IEEE Patent Policy Change Would Undermine Property Rights and Innovation

Alden Abbott —  4 February 2015

American standard setting organizations (SSOs), which are private sector-based associations through which businesses come together to set voluntary industrial standards, confer great benefits on the modern economy.  They enable virtually all products we rely upon in modern society (including mechanical, electrical, information, telecommunications, and other systems) to interoperate, thereby spurring innovation, efficiency, and consumer choice.

Many SSO participants hold “standard essential patents” (SEPs) that may be needed to implement individual SSO standards.  Thus, in order to promote widespread adoption and application of standards, SSOs often require participants to agree in advance to reveal their SEPs and to license them on “fair, reasonable, and non-discriminatory” (FRAND) terms.  Historically, however, American SSOs have not sought to micromanage the details of licensing negotiations between holders of SEPs and other patents on the one side, and manufacturers that desire access to those patents on the other.   These have been left up to free market processes, which have led to an abundance of innovative products and services (smartphones, for example) that have benefited consumers and spurred the rapid development of high technology industries.

Unfortunately, this salutary history of non-intervention in licensing negotiations may be about to come to an end, if the Institute of Electrical and Electronics Engineers (IEEE), one of the largest and most influential SSOs in the world (“the world’s largest technical professional society”), formally votes on February 9 to change its patent policy.  As detailed below, the new policy would, if adopted, reduce the value of SEPs, discourage involvement by innovative companies in IEEE standard setting, and undermine support for strong patents, which are critical to economic growth and innovation.

In a February 2, 2015 business review letter, the U.S. Department of Justice’s Antitrust Division (DOJ) informed the IEEE that it had no plans to bring an antitrust enforcement action regarding that SSO’s proposed patent policy changes.  Although it may not constitute an antitrust violation, the new policy would greatly devalue SEPs and thereby undermine incentives to make patents available for use in IEEE standards.  Key features of the proposed policy change are as follows.  The new IEEE policy requires a patentee to provide the IEEE with a letters of assurance waiving its right to seek an injunction against an infringer, in order to have its patents included in an IEEE standard.  The new policy also specifies that an analysis of comparable licenses for purposes of determining a FRAND royalty can only consider licenses for which the SEP holder had relinquished the right to seek and enforce an injunction against an unlicensed implementer.  Moreover, under the change, an SEP holder may seek an injunction only after having fully litigated its claims against an unlicensed implementer through the appeals stage – a process which would essentially render injunctive relief highly impractical if not futile.  In addition, the new policy precludes an SEP holder from conditioning a license on reasonable reciprocal access to non-SEP patents held by the counterparty licensee.  Finally, the new policy straitjackets licensing negotiations by specifying that royalty negotiations must be based on the value of the “relevant functionality of the smallest saleable compliant implementation that practices the essential patent claim.”  This ignores the fact that the benefit that a claimed invention provides to an end product – which is often key to determining reasonable licensing terms – depends on the specific patent and product to be licensed, and not necessarily the “smallest saleable compliant implementation” (for example, a small microchip).  All told, the new IEEE policy creates an imbalance between the rights of innovators (whose patents lose value) and implementers of technologies, and interferes in market processes by inappropriately circumscribing the terms of licensing negotiations.

The press release accompanying the release of the February 2 business review letter included this statement by the letter’s author, Renata Hesse, DOJ’s Acting Assistant Attorney General for the Antitrust Division regarding this matter:  “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards.”  Regrettably, this may fairly be read as a DOJ endorsement of the new IEEE policy, and, thus, as implicit DOJ support for devaluing SEPs.  As such, it threatens to encourage other SSOs to adopt policies that sharply limit the ability of SEP holders to obtain reasonable returns on their patents.  Individual contract negotiations, that take into account the full set of matter-specific factors that bear on value, are more likely to enhance welfare when they are not artificially constrained by “ground rules” that tilt in favor of one of the two sets of interests represented at the negotiating table.

