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Analysis on balance:
Standardisation and Patents

+ +

-- by Georg C. F. Greve
+FSFE, President

+ +

This paper provides an analysis of the + interaction of patents and standards. It was written under the + assumption of very little background knowledge, and therefore + provides some of the background necessary to understand the + issue. An expert in the field should be able to skip the + Background section. +

+ +

Introduction

+ +

Software patents have been a hugely controversial debate, with + lines of battle drawn primarily between large corporations holding + large patent portfolios and engaged in multiple cross-licensing + deals, and the Have-Nots, entrepeneurs, small and medium + enterprises, and software users from the student using GNU/Linux all + the way to institutional users in governments.

+ +

This debate got a lot quieter with the rejection of the software + patent directive in 2005. Its place in the headlines was taken by + other debates, such as standardisaton. Open Standards have been a + buzzword for years, but never has this term been discussed more + intensively.

+ +

On Wednesday, 19 November 2008, both debates met in Brussels at a + workshop titled + "IPR + in ICT standardisation", although "Patents in ICT + standardisation" would have been a more suitable name because the + discussion was exlusively about the interaction of patents and + ICT standardisation.

+ +

Patents and standards are fundamentally at odds, so many people + call for a balance between patents and standards. This article + comments upon the workshop and explains why standards should prevail + over patents at least in the area of software.

+ +

Background: Patents & Standards 101

+ +

The idea of patents is not new. Its roots lie in the royal + "litterae patentes" that conferred exclusive rights to certain + people. Democratic governments eventually took the position of the + monarchs, and patent legislation has evolved over time, but the + fundamental characteristics of what is a patent have not + changed.

+ +

Succinctly put, a patent is a monopoly granted for a limited time + by the government on behalf of its citizens.

+ +

The term monopoly has many negative connotations, and for good + reason. A monopoly stifles innovation and increases price due to the + absence of competition. On these grounds a monopoly is generally + understood to be to the detriment of economy and society. It is not + illegal to obtain a monopoly, but society has a legitimate interest + in limiting abuse of the power that a monopoly confers, and seeks to + achieve this through antitrust law.

+ +

The monopoly right created by a patent brings with it all side + effects of a monopoly. It is granted by the state because it is + understood that the absence of patents might prevent publication of + breakthroughs, which is understood to be more harmful than granting + the patent monopoly.

+ +

This initial patent deal is based upon disclosure, so that others + can learn from and build upon a new idea. Lack of useful disclosure + or advancement of public knowledge translates into the granting of a + monopoly with no return for society.

+ +

Like patents, standards are closely related to disclosure. The root + of the word standard appears to go back to heraldry, where it refers + to a symbol that is used to make a rallying point visible in + battle.

+ +

Modern use of the term keeps that meaning of publicly visible point + of reference, although it has been transferred to other areas. So + among other things it is understood as "something established by + authority, custom, or general consent as a model or example" or also + "a structure built for or serving as a base or support." + (from Merriam-Webster + On-line dictionary).

+ +

In Information and Communication Technologies, a standard has both + the above meanings. According to + the British + Standards Institution (BSI), a standard is "an agreed, repeatable + way of doing something. It is a published document that contains a + technical specification or other precise criteria designed to be + used consistently as a rule, guideline, or definition. [...] Any + standard is a collective work. Committees of manufacturers, users, + research organizations, government departments and consumers work + together to draw up standards that evolve to meet the demands of + society and technology. [...]"

+ +

The underlying idea is that a standard establishes common ground, + it provides the means for interoperability and competition. This is + especially true for ICT due to their strong networking effects. If + all participants in an ICT market adhere to the same standards and + make an effort to guarantee interoperability, not only can customers + choose freely between various products and services, they can also + exchange information with one another without problems.

+ +

In contrast, absence or failure of standardisation warps networking + effects in a way that monopolisation becomes almost certain. Users + of one product or service could only interoperate with users of the + same product or service. Over time, one solution would attain such + a large user base that other users are de-facto left with the choice + to join this group, or be unable to communicate fully with the + majority of users. This could for instance be achieved by bundling + software with a predominant hardware platform.

+ +

So standards are largely an instrument to enable competition for + the public benefit. The purpose of standards is intrinsicly + anti-monopolistic.

+ +

It is also pro-innovative. Since derivation from a standard + automatically breaks it, standardisation and innovation seem opposed + goals, and to some extent they are. But where all changes are done + in consensus between implementors, the result is an updated version + of the standard available to all. The second path is innovation on + top of the standard, using the standard as a base for innovation + rather than innovating inside the standard.

