Transcript Standard Setting in High

2014 Summer School in Law and Economics:
Law and Markets
July 17, 2014
Antitrust and
Intellectual Property
Randal C. Picker
James Parker Hall Distinguished Service
Professor of Law
The Law School
The University of Chicago
What issues are posed by
standard setting?



Can there be too much competition?
Can there be too little competition?
Are there pathologies in standard setting?
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Too much competition?

Formats
Computer
makers wanted to avoid multiple DVD
formats ala VCR Beta and VHS formats
The first letter suggests that there were a number
of possible formats for high-density disks (DIVX,
MMDF and ASMO, for example)
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Too much competition?


What are the harms of too much competition?
What does that mean?
Winner Take All example suggests that too
many firms may seek to set standards
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Winner Take All Markets: Simple
Version

Two Sector Economy
500
individuals
One sector: everyone earns $10
Second sector: one person will earn $1000,
everyone else will earn nothing, probability of
winning is just 1/N

What outcome do we want?
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Winner Take All Markets: Simple
Version

Answer
499
in sector 1, 1 in sector 2
GNP is 499 * 10 + 100* 1 = 5990
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Winner Take All Markets: Simple
Version


What outcome will we get?
Answer
Individuals
enter sector 2 until expected return is
$10.
100 individuals in sector 2, 400 in sector 1
GNP is 400 * 10 + 1000*1 + 99*0 = 5000
Same GNP as if we did not have WTA sector: the
value of that sector is fully dissipated
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WTA Markets: Version II

Empirical Claim
Creators
do not capture all of the social benefits of
their discoveries

Spillover from the WTA Sector to the SureThing Sector
The
winner in the WTA sector only gets 1000g,
where g is [0,1]
The balance, (1-g)1000, spills over into the other
sector
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WTA Markets: Version II


What outcome do we want?
Answer
Again,
allocate 499 to ST, 1 to WTA, for social
welfare of 5990
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WTA Markets: Version II

What outcome will we get?
Equilibrium
condition given by:
(1  g)1000 1000g
10 

500 N
N
Solution:
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
N  100 3  9  5g

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WTA Markets: Version II

Numbers
g
=1 gives N = 100, as before
g = 0.10645 gives N = 9
g = 0.012 gives N = 1, the social optimum
Note this version assumes WTA losers do not
share in spillover; could do version in which they
did
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WTA Markets: Version II

Bottom Line
Spillovers
can mitigate concern over tragedy of
the commons style over-competition
Indeed, if spillovers are too high, we could have
too few pursuing the WTA sector
Essentially empirical question on conflicting
incentives
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Consequences/Implications

Match to Standards Setting
Think
of standard setting problem as one in which
only a few standards (K =1, 2 or 3?) will survive?
Does this suggest that too many firms will try to be
standards setters, given the returns, than is
optimal?
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Consequences/Implications

Solutions?
Weaken
property rights to solve the problem?
Allow collectivization ala DVD standard setting
and patent pool to minimize competition?
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Too little competition?

Collusion
If
we permit firms to establish standards
collectively, won’t they collude?
Won’t this result in lower output and higher prices,
the classic harms of monopoly?
How should we evaluate whether a particular deal
is collusive?
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Technology Competition and
Monopoly
I
1st Stage
Possible Technologies
III
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II
2nd Stage
SSO
IV
16
Is This a Market Power Problem?
No
I
1st Stage
Possible Technologies
II
2nd Stage
SSO
Purpose of patents is to propertize inventions and
create power to exclude (remedy is a different point
(see eBay))
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Is This a Market Power Problem?
No
I
1st Stage
Possible Technologies
II
2nd Stage
SSO
Market power rules (antitrust and network industries
type regulation) should respect legitimately obtained
property rights, including those that give rise to market
power
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Is This a Market Power Problem?
No
I
1st Stage
Possible Technologies
II
2nd Stage
SSO
Exercise of market power here through patent shouldn’t
give rise to market power regulation
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Is This a Market Power Problem?
No
III
1st Stage
Possible Technologies
IV
2nd Stage
SSO
Should expect first-stage competition to limit harms
of ex-post monopoly created through selection
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Is This a Market Power Problem?
No
III
1st Stage
Possible Technologies
IV
2nd Stage
SSO
That goes to competing away second-stage
monopoly profits
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Is This a Market Power Problem?
No
III
1st Stage
Possible Technologies
IV
2nd Stage
SSO
Also should expect mechanism to control secondstage price setting to avoid deadweight losses
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1914
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1938
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1994
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1994
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VITA Disclosure Timeline
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VITA FRAND Obligation
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VITA FRAND Obligation
31
Subject to Royalty Cap
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US DOJ VITA
Business Review
32
Letter (Oct 30, 2006)
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VITA Experience: RAND
33
Insufficient
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VITA Experience: RAND
34
Disputes Impair Standards
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Disclosed Royalty Cap Will Help
35
Eliminate Ex Post RAND Problems
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Disclosed Royalty Cap Will Create
Ex Ante Patent Competition at Time
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of Technology Selection
Framing Patents and Standards
Competition

