At the core of today’s high technology markets are networks, both real and virtual.1 Real networks—links between devices and systems—scaffold the lower levels of information exchanges by ensuring a common hardware platform. Examples of real networks include the mobile communication networks (e.g. 3G UMTS, 4G LTE), local area networks (LANs), and the ‘network of networks’, the Internet. On top of real networks, there may also be networks built around software platforms, which enable users to share and exchange information important to them. These ‘virtual networks’ are formed by users as they select and utilise software applications, such as word processors, image editing programs, and social media.2
To many consumers, the complex pattern of networks that underwrites the success of high technology markets is more or less invisible.3 Consumers tend to cluster their activity around only a limited number of platforms (network hubs), and markets tend to ‘tip’ towards dominant solutions.4 The user experience is therefore often one of seamless interoperability. But the seamlessness of the user experience is sometimes bought at a steep price. Dominant software and hardware companies may utilise their intellectual property rights (IPR) to foreclose competition, and limit consumer choice by isolating competitors from the network or by raising their costs.5
In particular, IPR over technological standards (the technical details which define device and software interoperability within a network) may be used anti-competitively. In the case of ‘de facto’ standards,6 which arise from the market due to demand side efficiencies (network effects), the European Union (EU) Commission and European Courts have elaborated ‘exceptional circumstances’ whereby dominant companies and standard owners may be compelled to license their IPR to downstream competitors under so-called ‘open access’ rules.7 The competition law basis for these ‘refusal to deal’ or ‘essential facilities’ cases (e.g. Microsoft,8IMS)9 has generally been motivated by a ‘monopoly leveraging’ theory under Article 102 of the Treaty of the Functioning of the European Union (TFEU): the refusal to license IPR is seen to work as a ‘complementary strategy’ to extend a dominant position from an upstream market to one downstream, constituting an exclusionary abuse.10 More recently, the EU Commission and European Courts have also demonstrated their willingness to intervene in cases of ‘de jure’ or ‘cooperatively-set standards’.11 Unlike de facto standards, de jure standards arise by a process of cooperative standard-setting in formal standard-setting organisations (SSOs).12 When companies contribute technology for inclusion in a standard, they undertake a commitment to license any standards-essential patents (SEPs)13 under Fair, Reasonable and Non-Discriminatory’ (FRAND) terms. The precise content given to these terms is left to be hashed out by private negotiations between the parties, with the caveat that the framework for the negotiation may require a softening of some of the hard edges of IP law. In particular, recourse to injunctions may be limited. According to the recent EU Commission statements in Samsung14 and Motorola,15 and the Court of Justice of the European Union (CJEU) judgment in Huawei v ZTE,16 the threat or use of injunctions by the SEP-holder during these negotiations may thwart the process of FRAND bargaining,17 leading to the anticompetitive exclusion18 of competitors’ products from the market.19 As in the case of de facto standards, the Commission and CJEU also elaborate ‘exceptional circumstances’ under which a finding of abuse can be sustained, and simultaneously define a ‘safe harbour’ within which licensees may negotiate FRAND rates without threat of injunctions, although the precise competition law ‘theory of harm’ remains uncertain.20
This paper aims to contextualise the recent Commission and CJEU statements in Huawei, Samsung and Motorola as part of a broader ‘infrastructural approach’ to technological standards consistent with the de facto standards line of cases of Microsoft and IMS.21 The nerve of the argument is that despite the different competitive and cooperative processes that give rise to them, both these types of standards perform the economic role of ‘technological infrastructure’, and function as necessary inputs to downstream production in high technology markets.22 Achieving such infrastructural status has the potential to create an economic windfall on the supply side and demand side simultaneously by lowering production costs, increasing consumer surplus, and fostering static and dynamic competition, leading to greater product choice and diversity.23 However, as with traditional indispensable infrastructure, these social and private gains are only fully realised when the essential infrastructural resource is managed under an open access rule.24 The approach of this paper is both descriptive and normative. It is argued that despite the differences in the identified ‘exceptional circumstances’ and the legal rules used, the European approach to both de facto and de jure standards is underwritten by an implicit concern to ensure open access to technological infrastructure.25 A two stage ‘infrastructural approach’ is argued to be at the core of this approach, which can be roughly summarised as including (i) an ‘infrastructural screening test’, followed by (ii) an assessment of the appropriateness of an open access rule. This is the descriptive component. The normative component argues that by making this infrastructural approach explicit it becomes possible to taxonomise the access disputes over SEPs, ‘interoperability information’ and other privately owned technological infrastructure as part of a wider societal debate26 about the merits and pitfalls of private control over ‘public’ infrastructure, whether these are the traditional ‘top down’ infrastructures of roads, electricity and telecommunications; the (private) cooperatively set infrastructure of, e.g., mobile communications; or the ‘bottom up’ infrastructures of super-dominant software products, such as operating systems, search engines or social media websites.27 It is submitted that all these examples of infrastructure share a number of key characteristics that may jeopardise the efficient application of ‘property’28 rules and frustrate the normal process of market bargaining for access.29 Furthermore, as network products and markets continue to proliferate and take centre stage in the modern economy, the social trade offs involved in private ownership over technological infrastructure are starting to sharpen, as shown by the increasingly regulatory and interventionist tendencies of governments towards companies like Microsoft,30 Intel,31 Google32 and Facebook.33 Unlike with traditional infrastructure—where access issues have historically been solved by public provisioning or sector-specific regulation—the ‘bottom up’ provisioning of technological infrastructure presents governments with extremely difficult, if not intractable, efficiency gambles over private incentives and the public interest. By building on the insights of Brett Frischmann, Suzanne Scotchmer and Ian Ayres, and some useful tools from game theory, this paper develops and defends the utility of an infrastructural approach to technological standards and demonstrates how an open access regime can be efficient and principled in both law and economics.
The paper will develop the above arguments in the following framework. After this introduction, Part II will unpack the concept of ‘technological infrastructure’ as used in this paper. It will begin by introducing the infrastructural approach (Part II, Section A), before applying it to the special case of IP-protected essential ‘technological infrastructure’ (Part II, Section B). Part III will then focus on the strategic and legal dynamics of standard-setting in high technology. It is divided into three sub-sections. Section A (Part III) will provide an overview of the relationship between de facto and cooperative standards, by making use of tools from game theory to highlight the strategic aspects of standards development, both as a coordination game, and as a prisoner’s dilemma (Part III, Section B). Section C (Part III) will then hone in on the (EU) legal status and enforcement of the FRAND commitment in cooperative standard-setting. To this end, it will provide a review of recent cases in the EU, as well as a brief look at some key case law that has emerged internationally. Part IV then zooms in on the recent CJEU case law and Commission statements about the (un)availability of injunctions during FRAND negotiations, in certain conditions. The discussion will focus on teasing out the economic and strategic consequences of removing the availability of injunctions during FRAND negotiations. It aims to demonstrate that, in contrast to arguments of commentators who suggest that such an approach is tantamount to non-market price-setting, removing injunctions as a remedy may actually lead to an increase in successful private bargaining over FRAND, due to its ‘information-forcing’ negotiation framework. Part V is integrative, and attempts to synthesise the legal approaches adopted by the European Courts with respect to de facto and de jure standards and demonstrate that they form part of a single concern to apply an open access rule to technological infrastructure, thus allowing producers, consumers and society in general to benefit from the ‘synergies’ and network spillovers which may result (Part V, Section A). Section B (Part V) will conclude.
II. Infrastructure Theory
Although an ‘infrastructural’ approach to certain type of IPR has arguably been implicit in a number of key legal decisions and academic commentaries for some time,34 the first explicit development of this perspective was made by Brett Frischmann in 2005. In his paper, ‘An Economic Theory of Infrastructure and Commons Management’,35 Frischmann developed the idea that certain information resources (such as IPR) may share key attributes with traditional infrastructural resources (such as the power grid or the road system) which qualify them for special management in the public interest. As with traditional infrastructure, Frischmann argued that certain kinds of IP-protected information resources should be managed in a manner that promotes openness over private control. Below, these special attributes of infrastructural resources will be unpacked and explained (Section A) before the special case of IP-protected privately owned ‘technological infrastructure’ is developed (Section B).
A. Economic Characteristics of Infrastructure
‘Infrastructure resources are intermediate capital resources that serve as critical foundations for productive behaviour within economic and social systems’.36 Put simply, infrastructure functions as an input to downstream production but is not used up by such production. In order to fulfil this role, infrastructure is characterised as being non-rival,37 intermediate38 and generic.39 Traditional infrastructure is often characterised by two chief attributes: government involvement in its provision and/or management, and its predominantly open accessibility. Governments and the public have both historically recognised that certain resources tend to yield socially optimal outcomes when managed in an openly accessible manner. On the supply side, these socially optimal outcomes have traditionally been explained in terms of the returns-to-scale advantages inherent in natural monopolies, or by the ‘public good’ status of some infrastructural goods, which inhibits their private provision at socially optimal levels. Government regulation and public provision of such resources was therefore considered to be essential. Although in recent years, many of these resources have undergone some privatisation (e.g. the unbundling of telecommunications networks in many countries), they often still benefit from sector-specific competition policies, which mandate openness and non-discrimination as a condition of their private ownership.40 One consequence of the push towards liberalisation has been the necessity to develop ‘access rules’ for the downstream suppliers requesting access to indispensable assets owned by the incumbent (often state-sponsored) monopolist. The solution was the adoption of ‘open access’ terms, which were intended to prevent both exploitative and exclusionary abuse on the part of the monopolist as well as to ‘lower prices, stimulate technological innovation and increase consumer choice’.41 Pithily defined, an open access regime is an access regime implemented by the resource holder(s) or regulator, which permit all potential users to have access to the resource on similar terms.42 Such rules aim to ‘leverage’ the (partial) non-rivalry of the resources at stake, in order to realise maximum social spillovers and encourage competition.43
An important contribution made by Frischmann to the economic analysis of infrastructure is his focus on the ‘demand side’ aspects of open access to infrastructural resources, as opposed to the supply side. Indeed, the supply side arguments in support of government management of infrastructural resources fell out of vogue in the late 1970s and early 1980s, triggered in part by the notion that ‘government failure’ in the management of natural monopolies may lead to greater ‘deadweight losses’ than the ‘market failure’ inherent in their deregulation.44 Frischmann’s arguments on the demand side focus on the idea that infrastructural resources are effectively ‘conduits’ for downstream value production, serving to scaffold vast positive externalities: value which spills over into society at large without being completely captured by private interests.45 To illustrate his point, Frischmann gives the example of the traditional infrastructural resource of public highways. By being open access, the public transport network lowers transaction costs on commerce and thus leads to ‘scale returns—greater social value with greater use of the resource’.46 Frischmann argues that the same goes for any resource whose social function is that of a conduit for value production, including in special cases, intellectual property, as discussed in Section B (Part II).