In its future pronouncements on the patent-antitrust interface, DOJ should bear in mind its 2013 joint policy statement with the U.S. Patent and Trademark Office, in which it stated that “DOJ and USPTO strongly support the protection of intellectual property rights and believe that a patent holder who makes . . . a F/RAND commitment should receive appropriate compensation that reflects the value of the technology contributed to the standard.  It is important for innovators to continue to have incentives to participate in standards-setting activities and for technological breakthroughs in standardized technologies to be fairly rewarded.”  Consistent with this pronouncement, DOJ would be well-advised to clarify its views and explain that it does not support policies that prevent SEP holders from obtaining a fair return on their patents.  Such a statement might be accompanied by a critique of SSO policy changes that place ex ante limitations on SEP holders and thus threaten to undermine welfare-enhancing participation in standard setting.  It would also be helpful, of course, if the IEEE would take note of these concerns and not adopt (or, if it is too late for that, reconsider and rescind) its proposed new patent policy.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

10 responses to IEEE Patent Policy Change Would Undermine Property Rights and Innovation

  1. 

    What an impassioned debate … hope that everything works out in everybody’s best interests!

  2. 

    Thank you again for your comments. At this stage, I want to make just a few final points and then let the issue rest and close off future comments (at least by me, you may do as you wish, of course). (There are too many other things going on, and my time is limited.)

    First, in my view it is the essence of free market competition if IEEE continues to allow members in bilateral or multilateral negotiations to set their own terms, without having to rely on IEEE requirements regarding terms of comparison for FRAND calculation or “no suit for injunction” agreements. A change in a long-established IEEE policy allowing flexibility in licensing would me a move away from a market orientation.

    Certainly consortia such as IETF among others have had from the start “no patent” policies, and there is nothing wrong with that, when it is in the mutual interest of all participants to follow that approach. IEEE has had a very different approach over time, and there is no question that the most recent proposed change (whether one agrees with or not) has attracted substantial opposition from many IEEE members — in short, no consensus, for an organization that has a consensus-type tradition.

    I am not claiming that patents or the patent system are perfect; indeed, administrative patent reforms at PTO have been undertaken and have substantial support. But the crucial question regarding the patent system is “compared to what,” and recent research provides increasingly strong grounds for support of a strong patent system (see discussion of scholarship in my recent ABA ANTITRUST SOURCE article, “Abuse of Dominance by Patentees: A Pro-Innovation Perspective”). Recent critiques of the patent system based on “probabilistic patents” and other memes are examples of the “arm chair theorizing” you say you eschew. Moreover, studies that claim to estimate costs of the patent system have not been able to be replicated independently and are based on rather sweeping assumptions, not peer-reviewed empirical economics.

    Finally, that the assumptions of neoclassical price theory differ from reality has long been known; see for example Milton Friedman’s famous Essay on Positive Economics. But there is a dearth of support for the proposition that behavioral economics provides superior guidance, as Douglas Ginsburg, Josh Wright, and others have written. Indeed, in antitrust, for example, behavioralism gives little guidance at all as to appropriate policy. (That is not to say that behavioral economics may not be helpful in some fields, such as consumer protection, only that much more needs to be done before its practical utility can be shown.)

    Thanks once more for your interest in patent policy.

    • 

      Perfectly understandable if you’re not prepared to go back and forth forever. Neither am I. I will offer some closing comments of my own, however.

      First, in point of fact, IETF does not have a “no patent” policy. IETF imposes a duty of disclosure on all working group participants, and its policy is to prefer to avoid patented technology or to choose patented technology that has a royalty-free licensing commitment. However, “IETF working groups have the discretion to adopt technology with a commitment of fair and non-discriminatory terms, or even with no licensing commitment, if they feel that this technology is superior enough to alternatives with fewer IPR claims or free licensing to outweigh the potential cost of the licenses.” (RFC 3979)

      And in fact, there have been (prominent) cases where unethical parties have ignored prior FRAND licensing commitments, and engaged in precisely the kind of abusive practices that the IEEE policy attempts to foreclose, in attempts to shake-down companies based on use of IETF standards. (IMO, IETF would be well-served to, itself, clarify in more detail that which it expects of a FRAND licensing commitment, rather than leaving the terms entirely vague and undefined, as it has to this point.)

