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Intellectual property, standards and competition law:navigating a minefieldDr J. J. S. Watts M.I.E.E., C.EngSolicitor, Partner, Bristows3 Lincolns Inn FieldsLondon, WCZA 3AAAbsfract-The value attached to intellectual property,particularly patents, has been rapidly increasing overrecent years. The recognition, development andexploitation of intellectual property is now a centralfactor in technology management However, in the fieldof electronics in particular, there is a natural tensionbetween two objdves: on the one hand, protdngmarket share by carving ont dear proprietary positions;and, on the other hand, growing the market throughindustry-wide acceptance for new technologies,particularly by having the technology accepted asstandard.The general requirement imposed on Companies thatparticipate in formal standards-setting h that they mustgive an undertaking to the standards body to offerlicences to essential intellectual property on terms thatare fair, reasonable and nondiscriminatory. Anypatentee that has been involved in standards-setting, andwhich later seeks to license or litigate related patentrights, inevitably faces arguments about thisrequirementThe position is further complicated by theinternational legal landscape. In the European Union, itis often argued by potential infringers that the patentedtechnology is an essential facility, access to which (it isargued) must be granted under EU competition law.Patentees, however, view this as a form of compulsorylicensing.There is much that the technology manager can doto plan a snccesfnl route, guiding the development oftechnology projects through the complex interrelatednetwork of law, business practice, and technology. It isimportant to plan technical developments SO as to createa balanced portfolio of essential and non-essential rights,framed around appropriate products and methods, andto ensure that third party use of the rights can beeffdvely controlled and policed in a manner thatbenefits the technology and the business.IntroductionAll of the major players in the electronics industryseek to obtain a significant number of patents eachyear. Each of the key players holds portfolios ofhundreds or thousands of patents. For many, there areR&D and intellectual property performance targetswhich include the number of patents filed andgranted.Unlike many other industries, the electronicsindustry is particularly dependent on compatibility,interoperability and interconnection. As aconsequence, many different companies can bedeveloping equipment for the same systems andplatforms and there are inevitably a huge number ofpatents that are potentially relevant to muchdevelopment work. The position is M e rcomplicated by the fact that in many cases there areDr D R Baigent, M.Inst.P, C.PhysSolicitor, Associate, Bristows3 Lincolns Inn FieldsLondon, WCZA3AAseveral competing platforms in similar areas, usuallywith overlapping patent coverage.Potent porffioltosClearing the patent position for new products is anincreasingly complex task. While it may be feasibleto examine the principal relevant patents of a maincompetitor, an exhaustive study is generally notrealistic. There can be many companies involved,each with large patent portfolios. Furthermore, thenature of new technoloBes is often such that eachnew product must build upon numerous prevloustechnologies (and therefore previous patents) ratherthan sfaning from scratch. Analysing theinfnngement and validity of even one individualpatent is generally a complex task, and oRcn theanswer is uncertain. It is therefore almost alwaysimpossible, as a mancr of commercial reality, to gaina comprehensive and definitive understanding ofwhich patents really are infnnged and valid. A riskassessment IS the best that is commercially realistic.These factors mean that licensing has emerged asthe norm within the electronics industry, with the useof patents to define areas of exclusivity being limitedto narrow product fields. Such licences are generallyfor the mutual benefit of the parties, enabling each tooffer a wider range of products than would otherwisebe possible. This policy also benefits the industry(and society as a whole) by widening the range andsources of products, maintaining the pace ofinnovation and ensuring a competitive market. Patentsare thus normally used, not to kill off suppliers orcommercial collaborators, or to exclude others, but Ioachieve a widwin agreement in which both partiesachieve freedom to operate in a rapidly evolvingmarket.Between companies with large patent and productportfolios, the logistical dfficulties of licensingpatent-by-patent and product-by-product can becomeso complex that the only realistic approach is tonegotiate broad cross-licences. Cross-licensees gain asignificant benefit from the general hedom tooperate that cross-licences create. The benefits ofbroad cross-licences can only be accessed bycompanies with patent portfolios that are sufficientlybroad