11

Technical Standard-Setting and Patent Pooling, andCompetition Policy
Kim Junghoon(*)

When two or more inputs are essential in goods-production and they have become property rights and areseparately possessed by different companies, companies producing goods have to conclude license agreementswith the two or more holders of the relevant property rights. However, there is the possibility that
goods-production will be suspended due to the occurrence of hefty transaction costs, a refusal to license, etc.,
which causes the "tragedy of the anticommons." This causes especially serious problems when technicalstandard-setting and intellectual property rights are combined. It is the patent pool that has been attracting
attention as a solution to this tragedy in recent years. Both technical standard-setting and patent pooling in factcause various potential competition policy issues. This research considers relations among "technicalstandard-setting, patent pooling, and competition policy," from various angles.

Chapter I "Standardization" attempts toconceptualize the standards and standardization.
"Standard" in this report is defined as "that which isvoluntarily adopted as a collective preprocessing to
reduce uncertainty in repeated interactions
between humans and between technologies and cuttransaction costs," and "standardization" is defined
as a "process of building a collective consensus to
set the standard." Standardization is not always apurely technical process, and the standard createdby standardization does not always need to be thetechnically best option. The standard has to beunderstood as a result of compromise among
relevant stakeholders who have different interests,
and therefore, what is first important in analyzing
standardization is to recognize that standardization
depends on the conditioned technical, commercial,legal and regulatory contexts as well as what
(subject to be standardized) is standardized when(timing of standard-setting) and by whom(standard-setting body). The final report discusses
various aspects of the standard and standardizationon the basis of such awareness of the issues. The
aspects of the standard and standardization to which
special attention is attached are standard as an
institution, standards as public goods, standard asan alternative to public regulations, standard as atechnological infrastructure, standard as a dominant
design, standard as architecture, standard as acorporateorganization,community-specificstandard, standard as a carrier of technicalknowledge, standardization as a technical diplomacy,
and standardization as a means of forming theperception of technology. For details of these
aspects, see the final report. "Standard as an
institution" and "standards as public goods" aredescribed very simply here.
First of all, regarding "standard as an

institution," an institution is that which provides the
structure for various exchanges in society anddetermines the costs of transacting. Behind theformation of an institution is the purpose-to reduce
uncertainty by stabilizing economic transactions
and increasing predictability and to promoteeconomic transactions by realizing lower
transaction costs. The process of its formation andmaintenance is essentially collective. This
resembles the purpose and formulation process ofthe standard. Next is "standards as public goods." It
has been argued for a long time that the standard
corresponds to the concept of public goods, which
is defined by non-competitiveness and impossibilityof exclusion. However, there are also deep-rooted
criticisms against this argument. After organizing
and reviewing major arguments of both sides, thefinal report concludes that the standards are neither
complete public goods nor complete private goods
and that it is appropriate to position the standards
as "quasi-public goods." Specifically, the standards
serve as private goods in the sense that they haveexcludability to a certain degree in its use, but theyalso serve as public goods in the sense that theirconsumption involves little competition.
The final report discusses standardization byclassifying it into the following four methods basedon "difference in the process." The first one is themethod in which the standard is set by law or public
regulations and compliance with the standard iscompulsory. Specifically, the central government
sets and declares the technical standard and makes
compliance compulsory in a top-down way, as apolicy means to achieve some sort of public policy
objectives, such as promotion of public interest
including public health and safety. The second is themethod in which the voluntary, formal standard is
set by consensus obtained through negotiations in a(*) Ph.D., Researcher, Center of Social Informatics, Lecturer, Department Telecommunications Indiana University at
Bloomington, USA

