1. Youping Li and Jie Shuai have posted a paper on ssrn titled Licensing Essential
Patents: The Non-Discriminatory Commitment and Hold-Up, Journal of
Industrial Economics (forthcoming). Here is
a link to the paper, and here is the abstract:
Licensors of patents essential to a standard are often required to license on reasonable and non-discriminatory (RAND) terms. Using a model with owners of essential patents and licensees who invest into standard-conforming technologies, this paper demonstrates that the non-discriminatory commitment alleviates the hold-up problem. Moreover, it improves consumer and social welfare, and promotes upstream innovation as licensing revenue is increased. In an extended model with each licensor independently choosing whether to make the commitment, all licensors voluntarily commit in the unique equilibrium.
2. Jonathan Putnam has published a paper titled Economic
Determinations in FRAND Rate Setting: A
Guide for the Perplexed, 41 Fordham Int'l L.J. 953 (2018). Here is a link to the paper, and here is the abstract:
Owners of standard-essential patents commit to be prepared to license their technology on “fair, reasonable and nondiscriminatory” terms and conditions. When negotiations over such terms break down, arbitrators and courts may be tasked with determining them. Such determinations face unusual obstacles, such as the frequent inapplicability of patent damages law to pricing large, standardized patent portfolios. The absence of good legal guidance is compounded by an economic narrative--the “standard FRAND paradigm”--which systematically misstates the circumstances, objectives and requirements of a proper FRAND determination, systematically favoring implementers of the standard. I contrast this static paradigm with the proper, economically consistent, dynamic paradigm. I then explain why a “FRAND rate determination” is usually difficult-- starting with the threshold error of confining the determination to a “FRAND rate.” I also identify related economic errors that pervade both expert economic testimony and legal characterizations of the evidence in a typical proceeding. Because of the non-discrimination requirement, the consequences of such errors can persist indefinitely in later proceedings. In addition to highlighting these errors for prospective fact-finders, I close with a test for the legitimacy of a proposed FRAND determination.In the body of the paper, Putnam argues that :
Because both innovators and implementers make relationship-specific investments, and because neither group can specific ex ante the terms of the contract on which they will eventually agree, the standard-setting process inherently contains the potential for bilateral hold-up. As with hold-up by innovators, hold-up by implementers takes the form of exploiting the innovators' prior (R&D) investment to extract opportunistic gains from the relationship. Just as innovators can hold up implementers by demanding a price that is “too high” ex post, implementers can hold up innovators by demanding a price that is “too low” ex post. The “hold-up problem” is therefore symmetric.I don't agree with that perspective--in my view, the patent system is not designed to ensure inventors that they will recover their R&D costs, only to provide them with an opportunity for trying to do so--but it's an interesting twist on the standard holdup definition.
Thank you for your continued postings on FRAND/SEP issues. I truly enjoy them and am an avid reader of your blog/postings.
ReplyDeleteI wanted to briefly respond to your disagreement identified at the end
-- with the understanding that I have not yet read the Putnam paper. To begin, I'm not sure I also interpret "the patent system is not designed to ensure inventors that they will recover their R&D costs..." from this cited paragraph. Your disagreement is also raised a lot in the literature and on the speaker circuit and somehow/somewhere grew legs. But it is a red herring.
I honestly don't know of a single contributor to cellular standards who supports the position that they are entitled or ensured to recover their R&D costs. If I'm wrong on that, please provide support.
Indeed, companies that contribute engineering know-how to the cellular technical bodies at 3GPP, do so under the IPR Policy of ETSI. At 3.2 of that Policy is the statement, "IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS." (read, "should" not "must" or "shall") It is this notion of "should be adequately and fairly rewarded" that gets wrongly conflated to the view that a system is designed "to ensure innovators...will recover their R&D costs."
That all said, if we can agree that those who contribute technical know-how to the working groups do so not with the understanding that there is some assurance or requirement to have R&D costs recovered, but rather do so with the understanding that the policy encourages that those contributors "should be adequately and fairly rewarded," then I believe we will all be better for it.
Thank you for your time and always happy to discuss.
-Jim
Thank you for your post and for the kind words about the blog.
DeleteI don't think we're in disagreement. I agree that the patent system is intended to provide an opportunity for inventors to recoup their R&D costs, and that as long as the patent in suit is valid and infringed, inventors should recover fair compensation. My disagreement with Mr. Putnam goes to his characterization of implementer misbehavior as a form of holdup, which in my view implies that inventors are entitled to recoup those costs. If I am understanding his position correctly--and my apologies to him if I'm not--that doesn't seem right to me, since the patent system doesn't exist to reward someone for investing in inventing something that turns out not to be patentable or infringed or for that matter commercially unsuccessful. I do agree, though, that if implementers engage in unwarranted delay tactics to attain some marketplace advantage, there should be a sanction, which could be injunctive relief, enhanced damages, etc. I also think that SEP owners should get some of the value of standardization, a position I think would allay some of Mr. Putnam's concerns, as discussed in one of my papers with Norman Siebrasse.
Actually, in his article Mr. Putnam does agree with the statement that "there is no guarantee that R&D will be successful, and there is nothing about an SDO’s IPR policy or the assurance of 'fair' compensation that guarantees a positive return on investment." So my inference that he was implying something more was inaccurate, and I retract it. I'm still not comfortable using the term "holdup" in the way he does, but I do agree that a purely ex ante, probabilistic royalty may not adequately compensate for the risk that one's technology won't be chosen for inclusion in the standard. Norman Siebrasse and I address this, from a slightly different angle, in our paper The Value of the Standard.
DeleteThank you for this valuable sharing!
ReplyDelete