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Standard-setting and intellectualproperty rights: Some lessons and

policy agenda for consortium standard

Sadao NagaokaProfessor, Institute of Innovation Research, Hitotsubashi

UniversityResearch Counselor, RIETI

December 2008

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Outline

1. Technical standard and essentialpatents

２．”Tragedy of anti-commons” andcoalition formation

３．Holdup problem４．Patenting practices (continuations anddivisions)

５．Policy issues for discussions

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1. Patents in standards

• There are many essential patents for eachstandard.

• Why？(1)Complexity of a standard(2)R&D competition, including not only verticallyintegrated manufactures but also firmsspecialized in research, university and users

(3)Bandwagon effect due to network externality(4)patent applications, enjoying the benefits ofearlier filing dates (continuations and divisions)

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Table 1 Three technical standards and patent pools

Standard Pool Admin.,Year

Members of the poollicensors Essential patents Non-members Licensees

MPEG 2(standardspecifiation inDecember1994)

MPEG LA,1997

Originally (July 1997) 7firms, 1university;22 firms, 1 univ. as of April2004

Originally 125 patents (34families); currently(July 2004)644 patents (127 families)

Lucent , IBM 800 (November 2004)

6C,Toshiba,1998

Toshiba, Matsushita,Mitsubishi Electric,Time Warner,Hitachi, VictorCompany of Japan, IBM

180 US patents for player, and166 US patents for recorders(December 2004)

245 firms forhardware (decodersand encoders) 157firms for discs

3C,Philips, 1998 Philips, Sony, Pioneer,LG

131 US patents for DVD players,106 US patents for recorders(December 2004)

179 firms forhardware (decodersand encoders) 216firms for discs

3G(standardspecifiation inNovember1999)

3G PatentPlatform,2003

7 firms for W-CDMA

no significant third-partyevaluations (954 W-CDMArelated patents (in terms of USpatents) and 857 cdma2000related patents submitted to theARIB as "essential" byDecember 2004)

Many, includingQualcomm,Motorola,Ericsson, andNokia

DVD(standardspecifiation inDecember1995)

Thomson

Source: based on http://www.3gpatents.com; http://www.mpegla.com; DOJ Review Letter from Joel Klein to Carey R. Ramos,June 10, 1999; DOJ Review Letter from Joel Klein to Gerrard R. Beeney, December 16, 1998;http://www.dvd6cla.com/index.html ; http://www.ip.philips.com/.

Source: Nagaoka, Tsukada, and Shimbo(2006)

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Table 2 The number of firms owning the essential patentsfor DVD (player and recorder) for each technology subclass

Section IPC Subclass Number of firmsowning essentialpatents

Number ofessentialpatents

G01 Measuring; Testing G01D 2 3G02 Optics G02B 1 1G06 G06F 7 15G06 G06K 4 13G06 G06T 1 1G09 G09B 1 1G09 G09G 1 1G10 G10H 2 3G10 G10L 2 4G11 G11B 12 236G11 G11C 2 3G11 G11D 1 1G11 G11G 1 1H03 H03K 1 1H03 H03M 5 11H04 H04B 2 6H04 H04H 2 4H04 H04K 1 1H04 H04L 6 10H04 H04N 10 124H04 H04R 1 1H04 H04S 1 2

Human necessities A63 Sports; Games; Amusements A63H 1 1B11 Other B11B 2 2B32 Layered Products B32B 2 3

Performing operations;Transporting

Physics

Electricity

Information storage

Musical instruments; Acoustics

Educating; Cryptography; Display;Advertising; Seals

Computing; Calculating; Counting

Basic electronic circuitry

Electric communication technique

IPC Class

Source: Nagaoka, Tsukada, and Shimbo(2006)

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Table 3 Types of firms which own essentialpatents (Number of firms)

MPEG2 DVD(reader) ３G (WCDMA) Total %

Manufacturing firms (licensor andlicensee) 17 10 19 46 79.3%

Non-manufacturing user 3 1 2 6 10.3%

Pure licensor 3 0 3 6 10.3%

Total 23 11 24 58 100.0%

Note 1. Pure licensor includes a firm specialized in R&D, a firm specialized in patent portfolio managementand a university.

Note 2. Based on the firms belonging to patent pools for MPEG２ and DVD. Based on the firm which declarethe ownership of essential patents to the ARIB for 3G.