and atuactive to provide commercial value inplace of a licence fee. This fact, too, is a mjorincentive to constant innovation.However, extensive patent portfolios of largecompanies can in certain circumstances be used asweapons against innovation. If the portfolio issufficiently large, and contains patents with vague orwidely draw claims, almost any product can becaught with one patent somewhere within the0-7803-7385-5/02/$17.00 02002 IEEE. 837portfolio. It does not follow that the claim is beingproperly construed, or that the claim is valid. Themere existence of such patent “minefields” and thefear, uncertainty and doubt which they can sow in theminds of competitors and their customers cangenerate major difficulties for smaller companies,especially new entrants to the market. This can be thecase even if the smaller company believes there islittle or no merit in claims that their products infingea valid patent right of a company incumbent in themarket.StandardsStandardisation is the comerstone of todayselectronics industry. It is the existence of effectivehardware, software and interface standards thatfacilitates the interoperability and interconnectionrequirements of modem electronics. Standards can begenerally classified as either market standards orformal standards.Standards that are drawn up by an individualcompany or group of companies are known as marketstandards. An example of such a standard is the“x86” instruction set architecture pioneered by Intelwhich has been adopted by a large section of the PCindustty. Where such standards are widely adoptedthey are often referred to as “de facto standards.Generally, there is no legal requirement to complywith market standards. However, there may often betechnical or commercial reasons why compliance isessential.A company that develops a market standard canhave a significant advantage over its competitors,particularly where the company holds key IPRscovering aspects of the standard. For example,although processors that are x86 compatible havebeen marketed with varying degrees of success by anumber of Intels competitors, Intel still remains byfar and away the leading provider of x86 compatibleprocessors.Standards that are drawn up by recognised bodiessuch as the ITU2 and ETSI are known as formalstandards. Such standards often dictate essentialrequirements that are mandatory. For example,European mobile phone network operatorsimplementing GSM4 networks operate under nationallicences which require compliance with the ETSIGSM standard.Formal standards often encompass what are lmownas “essential” IPRs. An IPR is deemed essential whenit is not possible to make, use or operate equipment ormethods which comply with a given standard withoutinfringing that IPR. This, however, is a test that canbe hard to apply.It is often said that an IPR is to be assessed asessential or not on technical, not commercial,grounds, and taking into account normal technicalpractice and the state of the art generally available atthe time of standardisation. In practice that is oftennot a workable basis on which to judge essentiality. Ifthere are two technical solutions to a problem, but oneis prohibitively more expensive than the other, thenthe cheaper solution is, in effect, essential. Similarly,the only known solution to a technical problem willbe essential until a new solution is discovered.Because of these difficulties, the definition ofessentiality and assessing whether IPR are essential ornot remains an important area in enforcing IPR instandards-related technology.Most standards bodies (including ETSI forinstance) include procedures that take IPR intoaccount where a standard is in the process of beingdrawn up. Each participant is expected to declare IPRit holds which are (or might be) essential to the draftstandard if it were to be adopted. The owner isrequested to give an undertaking in writing that it isprepared to offer (or grant) irrevocable licences onfair, reasonable and non-discriminatory terms andconditions under such IPR.A company wishing to comply with a standard is inprinciple entitled to negotiate with the companiesholding patents in order to obtain licences for the useof the essential IPR on terms that are “fair, reasonableand non-discriminatory”. Those, however, areuncertain terms. It is generally hard to identifyuseable mechanisms through which to assess what isessential, to judge what is fair, reasonable and nondiscriminatory,or to enforce the obligation IPRowners obligations to offer or grant such licences.The extent to which these obligations provide apractical limitation once a standard has been finalisedand adopted by industry is therefore limited. Controlcan, however, sometimes be exercised throughcompetition law.Competition Low and StandardsIn the European Community, competition law isenforced both by the national courts of member statesand by the European Commission. The keycompetition law provisions are Article81 andArticle 82 of the EC Treaty.Article 81Article 81 