      Secondly, let me offer an analogy, in hopes it will help you to see how the antitrust policy you propose would actually be market-distorting, and not at all welfare-enhancing.

      Suppose you were a large company, about to launch a new line of business. You are going to select a technology platform from among multiple vendors. The initial investment to build the platform will be $10 billion. You expect to invest another $1 billion per year in the technology platform over the next 10 years. The technology options are all proprietary, and whichever vendor gets the initial contract, will also have to be used for the subsequent investments.

      Before you make your $10 billion dollar investment, you want a long-term assurance on pricing going forward, for once you have made your vendor selection, and invested the initial $10 billion, you are effectively trapped. Without a long-term contract with pricing guarantees, the selected vendor could unilaterally raise their prices by an enormous amount, and you would simply have to pay, because it would be uneconomical to abandon the platform.

      So in the evaluation and bidding process, you make clear that a long-term contract with guaranteed maximum pricing will be required. No vendor is obligated to participate in your process, but if they do, they will be required to commit to long-term pricing terms.

      This is a very straightforward contracting approach, and it happens every day in the real world.

      Now the government comes along and deems it an unfair business practice to require long-term pricing commitments in a contract. Instead, the government says the company may only require a commitment of “fair and reasonable” long-term pricing. But “fair and reasonable” has essentially no legally-established and enforceable limitations.

      I expect we all can see the enormous problem here. The initial decision to select a particular technology commits the company in a way that is very hard to reverse. By doing so, they become dependent on the vendor, endowing the vendor with enormous power. If the company fails to obtain hard contractual guarantees before committing to the technology, they are lost. The vendor will have all the leverage in any subsequent negotiations. It’s an untenable position.

      The above situation is a nearly perfect analogy to that of a standards organization adopting a standard. By adopting a standard, the standards organization (and all of the eventual standard users it represents) becomes committed and incredibly dependent upon the owners of the technologies incorporated into the standard. Once the standard has been adopted, it is too late for either the standards organization, or users who subsequently adopt the standard, to negotiate terms on a level playing field. The technology owners have all the leverage.

      Only before a technology is incorporated into a standard is there an opportunity to obtain fair terms. And practical experience has proven, time and time again, that merely obtaining a vague meta-commitment of “fair, reasonable and non-discriminatory” licensing terms is not sufficient to prevent the unethical from exerting the enormous leverage they have been given to extort license terms that are neither fair, nor reasonable, nor non-discriminatory.

      The obvious and natural market response to past abuses of vague FRAND licensing commitments is for the standards organization to require much more detailed and enforceable licensing terms commitments upfront (if not actual license terms!). This is the simple market-based solution. Participation is always voluntary for technology owners, and their power to negotiate terms is precisely the power of a party who doesn’t yet have a captive audience.

      Government intervention to prohibit such negotiation of terms prior to incorporation of technologies into standards—which is precisely the policy you are espousing—would be as outrageous, and market-distorting (and almost certainly welfare-diminishing) as government intervention to prohibit any other company from negotiating long-term price commitments before they select and become economically committed to any other vendor.

      • 

        Thank you. My IETF description was a short-hand simplification of a complicated set of conditions, which you very well summarized — the point was that consensus reined there.

        Your hypotethical is interesting (although alternative hypotheticals could be developed, of course), but in my mind it does not come to grips with the fact that an organization with a long history of developing policies in consensus fashion entered into an area where there was no consensus — on which featured disagreements among key members. My opinion would be that in such a situation, one would be best advised to let inidividuals companies agree on terms. Courts are working out the meaning of FRAND on a case-by-case basis, a better alternative in my opinion than adopting the views of a set of companies that want to sharply circumscribe returnst to SEP holders.

        By the way, I am not aware of any hard evidence supporting the proposition that “unethical” companies are “exerting the enormous leverage they have been given to extort license terms that are neither fair, nor reasonable, nor non-discriminatory.” This is an assertion which would be broadly contested by a large number of players in smartphone space (an area characterized by innovation and consumer benefits that would appear to belie allegations of “unethical extortion”.

