somewhere around 2.25% per device sold be establishing a de facto cartel, establishing fees that collectively render it impossible for new competitors to enter the field? That would appear to be the subject matter to which European Commission Vice President Joaquin Almunia alluded during a speech in Paris last Friday.Could the growing number of device manufacturers demanding intellectual property royalties of
Comm. Almunia now has the job made famous by Comm. Neelie Kroes during her relentless pursuit of Microsoft as Commissioner for Competition. During Friday's speech, Almunia appeared to suggest that a new enforcement mechanism may be necessary to prevent manufacturers from establishing barriers to entry under the guise of "FRAND" - fair, reasonable, and non-discriminatory - licensing terms.
But the Commission has led us to the edge of this cliff before, without coming up with a way to scale it. Almunia acknowledged that patent fee abuse can be a problem, but a careful read of the speech fails to shed any light on how the enforcement solution might work, beyond the imposition of more fines - the kinds of fines that result from years of investigation, long after the alleged damage has already been done.
Is FRAND 0-for-3?
The question, essentially, boils down to whether the standards process has been re-engineered to enable companies that contribute concepts that become standards to leverage their monopolies to keep too many competitors from using those standards. It sounds like the opposite of what a standards process should be, but legislators worldwide have seen ample evidence not so much that standards processes are being abused, but that they may actually have been established with this kind of leveraging in mind.
"When monopolies and tight oligopolies are allowed to occupy a market, they tend to resist change and often end up caring only about the preservation of their business models," Almunia stated. A fair market, he went on, is one that's "contestable," which he defined as enabling new players a chance of success. "Once a standard is adopted," he went on, "it becomes the norm and the underlying patents are indispensable. Owners of such standard essential patents are conferred a power on the market that they cannot be allowed to misuse."
One part of a solution, he suggested, was to make the standards process more transparent. In many situations, standards are negotiated between stakeholders in secret. However, since those standards belong to private industry, those stakeholders have argued, it is not up to any government regulator to dictate how those stakeholders should converse with one another.
Almunia went on to assert that once a standard has been declared, its licensing on FRAND terms must be ensured. He then added, "This is crucial if we want industries and businesses relying on such patents to develop freely to their utmost potential. I am determined to use antitrust enforcement to prevent the misuse of patent rights to the detriment of a vigorous and accessible market. I have initiated investigations on this issue in several sectors and we will see the results in due time."
The investigations Comm. Almunia refers to include one opened against Samsung a few weeks ago, in response to claims of unfair licensing by Apple, among others. Samsung's pledge to honor so-called FRAND terms comes in the wake of its own complaint last year, filed in multiple E.U. member states concurrently, claiming its own rights had been infringed by a variety of manufacturers.
Et tu, Neelie?
One problem that any legislative or regulatory body must face is that the perceived market value of any competitive company's technology portfolio is established by how much money the patents in that portfolio would likely garner through jury awards and favorable settlements. Many smaller companies bolster their own legal expertise as a way of offsetting their manufacturing deficiencies - what they can't earn in revenue off the street, they might make up for in settlements. If a regulatory body were to open up the standards process to complete transparency, and also dictate the process by which royalties are negotiated, companies may be faced with the prospect of raising the baseline fee for what they consider "FRAND" to compensate for the lessened amount of what they can obtain in court.
And if FRAND fees are limited, then those same companies may consider raising their street prices.
The European Commission has been down this road a few times before, stopping short of taking the critical step of influencing the market and triggering the avalanche that would inevitably follow. In 2007, the company considered the "poster child" for FRAND manipulation was Qualcomm. While the E.C. investigation began with plenty of bluster and fanfare, at the point in October 2009 where it had to make a decision more about what to do, rather than what to say, then-Competition Commissioner Neelie Kroes notoriously backed off, suggesting that her government's role should instead be more advisory than enforcement.
"In my view, there are a number of ways to assess whether there has been an excessive pricing abuse under Article 82 EC and the methodologies used will depend on the factual matrix," Comm. Kroes stated, invoking another famous metaphor. "Any antitrust enforcer has to be careful about overturning commercial agreements without a clear and coherent evidence base. But if standards are set in an open and transparent manner, industry can concentrate on delivering products which comply with these standards and which bring benefits to consumers, rather than devoting their energies to litigating in front of courts and competition authorities. Whilst it is for industry to choose what type of scheme is best suited to its needs, the Commission is ready to give inputs to ensure that standard setting is efficient and in line with the law."