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**DEPARTMENT OF JUSTICE**

How to Address "Hold Up" in Standard Setting\
Without Deterring Innovation:\
Harness Innovation by SDOs

**DAVID L. MEYER**

**Deputy Assistant Attorney General**

**Antitrust Division**

**U.S. Department of Justice**

**ABA Section of Antitrust Spring Meeting**

**Panel on Standards Development Organizations**

**Washington, DC**

**March 26, 2008**

Today's panel addresses the topic of so-called "hold up" by the owners
of patents and other intellectual property.[^1] The Department of
Justice has recently made a number of detailed statements on this
subject, including in speeches,[^2] in business review letters, and in
last year's "IP2 Report" issued jointly with the FTC.[^3] Those
statements have done much to remove some of the unfounded "antitrust
fear" -- arising from such cases as *Allied Tube*[^4] and
*Hydrolevel*[^5] -- that may have led standards development
organizations (SDOs) to shy away from experimenting with the full range
of tools available to address the potential for standards to "lock in" a
need for specific IP. Rather than repeat those statements, which I
commend to you, I would like to amplify a few related points.

I'll begin by asking what hold up means and when, if ever, it is a
problem. I'll then discuss the Antitrust Division's view as to the role
of antitrust law and enforcement policy in addressing the "hold-up"
issue. That approach can be summarized as follows: antitrust has a role
to play but its principal objective should be to harness the ingenuity
of participants in the standards development process to deal with hold
up in a manner that is optimally effective, meaning that it facilitates
efficient standards development *ex ante* -- including participation by
holders of IP useful to implementation of the standard -- rather than
merely attempting to protect standards users *ex post*.

# [I. Background: Hold up and Tradeoffs]{.smallcaps}

To bound the discussion, let me explain what hold up means (or ought to
mean). It is easiest to define hold up by first considering what it is
not. Hold up should not be taken to refer merely to demands by holders
of valuable intellectual property for a significant royalty fee in
exchange for access to that property, even if the holder has market
power (or even monopoly power) by virtue of the IP rights. Such market
power may merely reflect the value inherent in intellectual property;
for example, its value by virtue of providing a uniquely efficient
solution to some real-world problem.

Hold up also should not be taken to refer to every situation in which
the incorporation of IP into a standard enhances the value of the IP.
Efficient standards typically expand output, unlocking new markets for
the technologies used to implement them. This added value should not
necessarily be attributed to the standard rather than the IP. If
particular IP provides a uniquely efficient way to solve a problem that
must be overcome in order for a standard to work, the IP holder's desire
to earn a return reflecting the value of solving that problem is not
hold up; it is better thought of as a reflection of the intrinsic value
of the IP. This is so even if the standard unlocks value in IP for which
there was no market until the standard was created.

Sometimes, however, intellectual property acquires value, or acquires
significant additional value relative to other, alternative solutions,
only because it becomes imbedded in a standard. Before the standard was
adopted, there might have been many technological choices available, but
after the standard the many alternatives may have been reduced to one
(assuming there are no alternative standards). In this setting, the
standards development process can create market power on the part of an
IP rights holder that would not have existed absent the standard, and
this new market power can give the IP rights holder the ability to exact
a price that need not have been paid to develop a useful standard.

Should the owner of such property be permitted to "hold up" those who
become locked in by virtue of the standard? And, if we think this is a
problem, when is it an *antitrust* problem?

SDOs have been grappling with these issues for a number of years. To
reduce opportunities for hold up and to avoid the uncertainty that can
slow down adoption and implementation of a standard, some SDOs have
chosen to implement rules suggesting or mandating the disclosure of
patent rights before the standard is designed. Others have sought to put
limits on royalties by requiring *ex ante* commitments by holders to
license any patents incorporated into standards on reasonable and
non-discriminatory (RAND) terms after the standard is set. More
recently, some SDOs have sought to have patent owners reveal their most
restrictive licensing terms before the standard is set. By the way, as I
will discuss in a moment, some SDOs have no doubt made the conscious
choice not to implement any of these techniques.

In deciding how to approach the potential for IP hold up, SDOs and their
participants must consider many issues: how serious a problem is hold up
likely to be; how effective are the various measures for addressing it;
and what is the impact of those measures on the underlying goals of the
standards development process, perhaps principally the efficient
development of effective standards. These goals can be in tension with
one another, requiring SDOs and their participants to consider, for
example, the impact of the SDO's strategy (or the lack thereof) on:

-   The incentives of IP holders to participate in the SDO process;

-   The incentives of users of the standard (and thus of IP imbedded
    therein) to participate in the SDO process;

-   The ability of the SDO to develop the appropriate technical solution
    so that the standard works and is adopted by the industry;

-   The need to keep transactional costs low for the setting of the
    standard itself and, if needed, for the costs of licensing of IP (as
    is the case for other necessary inputs); and

-   The need for speed, both in the creation and the adoption of the
    standard.