        Enough said. Thanks again for your interest,

      • 

        Beauty is in the eye of the beholder. I have personally been engaged where patents subject to FRAND licensing commitments have been used in what I would unequivocally characterize as an abusive and unethical manner—and not by podunk players. But of course, to my view, some of the things the new IEEE policy is explicitly designed to prevent constitute per se unfair, unreasonable and discriminatory licensing practices for patents with a FRAND licensing commitment, and accordingly, are properly characterized as abusive and unethical. To pick one simple example, tying the licensing of SEPs to the licensing other IP is, per se, unfair and unreasonable, where a FRAND commitment was made.

        Much of these matters are conducted within the confines of NDAs and FRE 408, of course, but I can’t help but think that if one truly wishes to learn of abuses, it’s not hard to do.

        Let’s be clear though—nobody suggests that all SEP holders are abusive and unethical. But then it doesn’t need to be all holders for there to be a serious problem.

        What’s more, even if a particular holder is currently responsible and has good intentions, that’s no assurance that they or their patents won’t become problems, in the absence of better-defined FRAND licensing parameters. Management changes, and patents change hands. Take, for example, Nortel, which was an active participant in standards processes (including both IEEE and IETF), repeatedly issued both specific and blanket commitments to FRAND licensing of its SEPs, and at least so far as I know, was a responsible citizen in the standards process. But then, years later, they went bankrupt, and their portfolio was suddenly in the hands of the highest bidder.

        In any case, let’s remove the loaded terms “abusive” and “unethical” entirely, to avoid distraction.

        The status quo for SSOs has been to convert what should be competitive-sourcing negotiations into single-source negotiations, by declining to negotiate terms (beyond an extremely vague “FRAND” commitment) until after proprietary technologies have been adopted. Even if we leave value judgments behind and assume licensors are simply acting in the expected fashion for one negotiating zealously within the context of the leverage they have as a single source, the fact remains that they have the enormous leverage that comes with being a single source, and they were transformed into a single source precisely because of the fact of their incorporation into the standard.

        This is not a natural negotiating advantage, arising out of their innovation. This is an advantage conferred by a systematic failure of the standards processes (and arguably, arising out of the awkward nature of standards organizations).

        If a private company defining its own corporate standards behaved like standards organizations historically have, we would call it stupidity. Nonsensical. We certainly wouldn’t suggest it welfare-enhancing. At best, it’s welfare-neutral. A smart guess would be that it’s usually welfare-diminishing.

        And the idea that such zealous negotiation is merely the expected behavior for a party negotiating with such leverage underscores precisely why it is essential for more concrete terms to be negotiated before standards are adopted. Even if SEP holders are acting ethically, they are acting ethically within a market that has been systematically distorted by nonsensical standards processes.

        I think we all understand well that you believe there are better alternatives, but in the absence of strong evidence of market dysfunction, why should your beliefs justify pre-empting solutions that arise naturally of the free market? After all, it is you who are espousing intervention to prevent a naturally-arisen solution at IEEE. The burden of evidence is upon you to justify that such intervention is necessary. Believing it would be better is not a justification, in itself.

        (Of course, it’s hard to understand how or why any other solution would actually be better. If you have some alternative hypothetical you can provide to shed light on that, I’d certainly welcome seeing it. However, it’s truly hard to imagine how, once the negotiation has been converted from what should be a competitive-sourcing negotiation to a single-source negotiation, any intervention could offset that to turn it into a net welfare benefit.)

        Finally, I’m puzzled by your complaint about IEEE proceeding despite lack of consensus. It’s desirable to achieve consensus, but there’s always going to be situations where consensus cannot be achieved. Why should a (broken, no less) status quo be left in place, when there’s neither a consensus nor even a majority for that?

        This is the sort of policy change that could never achieve consensus, because the economic interests of the parties are inherently at odds. The notion that change should be proscribed because of that is quite strange. Organizations have governing processes to be able to adopt policies even when there isn’t consensus. There is nothing untoward about an organization using its existing, reasonable processes to adopt change, over the objections of a minority.

        That SEP holders, themselves, complain about these kind of things is easily understood. You have a (minority) faction that has historically been conferred with a tremendous business advantage by a policy that converted what should naturally be competitive-source negotiations into single-source negotiations. Nice work if you can get it. They have come to view that advantage as an entitlement, and they’re not about to give it up quietly. They’ll raise any objection they can, no matter how petty. Why anybody else would want to carry their water in this regard, is another matter.