Think of Competing Pairs
{Standard
1, Patent 1} v. {Standard 2, Patent 2}
Choosing a bundle and competition is over the
bundle

RAND Pricing Reduces Price Competition
if
both patents will be offering RAND pricing ex
post if chosen, little direct competition between the
patents ex ante
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Framing Patents and Standards
Competition

Choose based on technical merits of standard
and ignore price
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VITA Injects Patent Price
Competition into Standards

Again the Bundles
{Standard
1, Patent 1 with Max Royalty 1} v.
{Standard 2, Patent 2 with Max Royalty 2}

May be willing to trade off technical superiority
for lower prices
BMW
v. Toyota?
Smith & Wollensky v. McDonalds?
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Problems

Essential Patent Holders Can Remain Outside
the Working Group Process
Disclosure
obligations are tied to participation in
working group process, not overall membership in
SSO
Trade off influence over setting of standard
against disclosure/royalty obligations
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Problems

Go Broader?
Leverage
bundle of activities being undertaken by
SSO
 Raise the price of non-disclosure by moving
from just limiting participation in particular
working group to limiting overall participation in
SSO
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Variations and Pathologies:
Ownership Change
III
1st Stage
Possible Technologies
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IV
2nd Stage
SSO
How does a change in
the ownership of the
technology matter?
46
Screen Capture Slide
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FTC Negotiated Data (Jan 23, 2008)
Is This a Market Power Problem?

Questions/Issues
Doubt
we want a revocation mechanism for firm
committing patents to standard; creates too many
problems of opportunism
That said, not clear SSOs have blocked
revocation
Do we want a backstop on SSO decisionmaking
on revocation?
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FTC Negotiated Data (Jan 23, 2008)
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FTC Negotiated Data (Jan 23, 2008)
Google/Motorola Mobility

Setup
Firm
make F/RAND commitment in SSO process
but that leaves open exact specification of what
those royalty rates would be
Disagreement arises between patent holder and
device producer regarding meaning of F/RAND
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Google/Motorola Mobility

Characterizing This?
Breach
of F/RAND commitment by patent holder?
Infringement by device maker given that the
producer is declining to pay offered royalty?
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FTC G/MM (Jan 3, 2013)
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FTC G/MM (Jan 3, 2013)
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FTC G/MM (Jan 3, 2013)
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FTC G/MM (Jan 3, 2013)
SSO Mechanisms

Does the contract matter?
Royalty
Setting Mechanism
 Contract could specify ADR type mechanism to
resolve disputes over F/RAND
 What if it doesn’t?
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Standard Setting and Remedies

Does the contract matter?
Scope
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of Available Remedies
 Suppose commitment by patent holder to SSO
includes waiver of right to seek injunctions for
infringement?
 Suppose it doesn’t?
 Which way should the default run on injunction
waiver?
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FTCA 5 and SSOs

Question
What
role does FTCA Section 5 play in this
process? More broadly, what is the role of the
gov’t here?
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FTC G/MM: Limits on
61
Pursuing Injunctive Relief
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FTC G/MM: Limits on
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Pursuing Injunctive Relief
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FTC G/MM: Required G
63
Offers and Arbitration
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FTC G/MM: Required G
64
Offers and Arbitration
Article 101 [81]

1. The following shall be prohibited as
incompatible with the common market:
all
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agreements between undertakings, decisions
by associations of undertakings and concerted
practices which may affect trade between Member
States and which have as their object or effect the
prevention, restriction or distortion of competition
within the common market, and in particular those
which:
65
Article 101 [81]
(a)
directly or indirectly fix purchase or selling
prices or any other trading conditions;
(b) limit or control production, markets, technical
development, or investment;
(c) share markets or sources of supply;
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Article 101 [81]
(d)
apply dissimilar conditions to equivalent
transactions with other trading parties, thereby
placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to
acceptance by the other parties of supplementary
obligations which, by their nature or according to
commercial usage, have no connection with the
subject of such contracts.
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Article 101 [81]

2. Any agreements or decisions prohibited
pursuant to this Article shall be automatically
void.
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Article 101 [81]

3. The provisions of paragraph 1 may,
however, be declared inapplicable in the case
of:
any
agreement or category of agreements
between undertakings;
any decision or category of decisions by
associations of undertakings;
any concerted practice or category of concerted
practices,
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Article 101 [81]

which contributes to improving the production
or distribution of goods or to promoting
technical or economic progress, while allowing
consumers a fair share of the resulting benefit,
and which does not:
(a)
impose on the undertakings concerned
restrictions which are not indispensable to the
attainment of these objectives;
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Article 101 [81]
(b)
afford such undertakings the possibility of
eliminating competition in respect of a substantial
part of the products in question.
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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EU on Motorola/Samsung and SEPs
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Apple v Motorola
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(CAFC Apr 25, 2014)
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Apple v Motorola: Assessing a
80
Reasonable Royalty Rate
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Apple v Motorola: SEP
81
Portfolio Royalty Rate Example
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Apple v Motorola: Sup Ct eBay
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Injunction Standard
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Apple v Motorola: Lower Ct on
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FRAND and Injunctions
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Apple v Motorola: No per se rule
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barring injunctions for FRANDed SEPs