To illustrate the kinds of tradeoffs in play, a "perfect" technical
standard may take twice the development time of a "pretty good"
standard. Creating, implementing, and enforcing a licensing structure
takes time and money and may deter some licensors from participating in
the standard-setting process, so the cost-benefit equation may not be
favorable for some SDOs. One cannot say as a general matter that
slow-but-perfect is always better than fast-and-pretty-good. Or,
requiring numerous licensing commitments might discourage participation
by some patent holders, while the absence of such commitments might
discourage adoption of the standard by its prospective users. Thus, for
example, an SDO's decision to impose only vague RAND terms may be an
implicit decision to get more patentee participation in the standard
development on the front end, and accept more risk of high licensing
fees in the implementation on the back end. Again, one cannot say as a
general matter that either maximizing patent owner participation or
maximizing user adoption is always the better policy choice.

# [II. The Role for Antitrust -- The Division's Perspective]{.smallcaps}

So, where does antitrust come in? Antitrust has a role to play, but it
should be a supporting player, not the main event. At the Antitrust
Division, we think that innovation by standards setting organizations
and their participants offers the most effective means of addressing the
potential for IP hold up, uncertainty and inefficiency without
undermining incentives to innovate on the part of patent holders or
incentives to develop efficient standards that add value to the economy.
The experts at standards development -- which are SDOs and their
participants, not antitrust enforcers or antitrust courts -- are in the
best position to determine whether and how to manage hold up.

How can antitrust help achieve this result? We see two overarching
principles:

(1) Antitrust law and enforcement policy should provide *freedom* for
    SDOs to work things out in the manner best suited to their standards
    development objectives, while staying conscious of the need for
    appropriate boundaries to prevent anticompetitive behavior by the
    participants; and

(2) Antitrust law and enforcement policy should not interfere with the
    *incentives* of SDOs and their participants to engage in such
    innovation.

Applying these principles suggests at least three specific implications
for antitrust policy.

> **A. Antitrust Should Tolerate a Wide Range of Approaches by SDOs to
> the Hold-Up Concern**

In the wake of *Allied Tube* and *Hydrolevel*, SDOs often avoided all
discussion of price and commercial terms, including *ex ante* discussion
of licensing terms, fearing per se liability. Therefore, when the
Division issued business review letters to VITA[^6] and IEEE,[^7] one of
our goals was to reduce unwarranted fear of per se antitrust liability.
VITA sought to address hold up by requiring mandatory disclosure of
most-restrictive terms, and by establishing specific contractual
remedies. The IEEE later sought to address inefficiency in the standards
development process by creating a regime of optional disclosure of
most-restrictive terms, establishing a process allowing for some
discussion of licensing terms when comparing the relative merits of
technologies, and leaving remedies to the general law of contract. IEEE
also sought to formalize contractual relationships among IP owners, IEEE
members, and IEEE standard users, so as to improve the ability of
individual users of the standard to seek remedies through contract
actions.

We issued favorable business review letters to both organizations. We
made clear that we would apply the rule of reason to efforts by SDOs to
tackle the hold-up issue, because we recognized the potential
competitive benefits of both the SDO activity itself and arrangements
aimed at addressing hold up so as to foster efficient standards
development. Like any rule-of-reason analysis, our approach will be
flexible and tailored to the specific facts, including the particular
parties and the problem they are attempting to solve.

But remember, rule-of-reason treatment is not equivalent to *carte
blanche* for participants in SDO activities. A legitimate desire to
evaluate alternative technologies and avoid IP hold up will not sanction
monopsonistic behavior that leads to allocative inefficiencies by
unreasonably suppressing prices paid for IP used in standards. For
example, although performing cost-benefits analyses on which
technologies should be included in a standard may well require that
users engage in some discussion of the likely costs of the technology
(and perhaps also what level of cost would be supported by anticipated
downstream demand), agreements among users as the royalties they would
be willing to pay could have unreasonably anticompetitive effects. Such
concerns would be particularly elevated if agreements or discussions
spill over into uses of the technology outside the scope of the putative
standard.

