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Standard setting as a collaborative exercise is pervasive in the modern economy. Competitors in many industries confer with one another to establish standards relating to safety, interoperability, regulatory requirements, and numerous other aspects of product design. The resulting agreements among rivals offer at least the possibility of diminished competition. So standard setting has always presented a modicum of antitrust risk. Recently, however, the legal dangers have shifted to a new and more complex plane. A variety of intellectual property, contract, and tort considerations have now joined antitrust on the checklist of things to worry about. In particular, the fact that specific IP rights may be necessary to practice certain standards has begun to affect the way that courts view standard setting itself. The underlying concern (which has not yet been fully articulated) rests on the notion that the exclusionary power of IP rights in some circumstances may impinge upon a larger community interest in practicing a standard that was consensually adopted and implemented. Although there remains considerable respect for proprietary rights and widespread recognition that such rights should not be arbitrarily extinguished, there is growing interest in balancing the rights of owners with the rights of those who would practice the affected standard. A companion concern focuses on whether participants in the standard-setting process have been fully candid regarding the existence of IP rights and the plans for their enforcement. At this juncture, the rules are anything but clear, and the resulting uncertainty afflicts those on both sides of the problem. From the standpoint of an owner of patents or other forms of intellectual property, suggestions that its proprietary rights should not be enforced or that enforcement should be treated as a mere tort or breach of contract could threaten the company’s most important assets. From the standpoint of those investing to build products compliant with a standard, claims for IP royalties under penalty of exclusion could alter significantly the economic equation on which the investment was justified. For both sides, the level of uncertainty can be reduced by greater attention to detail during the standard-setting process itself. At the very least, those who participate directly in the process should be armed with the proper questions to ask about the intentions of others and with the answers least likely to spawn allegations of the company’s own misconduct. TOWER OF BABEL Much of standard setting today involves information technologies — electronics and software — in which products need to communicate with each other. Fax machines must transfer images to other fax machines. Personal computers have to connect to such peripheral devices as monitors, printers, and modems. And software designers must call up processing routines from operating systems. Without well-defined interfaces, the computer and electronics industries would resemble a tower of Babel, with little or no cooperation among participants and many stand-alone systems. Thus standard setting plays an especially useful — indeed a critical — role by enhancing the offerings available to consumers. Most standard setting is carried out through the offices of standard-setting organizations such as the Institute of Electrical and Electronics Engineers, the JEDEC Solid State Technology Association, the American National Standards Institute, the American Society of Mechanical Engineers, and the like. Almost all such organizations purport to deal with IP issues by setting general guidelines that require participants to grant a license to IP rights that are essential to practice the standard to any entity seeking one on reasonable and nondiscriminatory terms. But few, if any, standard-setting groups seem willing to administer the details of applying such abstract provisions or to settle disputes that arise after a standard is implemented. A host of questions remain largely unanswered by case precedent or industry custom. REASONABLE ISSUES Consider, for example, what might be a reasonable license fee for using the IP necessary to a standard to connect a particular peripheral device to a network of personal computers. Should it be a one-time, lump-sum license? Or should the fee be based on the value of some stream of products or services? If the latter, should the royalty be based on the minor value of a small chip that implements the standard, the greater value of the peripheral device, or the aggregate value of the products in the network? For all these ways and more, arguments have been made, informed by a variety of economic facts but with little truly definitive law from the courts. A similarly important question exists as to the point in time at which reasonableness should be tested. Assume that a reasonable royalty must bear some relationship to the actual value of the technology covered (although even this assumption is untested). A particular technology may have significantly different value before and after a standard is adopted. Prior to the standard-setting process, several technologies may compete with one another and have equal prospective value. After the standard-setting process, all that value gets shifted to just one technology. Arguments have been made for basing a reasonable royalty on both pre-standard-setting and post-standard-setting valuation. Another problem arises in trying to differentiate intellectual property that is necessary for the practice of a standard from that which is merely desirable. Sometimes proprietary technology relates only to cost-saving or efficiency-enhancing features, and there is no real agreement on whether it is economically feasible to participate in the market without using the technology. Further, some standards have initially optional features that can become important to customers over time, passing as a practical matter from optional to mandatory. As with the measure of a reasonable license fee, the importance of a technology can be hard to pin down. Difficult and highly specific issues come up in determining what is “nondiscriminatory” in the real world. Companies today can have complex relationships that make them vendors and customers in some markets, complementary providers in others, and competitors in still others. Attempting to negotiate a license agreement in such a setting that other users of the standard will not challenge as discriminatory can be tough. ‘FESSING UP Especially thorny problems can be provoked by disclosure — or, more likely, nondisclosure — of IP rights. Most standard-setting organizations take some measures to ensure that IP rights needed for a particular standard are disclosed to all participants. But here again the requirements are often poorly defined. What, for example, is the obligation to disclose pending applications for patents whose claim scope is still undetermined? Does the obligation to disclose extend to an entire company or merely to the patents known to those who participate in the standard-setting process itself? What is the consequence of a failure to disclose? Clear answers to these questions are difficult to find. Relatively untested legal theories, however, abound. A few lower court decisions have applied estoppel theories to block enforcement of patents that were necessary to practice a standard and were not disclosed at the time of the standard setting. The failure to disclose IP rights has been challenged as an antitrust violation, unfair competition, breach of contract, fraud, a violation of the Racketeer Influenced and Corrupt Organizations Act, and probably other ways as well. Only a handful of district court decisions have dealt with most of these issues, and none has done so in any comprehensive way. The antitrust enforcement agencies began showing an interest in this issue in 1995, when the Federal Trade Commission challenged efforts by the Dell Computer Corp. to obtain royalties from a patent relating to the so-called VESA Bus standard. The standard had been established by the Video Electronic Standards Association, an industry group of which Dell was a member. The complaint alleged that Dell’s participation in the standard-setting process and its failure to inform other participants as to pending patent applications constituted a violation of the FTC Act and the Sherman Antitrust Act. When the case was settled by consent decree, the diversity of public comments on the decree formed an interesting testimonial to the lack of consensus on underlying issues. Standard-setting organizations, economists, affected companies, and even some individuals brought forth a wide variety of competing views on the proper balance between the rights of an IP owner and the rights of those using a standard. The FTC and the Antitrust Division of the Department of Justice continue to express interest in applying antitrust concepts to this basic fact pattern. The well-advised company is therefore paying close attention. All of these issues are complex and not easily reduced to consensus. In a system such as ours, where market forces set IP values, companies quite naturally seek to gain as much profit as permitted from their intellectual property. On the other hand, those that invest in practicing a standard want to avoid a significant shift in the economics of that investment long after their decision is made. With the rules unclear, those participating in standard setting must, at a minimum, be aware of the pitfalls. An even better approach would be for those that fund the various standard-setting organizations to insist that these bodies themselves take steps to clarify with greater precision the duties of the participants to one another. Almost all participants have a strong incentive to seek clarity. But clarity is not likely to come soon, if at all, through the judicial process. The author is indebted to his partners Joseph P. Lavelle and Michael G. Cowie and to associate Karen Gibbs for assistance in understanding these issues. Robert P. Taylor is managing partner of the Silicon Valley office of Howrey Simon Arnold & White. Taylor specializes in patent and antitrust litigation and related fields of law.

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