+ +

Due to its global, consensus-driven nature, the first process is + comparatively slow. Another problem is the a substantial barrier to + entry into the standards process. As a result, large companies are + overrepresented in comparison to small and medium enterprises (SME).

+ +

The second path is open to everyone, private person, SME, or large + industry. It is also limited only by the speed of development of the + team making the innovation. If the innovation was made by just one + party, there will be a temporary monopoly. But given a certain + maturity, the innovation is then likely to be formalised into a + standard again, forming the base for the next innovation to be built + on top.

+ +

While the first path allows primarily for slow, small improvements, + the second path allows for full participation of the economic + majority and is much better suited for groundbreaking ideas and + arguably the more important to protect for society.

+ +

Conflict: Fundamentally opposed instruments

+ +

The fundamentally different goals for patents and standards + surfaced multiple times during the debate, for instance in the + speech of Mr Karsten Meinhold, chairman of the ETSI IPR Special + Committee, who + summarised it as "IPRs and Standards serve different + purposes: IPRs are destined for private exclusive use, Standards are + intended for public, collective use".

+ +

Both patents and standards derive their justification from the + public benefit, yet upholding one deprives the other of its + function. Standards seek to counteract monopolies, patents establish + them. Or, as Tomoko Miyamoto, Senior Counsellor of the Patent Law + Section in the World Intellectual Property Organization (WIPO) said + in her + presentation: Patent thickets and patent hold-ups arise from + legitimate exploitation of the exclusive rights intentionally + conferred by patents. They are a normal and intended consequence of + the patent system.

+ +

Allowing patents on standards consequently is an intentional act to + grant monopolies on standards to certain parties that includes the + right to block implementation by other parties.

+ +

Ex-Ante Disclosure

+ +

There are multiple attempts through which the standardisation + community has tried to mitigate these effects over the years. One of + these mechanisms is called "Ex-Ante Disclosure." The parties working + on a standard use this mechanism to commit to licensing terms while + the standard is still being drafted. If these terms are not + acceptable to the other parties working on the standard, the + technology that is covered by the patent is not included into the + standard.

+ +

What are acceptable terms is highly subjective. A large corporation + with big patent portfolio and existing cross-licensing agreement + with the holder of the relevant patents might consider adding one + more patent to the agreement a minor inconvenience. The same + situation looks substantially different from the perspective of a + small or medium enterprise that typically has at most a small patent + portfolio and has to expect extortionate licensing.

+ +

Since SMEs are strongly underrepresented in standardisation, Ex-Ante + Disclosure is likely to bring more satisfactory results to large + corporations with large patent portfolios that compete in the same + area. The economic majority generally has no say about the + acceptability of the terms.

+ +

Another issue of ex-ante disclosure is difficult enforcement, as + Suzanne Michel, Assistant Director Office of Policy and Coordination + of the U.S. Federal Trade Commission + (FTC) pointed + out in her presentation. The FTC had found + that Rambus + Incorporated had joined and attended standardisation meetings of + the Joint Electron + Device Engineering Council (JEDEC) in order to modify their + patent applications to cover technology that was under discussion + for inclusion in future standards. In the opinion of the FTC, this + behaviour was deceptive, violated JEDEC's disclosure policy, and + illegaly gave Rambus monopoly power.

+ +

The D.C. Circuit + Court disagreed with the interpretation of the FTC in their + April 2008 decision. According to Ms Michel, the court said that + avoiding so-called + "Reasonable + and Non-Discriminatory" (RAND) licensing terms does not + constitute abuse, and that there is no proof that JEDEC would have + avoided technologies if it had known that Rambus was planning to + use its patents to the fullest extent allowed by law. The court + also expressed reluctance to make patents unenforceable based on + vague disclosure policies.

+ +

Both patents and standards derive their justification from the + public benefit. There was no additional disclosure of new technology + provided by the patents that Rambus filed on the standards that were + about to be published. Giving Rambus monopoly power over standards + developed by JEDEC is also detrimental to public interest. So it + seems likely that a full public interest evaluation of this + situation would give that indeed the public interest did not prevail + in this case.

+ +

So it would appear that the FTC was correct in its evaluation, and + so was the court, because establishing time-limited monopolies is + the very purpose and function of patent law. The role of courts does + not extend to the undoing of laws and most legislators have not + given the public interest conflict between patents and standards + consideration.

+ +

JEDEC has meanwhile updated its disclosure policy, which may help + to avoid similar issues in the future. Considering the value that + patent law has in relation to standardisation for many courts, only + a future court case can demonstrate whether the issue has been + resolved in a way that holds up to formal legal review.