applies to anticompetitive or restrictiveagreements or arrangements entered into betweencompanies. This may include standardisationagreements. Standardisation agreements areagreements that have, as their primary objective, thedefinition of technical or quality requirements withwhich current or fkture products, productionprocesses or methods may comply. Such agreementscan cover various issues, such as standardisation ofdifferent grades or sizes of a particular product ortechnical specifications in markets wherecompatibility and interoperability with other productsor systems is essential. “Agreements” includesinformal understandings and concerted practices. Thestandards-setting processes in the electronics industryclearly falls within the scope of standardisationagreements.The terms of such standards and the way they areset may therefore give rise to conflicts withArticle 81. The Commission has recently publishedGuidelines on the application of Article 81 tohorizontal agreements, which includes agreements onstandards. These Guidelines, although non-binding,838are useful in understanding the current thinlong of theComssion in relaoon to standardisation agreementshand, standards that are not accessible to third parhesmay be discnminatory They may foreclose thirdThe Commission generally takes a positiveapproach towards agreements that do not limitinnovation and that promote economicinterpenetration in the common market or encouragethe development of new markets and improved supplyconditions.Standardisation agreements should not fall foul ofArticle 8 1 providedparticipation in standard setting is unrestrictedand transparent - all competitors in the marketaffected by the standard should have thepossibility of being involved in discussions.there is no obligation to comply with thestandard or it is part of a wider ageement toensure compatibility of product.access to the standard must be possible forthird parties on fair, reasonable and nondiscriminatoryterms to avoid elimination ofcompetition in the relevant market.By their nature, standards will not include allpossible specifications or technologies, hut in somecases, it is preferable for the benefit of the consumersor the economy at large to have only onetechnological solution to which all manufacturersadhere. Particular care is needed with such standardsto ensure that they are set on a non-discriminatorybasis and to take into account the fact that a universalstandard may have the effect of inhibiting theacceptance of new non-standard technology. Ideally,standards should be technology neunal. In any event,it must he justifiable why one standard is chosen overanother.Agreements are likely to fall foul of Article 81 ifthey:use a standard as a means amongst other partsof a broader restrictive agreement aimed atexcluding actual or potential competitors.grant the parties joint control over productionand/or innovation, thereby restricting theirability to compete on product characteristics,while affecting third parties like suppliers orpurchasers of the standardised products.prevent the parties from either developingaltemative standards or commercialisingproducts that do not comply with the standard.entrust certain bodies with the exclusive rigbtto test compliance with the standard, goingbeyond the primary objective of defining thestandard.impose restrictions on marking of conformitywith standards.It is not necessarily a cause for concem that oneparty helping to set a standard, or all the participatingparties between them have or develops a high marketshare. The effectiveness of a standard is oftenproportional to the share of the industry involved insetting and/or applying the standard. On the otherparhes, or cause the -market io segment. There aretherefore a very large number of factors to examineand the assessment of whether a standardisationagreement restricts competition is a complex one.A party which gives an undertaking to license onfair, reasonable and non-discriminatory terms canexpect to be challenged if it fails to adhere to thatundertaking. The undertaking will be part of therelevant facts to assess in deciding whether anysubsequent licensing activities seek to imposeconditions that prevent, restrict or distort competition.The Commission Guidelines give a number ofuseful illustrations, two of which are considered in theexample in the box (overleaf).Particular difficulties arise where several patenteesjoin together to offer a “one-stop shop” for patentlicences - so-called “patent pools. It can be hard toassess whether a patent pool is pro-competitive (forinstance by offering a simple, quick, and transparentaccess to the market) or anti-competitive (by allowingthe patentees to club together to impose terms that,were they acting individually, would not be accepted).Article 82Article 82 applies to anti-competitive conduct by acompany with a significant degree of market power ina properly defined relevant product market It appliesonly to those companies which are so import