Antitrust law will be especially intolerant of agreements among
standards users that are a guise for coordinating their downstream
operations. It will be equally intolerant of naked agreements among
owners of competing technologies to fix the price paid for technology to
be used by users of a standard, to allocate markets, or otherwise to
restrict competition. Such boundaries should surprise no one, and should
not hamper efficient and procompetitive standard development.

> **B. Antitrust Should Not Provide an Omipresent Safety Net for
> Standards Users**

Just as antitrust should not be an unduly harsh sword that deters SDOs
from experimenting with efficient mechanisms for developing standards
free of the hold-up specter, standards users should not look to
antitrust as an omnipresent shield against the desire of patent owners
to collect royalties for technology imbedded in a standard. If antitrust
claims are too easy to assert, antitrust will threaten the efficiency of
the standards development process.

First, if standards users see antitrust as a crutch that will protect
them every time hold up occurs, they might refrain from taking steps to
address the hold-up concern *ex ante*, *via the SDO process,* even
though *ex ante* efforts likely provide a more effective way to deal
with hold up than the threat of *ex post* antitrust liability. Again,
antitrust has a role to play, but a sound approach to antitrust analysis
should take into account the benefits of motivating all SDO participants
to act efficiently. For SDOs and potential licensees, this means
anticipating potential hold up problems and deciding whether they are
significant enough to deal with up front, and devising the best means of
dealing with the issue, whether via disclosure requirements or other
contractual safeguards.

Second, when SDOs and their participants *do* recognize the potential
for hold up, and do take steps to deal with it via the SDO process,
unduly interventionist antitrust rules are even more dangerous. They
almost inevitably would trample the delicate tradeoffs inherent in an
efficiently functioning SDO process. In a world where the potential for
hold up is well known,[^8] an SDO's failure to adopt *ex ante*
safeguards that succeed in preventing hold up may well be a conscious
choice rather than an accident or defect in the standards development
process. An SDO might rationally choose to rely on non-contractual
factors, such as reputation or the bargaining power of licensees, to
rein in any market power created by the standard. Or an SDO may decide
that the lack of *ex ante* safeguards is a reasonable price to pay in
exchange for making the SDO process as fast as possible, or for making
it as friendly to technology owners as possible.

It can be difficult in hindsight to determine exactly what tradeoffs
were contemplated by an SDO, but that does not mean that we should
ignore these tradeoffs out of zeal to ensure some relief just because
*ex post* royalty rates are perceived to be high. If SDOs choose to
impose less than what an antitrust court (or agency) might -- based on
its after-the-fact assessment once lock-in has occurred -- think was
ideal, antitrust should not step in and change the calculus. If it did,
it would upset the judgment of the SDO -- discouraging participation by
IP owners, slowing down standards development or otherwise interfering
with the standards development objectives of the SDO and its
participants.

Third, but related to the points above, standards for antitrust
liability that appear to provide insurance against hold-up may threaten
IP owner participation despite SDO efforts to encourage it. If the goal
is to foster the efficient adoption of standards that take advantage of
the optimum technology (giving consideration to benefits and costs),
participation by owners of technology is vital. We *want* to encourage
not merely the development of new and better technological solutions
(read, intellectual property), but also steps to make that technology
available (willingly) for use in applications that would benefit from it
and also require standardization. We do not want IP owners to take their
ball and go home. Antitrust laws that impose liability too readily would
seem to pose a serious threat of chilling participation by technology
owners in the standards setting process. Technology owners might
withhold technology from standards development activities as to which
the risks of liability exceeded the expected rewards, potentially
depriving niche applications of the best available technical solutions.
Or if they did make their technology available for use in the standard,
they might do so in a way that entailed less interaction with the
development activities, potentially undermining the most efficient
adoption of the ideal standard.

> **C. Antitrust Law Should Seek to Avoid Chilling Efficient Standards
> Development Activity**

In addition to allowing SDOs to experiment with alternative approaches
for dealing with hold up, and being tolerant of the balance that SDOs
strike when they exercise that freedom, antitrust law also should avoid
chilling efficient standards development activity. This objective
applies with special force to the antitrust analysis for judging the
legality of unilateral decisions by IP holders regarding communications
about their IP during the standards development process and the terms at
which they subsequently make their IP available. The SDO setting is one
where participation of IP holders has tremendous procompetitive
potential. If antitrust law threatened IP holders with treble damages
liability for conduct during or after the standards development process
simply because -- when viewed through the lens of hindsight once lock-in
has already occurred -- that conduct might subjectively appear as unfair
or unjustified, the law would risk discouraging the very participation
we value. For example, IP holders would have to think twice about
participating in standards development activity if antitrust law
established rules that would exact treble damages (or impose caps on
royalty levels) for statements that were not objectively false, or
omissions made absent any clear duty to disclose, during a standard
setting process just because a jury might later conclude that the firm's
communications about its IP were less forthcoming than the jury thought
was sufficient to avoid lock-in.[^9] Likewise, IP holders may choose not
to participate at all in the standards development process if their
participation created a risk of treble damages liability for royalty
rates that a jury thought were "unfair" or "unreasonably high."[^10]

