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Surviving Standards Wars and the Commission’s New Horizontal Guidance

JUNE 2010

The recent competition investigations launched by the European Commission against Intel, Rambus and Qualcomm demonstrate its continued interest, post-Microsoft, in the IT sector.

Particularly interesting about the investigations involving Rambus and Qualcomm is the Commission’s willingness to target abusive behaviour in the context of standard setting and patent licensing.

The activities of standard setting organisations (“SSOs”) and their members are already governed by the well-established competition law principles in the EU Treaty: in essence, they must not enter into anti-competitive agreements in relation to the standard (Article 101[1]) and dominant companies on the affected markets[2] must not abuse their market power (Article 102[3]). Indeed, the Commission issued Guidelines on how Article 101 applies to standardisation agreements back in 2001[4], and has reiterated that its current investigations merely reflect existing Article 102 case law.

One of the outcomes of these investigations is that the Commission has provided draft guidance on participation in SSOs, and the scope of the requirement for essential patent holders to charge fair, reasonable and non-discriminatory (“FRAND”) royalties within the proposed new guidance on how competition law should be assessed in the context of ‘Horizontal Agreements’ (i.e. agreements between actual or potential competitors).

This article summarises the competition law principles and guidance that apply to those participating in SSOs and for companies wanting to use the technology that is incorporated into industry standards and some practical ways to avoid the potential pitfalls.

Some background

What is a standard?

A standard defines the technical or quality requirements of current or future products, production processes, or compliance methods. It can cover various issues, such as the standardisation of different grades/sizes of a particular product, or technical specifications in markets where compatibility and interoperability with other products or systems is essential.
Standards can be adopted by private standards bodies, or under the aegis of formal standards bodies, including national and international organisations (such as the BSI and ISO respectively[5]), and the European standards agencies recognised by Directive 98/34/EC (ETSI, CEN and CENELEC[6]).

Competition law concerns

Standardisation agreements

Firstly, they arise because normally competing undertakings meet to draft the standard. The starting point in competition law is that competitors should compete independently, not co-operate and so, because the standards setting process provides an opportunity for competitors to get together, it could be used for anti-competitive purposes. However, a degree of co-operation may be justified if it leads to pro-competitive economic benefits.

Secondly, because the adoption of a standard creates a focus on one particular solution to a given technical issue, unless managed carefully, this could create barriers to entry, stifle innovation, discriminate against other solutions or even exclude potentially competitive alternatives to the same technical issue. This is particularly the case where the standard is biased towards one or more participants or controlled by one or more stakeholders and IP is involved.

Due to the potential for technical solutions focussed on one technology to create barriers, exclude entry or potentially discriminate against other solutions, standards-setting can give rise to considerable tensions between competitors with their own desires to promote their respective solutions and their different commercial objectives and positions in the market. In these circumstances, finding a common solution can be problematic.

The recent Rambus and Qualcomm investigations, as well as current difficulties around standard setting in the context of next generation mobile phones, are examples of how interests on each side of the standards setting equation can be pitted against each other. On the one hand stand the rights of IP holders in recovering the huge investments (and risks) involved in developing technology and therefore needing to achieve a margin which rewards them for the innovation and risk they have assumed. On the other lie the interests of the equipment, device or handset manufacturers as well as mobile operators themselves charged with monetising and generating a revenue stream out of the technology which embodies the IPR, effectively absorbing the IP as a cost to be recovered in the retail price. Clearly, technological innovation cannot be rewarded at a level that, ultimately, consumers would not be willing to pay.

There are also some stakeholders that are vertically integrated and have interests both as IPR holders and as vendors of final products. These companies are therefore likely to have a stronger incentive to cross-license their own essential IPR in exchange for essential IPR held by other companies than in seeking royalties.

