Patent Holdup and Oligopsonistic Collusion in Standard-Setting Organizations

Current controversies over patent policy place standard-setting organizations (SSOs) on a collision course with antitrust law. Recent theoretical research conjectures that, in an SSO, patent owners can “hold up” patent users in the sense of demanding high royalties for a patented input after the SSO has adopted the patented technology as an industry standard and manufacturers within the SSO have incurred sunk costs to design end products that incorporate that standard. Consistent with this conjecture, actual SSOs have recently sought no-action letters from the Antitrust Division for a variety of amendments to SSO rules that would require or request, at the time a standard is under consideration, the ex ante disclosure by the patent owner of the maximum royalty that the patent owner would charge under the regime of fair, reasonable, and nondiscriminatory licensing. This price information — which is characterized as the “cost” of the patented input — would, under at least one recent SSO rule modification, be a permissible topic for potential users of the patent to discuss when deciding whether to select it in lieu of some alternative standard. This exchange of information among horizontal competitors would occur ostensibly because the cost of the patented technology had been characterized as simply one more technical attribute of the standard to be set, albeit an important technical attribute. The Antitrust Division and the Federal Trade Commission have jointly stated that such discussion, by prospective buyers who are competitors in the downstream market, of the price of a patented invention that might become part of an industry standard should be subject to antitrust scrutiny under the rule of reason rather than the rule of per se illegality. The rationale that the antitrust agencies offer for applying the rule of reason to such conduct is that such horizontal collaboration might avert patent holdup. The Antitrust Modernization Commission (AMC) similarly endorsed the view that rule-of-reason analysis is appropriate for ex ante discussion of royalty terms by competing buyers of patented technology. This rule-of-reason approach, however, is problematic because it conflicts with both the body of economic research on bidder collusion and with the antitrust jurisprudence on information exchange and facilitation of collusion. Put differently, because of their concern over the possibility of patent holdup, the U.S. antitrust agencies and the AMC in effect have indicated that they may be willing in at least some circumstances to forgo enforcement actions against practices that facilitate oligopsonistic collusion by encouraging the ex ante exchange of information among competitors concerning the price to be paid for a patented input as an implicit condition of those competitors’ endorsement of that particular patented technology for adoption in the industry standard. However, neither the proponents of these SSO policies nor the antitrust agencies and the AMC have offered any theoretical or empirical foundation for their implicit assumption that the expected social cost of patent holdup exceeds the expected social cost of oligopsonistic collusion. This conclusion does not change even if one conjectures that such collusion will benefit consumers by enabling licensees to pass through royalty reductions in their pricing of the downstream product incorporating the patented technology. Proper economic evaluation of the plausibility of the passthrough conjecture will require information about the calculation of royalty payments; the demand and supply elasticities facing the licensees; and the structure of any industries further downstream between the manufacturer and the final consumer. Consequently, the magnitude of this effect will likely be a matter of empirical dispute in every case. Moreover, such a justification for tolerating horizontal price fixing finds no support in antitrust jurisprudence. Given the analytical and factual uncertainty over whether patent holdup is a serious problem, it is foreseeable that antitrust questions of first impression will arise and affect a wide range of high-technology industries that rely on SSOs. However, there is no indication that scholars and policy makers have seriously considered whether oligopsonistic collusion in SSOs is a larger problem than patent holdup.