Commentary Elsewhere: from other writers around the web. Please note the explanation of this section on the “About the Site” page.
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Technical standards are a necessary exception to a competitive marketplace based upon feature differentiation, but they pose risks because of the market power they confer on holders of standard-essential patents (“SEPs,” which generally speaking are technically essential and must be licensed in order to implement the standard). This is particularly true when the standard is widely adopted and there are no reasonable alternatives to its use. In such circumstances, a SEP owner can use the threat of an injunction to extract supracompetitive royalties or exclude competition entirely. This “lock-in” and related market power is what distinguishes SEPs from typical “differentiating patents” that are not incorporated into a formal standard-and is what makes Section 2 of the Sherman Act a powerful and appropriate tool to regulate SEP abuse.
The basic aim of the patent system is to create strong incentives to innovate and compete through feature differentiation, leading to consumer choice and competitive markets. As part of the patent grant, owners of differentiating patents may license their patents for a royalty, or enforce their rights to exclude infringers through an injunction or an action for damages. These rights, on their own, do not confer market power on the owner of a differentiating patent. Free riders (would-be infringers) can choose to work around differentiating patents or license the patented technology if it is available. And when disputes arise and a differentiating patent holder seeks to exercise its right to exclude via an injunction, the usual eBay factors protect the parties’ interests.
By contrast, standards—which are, after all, the result of concerted action by a group of would-be competitors in a standard-setting organization—effectively end competition among differentiated solutions. They can create tremendous value by allowing competing platforms and devices to interoperate. Innovation and differentiation may migrate and expand from the standardized space to new technologies on top of or adjacent to standardized technology. But when a SEP is adopted into a standard, implementing the standard requires implementing the patented technology. This in turn confers significant market power on the patent and its holder. To deal with this problem – and to avoid antitrust liability, SSOs typically require SEP owners to promise to license to all on fair, reasonable, and non-discriminatory terms.
In patent and contract cases, courts have rejected injunctions as violations of the SEP owner’s FRAND promise. But SEP injunctions also threaten competition, by raising prices, reducing output, and undermining confidence in standard-setting. Concerns over such harms prompted the FTC to pursue two high-profile cases under Section 5 of the FTC Act, but courts and agencies also should not hesitate to employ Section 2 of the Sherman Act. Section 2 prevents the “willful acquisition or maintenance of [monopoly] power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” Seeking injunctions on FRAND-encumbered SEPs easily satisfies that standard. The elements of Section 2 and their applicability to SEPs are discussed in more detail below.
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Contrary to the views expressed in this excerpt there is no evidence whatsoever that the US agencies feel that s2 can, in fact, be applied to prevent SEP holders seeing injunctive relief and it is for that very reason that the FTC used, controversially, s5 FTCA to secure a Consent Decree from an SEP holder that had much more important issues for it to deal with (the FTC investigation into search). Section 2 cannot apply in the way suggested, and just as US antitrust cannot prevent companies doing to Court to seek relief, it being for a Judge to decide, so EU competition law should not be distorted to achieve that result. Let us recall the fundamental right of access to Courts and effective relief, and for the Commission the inconvenient case law of ITT/Promedia and Protege (which build on the US concepts found in Noerr Pennington).