As opposed to the logic of the ‘tragedy of the commons’,47 where open access to resources results in negative externalities and competitive exploitation, Frischmann and others48 argue that infrastructural resources are often characterised by a ‘comedy of the commons’49 or a ‘cornucopia of the commons’, meaning simply, that greater use may lead to greater gains, such as in the well-known case of network goods subject to the ‘positive externalities’ of ‘network effects’. For example, as a telecommunication network expands to include a greater number of users, all existing users experience a value increase in the asset (as measured by the growth in possible connections to members of their social network). Moreover, this increase in consumer surplus is exponential, according to Metcalf’s law.50 Although networks are a special case since the generated value follows a power law, traditional infrastructures also tend to yield increasing social returns to use: a village’s use of a sewage system leads to public health gains; education infrastructure leads to a better informed electorate etc. All these outcomes derive from the ‘scaffolding’ role of infrastructure: the locus of value creation is downstream of the infrastructural good itself, and its value ‘spills over’ into a number of ‘adjacent and sometimes, completely unrelated markets’.51 The nub of the above arguments means that essential infrastructural assets attract an economic logic which can be summarised as ‘if infrastructure, then open access’.52
In modern high technology markets, networks play a central role in value creation and productivity as both producers and consumers leverage the network effects of real and virtual (software) networks to enhance the value of their products and intellectual creations. While the underlying real networks are often regulated and in some sense publicly provisioned (e.g. telecommunications cables, electricity grid, and the regulation of mobile spectrum),53 the ‘wealth of networks’54 in high technology is often purely privately provisioned and managed, such as in the case of software operating systems, applications and web services. As will be shown below, in some cases the intellectual property rights that ‘read on’ to these networks (and the network interfaces, such as standards) may qualify as essential infrastructural resources, thus demanding special treatment analogous to traditional infrastructure.
B. Privately Owned Technological Infrastructure
Although the argument for previously publicly owned facilities being treated as ‘essential facilities’ and made subject to an open access regime following deregulation is reasonably uncontroversial, the case of fully privately owned assets being treated the same way has proven more problematic. In particular, the idea that purely privately provisioned infrastructural assets should be subject to the ‘forced-sharing’ of an open access regime has provoked vituperative criticism from both academics and some Courts.55 The literature in this area is dense, but can be usefully summarised as clustering around two nodes. One node of the literature aims to undercut the premise of the infrastructural approach, by arguing that in dynamic environments privately owned assets rarely fulfil the requirements of infrastructure. It begins by acknowledging that the competitive process in network markets (which characterises high technology) may lead to super-dominant market shares. But it argues that the dominant positions that result only enable innovators to extract ‘Schumpeterian rents’,56 since the dominance is time-limited by the pressure of dynamic competition. The crux of the argument is that a static ‘snapshot’ of the market may well show that an asset is infrastructural, but that when viewed dynamically, these infrastructural attributes fade away and are replaced by a moving image of constant turmoil: a process of cascading dominance by competitors and new entrants.57 The second node of the literature is intimately related to the first, but focuses instead on the dangers of implementing an open access rule, even if the asset is found to be infrastructural. This argument may well concede that an asset is infrastructural in both static and dynamic senses, but argues that it was only the ex ante incentive of exclusive private control, often in the form of intellectual property rights and the corollary ability to restrict competition and charge monopoly prices, which justified the ‘infrastructural’ investment in the first place. In the words of Justice Scalia in the US Supreme Court ‘essential facilities’ case of Trinko:58 ‘The opportunity to charge monopoly prices–at least for a short period–is what attracts “business acumen”’. The argument runs that if private control is diluted ex post by a mandatory open access rule, then private companies’ incentives to invest in such infrastructural assets would be drastically reduced, curtailing dynamic efficiency and innovation.
Both these arguments are often advanced as deriving a priori from economic theory;59 however, both claims are actually empirical in nature. Whether or not a privately owned asset performs the role of infrastructure—even under dynamic conditions—is a factual inquiry. Although it is true that such factual assessments are prone to significant uncertainty, the legal and economic components of these tests can nevertheless be tuned to include an ‘error cost framework’,60 by, e.g., raising the threshold needed to support an infrastructural finding so as to avoid type 1 errors.61 Second, whether an open access rule would in fact negatively impact dynamic efficiency is also an empirical assessment, though one that relies on counterfactual analysis under certainty. An IP-protected infrastructural asset is both an output and an input62 of research and development (R&D). It may be true that the possibility of exclusive ownership triggered the asset-owner to invest in the first instance. However, the availability of that asset as an input also has the capacity to trigger follow-on and downstream productivity. What is required is a balancing of the two dynamic efficiencies,63 rather than the reliance on the a priori assumption that strong intellectual property protection is somehow equivalent to dynamic efficiency. These arguments and their rebuttals will be developed further in Part V, Section A.
By emphasising that the identification of technological infrastructure is a factual inquiry, we also usefully limit the scope of this paper’s thesis. At first glance, one might be tempted to argue that all technological platforms and standards are in some way ‘infrastructural’, in the sense of being intermediate, generic, and non-rival assets. However, just because an asset has the characteristics to become infrastructural does not yet mean that it has achieved the status of essential infrastructure. What is missing is the consideration of the demand side. In the case of technological infrastructure that arises via the market (de facto standards), it is the power of social demand and network effects that transform (for example, patented) high technology assets into indispensable inputs for downstream productive activity. Examples of such de facto standards abound in high technology, and include dominant document formats,64 audio-visual compression codecs,65 and microprocessor architectures.66 Such technological infrastructures emerge from the competitive process in network markets, characterised by a ‘winner takes all dynamic’. Only in cases where the infrastructural asset has replaced all viable substitutes—and it has become uneconomic for a competitor or new entrant to create an alternative—can the infrastructure be considered ‘essential’.67 In such cases, access to the infrastructural asset may perform the role of a market bottleneck. For example, in Microsoft, downstream networking software companies were found to require access to the upstream Windows operating system ‘quasi standard’ in order to compete on the networking software market.68 Furthermore, when the essential technological infrastructure is IP-protected, mandatory open access rules may only apply when the denial of access undermines industry-wide dynamic efficiency, such as by preventing the emergence of a new product or by retarding technical development.69
But it is important to stress that not all platforms or standards, nor all consumer markets, have the necessary attributes to transform a technological infrastructural asset into essential technological infrastructure. For instance, if switching costs70 are low,71 innovation rates are extremely rapid,72 and/or consumer preferences are fragmented.73 For the sake of completeness, it should also be noted that private companies who own technological infrastructure may choose to adopt open access rules as part of a business strategy to stimulate technological innovation downstream, even in the absence of any mandatory access rules.74 Such strategies are often observed in network industries characterised by two-sided markets.75 For example, an owner of a de facto standard in the form of a mobile operating system (OS) may choose to open up its Application Programming Interface (API) to software developers for free or at very low cost, such as in the case of both Apple and Android. By permitting application designers to create and sell applications (Apps) to consumers, the OS owner leverages indirect network effects to increase the value of its upstream infrastructure to consumers. In addition, companies owning ‘infrastructural’ software libraries or hardware76 may also choose to adopt open access regimes (such as open source licenses) in order to benefit from indirect value appropriation mechanisms like ‘Linus’s Law’,77 or to stimulate the dissemination and use of complementary hardware and software, or simply to engage more fully with the open source community. Finally, even where an infrastructural asset does qualify as an essential infrastructure, access problems may still be addressed by private-ordering solutions, such as patent pools or cross-license agreements.78
It is only as a last resort, where private-ordering access solutions fail, and the infrastructural asset is truly indispensable to downstream companies, that the asset may attract antitrust scrutiny and the mandatory application of an open access rule. In both the EU and US jurisdictions, ‘indispensability’ has been understood to mean that, on objective grounds, there is no actual or potential substitute to the contested resource and that the ‘denial of access […] can reasonably be expected to make competitors’ activities in the market in question either impossible or permanently, seriously and unavoidably uneconomic’.79
Although the essentiality of some technological infrastructures may be challenged on dynamic grounds using the Schumpeterian argument mentioned earlier, any robust analysis must also take into account that while ‘technology’ dominance can be limited over time, ownership over technologies often may not be.80 Fast innovation rates in dynamic markets may drive some technological infrastructures towards obsolescence, but the sequential nature of R&D trajectories81 often means that patents continue to ‘read on’ to subsequent generations, and technologies may need to be backwardly compatible. For example, the current de facto standard for PC CPU ‘instruction set’ architectures—the ‘x86 architecture’—has a legacy stretching back over 36 years.82 The process of ‘creative destruction’ cannot therefore be used as a blanket justification for refusal to intervene in dynamic markets characterised by persistent intellectual property rights, as a (promptly retracted) 2007 US Department of Justice Guidance Report once seemed to suggest.83 Such an approach would be tantamount to allowing the IP owner of an essential technological infrastructure to have significant control over the development of the downstream market. It is a pernicious misreading of economic theory to argue that such exclusive control leads to efficient outcomes. Under the neoclassical approach only market decision-making leads to optimal outcomes, not individual ones.84 The core of the infrastructural approach is to enquire into the nature of these hubs of exclusive control. Scholars such as Suzanne Scotchmer and Stephen Maurer have argued that the ‘heart’ of antitrust’s’ mandatory open access rules (e.g. the essential facilities doctrine) is to leverage the sharing of assets to harness synergies, resulting in consumer welfare gains such as cost reduction or value enhancement.85 Put another way, the competitive harm caused by the owners of technological infrastructure denying access to downstream companies is the foregone consumer welfare boon, resulting from excess unilateral control over R&D trajectories.86 This point will be picked up again in Part V, Section A.
