In response to the "smartphone wars" around the globe and emboldened by unfounded arguments that patents do not spur innovation, China and South Korea are quietly implementing antitrust policies that may require U.S. leaders in the industry to cheaply license their portfolios to domestic competitors in those countries.
In the United States, standard setting organizations are created to spur the development of different products that use a common standard, bringing important interoperability benefits to consumers worldwide. This voluntary model has been operating effectively for years and has resulted in many breakthrough standards including Wi-Fi, Bluetooth and wireless charging.
To contribute to a standard like the examples outlined above, a party must identify and agree to license their relevant intellectual property at fair, reasonable and nondiscriminatory (FRAND) rates — a departure from standard intellectual property rights that is made in recognition of the fact that the patent owner will certainly receive benefit from the use of their standard-essential patent (SEP) being implemented across many devices.
By usurping control of what has been a government-independent process, foreign regulators can potentially hold that any intellectual property that becomes widely used, even if developed and implemented independent of a standard setting organization, must be licensed at FRAND rates.
Regulators in Europe and most other developed countries are focusing on SEPs because a collective agreement amongst competitors raises potential issues under antitrust law. The adoption of a standard often limits or destroys the viability of technological alternatives, creating significant market power for SEP owners. Asian regulators appear to be moving toward applying the same scrutiny and approach to non-SEPS, which have none of these characteristics. China has ferociously investigated and penalized a U.S. chip-maker on its use of non-SEP patents. At the same time, China has been clear about its interests in economic nationalism.
Some fear that this reclassification of what constitutes a standard, creating de-facto standards (and thus de-facto SEPs) is an attempt by governments to make intellectual property cheaper for their constituent (domestic) companies at the expense of foreign suppliers, vendors, partners and competitors.
Regardless of the reason, the forced licensing of patent rights in this manner will certainly have long-term deleterious effects, and foreign regulators and American officials alike must be aware that such intervention will have consequences for innovation.
The reality is that companies will be reluctant to participate in deals with organizations located in countries where all of their valuable intellectual property will be subject to state-mandated licensing without their consent. Creating innovation takes significant time and investment, and if that investment cannot be recouped through a mechanism like competitive licensing, there is little point in bringing it to market, regardless of scale. For this reason, while foreign companies may see a temporary financial bonus from the protectionist actions of their home regulators, they will soon find themselves with fewer partners and less innovative products.
The use of antitrust laws to unfairly advantage domestic industry by taking patent rights from multinational corporations corrupts the system and may lead to broader trade problems that will harm the very industries that the regulators are trying to advantage. The voluntary standard setting in which industry leaders participate allows for all to use the standards at FRAND rates to develop their products. But those participants do not intend their entire portfolios to be outside of their control and will change their plans and operations if their rights are thwarted.
Governments are right to seek to foster domestic development of intellectual property rights. Domestic innovation is critical to job creation and economic growth. In the short term, it may be appealing to achieve this growth by coercing foreign companies to license at below market rates to benefit domestic industry, but such strategies will backfire in the long term.
Companies that are operating or planning to operate in countries that are contemplating an overzealous definition of what constitutes a standard need to voice their concerns and join with like-minded organizations to make their position clearly understood. Additionally, the United States government needs to weigh in on these issues and assure that the playing field is truly level, because the consequences of allowing abuse of intellectual property rights in this manner, and especially for protectionist reasons, will be dire.
Stoll is a partner and co-chair of the intellectual property group at Drinker Biddle & Reath and a former commissioner for patents at the United States Patent and Trademark Office.