In-House Counsel

Ex Ante

By legalthing

For decades, standard setting organizations (SSOs) have largely been considered to be an arcane area limited to a select group of manufacturers and technologists. However, with the rise of truly global markets and the significant switching costs inherent in many technologies, SSOs are now gaining increased public prominence.

If you are someone who hasn't considered the importance of SSOs in your life, think about this basic example. What if lighting manufacturers each used a different size base for light bulbs? It would result in chaos for consumers, distributors and resellers of lighting products. The cost of lighting would also increase because manufacturers would have a more limited market in which to allocate their R&D costs. Instead, most lighting companies build products conforming to industry standards set by an SSO. The result is that rather than differentiating their offerings based on the size of a light bulb socket, manufacturers are competing on the implementation ? the things that really matter to consumers (lumens, energy efficiency, cost/watt).

For a standard to succeed, the members of the SSO must operate with transparency. To effect this, the rules of most SSOs require disclosure of any patents that implicate a proposed standard and agreement to license them on a ?FRAND? (fair, reasonable and non-discriminatory) basis. Absent these requirements, an SSO member and patent holder could wait for a standard to be widely adopted and then assert its patents to extract higher royalties than it would be able to absent the standard. In the standards world, this is what is commonly referred to as a ?patent hold-up?. In this situation, companies that have invested resources in developing products based on one standard frequently find it too expensive to shift to another standard. Instead, they are left with the choice of litigating or paying the higher royalties (the cost of which is ultimately borne by the consumer or end user).

To me, it's reminiscent of a game we played as children called ?UNO? . In it, players make certain assumptions only to unexpectedly be faced with a ?wild card? from another player. Of course, the consequences in the world of SSOs are significantly more severe for companies, consumers and shareholders. When a SSO member fails to adequately disclose the existence of patents or refuses to license on FRAND terms, the viability of standard is called into question. The result is that adoption is frozen until the courts have removed the uncertainty. And, it's no surprise given the accelerated growth of computing that many disputes have arisen in connection with standards in the IT industry ? In the Matter of Dell Computer Corp. (computer bus), In the Matter of Rambus, Inc. (computer memory), Broadcom Corporation v. Qualcomm, Inc. (cellular telephony) ? are just a few examples.

In order to avoid the problems inherent with FRAND licensing, an increasing number of companies (including Sun) are advocating for the adoption of an ?ex ante? standards model. Under this model, standard setting policies require that members disclose applicable patents and specific license royalties and provide sample licenses (or agree to prescribed terms) at the beginning (thus, ?ex ante?) of the process of developing a new standard. This permits the members of the SSO to make more informed and efficient decisions as to what technology should be used as the basis for a standard. It also results in better predictability in licensing fees, instead of the ?wild card? of litigation that results under many FRAND policies.

VITA , a SSO creating standards for real time modular embedded computing systems, and the IEEE are examples of organizations that have both adopted policies in support of the ex ante licensing model. And, the United States Department of Justice has recognized these policies as pro-competitive.

Increased adoption of ex ante policies by other SSOs will help drive better transparency, openness and efficiency in the standards setting process. As a result, it will make it easier for companies to focus on innovation in the market instead of the courtroom.

Full post as published by The Legal Thing... on September 16, 2007 (boomark / email).