  3. 

    Ivory tower analyses seem to be the rule on this site, and the above post is certainly no exception. This one is particularly perplexing, however, inasmuch as it flies in the face of the pro-market ideology you claim to espouse.

    What amazing superpowers the IEEE must have that any policy it could possibly adopt could ever undermine property rights!

    After all, what is IEEE but a private entity, which even if successful as an SSO, remains just one of many SSOs operating within its domains? In fact, if SSOs were for-profit corporations, you would surely argue that the market functions well, engendering robust competition: there are many broad SSOs that work in the domains covered by the IEEE. Furthermore, targeted consortia are routinely created to develop and advance specific standards outside of the various broad SSOs.

    The suggestion, however, that IEEE could actually undermine property rights implies some nation-state class of power, or at a minimum monopoly power, neither of which it possesses.

    Yet you argue—no, actually, presume—that the market for standards setting is so dysfunctional—that IEEE wields so much power—that heavy-handed regulatory intervention by the government is required to protect property rights and innovation.

    On the basis of what? Purely theoretical conjecture of detriments that might arise from IEEE’s proposed policy changes!

    The proposed policy changes you criticize, on the other hand, are based on anything but conjecture. Rather, they are attempts to respond to specific abuses actually encountered in the past, where standards bodies and adopters alike found themselves unable to prevent what they (and most other reasonable people) considered to be violations of FRAND licensing commitments, for lack of codified definitions of just what it meant for licensing terms to be FRAND.

    It seems a perfectly reasonable, and predictable, market reaction for a standards body to finally respond to such by deciding it is going to codify a more detailed definition of what it means to be FRAND.

    You justify your criticism of IEEE’s actions on the basis that “Historically, however, American SSOs have not sought to micromanage the terms of licensing negotiations.” When somebody does something new, don’t we call that innovation? And don’t we normally think it proper to let the market tell us whether such is beneficial or detrimental, rather than to presume that we know best, and to suggest that the government should impose our own preconceptions of such, foreclosing potential innovation?

    Whether the particular limitations IEEE endeavors to impose will ultimately prove wise or foolish is beside the point. As a private entity operating in a well-functioning, free marketplace, in which potential standards participants may freely choose whether and with whom to participate, shouldn’t you be supporting IEEE’s right to exercise their own legitimate (and limited) market power to negotiate the terms of its engagement with those potential participants?

    How is this any different than any other negotiation of terms in any other well-functioning marketplace?

    When a market involves for-profit corporations innovating and negotiating hard with consumers, or with other corporations, then you are the first to tell us that, barring very specific circumstances that identify dysfunctional markets, those corporations should be free to try to do whatever they want—that if they go too far, the market will fix the problem, and they will fail.

    Yet for IEEE, without providing any evidence of market failure or dysfunction (merely putting forward the casual claim that the IEEE is “one of the largest and most influential SSOs”), you argue that IEEE’s proposed change is so ominous that it warrants a priori regulatory intervention to prevent it!

    I fear that you are so enamored of the presumed benefits of intellectual property that you have lost your objectivity. And your proposal that corporations require protection from the likes of IEEE is anything but support for well-regulated and well-functioning markets. You want truth? What you are proposing is properly derided as crony capitalism.

    It also seems to me that you fundamentally fail to understand the dynamics of standards development.

    There are two classes of standard essential patents: those that would be essential to any possible standard, regardless of design choices, and those that are essential to a particular standard, on the basis of design choices made in creating the standard.

    Most SEPs fall into the latter category.

    Participants in standards efforts routinely lobby to have their particular approach adopted into a standard. If their approach is adopted, they potentially stand to profit immensely from royalties on any patents they hold or are pursuing. If a competing approach is adopted, they don’t stand to profit, and will likely instead face paying significant royalties to others, including direct competitors.

    That is, these participants frequently participate in large degree to try to influence the design choices made, for their own benefit.

