Antitrust Rulemaking as a Solution to Abuse of the Standard-Setting Process

While many recognize the critical role that technology plays in modern life, few appreciate the role that standards play in contributing to its success. Devices as prevalent as the modern laptop computer, for example, may be governed by over 500 interoperability standards, regulating everything from the USB drive to the memory chip. To facilitate adoption of such standards, firms are increasingly turning to standard-setting organizations. These organizations consist of members of an industry who agree to abide by the organization's bylaws, which typically regard topics such as patent disclosure and reasonable licensing. Problems arise, however, when members violate these bylaws after a standard has been adopted. Where a member asserts its patents against other members in violation of the organization's bylaws, that member engages in what is known as "patent holdup." Both private and public litigation have focused on curbing this practice, but the current regime remains imperfect. This Note argues that the best approach to the current problem of patent holdup requires the Federal Trade Commission to promulgate an antitrust rule. This approach combines the advantages associated with traditional enforcement with the beneficial aspects of agency rulemaking.IntroductionSome technological advancements provide benefits by themselves. However, the vast majority of devices available to the consumer are in reality aggregations of independent patented technologies that are packaged together and that rely on interoperability standards to function.1 The personal computer is a prominent example of this concept.2 Personal computers combine various technologies, such as DVD drives, USB outlets, and memory chips, which each rely on interoperability among products to be fully functional. If there were twenty different standards for DVDs that required twenty different players, consumers would experience dramatically fewer benefits. Thus, it is important that industry settle on standards for interoperability among products.There are two primary ways in which an industry can settle on a standard: through the regular course of competition, which often gives rise to "standard wars," or through standard-setting organizations ("SSOs").3 Standard wars, such as the recent Blu-ray/HD DVD conflict and its predecessor the VHS/Betamax conflict, rely on the marketplace to decide which standard prevails.4 This process can be long, and it leads consumers either to purchase the losing standard or wait for the market to decide on a standard.5 To avoid these problems, industries can convene SSOs.6 SSOs are groups composed of members of a certain industry, such as the memory chip indus- try, who meet to decide on industry standards.7 Because the members set standards as a group, consumers benefit from interoperability among their products and are not forced to decide which standard to adopt.8 Further, industry benefits from increased and accelerated consumer adoption of its standard.9While SSOs provide many benefits to consumers and industry, some members of SSOs have devised ways to abuse the standard-setting process in order to extract greater returns. Through a practice known as "patent holdup," patent holders of a technology that will become a standard wait until their technology has been adopted by the SSO, and then "hold up" the manufacturing process by charging higher royalties to extract greater profits from the manufacturers.10 Patent holdup harms consumers not only by increasing the price of technology11 but also by delaying the standard-setting process and erasing the efficiency gains that attract industry to SSOs in the first place.12In order to combat these abusive practices, both the government and private parties have brought actions against SSO members who use patent holdup tactics, but the current state of the law has failed to establish sufficient disincentives to prevent these tactics for good. Reliance on private parties and the Sherman Act has proven ill suited for this new wave of anticompetitive practice. …