Possible Effects of Competition Policy on Standard-Setting

ETO Manabu
Consulting Fellow, RIETI

Correlation between standard-setting and competition policy

Standard-setting can generate business value only when it is conducted in tandem with intellectual property (IP) strategies. The owner of an IP can monopolize its use and thus receive all resultant benefits, license it and earn royalties, or offer it free of charge to others to transform it into an industrial platform to strengthen the owner firm's market position. Standard-setting is an effective way to make technologies available to others while also benefiting their owners.

At the same time, since standard-setting usually involves negotiations among several participants, firms involved in this process are concerned about the risk of violating antitrust laws and must pursue standard-setting while constantly seeking to avoid this risk. Japanese firms in particular—with their great aversion to violating antitrust laws—are already aware that antitrust laws can hinder standard-setting. However, antitrust laws may not only restrict but also support standard-setting, and are expected to effectively minimize IP-related risks involved in using standardized technologies.

In recent years, various IP disputes have emerged around the world due to sophisticated technology and complicated products, highlighting the rapidly expanding scope of IP risks involved in product manufacturing and sales. While standard-setting is an effective tool in producing and popularizing a product at low cost, an increase in IP risks can hinder the cost-cutting and market-expanding functions of standard-setting. Accordingly, this could seriously threaten the existence of Japanese firms that generally create value on the strength of their manufacturing capabilities. It is therefore essential to reduce IP risks in standard-setting if it is to be used as a business tool.

Recognizing these problems associated with standard-setting, in this article(*1) the author examines how competition policy may affect standard-setting and IP management.

Expansion of IP risks involved in standard-setting

Standards to be attained in standard-setting can be generally classified into three types: de facto standards, forum standards(*2), and de jure standards. In today's high-tech industry, there are an increasing number of cases of "forum" standard-setting in which several firms jointly seek to set and market their technologies as industrial standards to collectively monopolize the market. This increase is attributed to three main factors: (1) it is difficult for a single firm to monopolize a technology or or keep a product to itself since industrial products today are manufactured using various technologies whose patents are owned by different parties; (2) it is easier for firms to cooperatively secure a market for themselves rather than individually striving to maintain their respective market shares through separate sales efforts, thereby generating network externalities; and (3) before marketing their products, firms try to avoid the risk of enormous losses in case they lose the race for market dominance in the de facto standard-setting process(i). Moreover, it is becoming almost impossible to exhaustively identify all the patents that are used in a product at the time of standard-setting because so many patents are now involved in manufacturing a product, as indicated in Factor (1). Therefore, standards are now always set with the possibility that some relevant patents may not be identified. This situation gives rise to the so-called holdup(*3), in which the owner of a patent that was not identified during standard-setting but that is used in the technology which has become a market standard claims its IP rights and higher licensing fees.

Since standardized technologies are usually used worldwide, it is often very difficult for a holdup to stop usage. Moreover, with the specifications and users of standardized technologies publicly disclosed, once the patent of the firm executing the holdup is judged to be technologically essential for the product concerned, the patent owner can easily identify unauthorized patent users and claim compensation for violation of patent rights, which users cannot easily overturn. In other words, in the case of a holdup on a standardized and popular technology, the product manufacturers often have no choice but to accept the patent owner's request for licensee fees.

This is a major business risk and, accordingly, standards which could be involved in a holdup will not be widely used. The most important challenge facing standard-setting participants is therefore to set standards that will be free of holdups in the future.

To prevent holdups and to set standards that minimize the risk of holdups, industrial forums and public standard-setting organizations adopt a patent policy that stipulates the procedure of handling patents in the standard-setting process, clearly identifying patents that are essential for technologies being studied in the ongoing standardization. Nevertheless, the patent policy of any standard-setting organization is based on good faith and is not designed to detect parties of bad faith or to resolve a holdup that has occurred(ii).

Expected resolution of the holdup problem and limitations

In the past, the globally famous holdups by Dell Computer Corporation (the "VL bus" case) and Rambus Incorporated were fought in court as violations of competition law. Therefore, competition law is expected to effectively prevent holdups. However, those cases were in fact fought as competition law violations because allegations were made about flaws in the standard-setting process or violations of the patent policy. In other words, a holdup claiming an unreasonable amount of royalty payments may be permitted in the absence of defective rules in the standard-setting process. While Dell was judged to be in violation of Section 5 of the Federal Trade Commission (FTC) Act, Rambus went all the way to the US Supreme Court and won a verdict stating that there were no procedural flaws. In Japan meanwhile, in June 2005 the Japan Fair Trade Commission published "Guidelines on Standardization and Patent Pool Arrangements," setting forth the Commission's view on the application of rules. However, the conditions of antitrust law violations indicated in the Guidelines were too restrictive to prevent holdups in a wide range of situations or were virtually ineffective for that purpose in practice.

In China, on the other hand, the Anti-Monopoly Law came into effect on August 1, 2005. Article 55 of this law includes a clause on non-applicability to the use of intellectual property rights according to relevant laws, as well as the phrase: "This Law applies to undertakings that abuse IP and eliminate or restrict market competition." Since Article 55 is not in Chapter III's "Abuse of Dominant Market Position," but in Chapter VIII's "Supplementary Provisions," it is possible to define actions by those companies that do not correspond to the abuse of dominant market position, as an abuse of IP rights under the law. From this perspective, the clause is sufficiently effective for controlling holdups. Needless to say, no legislative revision to institute a similar clause would be possible in Japan. Yet, holdup prevention would require a major shift in the way that IP use is viewed in Japan, which would include coordinated revision of the Patent Act and the Antimonopoly Act. Preparations for such a modification should commence at the earliest possible time because rapidly developing Asian countries are suffering a surge in patent-related lawsuits, a trend that is likely to reach Japan before long.