    (To be sure, there are also other reasons they participate, and overall, standards processes usually benefit from the participation of these parties who bring extensive knowledge and practical experience to the process. Standards processes also benefit from being able to select from among the various proprietary technologies of the participants, with the reasonable expectation that those technologies will be available to adopters on FRAND terms.)

    With participants highly motivated to compete for an SSO’s “business,” in the form of adoption of their proprietary technologies, why shouldn’t an SSO aggressively negotiate the terms for these contributing parties’ contributions? Doing such serves to protect the interests of the SSO to ensure that adoption of its standards is feasible and cost effective.

    If the terms IEEE adopts actually are as onerous as you predict, then would-be participants will simply decline to participate in IEEE standards processes. IP known to be proprietary to those parties which can be avoided by design choice likely will be avoided. (But without the mandatory disclosure required of participants, IEEE standards may incorporate proprietary IP, without knowing it.) Proprietary IP which is unavoidable will, of course, still be adopted—and with no assurance even of FRAND terms from the IP holders.

    If the terms are actually onerous, these would-be participants will seek to direct new standards efforts to other SSOs, or to new consortia, with more acceptable terms, and even to start competing standards efforts elsewhere, for standards efforts already underway within IEEE.

    If IEEE cannot attract the best standards participants, and if the patent position of their standards ends up worse because of the lack of such participation, then IEEE’s power and influence as an SSO will rapidly decline, and they will be forced to backpeddle.

    That’s called the free marketplace at work.

    On the other hand, if the IEEE’s new terms are actually beneficial, then they will retain strong participation, and attract more standards efforts and adoption. Other SSOs will adopt similar terms, or experiment with other terms.

    This is what innovation is. This is merely innovation in standards setting process. Time will tell whether it is beneficial or not.

    So exactly what is it about this market that makes you propose that such innovation is so dangerous that heavy-handed government intervention is warranted to prevent it?

    Alas, history tells me that I shouldn’t hold my breath awaiting substantive answers to any questions posed here (or any reply, at all, for that matter). But then, perhaps you’ll surprise me….

    • 

      Thanks for the comment. I have a few reactions. You need not hold your breath.

      First, the comment misses the mark in suggesting that I am calling for “heavy-handed government intervention.” Indeed, I am not calling for any government intervention at all. The February 2 business review letter is an already existing policy intervention, in that its accompanying press release goes out of its way to praise the policy, thereby implicitly suggesting that other SSOs may wish to adopt it. I am calling for the government to “back off” this intervention and in so doing acknowledge the importance of strong IP rights — an acknowledment, by the way, found in a January 2013 Joint DOJ-PTO Policy Statement.

      Second, my concern is that the IEEE statement, as I explained, micromanages private contracts. Given its size, broad membership, and long history, IEEE is a major market force that, at least in the short run, can influence the ability of its members to negotiate deals that do not fit into the IEEE’s regulatory model. It is true that in the long run firms can leave and associate with other SSOs. However, an IEEE member must weigh the many benefits associated with remaining in IEEE, including influencing industry thinking and future standards discussions, versus the costs of a bad patent policy statement. That the benefits might marginally outweigh the costs and cause companies not to leave does not mean they are not made worse off, and their property rights are not being undermined. If they do chose to leave, however, they will bear significant costs in searching for new organizations (particularly if the U.S. government cajoles such organizations into adopting similarly poor patent rights protections) and they will forgo the benefits that they had previously enjoyed as IEEE members. This is a net welfare loss, perhaps a significant one. It would be better for IEEE to rethink its policy and not adopt it to avoid these losses. (In short, private regulation, like government regulation, can undermine markets — that it is “private” does not mean it is problem free, which leads to my third point). (The current proposal is in marked contrast to the 2007 IEEE proposal, which merely allowed members to announce negotiating terms and thereby tended to lower transaction costs.)

      Third, and somewhat related to the second point, Supreme Court precedent, and orthodox antitrust analysis, long has recognized that SSOs have the potential to harm competition by facilitating collusive agreements to harm competitors — see, e.g., Hydrolevel, Radiant Burners, Allied Tube. The IEEE proposed patent policy would effectively favor certain competitors (non-SSO holders) over others (SSH holders) by interfering in the fundamental nature of private negotiations. In that sense, if it does not literally violate the antitrust laws (a question I do not address in my post), it at least has the potential of imposing harm on the competitive process. (Indeed, some might view the proposal as the efforts by a small group to “capture” or “manipulate” an SSO, a major antitrust concern highlighted in Supreme Court precedent.)