So far most of the above analysis has focussed on de facto standards as technological infrastructure. While the emergence of de facto standards can largely be explained by the power of demand transforming the market from the inside out, de jure standards gain their essential infrastructure status by a different route. During cooperative standard-setting, companies agree on key infrastructural technologies on which to scaffold their downstream products, such as interoperability protocols and agreed bandwidths of the electromagnetic spectrum. Once these standards are agreed (usually in conjunction with a FRAND commitment, see Part III Section B), then companies often make ‘relation-specific investments […] because ex post design decisions are specifically based on the essential technologies selected ex ante’.87 As with the competitive process in relation to de facto standards, these relation-specific investments transform the character of the market, and push the agreed standards (and any SEPs) in the direction of essentiality for the downstream markets88 by creating a ‘relationship of dependence between the intellectual property right holder […] and other undertakings’.89
Now to sum up. It is important not to oversell the point. Only some IP-protected technological infrastructures have characteristics enabling them to work as bottlenecks to downstream value creation, namely those for which social demand and network effects or relation-specific investments in the context of cooperative standard-setting have eliminated substitutes and where demand has become inelastic due to their status as necessary inputs. These IP-protected resources take on the function of essential technological infrastructure by becoming indispensable, non-rival inputs for downstream value creation and potential bottlenecks for further technological development. Given their role as essential technological infrastructure, they attract the economic logic of the ‘infrastructural approach’, which demands ‘if infrastructure, then open access’. Although it is argued that this approach applies equally to de facto and de jure standards (see Part V, Section A), there are nevertheless some crucial differences between them, which must also sound in the relevant competition law tests. Unpacking the strategic components (in relation to standards participation) of these differences will be the focus of Part III.
Below, Part III builds on the distinctions between de facto standards and cooperatively-set standards, and deploys game theoretical tools to explain why the latter might be preferred in high technology markets. Section A focuses on cooperatively-set standards as a solution to a ‘coordination problem’ afflicting standard choice in high technology. Section B then explains why this solution is nevertheless ‘unstable’ unless standard participants are prepared to make ex ante ‘FRAND commitments’, in order to help solve a ‘prisoner’s dilemma’ problem that emerges ex post, after the cooperatively-set standard is adopted. Section C will then take a closer look at the legal nature of FRAND, and the extent to which its legal status makes its function as an ex ante commitment ‘credible’.
III. From De Facto to De Jure Standards
The purpose of this section is to take a closer look at the strategic nature of cooperative standard-setting in contrast to de facto standards. As mentioned in the previous section, there are some important differences between the two ways technological infrastructure emerge from the market, and these differences have consequences for how they can and should be managed. Section A aims to explain using game theoretical tools why companies in high technology may have incentives to coordinate their standard-setting efforts. Section B then deals with the related question of why cooperative standard setting generally requires ex ante FRAND commitments in order to be successful. Once these strategic aspects of cooperative standard-setting and FRAND commitments have been explained, Section C will look into FRAND as a ‘creature’ of law, including how its legal form attempts to make its status as a commitment ‘credible.’
A. Why High Technology Markets Prefer De Jure Standards: Game Theory Approach
When a de facto standard emerges from the market—often as the outcome of a ‘standards war’—the company that owns the standard reaps an economic windfall, as consumer markets and downstream producers90 ‘tip’ their consumption in its direction. The company then goes on to assume a dominant position on the market for the asset, along with the corollaries of volume increases, relative pricing independence, and a (comparatively) ‘easy life’.91 In fact, in contradistinction to non-network monopolies, the economic bonanza of achieving a standard in a network industry is general: both the demand side and the supply side profit. Consumers benefit from exponentially increasing network effects according to Metcalf’s law; the producer benefits from a larger consumer market, greater commercial certainty, and a single ‘platform’ on which to focus its production.92 But the nature of a standards war is that there are also losers. Companies who developed competing standards endure significant sunk costs without payoff. Consumers and producers who backed the ‘wrong horse’ end up with rapidly depreciating assets, as well as the costs involved in adopting and switching to the winning standard, where possible.
For the losing company, it would have been better to have coordinated with the winning company in advance and agreed on a common standard and to have shared in the windfall, even if that meant agreeing to use a standard ‘owned’ by the other. Likewise for the winning company. If we assume that the outcome of a standards war is essentially stochastic (an assumption with reasonably strong theoretical backing),93 then it too would have preferred in advance to have agreed on a common standard and shared in the windfall rather than risk ending up empty-handed. Ending up ‘empty-handed’ here refers to the worst outcome in the ‘game’ (also known as the ‘sucker’s payoff), where no standard is agreed and the losing company is left with significant sunk costs and no payoff. For example, in the High Definition (HD) audio-visual standards war between HD-DVD and Blu-ray, consumers and producers (including Microsoft Xbox) who bought and sold HD-DVD discs and readers were left with near worthless assets after Blu-ray achieved market traction and became the de facto HD standard. However, it was a near thing; the standards war included a number of episodes when HD-DVD significantly outsold Blu-ray.94 In its subsequent generation of Xbox (Xbox One), Microsoft switched over to the Blu-ray standard, despite the patents being substantially owned by its main downstream competitor in the console space, Sony,95 meaning that Sony profited from Xbox sales. The losses, both social and private, involved in Microsoft’s loss of the standards war would have been avoided if Microsoft and Sony (and the other stakeholders in the standards war) could have agreed on either one of the standards upfront. It is the purpose of cooperative standard-setting to help companies reach this outcome.
In the taxonomy of game theory, the structure of a ‘standards war’ is referred to as a ‘coordination game’. If only the parties could coordinate their behaviour ex ante they would be able to reach the best outcome: a commonly agreed standard (referred to as a ‘Nash Equilibrium’96 in game theory) as opposed to risking ending up at the worst outcome of having no standard at all. The purpose of cooperative standard-setting is to permit the emergence of coordinated market solutions to the problem of achieving a standard, enabling all participating producers (and also, eventually, consumers) to share in the economic windfall. Participants avoid the cost of standards wars and fragmented standards and consumers benefit from increased ‘downstream’ competition due to interoperability between competing technologies. To elucidate this game more clearly, Figure 1 contains a payoff matrix for the HD-DVD/Blu-ray ‘standards war’.97 The numerical values98 represent ‘producer surplus’, and stand in for the players’ (in this case either Sony or Microsoft) incentives to select a certain standard. Note that this game has two Nash Equilibria (the underlined values), where the parties agree on a single standard: (i) one where Microsoft agrees to a Sony-owned standard (Blu-ray); and (ii) one where Sony agrees on a Microsoft-owned99 standard (HD-DVD). If they select different standards, then neither benefits since the market remains fragmented. Naturally, the game is a simplification because it misses the outcome where one party ‘wins’ the standards war, but it does succeed in capturing the key motivations behind why companies favour cooperative standard-setting in high technology: because the cost of losing the standards war is often significantly greater than the benefit in winning. Although this is not the case in all industries, it is generally the case in high technology markets with complex products.100
Although not necessarily the best outcome for companies at all times (the best outcome would be to win a de facto standards war)—cooperative standard-setting represents the best ‘risk averse’ outcome.101 As shown in the payoff matrix above, when companies can agree on a standard upfront, they each harvest positive returns [1,3] or [3,1]. By adding the two values together (3+1=4), we also see that the total social welfare (spillovers excluded) is maximised at these two equilibria. These positive returns derive from the agreement ‘not to compete’ on the upstream market of the standard, allowing companies to instead divert more resources to creating better (interoperable) products downstream across a much wider consumer market. Consumers benefit from this downstream competition of interoperable products by avoiding ‘lock in’, and by getting a greater diversity and choice of products. As is also shown by the payoff matrix, failure to agree on a standard results in a fragmented market with zero payoffs. Although a zero payoff is not an entirely accurate representation of reality, it should be noted that in high-technology markets complex products often incorporate hundreds of different standards (and, sometimes, thousands of SEPs)102 so that the consequences of making wrong standards decisions can be drastic. Absent cooperative standard-setting, the multi-faceted and multi-technology devices that characterise current high technology markets would be severely handicapped. In the worst case, failure to adhere to a common standard (and consequent standard fragmentation) leads to lack of product interoperability and complete isolation from both real and virtual networks. From society’s perspective, the social cost is also considerable: significant losses in social welfare (lost network effects) due to absence of a common standard.103
Having now reviewed the strategic considerations for high technology companies to engage in cooperative standard-setting, it falls to consider why a FRAND commitment generally accompanies such standard-setting. It will be shown in Section B below that the stability of cooperative standard-setting relies heavily on the extent to which strategic behaviour after the standard is adopted is controlled (and seen to be ‘credibly’ controlled) ex ante, by legal commitments.
B. Solving the Ex Post ‘Prisoner’s Dilemma’: The Purpose of FRAND Commitments
As shown in the previous sub-section, cooperative standard-setting is a solution to the ‘coordination problem’ which afflicts high technology markets: high technology markets require standards, but simply relying on standards to emerge via the competitive process is extremely risky, both for the companies involved and for society. Although cooperative standard-setting might help solve the problem of coordination in achieving a common standard, it also creates the conditions for another strategic game to play out among standard-setting participants: the well-known prisoner’s dilemma.
The dilemma takes the following form. Companies who agree to coordinate with others on setting a standard still retain strong incentives to absorb as much of the economic windfall as possible. They may attempt this by ‘competing on the merits’ in markets ‘downstream’ of the standard, an outcome which also benefits consumers. Alternatively, and more dangerously, they may do so by attempting to ‘capture’ the ‘upstream’ standard once it is agreed, often by asserting intellectual property rights in the form of SEPs. This type of behaviour is referred to as ‘patent holdup’104 or ‘ex post opportunism’105 in the literature. Such ex post opportunism may manifest in the standards’ participant either refusing to license its SEPs to competitors once the standard is adopted or by charging excessive licensing fees in an attempt to raise competitors’ fixed costs. (As will be discussed in Part IV, the role of injunctions in enabling such threats and pricing strategies is crucial.) The structure of this game is that of a cooperation game or ‘prisoner’s dilemma’ because although both companies are better off not asserting their SEPs over the agreed standard (or not asserting them excessively), each nevertheless has strong incentives to do so, which results in each company attempting to prevent the other from using the standard. The payoff matrix in Figure 2 summarises the essential features of the strategic choices facing the standards’ participants after the standard has been adopted. To ‘share the standard’ refers to the strategy of choosing not to assert IPR (in the form of SEPs) to try to capture the standard, but instead focusing on producing products downstream. ‘Assert IPR’ refers to the strategy of attempting to ‘capture’ the upstream standard—by refusing to license SEPs over it (or to charge non-FRAND rates) once the standard is adopted—in order to prevent the standard’s use by competitors or to raise their costs. As is clear in the payoff matrix, both companies would be better off not asserting their IPR—by ‘sharing the standard’—(each then has positive payoff of 3; and the total social welfare is 6 (3+3=6, excluding spillovers); but both would like to avoid the ‘sucker’s payoff’ of zero when the other company has a payoff of five. This game structure thus leads to ‘Assert IPR’ as the dominant strategy for both players, and hence the Nash Equilibrium of the game results in the sub-optimal [0,0] payoff.
