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921-5555 1 2 3 4 Tools to Prevent Patent 1 1 2 3 4 TOOLS TO PREVENT PATENT "HOLD-UP" 6 7 8 9 10 11 12 Tuesday, June 21, 2011 13 9:30 a.m. 14 15 16 17 Federal Trade Commission 18 Conference Center 19 601 New Jersey Avenue, NW 20 Washington, D.C. 20001 21 22 23 24 25 For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 2 1 I N D E X 2 3 PAGE: 4 Welcoming and Opening Remarks 5 By Commissioner Edith Ramirez 5 6 7 Panel 1: Roundtable Discussion 13 8 9 Presentation: Professor Jorge Contreras 83 10 11 Panel 2: Roundtable Discussion 103 12 13 Panel 3: Roundtable Discussion 146 14 15 Closing Remarks 16 By Joseph Farrell, Director, Bureau of 17 Economics 18 19 20 21 22 23 24 25 For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 3 1 P R O C E E D I N G S 2 - - - - - 3 MR. ROACH: Hello everyone. I want to thank 4 everyone for coming. I'm delighted to see the folks that 5 are here, the interest in the issues today. I must say 6 the welcome, of course, is to the FTC Workshop on 7 Intellectual Property Rights and Standard Setting, the 8 one we've called Tools to Prevent Patent Hold-up. 9 And I am delighted to see the interest among 10 the folks who are here today, and I am very, very 11 grateful to our panelists, to our crew of panelists, who 12 have come and given us their time to be here today to 13 talk about these issues, and some of them have traveled 14 from quite some distance to be here. 15 I have a few housekeeping details I'm compelled 16 to pass on. I'm Pat Roach from the Office of Policy 17 Planning, by the way, at the FTC. And, so, if you'll 18 have the patience to bear with me, several little items 19 to take care of, one of them that is -- may be important 20 around lunchtime is that anyone who goes outside of the 21 building without the FTC badge, or even with the 22 unofficial badge, when you come back into the building 23 you are going to be required to go through the machine, 24 through that screening as you come in, but hold onto your 25 sticky patches because it will make your life a lot For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 4 1 easier. You'll just be able to be waived into this room 2 again after lunch. And because of that a reminder that 3 it may take just a little bit to come in and return to 4 the auditorium. 5 There are a few other things here. In the 6 event of a fire or evacuation of the building, leave the 7 building in an orderly fashion. Once you're outside, you 8 need to orient yourself to New Jersey Avenue, which is 9 along here on this side of the building. Across from the 10 FTC is the Georgetown Law Center, and the rallying point 11 is across the street in front of the right front 12 sidewalks in case we have a fire and so forth. 13 In the event it is safer to remain inside the 14 building in an event, we'll need to be told where to go. 15 You will be told where to go. And we have some security 16 folks. If you spot any suspicious activity, please tell 17 security. 18 I'm also going to give a welcome to those who 19 are viewing these festivities by webcast, and also have a 20 reminder to those who are here today that the event is 21 open to the public and it may be photographed, 22 videotaped, webcast or recorded. And by participating in 23 the event, you are agreeing that your image or anything 24 you say or submit may be posted at the ftc.gov websites 25 or on another of the government's -- the Commission's For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 5 1 publicly available social media. I'm told to tell you 2 this. 3 With that behind us, I would like to begin the 4 substance of the day today by introducing Commissioner 5 Edith Ramirez for opening remarks. 6 COMMISSIONER RAMIREZ: Thank you, Pat, and good 7 morning, everyone. On behalf of the Commission, I want 8 to welcome you to our standards workshop. Our focus 9 today will be on ways to limit the risk of patent hold-up 10 that occur when patented technologies are incorporated in 11 collaborative standards. But before I start, I'd like to 12 take a few minutes to introduce the key issues and 13 questions our three panels will discuss today. 14 I also want to take just a brief moment to 15 thank those responsible for organizing the workshop and 16 in particular Suzanne Michel and Pat Roach from our 17 Office of Policy Planning; Pete Levitas, Assistant 18 Director of the Bureau of Competition; and Joe Farrell, 19 Director of the Bureau of Economics, who will be speaking 20 to you himself at the close of the day. 21 I also want to thank our panelists for taking 22 the time to participate in today's workshop. Our 23 panelists have extensive experience with the technical, 24 business, and legal issues associated with standard- 25 setting activities, particularly in the high-tech sector, For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 6 1 and will no doubt have very interesting things to say 2 about the issues to be discussed today. 3 Standards are, of course, everywhere in 4 everyday life. They guarantee that the electrical plugs 5 on ordinary household products fit the standardized 6 outlets in our homes. Ordinary products like printer 7 cartridges and tires come in standardized sizes and 8 specifications which fosters choice and competition in 9 the supply of replacement parts. 10 Standards play a particularly important role in 11 the communications and high-tech sectors, making it 12 possible for us to exchange information seamlessly across 13 competing carriers, platforms, and devices. 14 Interoperability standards are especially important in 15 network sectors like wireless communications where the 16 value of the product to any one consumer grows with the 17 total number of consumers using the network. 18 Sometimes standards arise de facto in the 19 marketplace, which may not always be ideal. Innovators 20 may be reluctant to invest in R&D until they know which 21 standards will dominate the market, and consumers may 22 delay their purchases until a winner emerges. This is 23 one reason why many industries turn to collaborative 24 development through standard-setting organizations. 25 Collaboration can also lead to the adoption of better For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 7 1 technical standards with input from a broad range of 2 knowledgeable engineers and technicians. 3 On the other hand, collaborative standard- 4 setting can raise risks for competition and consumers. 5 SSO members are often product or technology market 6 competitors and collaboration can raise the risk of anti- 7 competitive agreements to exclude rivals or fix prices. 8 But since SSO activities can generate substantial pro- 9 competitive benefits, both courts and agencies evaluate 10 most SSO conduct under the rule of reason. 11 The risk of patent hold-up, the subject of 12 today's workshop, is another important competitive 13 concern associated with collaborative standard-setting. 14 In the context of the standard-setting process, patent 15 hold-up describes the situation where a patentee is able 16 to exercise increased market power in licensing 17 negotiations because its patented technology has been 18 incorporated into a standard. 19 The adoption of technical standards can 20 generate switching costs that change the competitive 21 landscape for an industry. After a standard is adopted, 22 firms may begin to make irreversible investments tied to 23 the adopted standard. Moreover, collaborative standard- 24 setting can be a lengthy process that requires SSO 25 members to reach consensus on a large number of complex For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 8 1 technical issues. Changing a standard after the fact can 2 add additional delay that slows the introduction of new 3 products, resulting in lost profits for firms 4 implementing the standard. 5 As a result of these costs, patentees that may 6 have faced meaningful competition prior to adoption of 7 the standard may face little competition after the fact. 8 Hold-up occurs when a patentee uses these switching costs 9 to demand higher royalty rates than it would have -- than 10 it could have negotiated before the standard was adopted. 11 Where a firm acquires market power through 12 deception or other exclusionary conduct, patent hold-up 13 can be an antitrust violation as the Commission 14 maintained in its Dell, Unocal, and Rambus cases. And as 15 the Commission concluded in N-Data, conduct that permits 16 patent hold-up can violate Section 5 of the FTC Act, even 17 if it does not necessarily violate Section 2 of the 18 Sherman Act. 19 However, even where patent hold-up does not 20 raise an antitrust enforcement issue, it raises an 21 important issue for competition policy more broadly.
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