Therefore, the main concerns about standard setting are: (i) that it could be used as a forum to exchange competitively sensitive information, and perhaps even facilitate hardcore cartel behaviour, such as price fixing or market sharing; (ii) how standards are set, used or accessed could discriminate against, or even exclude certain parties; and (iii) if IP is included in a standard, the terms on which such IP is made available to all, particularly the royalties charged, could give rise to abuses of a dominant market position.

Formal standards bodies are likely to have competition compliance procedures but private standards bodies may not. The consequences of breaching competition law can be serious and therefore participants need to be aware of the potential risks.

What does the new horizontal competition guidance set out in relation to these issues?

Restrictions which have an anti-competitive object

Agreements using a standard as part of a broader restrictive agreement aimed at excluding actual or potential competitors would be clearly anti-competitive. Such an agreement would arise where a national association of manufacturers set a standard and put pressure on third parties not to market products that do not comply with the standard.

Agreements between licence holders prior to the adoption of a standard as to the terms of licensing or in which they jointly fix prices of products will be clearly anti-competitive as will agreements between IPR holders on the licensing terms they will disclose or standard terms containing provisions which influence the prices charged to consumers.

Restrictions which have an anti-competitive effect

To determine whether a standardisation agreement can have an anti-competitive effect, a number of factors must be assessed including the extent to which members remain free to develop alternative standards or products.

The establishment of standards can create or enhance market power potentially leading to one or more of the contributors to a standard having a dominant market position, particularly where the contributor owns IPR in the standard. It can be difficult once a standard is adopted, to reduce such market power because often, standards have taken years to develop and are therefore difficult to reengineer to find an alternative technical solution.

Where participation in standard-setting as well as the procedure for adopting the standard in question is unrestricted and transparent, standardisation agreements which set no obligation to comply with the standard and provide access to the standard on FRAND terms do not restrict competition within the meaning of Article 101(1). However, agreements aimed at excluding competitors from the market normally infringe Article 101, as would restrictions on the parties’ freedom to develop alternative standards/products.

What is the meaning of ‘unrestricted’ participation in and procedure for the adoption of standards?

The rules for the SSO, and in particular its IPR policy, should guarantee that all relevant actors can participate in the process leading to the selection of the standard. The relevant rules should not exclude or discriminate against specific IPR holders and there should be no bias in favour or against royalty free standards. There should also be objective and non discriminatory procedures for allocating voting rights.

Transparency

The SSO should have procedures which allow stakeholders to inform themselves of upcoming, on-going and finalised standardisation work.

IPR Policy

The SSO’s rules should be binding on its members and seek to avoid misuse of the process through hold-ups and the charging of abusive royalty rates by IPR holders. Consequently good faith disclosure of essential IPR is necessary while a standard is still under development and before it is agreed. This requires the IPR holder to make reasonable efforts to identify any such existing or pending IPR which might have a bearing on the proposed standard and ultimately all essential IPR holders should be required to provide a written undertaking to license their IPR on FRAND terms. They should also be required to ensure that if they transfer the IP to any other company, that company will also be bound by the undertaking.

Whether or not licence terms are FRAND will be based on whether the fees bear a reasonable relationship to the value of the IPR. Ex ante disclosure, by IPR holders of their most restrictive terms (provided that they do not give rise to discussions between IPR holders) will not be a breach of competition law.

Economic benefits

Standards can be efficiency enhancing for a number of reasons, for example, they may:

establish technological interoperability and so encourage competition between technologies developed by different companies which helps prevent lock-in to one particular supplier;
reduce transaction costs for sellers and buyers;
be aimed at setting the agreed quality, safety and environmental aspects of a product and thereby facilitate consumer choice and lead to increased product quality; and
reduce the time it takes to bring a new technology to the market and facilitate innovation by allowing companies to build on top of agreed solutions.