The problem with having this prisoner’s dilemma sitting on top of the coordination game is that its ‘shadow’106 is visible ex ante to all standard-setting participants, who may then refuse to engage in the cooperative standard-setting process ab initio, if they assess the risk of ex post opportunism as insufficiently managed. In short, the existence of the ex post prisoner’s dilemma may work to destabilise the formation of cooperative standard-setting ex ante.
Because of this problem—recognised very early in the history of cooperative standard-setting107—participants are required to give an ex ante ‘commitment’ not to engage in patent holdup or ex post opportunism. Such ‘commitments’ are a well-known solution to prisoner’s dilemma problems, although the challenge is in making them ‘credible’,108 as will be discussed in Section C below. The commitment usually includes a number of components designed to constrain ‘defection’, the most important of which are the duty to declare any intellectual property over the standard before it is adopted, and the duty to license the latter on FRAND terms.
In economic terms, the purpose of the above commitments have been understood as an attempt to confine the licensing fees of standards-essential patents to the ‘value conferred by the patent itself as distinct from the additional value—the hold-up value—conferred by the patent’s being designated as standard-essential’.109 In short, FRAND attempts to ensure that the value of the SEP ‘ex post’ remains roughly the same as its value ‘ex ante’, stripped of any ‘strategic value’.110 As will be further explained in Section C below, this commitment also attempts to strike a balance between ensuring sufficient incentives for companies to contribute their technology for inclusion in the standard while ensuring its ex post openness. From the perspective of SEP-owners, the bargain can be defined as trading some of their unilateral price-setting rights in exchange for greater licensing opportunities, once the standard is adopted.111 Section C will provide a brief outline of the nature of the FRAND commitment as a ‘creature’ of law, including its status as a contract, as well as its more complicated relationship with competition law. It will also discuss how the legal character of FRAND attempts to make its status as a commitment ‘credible’, before setting the stage for Part IV. The latter will engage with the latest European case law on the topic of the availability of injunctions as part of the FRAND negotiation framework (Part IV, Section A), before focussing on the strategic components of the FRAND commitment in operation (Part IV, Section B).
C. Legal Analysis of FRAND Commitment
Before honing in on the legal analysis of the FRAND commitment, it is important to briefly zoom out to glimpse the infrastructural import of the commitment. As with other infrastructural assets, FRAND attempts to approximate an open access regime, but with one crucial caveat. Unlike traditional infrastructure, such as highways and the electricity grid, the technological infrastructure which FRAND attempts to ‘regulate’ only rarely involves public subsidisation, meaning that the intellectual property system has to ‘pick up the slack’ by ensuring the private recoupment of (at least) the investment in its development. Because technological infrastructure is by and large privately provisioned (see Part II, Section B), the FRAND commitment attempts to balance sufficient privately appropriability of the asset to the SEP-holders, while simultaneously ensuring ‘access’ to the standard implementers. In short, a FRAND commitment, such as the one embedded in the IPR policy of the European Telecommunications Standards Institute (ETSI), ‘seeks a balance between the needs of standardisation for public use […] and the rights of the owners of IPRs’.112
As mentioned in Section B (Part III), one of the key purposes of FRAND is to solve a ‘commitment problem’ which afflicts the standard-setting process: once a cooperatively-set standard is adopted the bargaining position of contributing companies to extract very high licensing fees is considerably improved (‘surges’)113 due to relation-specific investments and lock-in on the demand side. In order for the standard to be successful, standard-setting participants and implementers must assess the ex ante risk of ex post opportunism as low otherwise the whole endeavour might unravel. FRAND commitments function as an ex ante contractual commitment that contributing companies will not use their increased bargaining power to engage in ex post ‘unfair’, ‘unreasonable’ or ‘discriminatory’ licensing practices. However, in order to correctly do its job of preventing such behaviour, and thus ensuring the stability of cooperative standard setting, the FRAND commitment has to be legally ‘credible’ (enforceable). Part III, Section C(1) below will analyse the legal status of FRAND as both a contract, as well as its relationship with (EU) competition law. Section C(2) will then review the current understanding of its enforceability.
1. Contract or Competition Law Duty?
The legal form of the FRAND commitment is a contract between the IPR owner and the SSO (including its members, as third party beneficiaries).114 The commitment is normally embedded in an SSO’s IPR policy, alongside other complementary duties, such as the obligation for technology submitters to disclose ex ante any SEPs reading onto the standard.115 The latter duty is included to control the risk of so-called ‘patent ambush’. This occurs when a participant to cooperative standard-setting ‘deceptively’ allows an SSO to adopt a standard without declaring its SEPs. It then asserts its SEPs ex post, well after it is possible for the SSO to design around them, often demanding inflated royalties, such as in the EU case of Rambus.116
From a contractual point of view, the FRAND commitment is incomplete.117 Except for some arguably unhelpful guidance from the EU Commission in its Horizontal Guidelines (which may be used in contract interpretation),118 there is very little to help parties determine when a licensing offer is non-FRAND. According to some,119 the incompleteness of the FRAND contract is a good thing. It is sufficiently capacious to incorporate the complexities of market bargaining, such as cross-licenses, portfolio licensing, and a number of contingencies which may only occur after the standard is adopted. These commentators argue that further ex ante specification over the meaning of FRAND terms introduces economic, business and legal complexities into the domain of standard-setting, when the latter should remain foremost a technical procedure. This may slow down the standard-setting process and vitiate its utility.
In contrast to those who favour the incompleteness of FRAND, other commentators, and some SSOs, take the position that this incompleteness makes the commitment lack credibility, which increases the risk of ex post opportunism in the form of patent holdup.120 As already discussed, this lack of credibility can be argued to be visible ex ante to standard participants, who may then refuse to participate.
Scholars who criticise the contractual incompleteness of FRAND argue that SSOs should adopt policies that require SEP holders to declare their ‘most restrictive licensing terms’121 before the standard is adopted. Then, companies that either fail to disclose their SEPs in a timely matter, or breach their own licensing commitments, should become subject to strong penalties.122 Despite the recent creation of an EU competition law ‘safe harbour’ for the inclusion of such terms, only a minority123 of international SSOs have incorporated terms like the above into their IPR policies. Most SSOs seem content to live with the contractual incompleteness, and leave FRAND negotiations to the private parties.
By leaving the actual content of the FRAND commitment to the negotiation of the private parties themselves, SSOs have made at least three implicit institutional choices. First, that the normal process of market bargaining between parties can lead to a FRAND result. The game theoretical analysis in Section B (Part III) of the prisoner’s dilemma, however, applies pressure to this as a possibility—although everything depends upon the nature of the ‘negotiation framework’, as will be discussed in Part IV. Second, that FRAND determinations should ultimately be made by the Courts in case of disputes.124 Courts are good at a lot of things, but they are notoriously bad at price-setting, as will also be discussed in Part IV. Third (and very recently), at least one SSO—the ETSI—has also contemplated the role of the competition regulator in the determination and/or enforcement of FRAND by expressly involving the latter in its internal procedures for dealing with non-FRAND licenses.125 This institutional choice implies that competition issues may indeed form part of the general understanding of FRAND.
Discussion of these three institutional choices: market bargaining, Courts, and competition law will be embedded in the following examination of FRAND ‘enforcement’, in Section C(2) below. The nerve of this section is to assess the respective role of each of these institutions in the determination of FRAND.
2. Enforcement Issues
As already mentioned, FRAND commitments take the legal form of a contract between the SEP-holder, the SSO, and the SSO Members, as third party beneficiaries. Given this starting point, scholars are divided on how the commitment should be enforced. Some commentators, including Damien Geradin and Roger Brooks,126 argue that since FRAND is simply a contract, it should be enforced as such, before a court, utilising the normal instruments of contract law. Others, including Phillipe Chapatte127 and Maurits Dolmans,128 argue that FRAND duties map directly to EU competition law obligations contained in Art 102 TFEU, and should be enforced by the EU competition regulator and Courts on competition law principles. Below, these two positions are dealt with in turn.
a) Contractual Approach
According to advocates of the contractual primacy of the FRAND commitment, its enforcement should be solely a question of contract law. If one party to the FRAND contract alleges that the other is in breach—for example, by demanding ‘unreasonable’ licensing terms—then it is entitled to bring an action for breach of contract before the Courts. It is then up to the Courts to adjudicate:
‘[…] whether the terms offered, taking into account all of the specific circumstances between the parties and prevailing market conditions, fall outside the range of reasonableness contemplated by the FRAND commitment’. 129
This position holds that it is conceptual confusion to suggest that what is essentially a matter of civil law should be escalated to the level of competition law simply because both the FRAND commitment and Art 102 TFEU contain clauses related to setting ‘fair prices’.130 Treating the FRAND commitment as equivalent to Art 102 TFEU also introduces a logical problem of the following form. If FRAND is simply a restatement of competition law it makes the existence of a separate FRAND duty essentially redundant (at least in the European context),131 since it is already embedded in the duties under competition law. All companies which occupy a dominant position in the SEP would already be bound by the duties in Art 102 TFEU. However, if FRAND sets a higher standard of ‘unfair prices’ compared to the excessive pricing test under Art 102 TFEU, then a breach of FRAND would not lead to liability under Art 102 TFEU (since breaching the FRAND threshold might not yet amount to a breach of the Art 102 threshold) and would have to be enforced by contract anyway. Only in the case where the FRAND commitment is assessed as exactly the same as the duty under Art 102 TFEU would competition law be applicable, in which case the FRAND contract is entirely redundant. Moreover, the argument that the FRAND commitment merely reiterates Art 102 TFEU seems to go against a statement in the 2003 CFI (now ‘General Court’) case, ARD v Commission,132 where it was held that ‘the […] argument that the [FRAND] commitment is merely the reiteration of a legal obligation under Art 82 EC [now Art 102 TFEU] cannot be accepted’.133 Although that case concerned a merger and did not involve an industry standard, it seems to suggest that a FRAND commitment is stricter than the duty not to engage in ‘excessive pricing’ under Art 102 TFEU. If so, then a breach of FRAND, would not necessarily always be a breach of Art 102 TFEU, although the distinction between the two was never formally elaborated in that case.
