the worldsuch as those involving Apple,
Google, Microsoft, and Samsungconcerncommitments made during the standardiza-
tion process and the ways that firms have
sought to game the system. We explore why
the system is breaking down and propose a
way in which standard setting could be rede-
signed to address these problems.
Standardization assures users that they
will not be stuck with an orphan technology
largely incompatible with other systems and
used by few others. Instead, users will benefit
from network externalities, where the tech-
nologys value depends on the number of oth-
ers using the technology. This boosts demandfor new technology, which provides research-
ers with incentives to innovate.
Standard-setting organizations play three
roles in this process. First, engineers iden-
tify alternative avenues to solve a given tech-
nological challenge. Second, in cases where
there are conflicting technologies where none
is evidently superior, the SSO will frequently
coordinate on one approach. This winnowing
down of alternatives is important because it
greatly simplifies the choices of manufactur-
ers and consumers.
Finally, because stakes are high for firms
participating in the standardization process,SSOs seek to regulate the behavior of mem-
bers. Particular concerns are ensuring that
firms disclose relevant patents, so as to pro-
vide adequate information to other parties in
the standard-setting process, and agree not to
price licenses to their patents too aggressively,
so as to enable broader
adoption of the technol-
ogy. But SSOs are limited in
this regulatory role, because
technology owners can seek
another SSO if rules are too
onerous.
The intellectual property
(IP) embodied in standards
has two essential charac-
teristics, which can lead to
unfortunate outcomes. First,
in many cases, new tech-
nologies tend to be covered
by a wide array of patents
issued to the different firmsthat contribute components
to the technology. In this
patent thicket, if each pat-
ent owner sets the revenue-
maximizing price for its pat-
ent licenses without considering the fact that
other patent owners benefit from wider diffu-
sion, the resulting price is likely to be far too
high. Economists term this royalty stack-
ing.
Second, in many cases, there are multiple
routes to solving a given technological prob-
lem. Each one of these may be equally viable,but often an SSO will choose only one avenue.
After the decision is made, however, any pat-
ent needed to practice the standard becomes
a standard-essential patent (SEP), and the
patent owner can ask for a high royalty even
when other patents could have offered compa-
rable value, had the technology been morphed
differently. SSOs must therefore regulate
licensing of the patents chosen to be part of
the standard. SSOs typically eschew any dis-
cussion of price before the establishment of
the standard. This reluctance largely reflects
fear of antitrust authorities: Any price discus-
sions might lead to charges of collusive andanticompetitive behavior, as the SSO could
blackmail patentees to accept low prices in
exchange for inclusion into the standard.
To restrain firms from taking advan-
tage of the essentiality of their patents that
was acquired only from being included in a
standard, SSOs commonly require firms to
commit in advance to license their patents
on fair, reasonable, and nondiscriminatory
(FRAND) terms. But FRAND commitments
are ambiguous; what exactly is fair and rea-
sonable? This is determi
not by the SSO itself, bu
a court years after the st
dard is established. Perc
tions of patent value can
fer widely when one lo
before or after the dispu
Ambiguities associated w
FRAND commitments h
resulted in dozens of exp
sive litigations (1, 2).
Even in the absence o
legal dispute, the FRAN
requirement has not wor
well. Consider the
uncommon case where pticipants in an SSO est
lish a patent pool to join
license key patents cove
by the standard. Many po
simply divide royalties
proportion to the number of patents that e
firm has contributed to the pool. Such
rules may reflect that patents initially
ferent in their importance are made equa
essential by standardization. The process t
over-rewards minor innovations at the expe
of major ones. In these settings, selection
patents for the standard (and pool) canhighly contentious. SSOs may include eit
too many or too few patents in the standar
Structured Price Commitments
We propose an alternative approach, wh
we term structured price commitments.
suggest that SSOs follow this sequence:
1. During a discovery phase, part
explore which technology combinations
technically viable (as is done now by SSO
This engineering phase makes no refere
to prices at which patents would be licens
2. Before the standard is finalized (a
unlike todays practice), there is a receduring which firms commit to a price
at which they will grant nondiscriminat
licenses to their patents. Firms make co
mitments to the maximum price (and m
restrictive terms) that they would cha
before the patent is included in the standa
3. Participants choose the standard, w
out discussing prices, as is currently done
4. Finally, some or all of the participa
may form a patent pool after the standar
set, again following todays practice.
