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Who Should Own the Benefits of Standardization and the Value It Creates?

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Who Should Own the Benefits of Standardization and the Value It Creates? Minnesota Journal of Law, Science & Technology Volume 19 Issue 1 Article 3 2018 Who Should Own the Benefits of Standardization and the Value It Creates? Richard H. Stern George Washington University Law School Follow this and additional works at: https://scholarship.law.umn.edu/mjlst Part of the Science and Technology Law Commons Recommended Citation Richard H. Stern, Who Should Own the Benefits of Standardization and the Value It Creates?, 19 MINN. J.L. SCI. & TECH. (2018). Available at: https://scholarship.law.umn.edu/mjlst/vol19/iss1/3 The Minnesota Journal of Law, Science & Technology is published by the University of Minnesota Libraries Publishing. Who Should Own the Benefits of Standardization and the Value It Creates? Richard H. Stern* Introduction ............................................................................ 108 I. The Benefits, Value, and Risks of Standardization ........... 115 A. Public and User Benefits ....................................... 115 B. SEP Holder Benefits .............................................. 116 C. Effect of Standardization on SEP Value ............... 119 D. Sunk-Cost Holdup .................................................. 121 II. The Technological Background of the Cell Phone Wars .. 126 A. The Successive Generations of Standardization .... 126 B. Baseband Processors ................................................ 131 III. Qualcomm and Cell Phone Industry Market Structure . 133 IV. Qualcomm’s Challenged Marketing Practices ................. 135 A. “No License, No Chips” ............................................ 135 B. Refusal to License Competitors ............................... 142 C. Legal Theories of FTC and Apple Cases Against Qualcomm .............................................................. 144 1. Sherman Act Charges ...................................... 144 2. Unfairness Charge ........................................... 146 3. Clayton Act Issue ............................................. 150 D. Relief Sought in the Qualcomm Cases .................... 151 E. Ruling on Motion to Dismiss FTC Case .................. 157 V. How Courts Have Ruled FRAND Royalties Should Be Determined ................................................................... 159 A. FRAND Commitments Are Legally Binding Contracts ................................................................................ 159 B. FRAND Commitments Follow Patent Assignments163 C. Case Law on FRAND Royalty Determination ........ 166 © 2018 Richard H. Stern * Professorial Lecturer in Law, The George Washington University Law School. A Washington, D.C. patent and antitrust attorney, Stern was Chief of the Patent Section of the US Justice Department’s Antitrust Division during the Nixon and Ford Administrations. 108 MINN. J.L. SCI. & TECH. [Vol. 19:1 1. The Controversy over Royalty Base ................ 167 2. Non-Discrimination .......................................... 175 3. Multiple Patents on Same Component ............ 176 4. Determining Royalty When the Smallest Saleable Patent-Practicing Unit Is Quite Large ............ 177 5. Gaming the System by Adroit Claim Drafting . 179 VI. The 2015 IEEE Patent Policy Update ............................. 185 A. The IEEE “Clarifies” Its Patent Policy ................... 187 B. SEP-Owner Opposition to Patent Policy Update .... 190 C. The Grandfather Controversy ................................. 197 D. The Retroactivity Controversy ................................ 199 E. Retrospectivity of the 2015 Patent Policy ............... 201 VII. Who Is Entitled? .............................................................. 205 A. We Are Entitled to Share ...................................... 209 B. Downstream Prices Better Reflect the Value of the Technology to End-Users ....................................... 211 C. The Synergistic Value Chain Should Trump the Shortcomings of Competition ................................ 218 D. Incentivize Me or I’ll Defect .................................. 221 E. Legal Symmetry ..................................................... 223 F. The End Is Not in Sight ......................................... 234 G. Application of Utilitarian Theory .......................... 239 Conclusion ............................................................................... 242 Appendix A .............................................................................. 245 Appendix B .............................................................................. 