      Fourth, a large economics literature on contracting (stemming from seminal work by Williamson and Klein) highlights the harm that can flow from arbitrarily limiting the beneficial scope of contracting. Thus there is good reason to be concerned about the IEEE’s proposed very direct and major affront to the ability of firms to move along the contract curve and reach optimal bargains.

      Fifth, work by Wright, Kobayashi, Layne-Farrar, and other scholars have debunked the idea that hold-up concerns of the sort that arguably motivates the IEEE’s interventionist proposal cannot adequately be dealt with by private means.

      Sixth, the European Commission, hardly a non-interventionist institution, has raised concerns about this IEEE proposal, as have many property rights holders.

      In sum, to suggest that my proposal is “anti-market” is quite strange. Indeed, I believe it is profoundly pro-market, in that it seeks to discourage the adoption of one-sided rules that would undermine efficient contracting, property rights, and welfare-enhancing market processes.

      Thanks again for your interest in this important topic.

      • 

        I appreciate that you responded. That has proven a rarity here, where authors seem routinely uninterested in defending their own comments. But nonetheless, I fear your argument falls far short.

        While it’s true that you only explicitly called on the DOJ to clarify its position, it seems disingenous to suggest that you aren’t making the argument—and that you don’t believe—that DOJ should have warned IEEE that the move would be likely to spark enforcement action—or that you don’t believe intervention would, in fact, be appropriate in response to such a change.

        Are you seriously suggesting that you don’t believe that?

        Allow me to sweep over several minor points very briefly. I think you overstate it when you claim that the DOJ press release praises the proposed policy. And I think Supreme Court precedent is irrelevant here. The question at hand is not one of law. It is one of what constitutes good public policy. The two aren’t remotely the same. Finally, the postulated view that this proposal might reflect a small minority view within IEEE is without foundation, or merit.

        To the substance of the public policy argument, I fear you really do live in an ivory tower. As somebody well-acquainted with science, mathematics, and theory, I understand well that with the right assumptions—the right axioms of a universe—one can prove anything. But that proof will be relevant only to a universe for which those axioms hold true, and will not necessarily have any relevance at all to the real-world universe that we live in.

        Models in the field of economics, in particular, are notorious for making assumptions that cause them to frequently fail badly at predicting real-world outcomes. And work in behavioral economics has regularly demonstrated that some of the most fundamental assumptions routinely made by economists are fallacies.

        So “proof” in the form of theory suggesting that hold-up concerns can be “adequately dealt with” by other means is not proof at all. It is, at most, evidence—and it would be far from convincing evidence at that (especially where empirical evidence indicates otherwise).

        More importantly, adequacy is in the eye of the beholder, and in general we should not be satisfied to achieve mere adequacy. We certainly shouldn’t be deciding a priori (let alone based on mere bias and conjecture), that any of us is imbued with perfect foresight to know how things will turn out, such that we should foreclose free market experimentation to see what results are actually produced.

        You seem to want to make this a question of whether the proposed IEEE policy changes are wise or foolish. You clearly believe they are foolish, and it seems pretty clear that you believe this in large part because you perceive intellectual property in the form of patents to be some kind of sacred cow, the strengthening of which is unquestionably welfare-enhancing, and the weakening of which is unquestionably welfare-diminishing. That would be a discussion in itself, so I’ll just say that I probably feel just as strongly that you are badly misguided in this regard, at least when it comes to these fields. (And I say that with the benefit of actual real-world experience working in these fields, both in academia and in industry, having dealt with patents from almost all sides of the issue—as an inventor, as an ongoing investor in startups, as an executive charged with patent development, as an expert who has handled many patent defense matters, and who has advised on several offensive patent matters, and most of all, as someone who understands how companies actually think and behave when it comes to these matters—experiences that, from your background and your stated views, I expect you sorely lack.)