Source: Nagaoka, Tsukada, and Shimbo(2006)

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Figure 1 Time profile of the essential patents of threestandards

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MPEG2, US patents DVD(reader), USpatents

W-CDMA, US patents

A:priority date on or later than themonthof the first determination of standardspecification

C: applied on or later than themonth ofthe first determination of standardspecification, with priority date before themonth of the first determination ofstandard specification

P: applied but not yet registered beforethemonth of the first determination ofstandard specification

R: registered before themonth of thefirst determination of standardspecification

Source: Nagaoka, Tsukada, and Shimbo(2006)

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２． ”Tragedy of anti-commons” and coalitionformation

• Many essential patents which have been granted andwill be granted-double or more marginalizations due to royalty stacking、-hold-up risk

• Tragedy of anti-commons: overlapping propertyrights can hinder the efficient use of the resourceHeller and Eisenberg (1998)

• Can firms develop a contract or an institution toovercome the tragedy? (Coase theorem “Given clearproperty rights, inefficiency can be contracted away”)

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Patent policy of a standard organization

• Standard organizationFocus here on the open standard organization, not only official body such as ITU,ISO but also private forum such as DVD forum, excluding a private closedconsortium.

• Patent policy of a (open) standard organizationBefore the adoption of a standard, a participating firm is asked

- To disclose the relevant patents and- To commit to royalty free licensing (RF) or licensing under RAND conditions.

If such commitment is not given, the standard will be reformulated to avoid suchpatent.

• Standard body has avoided to discuss specific licensing terms, due both to antitrustconcern and to practical division of labor reasons, although the ex-ante RFcommitment has been possible (the distinction between RF and RAND has beenmade explicit for all three major international standard organizations).

• Patent search covers third party patents, but mostly voluntary search.

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A patent pool

• Collective licensing of essential patents which can internalize theexternality among the patentees and can achieve the economy ofscale in the assessment of essentiality of patents.

- Maximum royalty for the entire bundle of the complementarypatents for the entire effective life of the patents- Assessment of the essentiality of the patents- One stop shopping

• Subject to antitrust regulations

• Patent pool is formed ex-post after the standard is set. There is noex-ante agreement for the members participating in the standard tojoin the pool.

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Principles of Antirust regulation on patent pool asrevealed in Business review letters

and DOJ/FTC report

• Cover only complementary patents. Onlyessential patents, if the pool is dominant in thetechnology market.

• A mechanism for objective evaluation of theessentiality of the patents

• Freedom of bypass• No ancillary restraints such as on product

market competition and research competition• Open license (this would limit the additional

markup by manufacturing licensors)

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Figure 2 Structural relationship among patents

Patent A

Patent B

Patent C1 Patent C2

Complement

Complement

Substitute

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Coalition formation for a pool

• Given there is no ex-ante commitment, theorysuggests that

- there will emerge non-members, if the number ofthe patentees exceed a certain limit.

- A firm specialized in R&D will be more likely tobecome a non-member.

Aoki and Nagaoka (2005)• In fact, there are often outsiders of the patent

pool.

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Figure 3 Pool formation by five firms (A,B,C,D,E)

To become an outsider

The rest of firms will develop a poolto avoid royalty accumulation

Firm A will get as much asall of the remaining firms

Firm A needs to offer attractive terms for therest of firms to remain in the pool

Firm A is not able to make much

To promote the pool

Choice by firm A who can commit first

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3．Hold-up problem

• Hold-up risk Once the essential patent is included in the patent andas the standard is established in the industry, the user of thestandard is increasingly locked in the standard, due to its own andcollective sunk cost.

• Different causes of hold-up conducts

• Outsider Type 1 Commitment to “RAND” conditions but does notparticipate in the patent pool and charges a relatively high royalty

→ “RAND” conditions are vague and ex-ante licensing commitment notaccompanied by an explicit contract may not be enforceable ex-post.

Note. There are those non-members of the pool, who bypass the poolthrough cross-licensing. This has nothing to do with hold-up.

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RAND conditions• Why vague? In the past,- Most standards used be RF or have no effective patents.- Repeated relationship and mutual needs for a license

among vertically integrated firms• What is “reasonable”?- No hold-up element, i. e. royalty rate which would have

been agreed ex-ante, i.e. before the licensees sink theirinvestments.

- Reasonable as a whole, i. e. the cumulation of allroyalties do not make the aggregate rate too high evenfor the licensors

• What is “non-discriminatory”?- Allowing bypass through cross-licensing could erode

completely the price-increasing effect of the pool, while itgives competitive advantage to insiders over outsiders.

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Figure 4 Pool vs. cross-licensing

Firm B

Patents a,b,c d

Firm C

Firm D

firm A

Firm E

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• Outsider Type 2: Participated in the standarddevelopment process but failed to disclose the relevantpatents and enforced them once the standard is adopted→ Such hold-up would result in higher royalty rate aswell as higher product price

FTC cases (Dell, Rambus)Patent ambush

- Disclosure requirement of a standard body is on a besteffort basis.

