The FTC has just announced a broad settlement with Google. Let’s talk about one aspect, the consent order on “standard-essential patents” (SEP). It’s an important issue; the New York Times noted that “legal experts say Google’s settlement with the F.T.C. signals progress in clarifying the rules of engagement in high-tech patent battles, and thus could ease them.”
Patents have long been a part of American society. Indeed, the Constitution (Article I, Section 8) explicitly endorses them:
The Congress shall have Power …
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries
Thomas Jefferson was a principal architect of the American patent system (and indeed, as the Supreme Court has noted, was the “first administrator of our patent system”). He found patents, on the whole, to be beneficial, and noted that “An act of Congress authorising the issuing patents for new discoveries has given a spring to invention beyond my conception.” Still, he was cautious. By definition, a patent is a monopoly, albeit one presumed to be a net benefit to society. The Supreme Court, channeling him, put it this way:
The grant of an exclusive right to an invention was the creation of society—at odds with the inherent free nature of disclosed ideas—and was not to be freely given. Only inventions and discoveries which furthered human knowledge, and were new and useful, justified the special inducement of a limited private monopoly. Jefferson did not believe in granting patents for small details, obvious improvements, or frivolous devices. His writings evidence his insistence upon a high level of patentability.
The issue of monopoly is the crux, though. A patent is not the right to do something; rather, it is the right to prevent others from doing it. Suppose, for example, that you hold the patent on the pencil and someone else holds a patent on an eraser. Without the consent of the other, neither of you can manufacture pencils with attached erasers; such a device would infringe both patents. (The question of whether or not this combination is itself patentable is a complex one; I won’t address it here. For now, let it suffice to say that a patent may not be granted “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains”.)
Beneficial monopolies can arise from another scenario: standardization. Technical standards more or less by definition create monopolies; the chosen solution becomes the one everyone needs to implement: “[i]n the case of a standard that effectively requires the use of a proprietary technology, the standard, if adopted (whether de facto or by formal process), can imbue the technology with market power that it previously lacked. Thus there is the potential for monopolization, or more minimally a raising of rivals’ costs, through the conjunction of an adopted standard and a proprietary technology”. Note especially the last clause: “the conjunction of an adopted standard and a proprietary technology”. Therein lies the rub: how should the combination of a patent—one form of beneficial monopoly—and a technical standard—another form—be handled?
The issue can be thorny. Not surprisingly, standards organizations have long recognized this problem, though different ones have taken different approaches. The Internet Engineering Task Force (IETF) requires full disclosure of applicable patents, and lets the working groups decide if the proffered terms are acceptable. The World Wide Web Consortium (W3C) requires a commitment to royalty-free licensing. IEEE (the Institute of Electrical and Electronics Engineers)insists on a commitment that “a license for a compliant implementation of the standard will be made available to an unrestricted number of applicants on a worldwide basis without compensation or under reasonable rates, with reasonable terms and conditions that are demonstrably free of any unfair discrimination”. In other words, the means and mechanisms differ, but the overall goal is the same: to ensure that many different parties can implement the standard, thus mitigating the monopoly characteristics of the patent.
Trouble can arise when companies abuse the standards process, especially with respect to patents. The FTC has long taken a dim view of abuse: “This settlement makes it clear that firms cannot commit to an open standard, and then, after it becomes successful, assert patent rights in an effort to block use of the design or drive up the price through royalty payments.” (In this case, Dell had asserted a patent pertaining to a video card interface design after it was accepted as a standard.) Some patents, though, are more problematic than others.
If a patent applies to something within a device, it can be easier (though not free) to work around. Consider that patent in the Dell case. If that patent wasn’t licensable at a reasonable cost, a company could have designed its own interface to its own cards. That’s more expensive (and hence still potentially abusive), because it precludes buying off-the-shelf, standards- (and patent-) compliant ones; still, it’s probably doable. Life is much harder when the patent concerns ways of interacting with the outside world. A cell phone, for example, must talk to the cell phone network; if it can’t, it’s nothing but a fancy toy. No single party is big enough to build their own world-wide phone network; if nothing else, suitable radio spectrum isn’t available. That’s why the consent order with Google is so important: Google has agreed that it will not seek injunctions to bar companies from using Google’s SEPs while license negotiations are taking place. The issue of what constitutes a “FRAND”—fair, reasonable, and non-discriminatory—license fee is not resolved; however, it does prevent Google from keeping other companies out of certain markets entirely. “The FTC concluded that this type of patent hold-up is precisely what the standard setting organizations sought to prevent by instituting FRAND licensing requirements”. (In a related item, the Justice Department and the U.S. Patent Office have issued a statement saying that the International Trade Commission should not, in general, grant exclusion orders based on SEPs.)
It is no stretch to say that without these standards, smartphones couldn’t exist. This settlement will allow for “reasonable” incentives for inventors, while preserving the interoperability necessary in today’s interconnected world.