It should be noted that when Geradin and Brook’s FRAND contractual primacy argument was published in 2010, neither SSO IPR policies nor the European Courts had yet made definitive statements about the legal nature of the commitment.134 Since that date, (as already mentioned) at least one prominent SSO—ETSI—has recently modified (November 2014) its IPR policy to include internal procedures for dealing with non-FRAND licenses offered by ETSI members. Interestingly, the end point of the ETSI internal procedure includes the ‘General Assembly […] request[ing] the European Commission to see what further action may be appropriate […]’.135 This new approach seems to require ETSI members and SEP owners to contractually agree to the involvement of the European competition agency in the monitoring and enforcement of FRAND licenses. In addition to this SSO policy change, the recent CJEU decision in Huawei also places pressure on the argument that FRAND is simply a contract devoid of competition law relevance, as will be discussed in Part IV. Although these recent SSO IPR policy changes and the CJEU decision do not entirely destroy the FRAND contractual primacy argument, they do suggest that the FRAND commitment is now understood to be a duty with at least competition law relevance, if not enforcement.136
For the sake of international comparison,137 it should be noted en passant that in the US (an entirely different legal system than the EU) breaches of FRAND duties are routinely filed as breaches of contract,138 in addition to the occasional ‘patent misuse’ claim.139 Antitrust suits based upon the US ‘anti-monopolization’ provision of Section 2 Sherman Act (equivalent of Art 102 TFEU) are rarely pursued.140
b) Competition Law Duty?
An alternative view on the nature of the FRAND commitment is that it is a creature of competition law, and should be enforced as such. Supporting commentators141 argue that the FRAND commitment maps to Art 102 TFEU, and that its breach should attract antitrust censure.142 The EU Commission’s Horizontal Guidelines may be interpreted to support this view:
‘[T]he assessment of whether fees imposed for patents in the standard-setting context are unfair or unreasonable, will be based on whether the fees bear a reasonable relationship to the economic value of the patents’.143
The footnote to this sentence refers to United Brands,144 an ECJ (now CJEU) case under Art 82 EC (now Art 102 TFEU), which forms part of the CJEU’s ‘excessive pricing’ jurisprudence, and defines the latter as a price which ‘has no reasonable relation to the economic value of the product’.145 Not too much should be read into this small footnote in the Horizontal Guidelines. However, a plain reading would seem to suggest that the legal test for assessing ‘reasonableness’ under FRAND is identical to the test under EU competition law. This would mean that breach of a FRAND commitment would be tantamount to a breach of EU competition law, assuming that all the other elements required under Art 102 TFEU are also met.146
Unfortunately, aside from the recent Commission statements in Samsung and Motorola and the AG’s Opinion and CJEU judgment in Huawei that deal with the related issue of strategic negotiation for FRAND licenses (covered in Part IV), European case law to date has not managed to resolve these issues. Advocate General Wathelet in his Opinion in Huawei makes an oblique reference to the controversy over the legal status of FRAND, when he mentions, in passing:
‘[T]he matters at issue in the dispute […] stem largely from a lack of clarity as to what is meant by ‘FRAND terms’ and as to the requisite content of such terms, could not be adequately — if not better — resolved in the context of other branches of law or by mechanisms other than the rules of competition law’.147
The emphasised sentence suggests—tantalisingly—that other areas of law, or other mechanisms,148 might be better suited to resolve these disputes. However, that Opinion and the subsequent CJEU judgment, which substantially affirmed it, were only indirectly concerned with the ‘requisite content’ of FRAND, i.e., the meaning of, inter alia, ‘reasonableness’ in relation to licensing terms, focusing instead on the question of the use of injunctions during negotiations, as will be discussed in Part IV, Section A.
One relatively recent EU attempt at addressing the meaning of the ‘reasonableness’ criterion in FRAND issues arose in 2007 in a case involving Qualcomm’s licensing terms for its essential patents over the GSM/UMTS 3G standard.149 In the 2005 US litigation over patents in the same patent family, Qualcomm argued that, despite its commitment to F(RAND) terms, ‘charging what the market can bear […] is not anticompetitive or unreasonable’.150 In Europe, the case was eventually dropped and no determination was made.151 Other SEP-related cases, such as the 2009 cases of Rambus152 and IPCOM,153 turned on facts related to ‘deceptive conduct’ leading to ‘patent ambush’ and the transferability of the FRAND commitment, respectively. Unfortunately, neither case permitted the Commission or the European Courts to make a definitive statement on how to determine the ‘reasonableness’ element of FRAND.
In this regard, US courts have been more proactive. In the 2013 (breach of contract) District Court lawsuit between Microsoft and Motorola over the reasonableness of Motorola’s FRAND royalty requests on the H.264 video compression codec, Judge Robart set down some legal rules for determining the ‘reasonableness’ of a FRAND royalty. Robart referred to fifteen criteria contained in the well-known US 1970 case for determining ‘reasonable royalties’—Georgia Pacific154—and simply went down the list, expanding or contracting the royalty in line with the various factors to take into account. In that case, the plaintiff (Motorola) requested a rate more than one hundred times the FRAND rate, according to Robart’s determination.155
In most cases, the international consensus on FRAND determination appears to adopt the understanding that a ‘reasonable royalty rate’ should, coarsely put, reflect the ‘incremental contribution of the patent to the world’156 (or at least the next best alternative technology).157 Although a voluminous legal and economic literature has emerged which goes into the finer points of ‘reasonable royalty’ calculations158 for the purposes of FRAND, further discussion of this topic is outside the scope of this paper (except for some brief observations in Part IV, Section B), as the EU case law is still undecided.
Rather than focus on the specific royalty rate of a FRAND committed SEP in relation to a specific technology, the European Commission and Courts have been more active in defining the legal contours of the framework in which the FRAND negotiation takes place. In particular, recent EU statements and decisions have focused on the issue as to whether the owner of an SEP may have recourse to injunctions during the negotiations over a FRAND license.
The availability of the injunction remedy has significant consequences for the bargaining positions of parties in a FRAND negotiation.159 As will be discussed further in Part IV, there are two schools of thought on the desirability of injunctions. Some commentators argue that the threat of injunctions are economically efficient since they enable SEP-holders to extract the ‘full value’ of their patents and therefore encourages both SSO participation and the continued investment in innovation.160 Others argue that the threat of injunctions permit SEP-holders to ‘hold up’ standard implementers and extract ‘strategic value’ of the SEPs in addition to their market value,161 consistent with the prisoner’s dilemma problem sketched in Section B (Part III).
In what follows, market bargaining for access to an SEP where injunctions are available is referred to as bargaining under a ‘property rule’, whereas bargaining for access where damages are the only remedy is referred to as bargaining under a ‘liability rule’. As mentioned in Section C(1), the crucial question is whether the process of market bargaining, under property or liability rules, is able to deliver FRAND results which adequately control the risk of ex post opportunism (see Part III, Section B). An important component of assessing the outcomes of such bargains is whether the resulting FRAND license strikes the required balance (see Part III, Section C) between rewarding the SEP owner and ensuring open access to the technological infrastructure.
Consideration of these issues is the purpose of Part IV, which shall begin by an analysis of the recent CJEU and commission decisions (Section A), before turning to analyse the FRAND bargaining ‘dynamics’ under property and liability rules (Section B).
IV. The Dynamics of Bargaining under Property and Liability Rules
This section aims to review the nature of the FRAND commitment in operation, by assessing the process of FRAND bargaining under property and liability rules. Section A will begin by discussing the recent Commission statements and CJEU case law with respect to the availability of injunctions during FRAND negotiations. It will unpack and examine the economic rationale of the case law as well as offer a (limited) analysis of the applicable competition law theory of harm. Section B will then assess the economic incentives to reach a FRAND outcome under property and liability rule, by analysing the strategic context of the negotiations. It will conclude that the European Commission statements and CJEU judgment are economically robust, but according to different reasoning than that presented in those cases. Part V will then situate the Commission and CJEU decisions within the broader ‘infrastructural approach’ of this paper, and attempt to show how they fit into the existing European case law on de facto standards forming part of a unified concern to ensure the openness of technological infrastructure (Part V, Section A).
A. EU Position on Injunctions in FRAND Negotiations
In April 2014, the Commission adopted its decisions in the cases Motorola and Samsung. The cases concerned the two companies’ separate injunction applications against Apple in the course of a FRAND negotiation about an SEP over the 3G/UMTS standard. The Commission’s findings, shared between the cases, were that it is an abuse of a dominant position under Art 102 TFEU, when an SEP-holder applies for an injunction if: (i) it is in a standardisation context; and (ii) an SEP-holder has committed to license the SEP on FRAND terms; and (iii) the licensee is willing162 to take a license on FRAND terms. It is similarly an abuse of Art 102 TFEU to use the threat of injunctions in order to induce the licensee not to challenge the validity or essentiality of the SEP. Where the above ‘exceptional circumstances’ are met, the licensee enjoys a ‘safe harbour’ against injunctions and injunction threats. According to the Commission, ‘the seeking of injunctions can distort licensing negotiations and lead to licensing terms with a negative impact on consumer choice and prices’.163
In short, Samsung and Motorola stand for the rule that the SEP-holder is denied recourse to an injunction where a FRAND negotiation is ongoing with a ‘willing’ licensee. Under such conditions, the negotiation must therefore be carried out under the framework of a ‘liability rule’. In case the parties are unable to agree on a FRAND license, then the parties may submit, on the licensee’s request, to third party determination of a FRAND rate by a Court or agreed arbiter.