Therefore, standardisation should only be undertaken where it enhances competition, e.g. by developing new markets or improving supply. Standards should not limit innovation, nor lead to the obsolescence of existing products. The information needed to apply the standard must be available to those wishing to enter the market and an appreciable proportion of the industry should be involved in setting the standard transparently. In addition, the rules of the standard-setting organisations should contain sufficient safeguards to prevent the standard-setting process from being biased towards one or several participants.

Indispensability

The inclusion in a standard of substitute technologies (i.e., technology which is regarded by users/licensees as interchangeable with or substitutable for another technology) may limit inter technology competition because it can, in practice, foreclose of competitors by excluding one potentially competing alternative technology from being included in a different standard. As a general rule, the inclusion of substitute technologies in a standard is likely to give rise to restrictive effects on competition within the meaning of Article 101(1).

Therefore, only those elements that need to be standardised should be. Whilst consumers may benefit from having a single technological solution, this solution must be set on a non-discriminatory basis. It should ideally be technology neutral and it must be objectively justifiable why one standard is chosen over another. Generally, all competitors in the market(s) affected by the standard should be able to participate in discussions.

It’s also important to distinguish between standard setting and the related R&D/commercial exploitation. Agreements on standards should cover technical compatibility or a certain level of quality only and cannot, for example, oblige parties to boycott an alternative. Furthermore, granting ‘joint’ control over production/innovations will restrict competition in relation to the product’s characteristics and decrease consumer choice.

No elimination of competition

Any industry standard must remain as open as possible and be applied in a clear, non-discriminatory manner. Access must be possible for third parties on FRAND terms.

Benefits to consumers

Efficiency gains attained must be passed on to consumers to an extent that outweighs the restrictive effects on competition caused by a standardisation agreement or by standard terms and this may depend on the procedures used to guarantee that the interests of the users of standards are protected. Where standards facilitate interoperability and competition between new and already existing products, services and processes, and secure multiple supply sources it can be presumed that the standard will benefit consumers.

What are the particular concerns about Qualcomm / Rambus?

The Commission’s recent proceedings against Qualcomm and Rambus both concerned alleged abuses of dominance, contrary to Article 102.

Rambus was accused of charging unreasonable royalties for the use of its patents for technologies needed to produce Dynamic Random Access Memory chips (“DRAMS”) used in computer systems and other types of digital equipment. The Commission claimed that Rambus engaged in a “patent ambush”, whereby it participated in JEDEC’s[7] standards-setting activities but did not disclose the existence of patents that would be required to use the DRAMS standards. In December 2009, the Commission accepted binding commitments in which Rambus agreed to a worldwide cap on its royalty rates for 5 years. (This decision has since been appealed by Hynix Semiconductor, a competitor to Rambus.)

Qualcomm holds IPRs in the CDMA and WCDMA standards for 3G mobile phone technology. In October 2007, the Commission opened an investigation into complaints made by a number of mobile/chipset manufacturers that the licensing terms and royalties imposed by Qualcomm were not FRAND and, therefore, that Qualcomm had exploited the extra market power it gained as a result of having technology based on its patent incorporated into the standard. As the complainants withdrew their complaints, the Commission closed its formal proceedings into Qualcomm but, nonetheless, stated that the case had raised important issues about the pricing of technology after its adoption as part of an industry standard.

These cases demonstrate the potential difficulties with incorporating proprietary technology into a standard, which is particularly likely to arise in high-tech sectors.

IP and standards – resolving potential conflict

A clear tension exists between having standards that are open to all, and proprietary IP.

This issue first arose in the early 1990s over the GSM standards developed within ETSI, culminating in the ETSI IPR Policy and undertaking, which aims to balance the needs of standardisation for public use and rewarding IPR holders.
There are strict disclosure notes in the ETS/IPR policy. Members must use reasonable endeavours to inform ETSI of “essential” IPRs (i.e., it would be technically impossible to implement the standard without using this IPR). Prior to commencement of work, patent searches may be carried out to check whether essential IPRs exist in relation to a proposed standard. Owners of essential IP are given 3 months in which to undertake to give irrevocable licences on
FRAND terms for use of the IPR.