- A patentee has an incentive to delay the disclosure soas to reduce the risk that the standard is going to be re-designed to get around his patent.

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・ Outside type 3 No participation in thestandard development process butasserted the “submarine” patent→difficulty of conducting exhaustivesearch over third partiesdue partly-absence of complete disclosure systemfor patent applications in the US

-liberal use of continuation applications inthe US.

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Table 4. Types of outsiders

JPEG

FTC vs. DellFTC vs. Rambus(JEDEC standard onDRAM),Broadcom vs.Qualcomm (ITU-Tstandard on H.264)

FTC vs. Negotiateddata solutions( Ethernet )

Case

Patent wasreassigned

YesYes1

Patentreexamined

NoNo3

Rambus hadexited theJEDEC beforethe adoption ofthe standard

No (No disclosure)Yes2

NoteEx-ante disclosure andlicensing commitmentsuch as on “RAND”conditions

Participation instandarddevelopmentprocess

Type

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4. Patenting practices (continuations anddivisions)

• Constraints on patent search- Essential patents can be generated ex-

post, using the continuation practices,enjoying the earlier priority of parentpatent.

- Identifying the existence of third partypatents may increase the risk of trebledamage, in case that they are valid andessential for the standard.

- Public good aspect of patent search

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特許出願 90.4.18 91.4.16 97.2.19 99.9.21成立最初の特許出願 PCT出願（=US510898) 分割出願 US5954804US510898 WO09116680(1991/10/31公開） 97.11.26 99.6.22成立

継続出願 US591510598.11.20 99.9.14成立継続出願 US5953263

99.3.4 99.11.30成立継続出願 US5995443

JEDEC活動91.1 92.5 95.12初めて参加 正式に参加 最後の参加（東芝の招き）

標準化活動SDRAM 93.11

標準認定

DDR SDRAM 96.12 97.12富士通のプレゼン 仕様が固まる（JEDEC内での作業開始）

規格間競争

・推進者ではなかった・ディスクローズすべき特許を持っていなかった

・既にJEDECを退会していた

日立提訴時争点となった４つの特許すべてUS510898をもとにして分割・継続出願を行った

インテルがラムバスのDirect RDRAMサポートを表明その後製造コストの問題が発生

99年6月インテルがラムバスサポートを取りやめる

00年1月ラムバスが日立を提訴

Figure 5. ランバス事件

ランバスの場合には、国際出願していたので、当初出願の明細書は公開。

出典： 長岡貞男(研究代表者),2005a

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Table 5. The essential patents which wereobtained, using divisions, continuations and

continuations-in-parts

Total those which enjoyearlier filing dates

Continuations CIP Divisions Total per

patent

85 37 44 9 32 85 2.3044% 52% 11% 38%

180 83 34 5 62 101 1.2246% 34% 5% 61%

131 47 38 9 15 62 1.3236% 61% 15% 24%

396 167 116 23 109 248 1.4942% 47% 9% 44%

DVD (3C)

Note １. 10 firm for MPEG2 include Sony, Philips, Thomson licensing, Mitsubishi, Matsushita, GEtechnology, General instrument, JVC, Samsung. And Toshiba.

Note ２．There are some overlaps between continuations, CIP and divisions.

Number of essentialpatents Frequency of continutations, CIP and divisions

MPEG2 (10 firms)

DVD (６C)

Total

Source: Nagaoka, Tsukada, and Shimbo(2006)

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Table 6. Do continuations favor pioneers? (dependent variable: the shareof the essential patents using continuations, CIPs or divisions)

Basic specification Extended specification

contcipy contcipdivy contcipy contcipdivy

Coef. Std. Err. Coef. Std. Err. Coef. Std. Err. Coef. Std. Err.size of essentialpatents in thestandard formationstage

lnpatentsb

-0.133 0.074 * -0.125 0.067 *quality of early stagepatents lncitedness -0.188 0.085 ** -0.166 0.077 ** -0.199 0.084 ** -0.161 0.076 *

age -0.021 0.022 -0.044 0.020 ** -0.065 0.312 0.130 0.285

age 20.002 0.011 -0.006 0.010

MPEG dummy mpeg 0.132 0.088 0.083 0.080 0.040 0.105 -0.020 0.096Number of obs=21 Number of obs=21 Number of obs=21 Number of obs=21R-squared = 0.2828 R-squared = 0.3897 R-squared = 0.4208 R-squared = 0.5049