A Better Route to Tech Standards
INTELLECTUAL PROPERTY
Josh Lerner1* and Jean Tirole2
Prestandard price commitments, as well as
government intervention, may help patent
licensing and standard setting.
1Harvard Business School, Boston, MA 02163, USA. 2Tou-
louse School of Economics and Institute for Advanced Studyin Toulouse, 31000 Toulouse, France. *Author for corre-
spondence. [email protected]
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POLICYFORU
Our theoretical analysis (3) looks at conse-
quences of this modified standard-setting pro-
cess. Initially, it might be thought that this pro-
cess, too, might lead to a variety of opportu-
nistic behaviors. For instance, a patent-holder
might set a high price cap in order to achieve
a stronger bargaining stance when it comes todividing profits from the eventual patent pool
formed around the standard. Such behavior
might lead to excessively high licensing rates
and too little technology adoption. Despite
the possibility of such gaming, our analy-
sis shows that structured price commitments
achieve the desired competitive bench-
mark, with license prices the same as would
prevail if there were no network externali-
ties and, thus, no need for a standard, which
would free users to adopt whatever mixture of
technology they wished. This provides a rea-
sonable balance between incentives for tech-nology innovation and diffusion.
How can price caps selected before stan-
dard-setting work? Intuitively, when patents
are fairly interchangeable with each other
before selection of the standard, the require-
ment to commit to a cap forces patent own-
ers to choose a lower price than they would
afterwards, so as to get their patent included
in the standard. Otherwise, the SSO would
choose a more affordable option. And when
patents are complementary rather than inter-
changeable, setting ones price away from its
competitive level leads to a loss of profit: For
instance, if a patent owner opts for a low pricecap, other owners will be less willing to give
him or her a large share of the proceeds of any
patent pool that may form.
Such commitments lower the amount that
ultimately will need to be paid to license the
key patents to implement the standard, and
also better match the rewards to innovations
(royalties) with their contributions.
We do not suggest abandoning FRAND.
SSOs may make mistakes, and important
patents may escape attention at the time the
standard is promulgated. However vague and
limited, FRAND still imposes some ex post
constraints on licensing terms. Thus, we view
structured price commitments as a comple-
ment, not a substitute, to FRAND.
Can Regulation Work?The idea that patent owners might commit
to prices before standard-setting is not new;
both academics and policy-makers [e.g., (4)]
have mentioned that possibility. Furthermore,
this policy has been tested by some SSOs (see
text box). Yet there has been little adoption by
SSOs in general.
One issue is that economists had no
framework for thinking about price commit-
ments. There was no way to predict, even at a
theoretical level, what would happen if such
commitments were mandated. The theoreti-
cal analysis comforts us about the normativeimpact of commitments (should we expect
a good outcome from this new institution?).
But thus far, it does not explain why SSOs
which, rightly or wrongly, tried them, failed
to appeal to IP owners and set a new stan-
dard for the standard-setting process.
Consistent with historical examples, our
model highlights that patent owners prefer
to go to an SSO that does not constrain their
freedom to license patents as they see fit.
Competition between SSOs, which we term
forum shopping, allows IP owners to find
more complacent SSOs that do not put such
pressure on their prices. Owners of equallyimportant, standard-relevant patents will
always opt for a lenient (commitment-free)
SSO. Only in specific circumstances will pat-
ent owners be attracted by such requirements,
e.g., when owners of clearly essential patents
fear that an SSO will include a number of
more minor patents, with whose owners they
will have to share the pie equally.