246 INTRODUCTION Standardization creates enormous benefits for all those it affects, and in doing so it creates enormous economic value. The value is enjoyed in varying shares by the public, standards- implementing device manufacturers, service providers, and the owners of patents on the technology implemented in standards. How should this value be allocated among these stakeholders? Some suggest that the free market should make this determination in a reign of laissez-faire—in what Hobbes describes as the “war of all against all.”1 But that is too simple. The free market may well be unable to resolve this conundrum. 1. THOMAS HOBBES, DE CIVE 101 (Bernard Gert ed., Doubleday 1972) (1642). 2018] WHO SHOULD OWN THE BENEFITS 109 Any resolution requires all sorts of state intervention and coercion—contract enforcement in courts, patent infringement litigation remedies, and government and private antitrust litigation backed up by judicial enforcement. Moreover, as US courts have recognized, market failure is inevitable and may therefore lead to unjustified wealth transfers. For standardization necessarily creates potentially harmful monopoly power unless some private or public means modulate the monopoly power to some degree. In the last several years, this issue has become the focus of increasing controversy, and therefore of increasing public policy concern. This controversy has been marked by: patent infringement litigation,2 largely over the determination of reasonable royalties for standard-essential patents (SEPs);3 a 2015 update of the Patent Policy4 of the Institute of Electrical and Electronics Engineers (IEEE), a major US standard-setting organization (SSO); a business review of that Patent Policy update at the Antitrust Division,5 concluding with a 2. See, e.g., Commonwealth Sci. & Indus. Research Org. v. Cisco Sys., Inc. (CSIRO), 809 F.3d 1295 (Fed. Cir. 2015); Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014); VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014); LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51 (Fed. Cir. 2012). 3. A standard-essential patent (SEP) is a patent that is necessarily infringed when a standard-compliant device is manufactured or a standard- compliant service is performed. A SEP covers technology embodied in a standard or that the standard implements. Standards typically incorporate patented technology of many SEPs. Since each SEP is essential to making a standard-compliant product, at least in principle, each is a sine qua non for compliance. There are patents designated as SEPs, however, that cover only optional features or certain types of implementations of standards. Therefore, some standard-compliant products implement the technology of only some of the designated SEPs for a given standard. See, e.g., Ericsson, 773 F.3d at 1232 (referring to IEEE 802.11 standard); Microsoft Corp. v. Motorola, Inc., No. C10- 1823JLR, 2013 U.S. Dist. LEXIS 60233, at *160 (W.D. Wash. Apr. 25, 2013) (“[D]espite the fact that Motorola argues that these 13 patents are ‘essential’ to the 802.11 Standard. Microsoft [standard-compliant] products do not use these patents in any way . .”), aff’d on other grounds, 795 F.3d 1024 (9th Cir. 2015). 4. The update is part of Article 6.2 of the Standards Board Bylaws of the IEEE Standards Association (IEEE-SA). INST. ELEC. & ELECS. ENG’RS, IEEE- SA STANDARDS BOARD BYLAWS § 6.2 (2016), https://standards.ieee.org/develop /policies/bylaws/sb_bylaws.pdf. 5. Renata B. Hesse, Response to Institute of Electrical and Electronics Engineers, Incorporated, U.S. DEP’T JUSTICE (Feb. 2, 2015) [hereinafter DOJ 110 MINN. J.L. SCI. & TECH. [Vol. 19:1 determination that the policy did not appear to violate the antitrust laws; opposition and resistance to the 2015 policy update from major US and European owners of SEPs covering technology used in standards that cell phones implement;6 national regulatory agencies’ trade regulation enforcement actions in Korea,7 China,8 Japan,9 and Taiwan10 against a dominant US cell phone SEP owner and cell phone telecommunications chip seller (Qualcomm, Incorporated) for allegedly abusive exploitation of its SEP ownership; and January 2017 lawsuits that the US Federal Trade Commission Response to IEEE], https://www.justice.gov/atr/response-institute-electrical- and-electronics-engineers-incorporated. 6. See text infra at notes 327–62. 7. See Press Release, Korean Fair Trade Comm’n, KFTC Imposes Sanctions Against Qualcomm’s Abuse of SEPs of Mobile Communications (Dec. 28, 2016) [hereinafter KFTC Press Release], http://www.ftc.go.kr/eng/solution /skin/doc.html?fn=0575fbdccbed8ced77b565db3dc7d32ffc7051e67ef109afad6d4 f1cd780d6e8&rs=/eng/files/data/result/files/bbs/2017/. 8. See Noel Randewich & Matthew Miller, Qualcomm to Pay $975 Million to Resolve China Antitrust Dispute, REUTERS (Feb. 9, 2015, 3:19 PM), http://www.reuters.com/article/us-china-qualcomm/qualcomm-to-pay-975- million-to-resolve-china-antitrust-dispute-idUSKBN0LD2EL20150209. 9. See Press Release, Japan Fair Trade
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