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standards organization. This is generally called "dejure standardization," and means "standardization
formed by voluntary negotiations to build aconsensus among several stakeholders through anintermediary organization, called standards
organization, outside of the context of legislation
and regulation." The third is the method in which
technology that has survived in market competitionis set as the de facto standard afterwards without
depending on standards organizations. This refers
to neither top-down standardization by thegovernment nor pre-coordinated standardization byformal standards organizations, but standardizationby the market. This is called "de facto
standardization" in the sense that products andservices that have survived in market competition
substantially become the standards. The de facto
standardization is subsequent formation of thestandard as a result of free interactions amongplayers in the market, i.e. competition. The last
method is a cross between formal standardizationand de facto standardization in which the standard is
set by a consortium, which several companies thatshare common business purposes in standardization
organize by contributing their technologies instandardizing a specific technology and carrying out
pre-coordination, in order to speedily set thestandard, without depending on formal standards
organizations. Consortium-based standardization
can be understood as a compromise between the"compatibility/stability" derived from the standard
and the "flexibility/diversity" derived from market
competition. The final report discusses in detailconsortium-based standardization since sufficientresearch thereof has not been conducted despite
the rapid increase in the commercial and politicalimportance of consortiums.
The conventional standardization was rather inthe form of sanctioning products and technologies
that have been established, i.e. ex post
standardization, in many cases. However, the valueof "ex post standardization" declined around the
mid-1980s due to network effects (that is, value
increases according to the scale of network) and theshorter product lifecycle caused by increase in the
speed of technical innovation mainly in high-techindustries, including the information andcommunication fields. Then, there has been an
increasingnecessityfor"anticipatory
standardization," in which a standards organization
expects technology in advance and sets thestandard before commercialization of the relevant
product. The final report discusses the flow of suchtransfer from ex post standardization to anticipatory
standardization.
Standardization has various advantages anddisadvantages. Specifically, the advantages on the
producer side are reduction of transaction costs,
market expansion due to the increased
dissemination of technology, achievement of

economies of scale and incentive to new entry andinvestment,
promotionofintra-standard
competition, improved recognition in the market,
ensured incomes from licensing patents included in
the standard due to dissemination of the standard
and consequent rise in sales, and increased
investment in research and development due to theeliminationofoverlapping
researchanddevelopment costs and the avoidance of researchand development costs from becoming sunk costs,
and network effects of complementary goods bystandardization. Consumers benefit because they
are able to obtain information about products in a
predictable, consistent way and to compare services
or goods by common criteria, and environmental
protection and product safety are guaranteed. On
the other hand, standardization also has several
disadvantages. Of these, the final report discusses
twodisadvantages
thatareconsidered
representative, i.e. restriction by lock-in effect oninter-standards competition and generation change
and restriction on system diversity.
In the past 20 years, the environment
surrounding standardization has been rapidlychanging mainly in the information andcommunication field. Cited as the core of thechanges are the growing importance of theinternational standards due to the rise in the global
economy and the WTO/TBT Agreement(Agreement on Technical Barriers to Trade), theglobalization of standards activities, the rise ofregional standardization, the increasing importanceof anticipatory standardization, the rapid expansionof the new digital economy, such as the Internet
and e-commerce and the acceleration of the speedof technical progress attributable to it, power shift
from formal standards organizations to informal
standards organizations due to the rise of private
informal standards organizations, such as
consortiums and forums, the diversification ofstandards organizations and the formation of
coordinative structures, the diversification ofstandardization-related stakeholders, the increasing
interdependency and complexity of standards, theconvergence of industries due to the progress oftechnical convergences and the increasing
possibility of jurisdictional overlap and conflict
between standards organizations thereby, and therise of IPRs in standard-setting due to the progressof the pro-patent policy. Among these, the final
report discusses in detail the "diversification ofstandards organizations and the formation of
coordinative structures" and the "growing
importance of the international standards due to the
WTO/TBT Agreement in 1995." The final report
also discusses the influence of these changes in theenvironment surrounding standardization on
industrial
standardization
while
using
telecommunications standardization as an example.
In particular, it analyzes how the traditional● 87 ●IIP Bulletin 2004