In November 2014, the Advocate General Wathelet delivered his Opinion in the case of Huawei v ZTE. The facts were similar to that of Samsung and Motorola, with Huawei applying for an injunction against ZTE’s use of an SEP reading onto the 4G/LTE standard after negotiations had reportedly ‘broken down’. Wathelet’s findings in that case were in substantial agreement with the Commission decisions, except greater detail was given as to what constitutes a ‘willing licensee’. In order for injunction applications to amount to a competitive abuse, the licensee must have demonstrated itself to be ‘objectively ready, willing and able to conclude a licensing agreement’, while not behaving in a ‘dilatory manner’ in reaction to the SEP-holder’s licensing offer. In addition, the SEP-holder must have failed to comply with at least one of the cumulative ‘procedural requirements’ of the FRAND commitment, such as ensuring to formally notify the licensee of its need to have a license, together with the complete licensing terms and royalty calculations.164 The licensee is furthermore permitted to respond to the SEP-holder’s FRAND offer with a reasonable counter-offer, as well as a request for third party FRAND determination, although the SEP-owner may in the latter case request a bank guarantee.165
Though considerably more pithy and seeming sometimes to rely on equitable estoppel166 principles rather than the strict application of competition law, the CJEU’s July 2015 judgment in Huawei, essentially affirmed the findings of the Advocate General. One exception (perhaps only a matter of interpretation) is the licensee’s unilateral right to request third party FRAND determination in case of continued disagreement over a FRAND rate. The CJEU judgment, in contrast to the AG’s Opinion, seems to make this a matter requiring ‘mutual agreement’ rather than at the ‘licensee’s request’. However, if that were the case, one can imagine the potential for negotiations grinding to a halt if the parties continue to disagree over a FRAND rate, and if the SEP-holder (or licensee) refuses to submit to third party determination. In such case, however, it is likely that the dispute would enter the Courts—who would then probably be tasked with the role of such determination.167
Aside from the small issue mentioned above, the current law of the EU with respect to this aspect of the enforcement of FRAND commitments can now be said to be definitive. FRAND negotiations must proceed under a liability rule rather than a property rule, so long as the licensee is objectively willing and serious in its intention to conclude a FRAND license. Failure to reach agreement in the above shall lead to third party FRAND determination.
These decisions of the Commission and CJEU are substantially inline with international practice, and there seems to be a growing transatlantic consensus on the point. Although not referring to competition law principles, a United States (US) policy document issued by the USDOJ and US Patent Office in January 2013, stated that:
‘[I]n some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest. This concern is particularly acute in cases where an exclusion order based on a F/RAND-encumbered patent appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment’.168
This guidance was ‘operationised’ in August of 2013, when the (then) US trade representative Michael Froman, struck down (on the request of President Obama) a US International Trade Commission169 exclusion order against Apple mobile products found to infringe Samsung’s SEPs over the 3G standard. Although based on ‘public interest’ and equity arguments (also endorsed by the landmark US case of eBay v MercExchange)170 rather than competition law principles, the effect is the same. The availability of injunctions during FRAND negotiations is severely circumscribed. Market bargaining over FRAND rates should occur in the shadow of a liability rule, as a property rule may lead to suboptimal (public interest, competition) outcomes.
On 3 November 2015, the first post-Huawei case law was decided, where the Court had the opportunity to apply the Huawei criteria. The German case of SISVEL v Ruess171 was the first EU case to apply the ratio of Huawei to the question of the availability of injunctions in FRAND negotiations. The case concerned the defendant’s (‘Haier’)172 defence against SISVEL’s injunction application for infringement of its SEPs over the 3G UMTS standard. Haier, using the same defence as ZTE in the Huawei case, argued that the SEP-owner’s FRAND commitment disabled it from applying for an injunction. However, Haier’s defence was rejected and SISVEL’s injunction was granted, due to the dilatory behaviour of Haier in responding to SISVEL’s FRAND offer. This case demonstrates that Courts (at least in Germany) do not view the Huawei decision as a ‘get out of jail free card’ for SEP-infringers, but will only deny injunctions if the conditions laid down in the Huawei ‘safe harbour’ are strictly adhered to. The consequences of this recent case will be discussed again briefly in Section B (Part IV).
Having now summarised the latest EU case law on the availability of injunctions during FRAND negotiations, the contours of the bargaining framework for reaching FRAND licenses are reasonably clear. However, the legal and economic rationales behind bargaining under a liability rule for FRAND remain underdeveloped. Moreover, the CJEU’s theory of competition law harm seems poorly founded. In so far as it considered the matter at all, the CJEU appeared to base its theory of harm upon ‘monopoly leveraging’:
‘[T]he fact that that patent has obtained SEP status means that its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question […]’.173
The emphasised language, particularly the phrase ‘reserve to itself’ in relation to a downstream market, is generally indicative of the application of a monopoly leveraging abuse. The difficulty of trying to impose a monopoly leveraging theory on the facts of Huawei (and SEP/injunction cases in general) is that it would require treating the injunction application as a ‘refusal to license’, as per the de facto standards line of cases like Microsoft. However, treating an injunction application as a ‘refusal to supply’ completely overlooks the strategic element of such applications in a FRAND negotiation that the injunction (or threat of one) is usually a complementary strategy in order to extract higher licensing fees, according to patent-holdup theory. It also glides over the fact that Huawei’s injunction application was lodged only after it had already made an offer to ZTE, which ZTE rejected. To consider these facts as amounting to a ‘refusal to supply’ would require Huawei’s initial offer to have amounted to a ‘constructive refusal’, by being so out of the orbit of what is reasonable that it was an effective denial of access.174 However, no reasoning to this effect was present in the judgment.
Despite the possible ‘monopoly leveraging’ language of the CJEU quote, it might also be possible to sustain a theory of harm based on ‘margin squeeze’ where the injunction (either threat or application) functions as a complementary strategy to achieve the main strategy of raising the prices on ZTE’s inputs (4G/LTE SEPS) in an attempt to exclude ZTE from the market.175 However, the law around margin squeeze is currently in some disarray, given the recent Teliasonera case176 and the difficulty of integrating it with the Guidance Paper on Art 82 EC.177 In addition, the required analysis of ‘equally efficient competitor’ was completely absent from the CJEU judgment.178
An alternative possibility which avoids the difficulties of trying to force the facts of Huawei into the shoes of existing case law is to zoom out from the specific legal rules of either ‘monopoly leveraging’ or ‘margin squeeze’ and focus on general principles. According to Alison Jones:
‘[…] it might be preferable to rely on these lines of cases more generally as indicating that when identifying an abuse the EU courts look for evidence: (i) of whether the conduct at issue falls within the scope of competition on the merits; and, where it does not; (ii) of whether anticompetitive effects, actual or potential, can be demonstrated’.179
This approach would effectively make the specific legal rules in Huawei amount to the identification of a sui generis abuse.180 Given the difficulty in aligning Huawei with existing case law, this position has some support. However, it is the purpose of Part V to attempt to integrate the Huawei decision with the overall approach of the de facto standards case law, by delineating an ‘infrastructural approach’ to technological infrastructure.
Leaving further discussion of the competition law components of the Huawei decision to Part V, Section B (Part IV) below will now push on with the economic analysis. The key economic consequence of Huawei is on its effect on the bargaining framework for the FRAND negotiation, by removing the availability of injunctions when the licensee is within the defined ‘safe harbour’. Section B and subsequent subsections will focus on analysing the effect of this by doing a comparative analysis of FRAND bargaining under property and liability rules. It will be shown that by removing injunctions from the negotiation toolbox of SEP-holders, the credibility of the FRAND commitment is strengthened. Introducing the ‘threat’ of third party FRAND determination may function to ‘force’ information from the SEP-holder about its true valuation of the SEP, helping to keep royalty rates ‘reasonable’.181
B. Bargaining in the Shadow of Legal Rules: ‘Property’ v ‘Liability Rules’
Below, the comparative ‘information forcing’ potential of injunctions and liability rules to allow parties to arrive at a FRAND rate is assessed. The analysis will conclude that while the threat of injunctions may lead to supra-FRAND licensing demands, a liability rule has the ability to force information from the parties to arrive at more accurate SEP valuations. It will be shown that the threat of ‘outsourcing’ the FRAND determination contingent on failure of the parties to agree may lead to more FRAND-like valuations.
1. FRAND Bargaining under Injunctions v Liability Rules
When companies bargain over the value of an SEP, the transaction cost at issue is that of ‘private information’.182 Both the SEP-holder and the potential licensee have strategic incentives to hide their true valuation of the resource. SEP-holders would like to inflate the value of the SEP, while licensees wish to decrease it to the minimum amount possible. In a competitive or quasi-competitive market (such as does not usually exist in the context of SEPs), both sides of the transaction would be disciplined by possible substitution on the demand side (other buyers) and supply side (other sellers). The market acts as an information-forcing mechanism, revealing a valuation of the asset closer to its actual incremental value.183 But where demand is inelastic as in the case of SEPs, there are few constraints to force the private information about value from the SEP-holder, and the value may reflect instead the ‘strategic value’, especially in the case where injunctions are available.
According to bargaining theory,184 the availability of an injunction in this context may function as a ‘threat point’, enabling the SEP-holder to make the licensee internalise the potential losses of a successful injunction in its decision to accept the offered licensing fee (‘patent holdup’).185 Commentators who argue against the availability of injunctions during good faith FRAND negotiations often present a variation of the above argument that injunctions basically facilitate unilateral supply side price setting, which may be inefficient, as well as anticompetitive under EU law. But it is important to note that an argument against injunctions does not translate into an argument for a ‘liability rule’. That would be to commit what Harold Demsetz elsewhere has called the ‘Nirvana fallacy’.186 What is required is a comparative analysis between bargaining in the shadow of injunctions against bargaining in the shadow of a liability rule. This is the purpose of the following sub-sections.
