FTC Holds Workshop on Preventing Patent Hold-Ups

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Workshop participants considered mandating disclosure and restricting license terms.

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The Federal Trade Commission (FTC) recently held a public workshop to discuss strategies for preventing patent hold-ups.

Patent hold-ups can arise when a patented technology is used as a basis for an industry standard, such as the DVD standard developed in the 1990s. A standard-setting organization (SSO) establishes standards to enable technology companies to develop new products that can interoperate with components and products from other firms.

Once a standard is widely adopted, a manufacturer may find it difficult to switch to alternative technologies. A firm with a patent incorporated in the standard can thus demand excessive royalty payments from other firms. Those payments may not only reflect the value of the patent itself, but also the value stemming from the market power created by the standard. The assertion of patent rights in this way creates an antitrust risk known as a patent hold-up. A patent hold-up can undermine competition on the merits between technologies, and can harm consumers if manufacturers pass on higher costs resulting from it.

The recent FTC workshop examined three potential ways of preventing such hold-ups.  First, an SSO can require its members to disclose its patents in a standard upfront. These so-called patent disclosure rules would ensure that before SSO members adopt a standard, they are aware of the patents it would incorporate. Disclosure is, however, an imperfect solution to the hold-up problem because does not affect patent holders who are not members of the SSO.

Second, an SSO can require holders of patents that are incorporated into a standard to license those patents to users of the standard on reasonable and non-discriminatory (RAND) terms. The intention of this approach is enable standard setters to adopt the best standard, without concerning themselves with patent hold-ups.

Finally, patent holders could be required to disclose the specific license terms of their patents beforean SSO adopts a standard.  This approach avoids patent hold-ups by setting royalty and licensing terms before a patent holder gains market power.

The FTC will accept public comments on these, or other, ways of addressing the problem of patent hold-ups. The agency requests that comments be submitted via its website through August 5, 2011.

Abigail Slater

Abigail Slater is an antitrust attorney by the Federal Trade Commission (FTC) in Washington D.C. All views expressed are the author’s own and do not represent the views of the FTC or any individual Commissioner.