paradigm of telecommunications standardization
under the system of the PPT (Post, Telephone, andTelegraph) and the CCITT (Consultative
Committee for International Telephony andTelegraphy) came to collapse as a result of threefactors-(1) technical factors such as theconvergence of telecommunications and information
processing based on digital technologies thatstarted in the 1960s, (2) industrial factors such as
the emergence of multinational companies due tothe progress of globalization and mutual entry
between IT companies and telecommunications
carriers, and (3) political factors such as trends
toward the liberalization and deregulation of thetelecommunications market in the 1980s.
Chapter II "International Comparative Analysisof Standards Policy" overviews the history andcharacteristics of standards policy in Europe, theUnited States and Japan. For details, see the final
report.
Chapter III "Intellectual Property Rights andCompetition
PolicyIssuesinTechnical
Standard-Setting" covers the issue of theconvergence of technical standard-setting and IPRs,
which has been rapidly proceeding in recent years,
and summarizes the approach made by major
standards organizations to the issue, as well as
analyzes case examples from the viewpoint ofcompetition
policy.
Ingeneral,technical
standard-setting and IPRs are considered to be in a
conflicting relationship. More specifically, while
technical standard-setting brings "benefits fromsharing" by standard-setting through the collective
consensus-building process, IPRs bring "benefits
from exclusive possession," i.e. to increase the
incentive for technical development and market
development by granting exclusive ownership, for acertain period of time, to those who created new
knowledge. However, they can be said to becomplementary to each other from the point ofview that they promote innovation, contribute toindustrial development and enhance consumer
welfare.
In conventional standardization, IPRs havebeen licensed royalty-free in principle, androyalty-paying licensing was exceptional. However,the "reversal of principle and exception" has been
occurring in recent years. In other words, atpresent, even if a standard was set through theconsensus-building process of a standards
organization, the standard cannot always be usedfreely (royalty-free). If the use or implementation ofa standard involves IPRs, the obtainment oflicenses from the relevant right holders becomes aprerequisite. Behind this is the recently growing
recognition of the value of intellectual property, andtheadvancing
convergenceoftechnical
standard-setting and IPRs, such as the more active

IIP Bulletin 2004

exploitation of IPRs in standardization. Various
problems are also arising in the flow of convergence.
In particular, the urgent policy issues are demands
for excessively high royalty by IPR holders who
claim their IPRs after relevant standard isestablished, discriminatory treatment in licensing,including the exclusion of competing companies,
and demands for licensees' fulfillment of excessive
incidental conditions, including free grant-back.
Standards organizations have taken various
measures against these problems in the past. The
final report organizes the IPR policies of major
standards organizations, such as ITU (International
Telecommunication Union), ISO (International
Organization for Standardization), ANSI (American
National Standards Institute), and ETSI (European
Telecommunications Standards Institute). Of these,
the dispute over the IPR policy of the ETSI in 1993
is discussed further in the final report since it isexpected to provide major suggestions in
discussions on the balance between technicalstandard-setting and IPRs.
Technical standard-setting is originally basedon a collective consensus among market players, so
it can be understood as potentially including thecompetition policy issues. Traditionally, competition
policy authorities have taken a stance of"non-intervention" in technical standard-setting bystandards organizations. This is because of theassumption that, in most cases of technicalstandard-setting by formal standards organizations,participation is open and licenses are granted under
the RAND (Reasonable and Non-Discriminatory)clause and the adoption of standards set is also notcompulsory.
Another
reasonforthenon-intervention policy is that the competition
policy authorities have been accurately aware of thebeneficial aspects of technical standards, such asincreasing consumer benefits through promotion of
intra-standard product competition, achievement of
economies of scale, reduction of manufacturingcosts and product prices, and improvement of the
incentive to invest in intra-standard research anddevelopment. However, it has to be noted that thisdoes not mean that the competition policy
authorities have completely renounced theirregulatory authority over technical standard-setting
by standards organizations. Even if the competition
policy authorities basically take a stance of
non-intervention, since technical standard-setting
by standards organizations contains the aspect ofcollective cooperative work among privatecompanies in the competitive market as mentioned
above, it is highly likely to cause the competition
policy issues. In particular, this is likely when theabove assumption has broken down. Moreover,depending on how to handle IPRs in
standard-setting, the standard-setting is highly
likely to become the target of investigations by thecompetition policy authorities. The following are● 88 ●

