Loads of New Papers on FRAND, Holdup, and Related Topics, Part 2

1.  Jorge Contreras has posted on ssrn a document titled European Commission - DG Enterprise and Industry - Public Consultation on Patents and Standards - Responses submitted by Prof. Jorge L. Contreras, described as "a response to the Public Consultation on Patents and Standards issued by the European Commission Directorate-General for Enterprise and Industry."  Here is a link.

2.  Reto M. Hilty and Peter R. Slowinski have published a paper in the September 2015 issue of GRUR Int. (pp. 781-92) titled Standardessentielle Patente--Perspectiken außerhalb des Kartellrechts ("Standard Essential Patents:  Perspectives Beyond Competition Law").  Here is the abstract (my translation, with the usual caveats):

Standard setting is a phenomenon that is not limited to the field of information technology.  To the contrary, one of the foundational decisions of the German Federal Supreme Court in this area, the Standardspundfass decision, concerns the field of mechanics.  The greater necessity for interoperability in the field of IT-based markets, however, makes the question of the legal treatment of standards (or rather of patents which relate to standards) a matter of particular relevance and controversy.  This arises not only on account of the sheer mass of standards which play a role in his field for reasons of compatibility, but also on the condition that IP rights which pertain to standards are deployed in the IT-sector to a great extent for strategic considerations.

As a result, at present a range of fundamental questions are being contested within the framework of the so-called Patent Wars.  In particular, American and German courts, as well as the EU Commission and the U.S. Federal Trade Commission, have addressed the problem, and as a consequence of the preliminary questions submitted by the LG-Dußeldorf the CJEU will now also take up the matter.  To be sure, this last-named proceeding sounds firmly within competition law, and thus generally focuses the discussion in Europe heavily on this particular compensating mechanism outside the bounds of patent law.  

The present essay identifies the essential questions, illuminates the underlying economic conditions and interests which lie behind standards or rather patents pertaining to standards, and evaluates the approaches proposed up to now. Above all, however, the analysis of both present and possible future law focuses on aspects internal to patent law as well as approaches grounded in contract law. 

(The reference to the questions submitted to the CJEU, of course, is to the Huawei v. ZTE  judgment, which came out in July.  No fault to the authors here, by the way--I have a paper coming out soon that refers to the CJEU's decision in the future tense too, because the substantive editing on the piece was completed before the judgment was handed down.)  The authors ultimately propose that the EU adopt a regulation that would interpret FRAND commitments made to SSOs as contracts for the benefit of third parties.

3.  J. Gregory Sidak has a new paper titled Tournaments and FRAND Royalties.  Here is a link to the paper.  From the introduction:

. . . Some economists testify in litigation over FRAND royalties that, if two inventors each develop a similar substitute technology, and the two technologies would generate an equal amount of value to a manufacturer, the manufacturer would need to pay only a nominal FRAND royalty for the technology chosen for adoption into the standard, because the two inventors would compete to sell their respective technologies and would enable the manufacturer to bid down the FRAND royalty to nearly zero. For example, in Innovatio, Judge Holderman wrote in 2013 that a respected economist, Dr. Gregory Leonard, “testified that . . . if two patented and equally effective alternatives both cost the same amount . . . the two patent holders would negotiate the price down to effectively zero.” Economists testifying to this effect next assert—on the basis of the theoretical arguments that Carl Shapiro, Joseph Farrell, Mark Lemley, and others advanced in 2007—that any increment of royalty that the SEP holder receives beyond that near-zero amount constitutes “holdup value,” which Shapiro, Farrell, Lemley, and others argue the SEP holder has wrongly extracted from the implementer solely by virtue of the SSO’s having chosen the SEP holder’s technology for the standard. . . .

The argument that a FRAND royalty is “effectively zero” implicitly depends on modeling competition between the technologies in standard setting as a static Bertrand pricing game without capacity restraints. However, the argument that a price war between SEP holders would drive down a FRAND royalty nearly to zero requires assuming (1) that there is no differentiation between the competing (substitute) technologies, and (2) that the inventors lack any outside option for monetizing their technologies. What empirical evidence exists that an SSO could choose from many substitute technologies for each and every facet of a standard, and that those substitute technologies are all homogeneous in terms of price and quality? None. If all substitute technologies were homogeneous, then standard setting would essentially be a lottery—and a most peculiar lottery at that, whose winner receives only a penny for his troubles.

If an inventor could receive only a pittance for his investment in developing his technology and in contributing it to a standard, he would cease contributing proprietary technologies to collective standards and instead pursue more profitable outside options. That reasoning is even more compelling if the inventor is a publicly traded firm, answerable to its shareholders. Therefore, modeling standard setting as a static Bertrand pricing game without any differentiation among the competing technologies and without any outside option for the inventors would predict that every inventor loses—that is, no inventor could possibly recoup his investment in innovation and therefore would quickly exit the market. Standard setting would be a sucker’s game for inventors. As Nobel laureate Milton Friedman famously wrote, “Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to ‘explain.’” The observed fact that many SSOs continue to set standards and that many innovators continue to contribute their technologies to those collective standards strongly suggests that a different economic model than static Bertrand competition would better predict how standard setting works in the real world.

In this essay, I explain how, in economic terms, collective standard setting resembles a tournament, and I show how the economic scholarship on tournaments can inform legal analysis of FRAND royalties.