2. Bargaining in the Shadow of Injunctions: Dynamic Constraints?
There are at least two main arguments in favour of the availability of injunctions in a FRAND context against a willing licensee. First, that the problem of ‘patent holdup’ in FRAND licensing negotiations is significantly oversold. This argument states that there is no or little empirical evidence that ‘patent holdup’ is a problem and that taking away SEP-holders’ rights to injunctions is an unnecessary solution to a non-existent problem.187 The second argument for the continued availability of injunctions in FRAND negotiations is that SEP-holders are in fact constrained in important ways from exploiting the inelasticity on the demand side, by engaging in patent holdup.
Taking the arguments in order, it is true that the empirical literature is undecided on the problem of patent holdup. Some commentators remark wryly that ‘if patent holdup is slowing innovation, it is slowing it down to perhaps the fastest rate in human history’.188 High technology markets characterised by high patent concentrations and standards, which are candidate industries for patent holdup problems, have witnessed dramatic and continued price declines and rapid innovation rates. However, as patent holdup naysayers admit,189 even if the above is true, such a finding cannot support the thesis that patent holdup does not have an adverse effect on innovation, because the counterfactual remains unobserved. One can still argue innovation rates and price decreases would have been faster but for patent holdup. Patent holdup is difficult to empirically assess because it tends to operate in the opaque negotiating rooms of private bargaining, and only enters the Courts on the margin. Given this empirical problem, it is not possible to take this argument much further. Instead, one must resort to economic analysis of the private incentives to engage in patent holdup. This is the second argument of patent holdup naysayers: that SEP-holders are dynamically constrained from engaging in patent holdup.
One important dynamic constraint that has been argued to operate in the domain of standard-setting comes in the form of ‘reputational effects’ in the technological trajectory of standards:
‘[b]ecause standards evolve over time, and many high technology standards pass through multiple versions, any unreasonable pricing or abuse of market power can be punished in future iterations of the standard’.190
This argument suggests that standard-setting participants treat the standard-setting process as a ‘repeated prisoner’s dilemma game’, rather than the ‘single shot’ game outlined in Section B (Part III). The argument runs: players have the ability to ‘punish’ patent holdup behaviour in subsequent rounds by refusing to include the technology of those ‘behaving badly’ in subsequent generations of the standard. To advocates of this view, the ‘threat point’ of a patent injunction would only rarely be utilised, as SEP-holders have incentives to set licensing fees at rates acceptable to licensees in order to avoid punishment in later standard-setting rounds.
But this ‘dynamic constraint’ argument is vulnerable to a number of attacks. First, unlike the case of showing that patent holdup has or has not a negative effect on innovation, this argument makes an empirical claim which is easily rebutted. One simply needs to show that there are cases where parties cannot agree on a FRAND license.191 There are many examples of the latter, including the cases cited involving Apple, Samsung, Motorola, Microsoft, Qualcomm – most of the big players in high technology markets today.
An additional point against the effectiveness of ‘reputational effects’ in constraining licensing behaviour takes stock of the number of players in the standard-setting ‘game’, which may have a dilutive effect on the constraint. The standard-setting game is one with often hundreds of participants. For example, the 3G Partnership Project (3GPP)—the telecoms SSO ‘mothership’ uniting six SSOs under its umbrella—has more than 400 individual members.192 It is difficult to see how SEP-holders’ selective patent holdup of a few competitor companies might have really negative reputational effects sufficient to constrain behaviour.
Finally, one may also challenge the underlying premise of the argument that the standard-setting process is in fact a repeated game. Although it is impossible to challenge the fact that standards do require repeated interactions between participants, it is often the case in technological standards that succeeding generations of a standard build on the platform of previous generations, and often require backward compatibility193 (see Part II, Section B). This may mean that SEPs in one generation continue to ‘read on’ to succeeding ones, although the overall share in SEPs owned by any one company may rise or fall.194 This would mean that even if SEP-owners have acquired a ‘bad reputation’, it would be extremely difficult, if not impossible, to remove their SEPs from the technology without jeopardising the integrity of the standard. Furthermore, it might also be the case that repeat offenders may simply have the best technology, meaning that isolating them from engaging in standardisation would lead to inferior standards. For example, Qualcomm has been involved in a number of FRAND-based litigations, but nevertheless remains in the top two195 contributors of SEPs to wireless standards. Although none of these arguments kill the dynamic constraint argument, they do serve to weaken the disciplining effect of reputation in the standard-setting process.
Having now addressed the arguments of empirical poverty and dynamic constraints that are generally deployed by those in favour of retaining the availability of injunctions in FRAND negotiations, we turn to assess the arguments for and against adopting a liability rule.
3. Bargaining in the Shadow of a Liability Rule or Third Party Determination
By removing the availability of injunctions in negotiations with an ‘objectively willing’ licensee in a FRAND context, the usual ‘property rule’ underlying patents is replaced by what amounts to a ‘liability rule’. According to the recent Huawei, Samsung and Motorola decisions, when negotiating parties cannot agree on FRAND terms, they will generally have the option to submit to a neutral third party to determine the FRAND rate.196 Following the CJEU Huawei decision, if they cannot agree on a third party arbiter, it is likely the dispute would be submitted to the Courts. Another way of viewing the above is that the parties are forced to negotiate a FRAND license in the shadow of third party FRAND determination, as will be discussed in Section B(3)(a).
There are at least two economic197 arguments against such a curtailment of the SEP-holder’s IP rights. First, that negotiating in the shadow of a liability rule (or third party determination) may lead to reverse holdup, (otherwise known as ‘hold-out’), where the licensee gains too much bargaining power. This may lead to licenses which are non-FRAND because they are too cheap, thus harming dynamic efficiency. Second, that even if injunctions may lead to ‘excessive pricing’, outsourcing price determination to a ‘market mimicking’ mechanism such as the Courts or a neutral third party, will lead to inefficient and inaccurate pricing, perhaps meaning that the ‘cure is worse than the disease’.
a) Problems of Reverse Holdup; Information-Forcing under a Liability Rule
In order to assess whether reverse holdup may be a problem under a liability rule, it is necessary to review the strategic position of the licensee in such a negotiation. Failure of the negotiating parties to agree on a FRAND rate will most likely lead to third party rate determination. This means that the licensee’s ‘threat point’ is one of relegating FRAND determination to a third party.198 In most cases, there would be significant legal costs (not to mention wasted time) associated with this eventuality. There would also be significant transaction costs associated with the uncertainty of such a process. However, it is likely that both the legal and transaction costs would be apportioned symmetrically across the bargaining parties: both parties would have to retain counsel and neither would be able to predict the outcome of the FRAND determination process in advance. Furthermore, as the recent German case of SISVEL v Ruess demonstrates, Courts may still grant injunctions to SEP-owners in circumstances where the Huawei conditions are not fulfilled. It would therefore be unreasonable to argue that the Huawei rule is somehow licensee-friendly, as the licensee’s obligations under Huawei seem to be interpreted narrowly. In conclusion, the threat point available to a licensee under a liability rule would most likely be insufficient to negatively affect the SEP-holder’s interests in a FRAND negotiation.
Moving on to the second argument about the inefficiency of third party FRAND determination, it is true that non-market mechanisms are notoriously poor at simulating market price setting. This is because ‘price’ is a signal that results from the interaction of a vast array of different factors, summarised by economists as ‘demand’ and ‘supply’. Such factors constitute ‘information’, which is extremely costly to procure and difficult to integrate by non-market entities. Because of this, non-market price-setting is generally avoided by the Courts and spurned by the private sector, unless no market-based price-setting mechanism is available. However, the poverty of market-mimicking mechanisms can be leveraged to reach efficient outcomes under a liability rule, as explained below.
Since both parties to a FRAND negotiation have an interest in avoiding the uncertainty of third party adjudication, they each have incentives to reveal their true valuations during negotiations. Under the threat of third party determination in case of failure to agree on a FRAND rate (and the resulting extra costs, time, and unpredictability), rational bargainers may choose to shed their ‘strategic valuations’ and make offers closer to the actual incremental value of the SEP. This is because both parties will attempt to simulate the price-setting behaviour of a hypothetical third party arbiter in their own valuations, and each would attempt to make offers of the (respective) maximum and minimum amounts that could be accepted by the other party.199 The SEP-owner may have extra incentives to offer a ‘reasonable’ FRAND rate, as third party determination would then limit its flexibility in negotiations with other parties.200 By shedding strategic valuations and moving closer to what the parties can reasonably accept, the parties can be said to be revealing their ‘private information’ over the true valuation of the asset.
According to the work of a number of scholars including Mark Lemley,201 Ian Ayres202 and Rochelle Dreyfuss,203 the transaction costs associated with the uncertainty of third party price determinations may actually (in fact, admittedly perversely)204 function as information-forcing mechanisms, and the latter may gain in efficiency as the transaction costs are perceived to increase. When the price-setting body is perceived as particularly unpredictable, costly and slow,205 parties have even stronger incentives206 to reveal their ‘true’ valuations in order to avoid submitting to such a process.
Empirical data on settlements in the shadow of liability rules compared to property rules, show that the former often have a higher number of settlements.207 Though the empirical data is not so far conclusive, it does lend weight to the information-forcing character of bargains conducted in the shadow of liability rules, and suggests that FRAND rates may be more forthcoming under a liability rule (and third party determination) compared to a property rule. As Lemley and Shapiro put it: ‘[s]o long as the arbitration procedure itself is unbiased, bargaining in the shadow of binding arbitration will tend to lead to reasonable rates’.208
Now to sum up. It has been argued above that FRAND bargaining under a liability rule has distinct advantages over bargaining in the shadow of an injunction. These advantages include reducing incentives for ex post opportunism due to the information-forcing potential of the threat of third party price-setting. These incentives may furthermore increase as the unpredictability, cost, and time for such a procedure increase.
By removing injunctions from the negotiation toolbox of SEP-holders, the EU Commission and Courts have recognised that market bargaining under a property rule may lead to sub-optimal results when the asset at stake is an essential infrastructural asset, such as a FRAND-committed SEP. By removing the availability of injunctions in such cases, the FRAND commitment gains credibility as the risk of ex post opportunism is reduced. This result may help to encourage the process of cooperative standard-setting since the prisoner’s dilemma of ex post patent holdup would be perceived as credibly controlled (see Part III, Section B).
V. Integrating the Infrastructural Approach
This section sets out to integrate the key arguments and insights generated in the previous sections of this paper. Section A takes a closer look at the EU de facto and de jure standards case law, and attempts to harmonise the overall reasoning of the cases to reveal the underlying infrastructural approach. Section B then offers some concluding remarks.