The corollary is that without a govern-
ment mandate and/or purchasing prefer-
ences, SSOs are unlikely to opt for the right
answer and demand price commitments
Nevertheless, the suggestion that price com
mitments be mandated has problems: I
could be infeasible or, if feasible, the regula
tion might do more harm than good.
Concerning feasibility, the rule can be
implemented where public procuremen
is sizable, such as telecommunications. I
would suffice to require suppliers to con
form to compliant standards enacted
by SSOs requir ing price commitments
Furthermore, antitrust authorities and courts
already involved in regulating standard
setting through reviews and litigation, could
favor compliant standards and discourage
noncompliant ones.
As for unintended consequences of reg
ulation, the requirement is simply to com
mit to a price cap. If practice does not work
according to theory (only experimentation
can tell), the hazard is that IP owners will se
too high a cap. But it cannot be worse than
the current policy, which is formally an infinite price cap. The combination of a cap with
FRAND cannot be worse than only FRAND
So this is rather low-risk.
In recent years, antitrust authoritie
have wakened to the importance of stan
dardization and the way in which firms can
manipulate this process (5). Now, the chal
lenge is to create rules that will ensure tha
standards can effectively promote transla
tion of scientific and technological insight
into new products and economic growth
Requiring price commitments is theoreti
cally appealing, rather risk-free, and worthexperimenting with.
References and Notes 1. Lemley and Shapiro (2) suggest that these disputes be
settled via arbitration, making adjudication more expedi
ent, better informed, and overall more consistent. 2. M. A. Lemley, C. Shapiro, Berkeley Technol. Law J.28,
1135 (2013). 3. J. Lerner, J. Tirole, Standard-essential patents (Work-
ing paper no. 19664, National Bureau of EconomicResearch, Cambridge, MA, 2013).
4. D. P. Majoras, Recognizing the procompetitive potentia
of royalty discussions in standard setting, Standardiza-tion and the Law, Stanford University, 23 September
2005; www.ftc.gov/sites/default/files/documents/public_statements/recognizing-procompetitive-potentia
royalty-discussions-standard-setting/050923stanford.pdf.
5. National Academy of Sciences,Patent Challenges for
Standard-Setting in the Global Economy: Lessons From
Information and Communications Technology(National
Academy Press, Washington, DC, 2013). 6. T.O. Barnett, Business Review Letter: VITA, Antitrust
Division, U.S. Department of Justice, 30 October 2006. 7. J. L. Contreras,Jurimetrics53, 163 (2013).
Acknowledgment:J.T. is a member of Industrial EconomicsInstitute, which receives funds from Microsoft, Orange, andQualcomm.
The international trade association VITA, which develops standards that govern modular embeddedcomputer systems in such products as advanced avionics devices and complex medical instruments,became frustrated when owners of patents that were essential to implementing one of their new standardsdemanded a higher royalty rate than anticipated after being deemed standard-essential. As a result, VITAproposed a new policy, which the U.S. Department of Justices Antitrust Division approved in October2006 (6). VITA demanded that members declare the highest royalty rates and most restrictive terms underwhich they would license these patents for implementation of the given standard. In response to thiscontroversial policy, Motorola launched a campaign to decertify VITA as an SSO recognized by the
American National Standards Institute, an effort that ultimately proved unsuccessful. Although VITA endedup moving forward with its standardization process, it was not a spectacular success (7). Similarly, theInstitute of Electrical and Electronics Engineers and the European Telecommunications Standards Instituteencountered stiff resistance and, in the end, had to make price commitments optional. Even if pricecommitment requirements lead to a good outcome, we cannot expect SSOs to mandate them bythemselves or expect patent holders to cooperate with standard bodies that mandate such commitments.
10.1126/science.124643PHOTOCREDIT:HARLANDQUARRINGTON/WIKIMEDIACOMMONS
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