Consultation and reporting procedures are established to resolve situations where FRAND licences are not given prior to adoption of the standard. Alternative technology will be used if available on FRAND terms, failing which work on the standard will cease. Similar procedures exist for where FRAND licences are withheld after adoption of the standard, which can result in modification of the standard.

In either case, where FRAND licences are refused, there is scope to seek assistance from the European Commission. As the Rambus and Qualcomm cases demonstrate, this can prompt a detailed competition investigation. Ultimately, the Commission is empowered to require FRAND licensing - and impose fines - where Article 102 has been infringed.

The draft guidance recently published for consultation by the European Commission covers many of the issues originally debated by the Commission during the establishment of the ETSI IPR policy.

Basic guidelines

If you’re considering a standard setting initiative (e.g. through a trade association)……

Do your ‘due diligence’:

Are there good economic objectives behind the proposed new standard? Check that it wouldn’t limit future innovation (which is more likely if the products concerned are in the early stages of development). Will it enhance efficiency and benefit consumers (e.g. lower prices, improved quality, innovation and technical development)? Is it really necessary? Check that no existing products would be rendered obsolete.
Confirm that there is no anti-competitive aim – e.g. a wish to exclude other operators from the market. If there is, the trade association and its members who participate in these discussions will have breached Article 101.

Is there an IP policy/undertakings? Check the terms carefully. If not, then the participants need to decide upfront how to deal with any IPRs in formulating the standard. The ETSI IP policy provides a useful example.
Ensure that there is a competition compliance procedure, including clear guidelines as to what can and cannot be discussed. The administrative arm of the trade association is often best placed to oversee this.
Consider approaching the relevant standards setting body first, which will be able to guide you through the process.

If you have an IPR which could be essential, depending on the technological direction in which the standard is developed….

Consider your own strategic objectives – do you want your IPR included, what sort of licensing terms would you seek to apply – are they FRAND? If not – you need to try to avoid your IPR becoming ‘essential’. Generally, it is commercially advantageous to include your IP in the standard – but confirm whether it will be an important part, as this determines the licence fee that you may be able to apply.
Check the IP policy/undertakings to confirm what procedure to follow. Make it known to all the other participants that your IP is likely to be essential (assuming there is not a negative disclosure process as in some specialist standards bodies).

If another participant has essential IPR but isn’t planning to make this known…

Notify the trade association - check for any procedure under the IP policy/undertakings. If no IP policy/undertakings govern this situation, consider using alternatives to that IP.

Susannah Sheppard and Rachel Iley

Useful URLs

Commission announcement of consultation on horizontal guidance
http://ec.europa.eu/competition/consultations/2010_horizontals/index.html
Commission announcement of Rambus statement of objections
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/330&format=HTML&aged=0&language=EN&guiLanguage=en
Commission launches formal proceedings against Qualcomm
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/389&format=HTML&aged=0&language=EN&guiLanguage=en
ETSI guide to IPRs, including its IPR policy
http://www.etsi.org/WebSite/AboutETSI/IPRsInETSI/IPRsinETSI.aspx

[1] Or the equivalent UK law, the Chapter I prohibition in the Competition Act 1998

[2] The markets which can be affected are (i) product markets to which the standard relates; (ii) service markets for standard setting; and (iii) markets for testing and certification.

[3] The equivalent UK law is the Chapter II prohibition in the Competition Act 1998.

[4] Guidelines on the applicability of Article 101 of the EC Treaty to horizontal cooperation agreements http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:003:0002:0030:EN:PDF

[5] British Standards Institute and International Organization for Standardization.

[6] Respectively, the European Telecommunications Standards Institute, European Committee for Standardization, and the European Committee for Electrotechnical Standardization.

[7] The semiconductor engineering standardization body, Joint Electron Device Engineering Council.