A. Integrating the Case Law on Technological Infrastructure
It is well established in EU competition law that antitrust concerns can trump the exclusivity of an intellectual property right only in ‘exceptional circumstances’ and where the alleged anticompetitive use of the right is not ‘objectively justified’. The 1968 case of Parke & Davis v Probel209 established the principle that the ‘special protection’ given by a patent is not an infringement of competition law unless its exercise ‘degenerates’ into an abuse of that protection. The ‘very subject matter’ of the ‘special protection’ was later defined in the 1988 case of Volvo v Veng210 to be the right to exclude ‘third parties from manufacturing and selling or importing, without its consent […]’, though it left the door open for a finding of abuse in case of the ‘arbitrary refusal to supply’ or excessive pricing. In line with this early case law, the Commission’s Guidance on the enforcement of Article 82 EC (now 102 TFEU), starts from the position that dominant undertakings ‘should have the right to choose its trading partners and to dispose freely of its property’.211 A series of more recent CJEU and General Court cases have elaborated on the ‘exceptional circumstances’ required to motivate a finding of ‘refusal to supply’ in relation to an intellectual property right, culminating in the 2007 Microsoft decision of the General Court. In that case, which substantially endorsed the framework established in the earlier cases of IMS and Magill, the following cumulative conditions were considered sufficient (but not necessary) 212 to justify a finding of a ‘refusal to supply’ and abuse of dominant position in relation to IP: first, that the refusal relates to a product or service indispensable to an activity on a secondary market; second, that it prevents the emergence of a new product or technical development213 for which there is potential consumer demand; third, that it is such as to exclude any effective214 competition on a secondary market; and fourth, that it is not objectively justified.215
Since this test has been substantially used to motivate compulsory licenses and open access to IP covering de facto standards, it would have seemed to be the natural competition law approach to cooperatively-set standards as well. However, both the AG Wathelet and the CJEU were careful to distinguish the de facto standards cases from the de jure standard case at issue in Huawei:
‘[I]t must be pointed out, as the Advocate General has observed in point 70 of his Opinion, that the particular circumstances of the case in the main proceedings distinguish that case from the [de facto standards] cases which gave rise to the case-law […] by the fact that the patent at issue is essential to a standard established by a standardisation body […]’.216
The AG and the CJEU were also careful to distinguish the German case law of Orange Book,217 which the referring Court considered relevant on the same grounds.218 In distinguishing the cases, the AG made the observation that ‘it is only natural that, in those circumstances [of a de facto standard], the patent owner will have greater negotiating power than in the case of an SEP the owner’.219
It is submitted that the CJEU was correct to support a distinction between de jure and de facto standards. However, it is argued that the ground for the distinction can be more precisely defined. To briefly preview the argument below, the nub of the distinction should derive from the greater difficulty and uncertainty in identifying essential technological infrastructure in de facto standards cases compared to de jure standards cases. Using Easterbrook’s ‘error-cost framework’ (see Part II, Section B), the increased likelihood of committing type 1 errors in relation to de facto standards should demand a more robust and exhaustive ‘infrastructural screening’ test than that of de jure standards. However, once qualified as essential technological infrastructure, then the application of an open access rule should follow unless there are very good reasons to counsel against. The underlying logic of the infrastructural approach can thus be summarised as ‘if infrastructure, then open access’. This approach can be decomposed into two steps, including (i) an ‘infrastructural screening test’, followed by (ii) an assessment of the appropriateness of an open access rule, as will be discussed in detail below in relation to de facto and de jure standards.
In the case of the purely ‘bottom up’ technological infrastructure of de facto standards, the ‘essential facilities’ test was used to ‘screen’ for the infrastructural character of the asset and assess the merits of an open access rule, and can be divided into two parts. First, the ‘essentiality’ and sine quo non status for effective competition can be said to go towards determining whether the asset is truly infrastructural. This is a factual inquiry. Only if the asset cannot be reproduced and if denying access to it would seriously harm effective competition can it be considered ‘infrastructural’. Its attributes of being non-rival, intermediate and generic (see Part II, Section A) are implied by its function as an input; however the ‘non-rivalry’ assessment may also sound in the second part of this analysis: assessing the merits and conditions of applying an open access rule given the asset has been found to be infrastructural. The IP-specific test of the ‘new product’ or ‘technical development’ can be seen to form part of the assessment of whether an open access rule is appropriate: it is only in cases where denial of access would harm dynamic efficiency (the emergence of a new product or technical development) that an open access rule would be a principled approach. Otherwise, the Schumpeterian arguments (summarised in Part II, Section A) in favour of strong, exclusive intellectual property protection would likely tip the balance against an open access rule. Finally, an open access rule may also be challenged by ‘objective justifications’, such as where, for example, the infrastructural asset is not truly non-rival and sharing access may lead to e.g. congestion problems.220 From a competition law perspective, the consumer harm of ‘monopoly leveraging’ in a de facto standards case is identified as the loss of the ‘new product’/technical development’, referred to in Microsoft as loss of ‘consumer choice’.221
In the case of de jure technological infrastructure, the infrastructural status of the SEPs need not go through the exhaustive ‘essential facilities’ style ‘infrastructural ‘screening test’, since the ‘quasi-top-down’222 and cooperative approach of de jure standard-setting raises fewer risks of misidentifying essential infrastructure. Compared to de facto standards, the risk of type 1 errors is less in relation to de jure standards. De jure standards are considered technological infrastructure (almost) by definition, as they create a ‘relationship of dependence between the intellectual property right holder […] and other undertakings’.223 The legal analysis in Huawei can be seen to focus purely on the equivalent of the second part of the ‘essential facilities’ analysis:224i.e. the conditions under which the application of an open access rule is appropriate. Since the basis of the open access rule was the ex ante FRAND contractual commitment, and since SEPs only attained their infrastructural status by virtue of this commitment,225 it is the bargaining conditions around this duty which are the Court’s focus. As explained earlier, the nub of the Court’s decision on this point was that an open access rule to SEPs should apply unless the licensee’s approach to the negotiation is not ‘objectively willing’, or otherwise in bad faith. Where these elements are absent, then the parties must conduct their negotiation under the shadow of a liability rule, which amounts to the application of an open access rule. The ‘essential facilities’-style ‘objective justification’ as a means to challenge the application of open access would not be available in a de jure standards case, as such considerations should have been internalised before the SEP-holder committed to a FRAND contract. The consumer harm in the case of de jure standards under the sui generis Huawei test seems to be dual: that there will be harm in patent hold up risk (leading to exclusion of competitors, and loss of consumer choice),226 and also that the ‘risk that confidence in the standard setting process will be undermined’.227 This second element of harm links to the strategic considerations of standard-setting developed in Sections A and B (Part III), and the fact that the risk of patent holdup can cause the coordination conditions for de jure standards to unravel,228 due to the frustration of the ‘legitimate expectation’ of FRAND licensing.229
A useful way of summarising the ‘infrastructural approach’ outlined above is contained in Figure 3. As shown there, the approach is characterised by two main steps: ‘an infrastructural screening test’, followed by an assessment of the appropriateness of an open access rule. In the third box on the right, the suggested theory of harm motivating the competition law intervention is also included.
Now to sum up. The de jure and de facto standards cases are unified by an infrastructural approach to the underlying technological infrastructure, of the default form ‘if infrastructure, then open access’.230 In de facto standards cases (such as Microsoft) the risk of type 1 errors counsels for a robust ‘infrastructural’ screening test before the application of an open access rule. However ‘objective justifications’ (e.g. congestion) and ‘dynamic efficiency’ (absence of a new product/technical development) arguments may still be recruited to defend against application of an open access rule. In de jure standard cases, the ‘infrastructural screening test’ is foregone due to the inherently essential infrastructural nature of cooperatively-set standards. The analysis instead focuses on the ‘open access’ conditions. To this end, an open access rule is applied by default unless the licensee is shown to not be objectively willing, or otherwise behaves in bad faith during the FRAND negotiation.
Viewed in the above way, the ‘essential facilities’ test can be seen as just one legal approach to ensuring the open access of essential technological infrastructure—and one which is tuned to the difficulties of mandating access to purely ‘bottom up’ technological infrastructure. The de jure standards test is another, perhaps sui generis, test (see Part IV, Section A) to the same problem, although tuned to the issues of cooperative standard-setting. Both tests are unified by the overall two stage ‘infrastructural approach’.
B. Concluding Remarks
As high technology markets have become central to economic production, modern economies have undergone a profound shift in the provisioning systems of essential infrastructure. While traditional infrastructures retain their crucial importance for scaffolding social value creation, technological infrastructures in the form of real and virtual networks have arisen via bottom-up and industry-coordinated processes to take centre stage. As these technological infrastructures swell to include greater proportions of social activity, the trade-offs between their private ownership and the public interest in their ‘open access’ and management are sharpening. The regulatory attention attracted by such companies as Google,231 Facebook,232 Microsoft233 and Intel234 is symptomatic of the increasing tension between these companies’ private ownership of key technological infrastructures and the latters’ inherently public role.
It is submitted that the infrastructural approach endorsed by this paper may have some role to play in helping to identify the nerve centres of the debates over private ownership and public interest. The two stage approach of first ‘screening’ for infrastructure, then assessing the utility of the open access rule can be used to assess whether exclusive private control over an essential technological infrastructure is justified. The infrastructural approach235 may then go on to craft legal sui generis rules (such as, arguably, in Huawei) that recognise the importance of continued private investment, while bringing the interests of social welfare into the mix, and attempting to tune the legal tests to the uncertainties of market intervention.
By mandating ‘open access’ over essential technological infrastructure in certain well-defined cases, competition law is merely reinstating the ‘lost message’ of the early case law, that ‘antitrust law should not discard beneficial synergies that require sharing’.236 Although today’s high technology markets generate new and interesting facts, the principle that privately held ‘conveniences affected with the public interest’237 may be restrained from taking ‘arbitrary or excessive duties’ has very deep roots within the law. Taking privately owned technological infrastructure seriously as ‘infrastructure’ sits firmly in this legal tradition, as well as representing a step towards greater openness, dispersion of unjustified control, and competition in today’s high technology markets.
The author declares that they have no competing interests.