possible competition policy issues that may occur informal standardization: the "act of refusing to granta license for an IPR included in a non-substitutable
technical standard," "pre-consensus about thequantity of production, price, and the timing ofcommercialization among members participating instandardization," the "act of skewing the fairstandards process," and "claim of a patent anddemand for an expensive license fee after
establishment of the relevant standard." Inparticular, the final report analyzes the claim of apatent and demand for an expensive license fee
after establishment of the relevant standard while
using the Dell case in 1996 as an example.
Chapter IV describes the major aspects of"IPRs." The legitimacy and types of IPR protection
are discussed in the chapter. In particular, thefollowing two aspects are discussed as rationales
for setting patent rights: patent right as a system togive the incentive to invent and patent right as asystem to give the incentive to disclose
information.
Chapter V "Concept of Patent Pool" considers
the definitions, classifications, advantages andproblems of patent pools. Based on the existing
definitions of patent pool, this chapter defines
patent pool as "a mutual agreement among two or
more patent holders to conduct cross-licensing
between members or to jointly grant a license to athird party through mutual reservation of exerciseof their exclusive rights by patent rights." In
addition, the final report conducts analysis while
citing advantages and disadvantages of patent pools.
The advantages are (1) reduction of transaction
costs by regularizing transactions, (2) elimination ofblocking by forming a patent pool, (3) reduction of
cumulative license fees, (4) avoidance of costly
infringement suit battles, (5) increase of economic
benefits by reservation of exclusive rights, and (6)increasing incentive to invest in research anddevelopment due to a rise in the expected values ofpatents. On the other hand, the disadvantages are(1) the possibility that a patent pool is misused as
an excuse for market division or price-fixing, (2) the
possibility of a tie-in with patents other thanessential patents, (3) the possibility that various
restrictions are placed on the downstream markets
with the use of licensing conditions set by a pool,(4) the possibility of pooling a weak patent to makeit difficult to file a suit for invalidation of the patent,(5) the possibility of inhibiting new inter-standards
innovative activities, (6) the possibility offacilitating free-riding, (7) the possibility that apatent pool acts as a barrier to entry into themarket, and (8) the possibility of excluding specificcompanies.
Chapter VI "History of Relationship Between

Intellectual Property Rights and Competition
Policy" reviews and considers the history of therelationship between IPRs and competition policyin the United States with a focus on the handling ofpatent pools. The relationship between IPRs andcompetition policy has not been historically stable
but a dynamic one that changes with the times. The
final report discusses the transition of therelationship between them by roughly dividing thehistory of the relationship into four periods. First ofall, the time before 1945 is called the "era ofsuperiority given to intellectual property rights."
The basic position of the competition policy
authorities and the court on IPRs in the early 20th
century can be summarized by the idea that "IPRs
are sacred and located outside the power of thecompetition policy authorities." Based on such a
position, the competition policy authorities had
made decisions to exempt the acts of companies
holding IPRs from competition policy investigations
for a long period of time by broadly interpreting
exception clauses. Based on a similar idea, theauthorities considered patent rights to be legalmonopoly and regarded patentees as having
wide-ranging discretion in licensing acts withrespect to patent pools and cartels. Due to suchfavorable treatment, companies that formed apatent pool could put various restrictions on theconditions of licensing to licensees virtually
without worrying about the competition policy
authorities. Next, the period from 1945 to the1970s is called the "era of superiority given tocompetition policy" and is analyzed in this chapter.
This period can be understood as the period when
the competition policy came to extend its authority
to IPRs. Such strict competition policy
investigations of IPRs reached a climax with thepolicy called "Nine No-Nos" that was announced by
the Department of Justice in 1975. The "Nine
No-Nos" describes nine categories of acts that the
Department of Justice would consider to be
inhibiting competition. If a licensing act were
determined to be falling under any of these acts, it
was deemed per se illegal. However, such strict
competition policy reached a turning point with thebirth of the Republican Reagan administration
upholding a pro-patent stance in the early 1980s,
and the rise of the Chicago School that called forthe free market and asserted the restrictive role ofcompetition policy. In the final report, this period ischaracterized as the "pro-patent era." The lastperiod is the "era of the 1995 IP Guidelines," and it
is characterized by the "Antitrust Guidelines for the
Licensing of Intellectual Property (hereinafterreferred to as the 1995 IP Guidelines)" announced
by the Department of Justice on April 6, 1995. The
1995 IP Guidelines replaced the IPR-related
sections of the "U.S. Department of JusticeAntitrust Enforcement Guidelines for International
Operations" in 1988 and 1989, and gave basic● 89 ●IIP Bulletin 2004