+ +

(F)RAND

+ +

This is true for all standardisation bodies that require ex-ante + disclosure, which most of them don't. Instead the majority of bodies + appear to rely on purely voluntary disclosure and the assurance that + patent holders involved in the process will agree to so-called RAND + or FRAND + ("Fair, + Reasonable and Non Discriminatory") terms.

+ +

One common criticism of (F)RAND terms is the lack of a definition + of what is reasonable and for whom. During the 2006 Internet + Governance Forum (IGF) in Athens, Susy Struble of Sun Microsystems + pointed out + that what is reasonable for one party may not be reasonable to + another.

+ +

Licensing practices do indeed vary, and are influenced by various + factors, including, but not limited to, the questions whether or or + not a company has a stake in the relevant market, and how + aggressively it pursues its patent revenues.

+ +

Additionally, patents can be sold or acquired as part of a business + restructuring or acquisition. A future patent holder may consider + different terms reasonable, so could a patent holder who did not + participate in the standardisation process and never committed even + to RAND terms.

+ +

RAND terms generally amount to a vague assurance to license upon + request. Such an assurance does not constitute a perpetual license + on the patent and is not valid for the new holder of a patent. So a + new holder can choose freely how to enforce the patent, including + patent hold-ups on all existing implementations of the standard.

+ +

As Ms Miyamoto from WIPO pointed out, a patent hold-up is a + legitimate and intended use of the patent system. So even in a RAND + regime, there is a substantial amount of uncertainty that invariably + favors large companies, which not only have deeper pockets, they + also have larger legal departments and patent portfolios.

+ +

It is this uncertainty that has caused great frustration among SME, + which Charles Schulz of Ars Aperta summarised as RAND referring to + "RANDom licensing at the sight of competitors." + In his + presentation, Mr Schulz also pointed out that (F)RAND terms are + discriminating against Free Software. Even RAND terms linked to zero + royalties, the so called RF-on-RAND ("Royalty Free on RAND"), + RAND-RF ("RAND Royalty Free") or RAND-Z ("RAND with Zero royalties") + terms often exhibit the same problems because they do not permit + sublicensing.

+ +

Free Software + (a.k.a. Open + Source, FOSS or FLOSS) is based on the principle that every + living person and every legal entity can be a user, developer, + distributor, or any combination of the above. Only conditions which + permit this to take place are acceptable to Free Software, which is + estimated to reach 32% of + all IT services and 4% of European GDP by 2010.

+ +

In her + presentation, Amy Marasco, General Manager Standards Strategy of + Microsoft, emphasised that she does not consider Free Software a + business model. That is true to the same extent that proprietary + software itself is not a business model. Business models are what is + built on top of both Free Software and/or proprietary software.

+ +

Ms Marasco continued to point out that all these business models + are legitimate. And while there are strong differences in opinion + about which software model is the better and more sustainable choice + for economy and society, from the perspective of a political + analysis of standards, all business models based upon proprietary + software, Free Software, or a mixture of the two need to be + considered valid and legitimate.

+ +

As mentioned before, the Free Software related parts of European + GDP are estimated to reach 4% by 2010. All parties agree that all + business models, including those incorporating Free Software, are + legitimate. This raises the question whether it can be considered + Fair, Reasonable and Non-Discriminatory to exclude this legitimate + part of economy by choice of patent licensing terms.

+ +

Harm from exclusion?

+ +

The situation bears an odd semblance to the situation with + counterfeit + pharmaceuticals, where the argument for patent enforcement is + generally accompanied by public health considerations. But only + effective pharmaceuticals that are identical to the patented product + would actually violate the patent. Health risks arise primarily + where the patents are not being violated.

+ +

In standards, the situation is somewhat similar. If patents are + part of a standard, only an implementation that is covered by the + patents provides an effective antitdote to monopolisation. Having to + circumvent patents will break standards compliance and harm the + public benefit that is the driving force behind standardisation.

+ +

So patents in standards have the potential to make full + interoperability impossible for legitimate businesses in some + markets. As the aforementioned + BSI points + out: "Standards are designed for voluntary use and do not impose + any regulations. However, laws and regulations may refer to certain + standards and make compliance with them compulsory."

+ +

Once a technology has been standardised, certain choices are no + longer made for technological quality. Even where a better solution + exists that would have the additional value of not violating a + potential patent on the standard, an implementor would choose to + follow the technologically inferior standard in order to have full + access to the market. Such a case turns the initial idea upside + down: The technology is valuable because it is patented, not + patented because it is valuable.