        But as I stated previously, this is not a question of whether the IEEE policy is wise or foolish. It’s a question of whether it would be good public policy to intervene to foreclose IEEE from adopting the policy.

        You express surprise at the characterization of your position as anti-market?

        You are proposing that you know what is best, policy-wise, and that market participants should be foreclosed from adopting any other approach. Does that sound like a market-based solution to you? It sounds like central planning to me.

        What’s more, you propose this on the basis of conjecture, and while you repeatedly wave your hands claiming IEEE to be especially large and influential as a standards organization (claims that, themselves, are quite debatable), you fail to provide any actual substantiation for the implication that the standards process market is somehow dysfunctional, or that IEEE wields extraordinary and problematic power within that market, in particular.

        On the other hand, evidence that the market is quite functional, and that IEEE does not wield extraordinary power, abounds. There are many standards organizations. Parties that hold key intellectual property have complete control over how they choose to pursue standards. They need not cooperate with any standards organization or process that they dislike. Any standards process they shun will have a significant burden due to lack of any licensing commitment, at all. If there is a consensus among key patent holders that IEEE’s policy is bad, they can easily choose to pursue a standard in one of many other standards organizations. Any forum they choose will have a tremendous advantage over competing standards efforts, by virtue of having the participation of the key patent holders and agreement to some licensing terms.

        And even if every conventional standards organization on earth adopted policies that those patent holders found unacceptable, or even just unappealing, they could quite easily create their own forum to establish standards. The clear feasibility of such is demonstrated by the many highly successful, widely-adopted standards that have used precisely such a completely private process. To name just a few: USB, SATA, HDMI, HDCP, DTCP, DLNA, DOCSIS, MoCA.

        Heck, DOCSIS is a good example of just how mistaken these patent fears may actually be. DOCSIS, the specifications for which are developed within completely private CableLabs, has an associated royalty-free patent pool. There’s no obligation for any patent holder to join that pool, but the vast majority of the key patents are held by implementers, and joining the pool conveys the benefit of a royalty-free license to essential IP from any other member.

        At last check, there were over 100 current signatories (including Qualcomm as successor to Atheros, btw). Vendors have earned at least tens of billions of dollars on DOCSIS equipment sales in the US alone (and certainly reaching hundreds of billions, if you include equipment outside of the DOCSIS spec necessary to implement DOCSIS systems), and consumers have undoubtedly saved billions due to the royalty-free IPR structure.

        And perhaps it will come as a surprise to you that, nearly 20 years along in the standardization process, there is no shortage of innovation in cable modem development. DOCSIS standards development continues to have robust vendor participation, with vendors serving as the primary source for innovations considered for new versions. These vendors compete to have their best ideas incorporated into the standard, just as in other processes. Only in this process, they compete in hopes that they will end up with advantages in speed-to-market and quality due to selection of their approach, rather than in hopes of earning royalties.

        And many of the other privately-controlled standards are either similarly available to implement on a royalty-free basis, or have associated patent pools with very low license fee schedules that are published and available to all comers on identical terms.

        With such clear examples of successful standards, robust underlying businesses, and no shortage of ongoing innovation, in contexts where private policies have imposed even stricter limitations on patent licensing, or in some cases even effectively foreclosed patent royalties entirely, how can you seriously claim that the proposed IEEE policy changes will obviously generate a net welfare loss?

        And with so many successful examples demonstrating that it is unquestionably feasible for key patent holders to create their own forum to develop standards, if need be from their perspective and they so choose, subject to licensing limitations as weak or as strong as they wish, how can you seriously claim IEEE wields so much power that regulatory intervention could possibly be justified?

        The actual, real-world empirical evidence simply does not support your assertions. And even if it did, your position would still be anti-market—it would simply be using a perceived greater good to justify imposing a centrally-planned policy while foreclosing policies negotiated freely by voluntary participants in the standards process market.

        (For the record, I’m no laissez-faire, free markets purist. I believe in appropriate, preferably limited, regulation of markets, where market failure in the absence of regulation is apparent. But interventionist regulation on the basis of the mere belief that bad things will happen? That’s a very different animal, indeed.)

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