standards for the competition policy authorities toinvestigate issues arising in IPR licensing activities.
These IP Guidelines are considered to be of greatsignificance for the following reasons: The
guidelines redefined the relationship between IPR
policy and competition policy from a conflicting
relationship to a complementary one; The
guidelines contributed to the significant reductionof institutional uncertainty in various subsequent
licensing activities of private companies; The
guidelines enabled the competition policy side to
take more consistent policy measures; The
guidelines showed more amicable policy toward
collective license management mechanisms, suchas patent pools and cross-licenses. The main pointsof the argument in the 1995 IP Guidelines can be
simply summarized by the following four points.
The first point is the identification of intangible
goods and tangible goods, i.e., IPRs are regarded as
being essentially compatible to any other property
rights under the competition policy. The second is
the point that the grant of IPRs is not equated withthe grant of market power. The third is the pointthat the guidelines stipulate that the combination ofcomplementary IPRs is pro-competitive. The fourthis the point that the guidelines stipulate that the actof transacting IPR-related licenses, such ascollective license management mechanisms,
including patent pools, would be treated not by the
per se illegal rule but by the rule of reason. The
rule of reason analysis of patent pools is basicallythe same as that of other IPRs. Specifically, in
response to the formation of a patent pool, thecompetition policy authorities first investigate
whetherthepatentpool
hascreatedanticompetitive effects. If the patent pool is foundto have anticompetitive effects, the competition
policy authorities will next compare theanticompetitive effects with the pro-competitiveeffects or efficiency-enhancing effects, such as (1)integrating complementary technologies, (2)reducing transaction costs thereby, (3) clearing
blocking relationships between patents, (4)avoiding costly infringement suit battles, and (5)promoting the dissemination of technology. Only if
the anticompetitive effects are judged as larger thanthe pro-competitive effects, the competition policy
authorities will take antitrust measures.
Chapter VII "Case Study of Patent Pools"
covers five case examples (i.e. (1) Aircraft pool, (2)MPEG-2 pool, (3) DVD pools, (4) SUMMIT/VISX
pool and (5) 3G Platform), and analyzes thehandling of each case in terms of competition policy.
Smooth transactions of IPRs as inputs areinevitable for production in such fields asbiotechnology and information and communications
where joint production requiring two or more
inputs to produce one product is the main form of
production. Especially, if non-substitutable property

IIP Bulletin 2004

rights, i.e. essential patented technologies, areoverlapping, the incentive to produce products
declines due to rise in transaction costs and thepossibility of a holdup, ending up in the under-useof resources due to overlapping property rights,
which is called the "tragedy of anti-commons."
Patent pools have recently been attracting attention
for the reason that they prevent the arising of thetragedy of anti-commons by centralizing licensing
in advance through a collective management
mechanism, thereby reducing transaction costs.
Based on such awareness of the issue, the final
report conducts analysis from the competition
policy viewpoint with respect to the aircraft poolthat was formed at the request of the government,
MPEG-2 pool and DVD pools that were
investigated and approved in Business Review
Letters issued by the Department of Justice,
SUMMIT/VISX pool that was investigated anddissolved by the competition policy authorities, andthe patent platform system for Third Generation
Mobile Communication (3G), which is atransformed version of patent pool that enabledmore flexible licensing negotiations.
Chapter VIII "Points in Competition Policy
Investigations of Patent Pools" considers 10 pointsof the argument that are considered to be importantin analyzing competition policy toward patent pools.
Specifically, the chapter discusses (1) Is a patentpool a "gathering of essential patents"?; (2) Does
the selection process maintain "independence andneutrality"?; (3) Is a relationship between patents"mutually complementary"?; (4) Is licensing by apool "open and non-exclusive"?; (5) Is licensing by apool "non-discriminatory"?; (6) Is "individual
licensing" by pool members ensured?; (7) Are the"appropriate assessment of the value of patents"
and the "fair distribution of license income"ensured?; (8) Is a measure to "prohibit the sharingof competitively sensitive information" taken to
reduce the possibility of conspiracy among poolmembers?; (9) Is the "effect on innovation" taken
into consideration?; and (10) Is the "grant-backprovision" balanced?
As above, the final report mainly discusses
technical standard-setting, patent pooling, andcompetition policy. Both technical standard-setting
and patent pools have the effect of reducing
uncertainty inherent in economic transactions,lowering transaction costs, and promoting
transactions
andinnovation
throughvoluntary/collective coordination. On the other
hand, it is also true that technical standard-setting
and patent pools potentially raise competition policy
issues since they are established through a
cooperative act among private companies in a freemarket. The "harmonious coexistence" of threeparties-technical standard-setting, patent pooling,● 90 ●

and competition policy-significantly increases
economic efficiency. On the other hand, a conflictamong them can result in the serious deteriorationof economic efficiency. A question of how to realize"harmonious coexistence" is a very important issue
for the policy authorities. However, sufficientacademic/policy research has not been accumulated
in terms of this issue. Further discussion is
expected to continue in the future.

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