+ +

There are also cases where certain standardisation organisations, + e.g. the International Organisation for + Standardisation (ISO) have a priviledged position with + governments for procurement decisions. Due to patents and + insufficient (F)RAND conditions, not all standards priviledged in + this way can be implemented by all legitimate market participants + that should be able to compete in public tenders.

+ +

So through the special priviledge for organisations like ISO which + accept terms insufficient to guarantee competition, the monopoly + right conferred by patents translates into an oligopoly or even a + monopoly for public procurement. This exclusion of competition from + tenders by means of patents on standards is detrimental to the + public benefit because it leads to higher prices and consequently + higher taxes.

+ +

Remedies for this situation would have to address the way in which + governments grant procurement preferences to standards, the way in + which patents are handled in standards, the patent system itself, or + a combination of all of the above.

+ +

Attempted remedies

+ +

Good patent research costs around 100.000 EUR according to Rigo + Wenning, Legal Counsel & Patent Policy Team Contact of the + W3C/ERCIM who spoke about + "Standards, + Patents and the Dynamics of Innovation on the Web." The W3C is + indeed the only Standards Setting Organisation (SSO) that has a + sufficient patent policy for its standards in order to accomodate + all legitimate business models.

+ +

From the perspective of most SMEs, 100.000 EUR patent research costs + are prohibitively expensive. But even large companies will find this + cost considerable, which is only one of the cost generators. More + damage can be caused by injunctions against a product, or claims for + damages. In + his presentation + of IBM's "SoftIP" concept, Roger Burt, Senior Counsel of IBM + Europe introduces the issues with a quote from a BSA et al. Amicus + brief in eBay v MercExchange. The quote summarises the problems of + large industry rather well:

+ +"Technology products typically consist of hundreds or +thousands of patented components. It therefore is impossible for +technology companies to investigate all of the patents, and pending +patent applications that may be relevant to a new invention (product), +notwithstanding their best efforts to do so. When, as frequently +occurs, the claim of infringement is not made until after the new +product is released or the industry standard has been adopted, +designing around the claim is no longer a realistic option. Because an +injunction will issue automatically upon a finding of infringement – +even if the claim relates to an insignificant part of the product – +the target of the claim is forced to pay an extortionate settlement in +order to preserve its business." + +

Another attempt to keep patents fees from becoming exorbitant even + for the largest corporations was introduced by Tim Frain, Director + IPR regulatory affairs, Nokia in his presentation about + "FRAND + Best Practice." Mr Frain advocates a system based on "Aggregated + Reasonable Terms" & "Proportionality" (ART+P).

+ +

The underlying idea of this approach is that if every patent holder + individually charges patent fees they consider Fair, Reasonable and + Non-Discriminatory, the resulting fees may easily add up to 50% or + more of the cost for the end product. So all patent holders should + commit ex-ante that the aggregate licensing cost for all patents + should be reasonable. As an example, Mr Frain cited that in Nokias + view, the patent licensing fees on the communication technology for + mobile phones should be below 10% per handset.

+ +

Both approaches are attempts to control the use of monopolies + granted by patents and as such are trying to get voluntary buy-in + from other parties to not exercise rights that the patent system has + granted them.

+ +

Unfortunately they both fall short of the criterion of + non-discrimination against legitimate business models, and the ART+P + approach also has the practical weakness that convergence joins more + than one kind of technology per device, so the total patent + royalties on a smart phone may still reach 50% even if the cost for + GSM & Co are limited to 10%. But even these 10% can be + considerable for laptops with included UMTS modems, or embedded + devices, an area in which the profit margins are typically far below + 10%.

+ +

To put it in the form of a controversial question: Is it fair and + reasonable that patent holders receive a higher monopoly rent than + an innovative company stands to gain by bringing out a new product + and bearing all the risk associated with it?

+ +

Cui bono?

+ +

So who benefits? As explained before, patents are designed as a trade-off. Their + benefits are often explained with the lone inventor having a genius + idea. Would it be fair if this inventor published the idea only to + see a large company bring it to market faster than the inventor + could, with no financial reward for the inventor? Most people would + agree this is not fair.

+ +

In the absence of patents, such an inventor could only choose + between accepting fate, or keeping the innovation secret for as long + as possible while trying to bring it to market. Patents grant a + temporary monopoly for the inventor in return for publication, such + that the inventor can find investors, set up a company, finish + product development, bring it to market, and enjoy a head start + before others can compete normally.