Expectations and challenges in terms of competition laws for the patent pool

Under such circumstances, patent pools are another possible way to combat holdups. A patent pool is expected to reduce the risk of holdups by getting many patent holders to participate in a pool, thereby establishing a mechanism of patent concentration and, when an outsider launches a holdup, to minimize the outsider's patent fees by proposing the pool's licensing fees as indices.

The history of patent pools and competition laws can be roughly summarized as follows: (1) in the early 20th century, numerous patent pools emerged one after another to be exempt from pro-competition regulations; (2) up to the 1990s, patent pools were strictly controlled by the authorities as an anti-competition practice; (3) since the 1990s, the efficacy of patent pools has been reevaluated in avoiding so-called patent floods or patent thickets(iii). The third period was heralded by the MPEG2 patent pool established by MPEG-LA in 1997, a well-known example of a successful patent pool.

To escape the strict control that the competition law authorities had exercised on past patent pools, the MPEG2 patent pool was organized so as to impose various restrictions on its own operations to prevent antitrust problems. For example, the patent pool's requirements include the following: (1) it only covers patents that are essential to technologies being standardized, (2) it requires non-exclusive licenses, (3) it allows individual contracts outside the pool, and (4) it enables non-exclusive grant-backs. The MPEG2 patent pool has strengthened its legality by obtaining business review letters from the US Department of Justice concerning such arrangements. For this reason, although there are other types of patent pools, such as essential patents (including commercially essential patents) and patent pools that take into consideration cross licensing via profit sharing, these patent pools have also been designed on the basis of the MPEG2 patent pool model, namely, (1) covering only essential patents, (2) providing fair and non-discriminatory licensing, and (3) always allowing extra-pool contracts.

In this manner, today's patent pools are organized and operated under strict self-control in order to comply with harsh regulations by the competition law authorities. Meanwhile, there have been marked changes in competition policy in the face of standard-setting movements. In the report Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, published by the US Department of Justice and the FTC in 2007, a patent pool is defined as one result of standard-setting activities and is considered to be beneficial to consumers. The report examined the joint negotiation of licensing terms before standard-setting by standard-setting organization participants by utilizing the rule of reason analysis.

In view of such changes surrounding standard-setting and world economic trends, patent pools need to be improved to facilitate their use and create an environment in which product manufacturers can use standardized technologies at low cost and without concern. One way to do so is to expand the scope of patent pools from the current limit of essential patents.

At present, technologies that have become industrial standards include both essential ones and numerous peripheral ones. For the latter, this refers to those technologies that are most suitable and advantageous for business in a given situation despite their non-essential nature. However, peripheral technologies are not covered by the patent policy of standard-setting organizations and so are subject to many holdups. Even when the patents of peripheral technologies are known, signing a contract with a patent pool will only grant the right to use the patents of essential technologies; individual contracts with respective patent owners are required in order to use peripheral technologies. While it is understandable that including peripheral technologies in a patent pool could be viewed as a tie-in under the competition law, implementing patent pool licensing of peripheral patents in a practical manner while maintaining competition would increase the value of a patent pool.


The environment surrounding standard-setting and intellectual property is rapidly changing, generating various new problems which are difficult to resolve within the framework of antitrust laws. IP laws, civil law, international conventions and many other institutional arrangements must also be taken into consideration to tackle these problems. For Japan to continue making profits in the global market as a manufacturing nation, it is essential to create an environment in which Japan can engage in high-value manufacturing and sell the resulting products to the world without concern. Competition and IP policy makers need a closer understanding of and support for standard-setting activities in order to prevent various attempts to thwart the development of such an environment.

November 30, 2010
  1. This article is a summary of the author's presentation at the 9th meeting of the Research Project Team "Globalization, Innovation, and Competition Policy" of the Research Institute of Economy, Trade and Industry (RIETI), held on July 16, 2010. For details, please refer to the author's article in Kose Torihiki, No. 720 (October 2010 issue).
  2. While "consortium standard" is sometimes distinguished from "forum standard," the author uses the term "forum standard" to collectively refer to the two concepts in this article, in consideration of the existing confusion as to the definitions and functions of the two concepts.
  3. It is inaccurate to use the term "holdup" to refer to all patent owners who claim ownership of a patent used in a technology after it has been set as an industrial standard. In reality, many patent owners realize that their patents have been used in technologies only after they have become standards, and they exercise their legitimate rights if they are led to claim a reasonable monetary amount for the use of their patents. However, such a "reasonable" claim can still seriously impact the business of other parties concerned since it represents a cost that emerges after the product price competition has been settled.
  1. TAKIGAWA, Toshiaki: "Hyojunka to Kyosoho (Standard-setting and the Competition Law)," Journal of Intellectual Property Association of Japan, Vol. 1, No. 1, 2007
  2. ETO, Manabu: "Hyojunka Katsudou niokeru Patento Porishii no Yakuwari (Role of Patent Pool in Standard-setting Activities)," Journal of the Japan Society for Science Policy and Research Management, Vol. 22, No. 3/4, 2007
  3. DOI, Noriyuki: "Patento Puhru to Kyoso Seisaku: Tenbo to kadai (Patent Pool and Competition Policy: Prospects and challenges)," Keizaigaku Ronkyu, Special issue to mark the retirement of Professor Minoru Nishida, Vol. 63, No. 1, 2009

November 30, 2010