# [III. Conclusion]{.smallcaps}

In the past, the options available to SDOs to deal with the issue of
hold up were unnecessarily constrained by fears of antitrust liability.
As the tools available to SDOs expand, thanks to a more rational
antitrust approach, it remains important for antitrust law and policy
not to take back that flexibility by imposing liability every time the
mechanism chosen by the SDO fails to avoid hold up, and a decision maker
(judge, jury or Commission) believes the resulting price charged was
excessive. Instead, antitrust should focus on the propriety of the SDO
*process* itself, and with respect to claims that misbehavior led to
hold up and "monopolistically" high prices, impose liability only where
competition has been harmed.

[^1]: This paper is adapted from remarks made at the panel discussion on
    Standards Development Organizations at the American Bar Association
    Spring Meeting (Mar. 26, 2008).

[^2]: *E.g.*, Gerald F. Masoudi, Deputy Assistant Attorney Gen., U.S.
    Dep't of Justice, Objective Standards and the Antitrust Analysis of
    SDO and Patent Pool Conduct, address at the Law Seminars Int'l
    Annual Comprehensive Conference on Standards Bodies and Patent Pools
    (Oct. 11, 2007),
    http://www.usdoj.gov/atr/public/speeches/227137.pdf.

[^3]: [U.S. Dep't of Justice & Fed. Trade Comm'n,]{.smallcaps}
    [Antitrust Enforcement and Intellectual Property Rights: Promoting
    Innovation and Competition]{.smallcaps} 33-56 (Apr. 17, 2007),
    http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.

[^4]: Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492
    (1988).

[^5]: Am. Soc'y of Mech. Eng'rs v. Hydrolevel Corp., 456 U.S. 556
    (1982).

[^6]: Letter from Thomas O. Barnett, Assistant Attorney Gen., U.S. Dep't
    of Justice, to Robert A. Skitol, Esq. (Oct. 30, 2006), *available
    at* http://www.usdoj.gov/atr/public/busreview/219380.pdf.

[^7]: Letter from Thomas O. Barnett, Assistant Attorney Gen., U.S. Dep't
    of Justice[,]{.smallcaps} to Michael A. Lindsay, Esq., *available
    at* (Apr. 30, 2007),
    http://www.usdoj.gov/atr/public/busreview/222978.pdf.

[^8]: In the wake of *Rambus* (see generally the FTC decisions that
    found liability and imposed a licensing remedy, *In re* Rambus,
    Inc., No. 9302 (F.T.C. July 31, 2006), *available at*
    <http://ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf>;
    Opinion of the Commission on Remedy at 17, *In re* Rambus Inc., No.
    9302 (F.T.C. Feb. 5, 2007), *available at*
    http://www.ftc.gov/os/adjpro/d9302/070205opinion.pdf, and the D.C.
    Circuit's recent opinion overturning those decisions, Rambus, Inc.
    v. Fed. Trade Comm'n, No. 07-1124, slip op. (Apr. 22, 2008),
    *available at*
    <http://pacer.cadc.uscourts.gov/docs/common/opinions/200804/07-1086-1112217.pdf>)
    and similar standards cases, which have publicized the hold up
    problem, it will be increasingly difficult for SDO participants to
    argue that they did not anticipate the difficulties that can arise
    from failing to spell out the obligations of patent holders in
    detail.

[^9]: This is not to say, however, that fraudulent activity within SDOs
    could never constitute monopolization in violation of Section 2 of
    the Sherman Act. *See, e.g.*, Walker Process Equip., Inc. v. Food
    Mach. & Chem. Corp., 382 U.S. 172 (1965).

[^10]: The Supreme Court's decision in Weyerhaeuser Co. v. Ross-Simmons
    Hardwood Lumber Co., 127 S. Ct. 1069 (2007), suggests that the
    "fairness" of prices charged by an alleged monopolist, which is part
    of the definition of FRAND (fair, reasonable and non-discriminatory
    licensing), should play little or no role in antitrust analysis
    under Section 2 of the Sherman Act.