+ +

This mechanism seems to have worked reasonably well for some time + in the past. But some basic parameters have changed, while patents + have been extended in an essentially unreflected way to more + areas. This is particularly true for software, where patents play no + meaningful role in disclosure, breaking the patent deal for + society. More importantly, while the time of bringing new innovation + to the market and the time between groundbreaking discoveries has + been decreasing.

+ +

Raymond + Kurzweil found an exponential pattern in innovation reach back + all the way to single-cell organisms. Concluding that this must be + a universal principle, Mr Kurzweil has been + making predictions + for the future of which several have turned out to be largely + accurate so far. When applying this principle to patents, from the + constant duration of the monopoly guaranteed follows an + exponential growth of the value of an individual patent.

+ +

The price that society is paying for granting patents has been + growing + exponentially since the time that the initial patent bargain was + struck. This would explain why the price for the patent system seems + increasingly exorbitant with growing calls for reform, which have + led to the recent announcement of the + "First + in Series of Hearings on Evolving Intellectual Property + Marketplace" by the U.S. Federal Trade Commission (FTC).

+ +

Remedies to this problem could be to decrease the lifespan of + patents, adapt them to the specific situation in the field, and + exclude fields from patenting in which patents provide no meaningful + disclosure.

+ +

When it comes to standards, it was An Baisheng, Deputy Director of + the Division of Technical Regulations Department for WTO Affairs of + the Chinese Ministry of Commerce who raised the question of public + vs private benefit in his presentation titled + "Strike + the Right Balance between Public and Private Interests in IPR in ICT + Standardization".

+ +

Taking our "lone inventor" scenario above, the question that we'd + have to ask for patents on standards is: Would it be fair if our + inventor could prevent someone else from bringing to market an + innovation of their own that somehow interacts with the initial + invention? To make it less abstract: Should a patent on a typewriter + extend to carbon copy paper that has the right size to be used in + that typewriter? Most people would agree this goes too far.

+ +

Potential Remedies

+ +

Interoperability trumps patent

+ +

During the software patent debate in the European Union there was + consensus among SME, Free Software and big businesses + representatives from companies such as IBM or Sun Microsystems that + patents should be unenforceable to limit or prevent + interoperability.

+ +

In the European Union, this could be introduced into the ongoing + Community Patent debate. On a global level, WIPO should consider + this as part of its ongoing Development Agenda discussions.

+ +

Once implemented, this would solve the most harmful side-effects + for all legitimate business models and give interoperability and + competition preference over monopoly rights. Considering the + extraordinary networking effects that exist in this market, such a + preference seems justified.

+ +

Update policy in SSOs

+ +

Secondly, Standard Setting Organisations (SSOs) could update their + patent policies to ensure that their standards are usable in all + business models. Many SSO representatives in the meeting maintained + that it was not their place to mandate certain patent policies. At + the same time, + the Common + Patent Policy of ITU-T, ITU-R, ISO and IEC already states the + principle that "a patent embodied fully or partly in a + Recommendation | Deliverable must be accessible to everybody without + undue constraints." As this analysis demonstrates, current + application of RAND falls short of that principle.

+ +

There is additional precedence supplied by the common way in which + SSOs protect standards against potential later claims from Copyright + holders by requiring all participants to a standardisation process + to assign their copyright to the SSO. Applying appropriate similar + measures on patents for similar reasons seems justified.

+ +

Provide intermediate and migration possibilities

+ +

Many patent-encumbered standards already exist, and even if WIPO + ends up agreeing on a general interoperability preference, it will + take decades for this to become local law.

+ +

As an intermediate solution, (F)RAND needs to be enforced in a way + that the license terms do not disciminate against any valid business + model, as is still common today. A potential solution could be to + tie (F)RAND royalties to the downstream licensing revenue.

+ +

Business models that are based on proprietary licensing based on + copyright or patents for revenue would continue to operate as they + do today. Business models that do not rely on such licensing revenue + would be enabled to interoperate and compete.

+ +

Taking this step would also realign ITU-T, ITU-R, ISO and IEC again + with their declared Common Patent Policy.

+ +

Update governmental procurement guidelines

+ +

Governments and Inter-Governmental Organisations should update + their procurement guidelines to procure only products based upon + standards that do not discriminate against any legitimate business + model. This means a review of blanket approval for certain standard + setting organisations, and only a limited approval for organisations + that have not updated their patent policies appropriately by the + time of the review.

+ +
+ +

DISCLAIMER: This paper was written from the + perspective of an expert in the field of software. The conclusions + may apply in their entirety, partially, or not at all to areas + other than software. +

+ + + + $Date$ $Author$ + + +