Adj R-squared = 0.1563 Adj R-squared = 0.2821 Adj R-squared = 0.2278 Adj R-squared = 0.3398

*** 1% significance, ** 5% significance, * 10% signigicance

Share of essentialpatents usingcontinuations, CIPs ordivisions

Share of essential patentsusing continuations or CIPs

Share of essential patentsusing continuations, CIPs ordivisions

difference betweenapplication year and2005

Share of essential patentsusing continuations or CIPs

Source: Nagaoka, Tsukada, and Shimbo(2006)

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Appendix: Descriptive statistics of the essentialpatents by firm

Note. Patents represents the number of essential parents held by a firm, patentsbrepresents that at the standard formation stage, contcipy is the share of the essentialpatents using continuation or CIP, contcipdivy is the share of the essential patentsusing continuation, CIP or division.Note. The sample focus on the firms with at least three essential patents.

Variable Obs Mean Std. Dev.Min Maxpatents 21 18.86 18.58 3 66patentsb 21 7.62 4.94 2 22contcipy 21 0.31 0.20 0 0.8contcipdivy 21 0.43 0.20 0 0.8citedeness 21 29.97 19.53 11.9 95.2age 21 13 1.9 11.0 17.9mpeg 21 0.52 0.51 0 1c6 21 0.33 0.48 0 1c3 21 0.14 0.36 0 1

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5. Policy issues for discussions5.1 Clarify and strengthen the patent policy of a standard

organization for more clear ex-ante contracting- To accommodate more clear ex-ante unilateral

licensing commitments before the adoption of thestandard(IEEE LOA with an option on the maximum rate, VITAcompulsory rule)

- Defining the principles of the RAND conditions.(1)Hypothetical ex-ante negotiations and(2)Reasonableness as a whole.

- Ex-ante commitment to the collective licensing ofessential patents through a patent pool at the stage ofinitiating a forum activity for a standard

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Letters of assurance‘A Letter of Assurance shall be either:

a) A general disclaimer to the effect that the Submitter without conditions will notenforce any present or future Essential Patent Claims against any person or entitymaking, using, selling, offering to sell, importing, distributing, or implementing acompliant implementation of the standard; orb) A statement that a license for a compliant implementation of the standard will bemade available to an unrestricted number of applicants on a worldwide basis withoutcompensation or under reasonable rates, with reasonable terms and conditions thatare demonstrably free of any unfair discrimination. At its sole option, the Submittermay provide with its assurance any of the following: (i) a not-to-exceed license fee orrate commitment, (ii) a sample license agreement, or (iii) one or more materiallicensing terms.’

IEEE-SA Standards Board Bylaws Subclause 6.2, Para 3, 4 & 5

• Shall be one of the following:– Assurance that Essential Patent Claims will not be enforced– Assurance that Essential Patent Claims will be licensed

• Reasonable and nondiscriminatory– With or without monetary compensation

• At its sole option, Submitter may include– Not-to-exceed rates– Sample license agreement– Material licensing terms

– A statement that Submitter is unable or unwilling to grant license

(Source) 2007 IEEE-SA Patent Policy

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5.2 Competition policy-Help making the patent policy of a standard organization

enforceable, considering that a hold-up behavior in thecontext of standard can have substantially anti-competitive consequences on product market andtechnology market and the difficulty of a contractualsolution.( Anti-competitive consequences in the sense of higherprice for consumers and the reduced profit for the firm witha complementary technology through deceptive conductand not necessarily monopolization.)

-Clarifications of the regulations on the policy menu of astandard body and a patent pool:(1) Ex-ante commitment to the collective licensing ofessential patents through a patent pool (no unilateralbypassing)(2) RAND and cross-licensing(3) The royalty rate of the bundle of essential patents(4)Joint action for the patent enforcement of the patenteesof essential patents

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5.3 Patent policy- It would be important to introduce the fulldisclosure of patent applications in the US andto reform the willful infringement doctrineweakening the use of the disclosure information .

- The continuations and division practices whichallow a firm to enjoy the benefit of the earlierfiling date of its patents could be more time-limited.

- Standard body could be encouraged to makethe contributions accessible to the public andthe patent offices even if such access requiresfees, so that a contributor can prevent hiscontribution being patented by others.

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5.4 Other points for standard bodies- Coordinate the licensing commitments and

patent disclosure requirement- Strengthen the joint search over the third

party patents

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• 長岡貞男(研究代表者),2005b,『技術標準と競争政策―コンソーシアム型技術標準に焦点を当てて』(公正取引委員会競争政策研究センター)

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