Analysis on balance:Standardisation and Patents

This paper provides an analysis of the interaction ofpatents and standards and finishes with some concreteproposals to address the most pressing issues. It was writ-ten under the assumption of very little background knowl-edge, and therefore provides some of the background neces-sary to understand the issue. An expert in the field shouldbe able to skip the Background section.

- - Georg C. F. GreveFSFE, President

2. December 2008

Introduction

Software patents have been a hugely controversial de-bate, with lines of battle drawn primarily between largecorporations holding large patent portfolios and engagedin multiple cross-licensing deals, and the Have-Nots, en-trepreneurs, small and medium enterprises, and softwareusers from the student using GNU/Linux all the way toinstitutional users in governments.

This debate got a lot quieter with the rejection of thesoftware patent directive in 2005. Its place in the head-lines was taken by other debates, such as standardisaton.Open Standards have been a buzzword for years, butnever has this term been discussed more intensively.

On Wednesday, 19 November 2008, both debatesmet in Brussels at a workshop titled ”IPR in ICTstandardisation”, although ”Patents in ICT standardisa-tion” would have been a more suitable name because thediscussion was exlusively about the interaction of patentsand ICT standardisation.

Patents and standards are fundamentally at odds, somany people call for a balance between patents and stan-dards. This article comments upon the workshop and ex-plains why standards should prevail over patents at leastin the area of software.

Background: Patents & Standards 101

The idea of patents is not new. Its roots lie in the royal”litterae patentes” that conferred exclusive rights to cer-tain people. Democratic governments eventually tookthe position of the monarchs, and patent legislation hasevolved over time, but the fundamental characteristics ofwhat is a patent have not changed.

Succinctly put, a patent is a monopoly granted for alimited time by the government on behalf of its citizens.

The term monopoly has many negative connotations,and for good reason. A monopoly stifles innovation and

increases price due to the absence of competition. Onthese grounds a monopoly is generally understood to beto the detriment of economy and society. It is not illegalto obtain a monopoly, but society has a legitimate interestin limiting abuse of the power that a monopoly confers,and seeks to achieve this through antitrust law.

The monopoly right created by a patent brings with itall side effects of a monopoly. It is granted by the statebecause it is understood that the absence of patents mightprevent publication of breakthroughs, which is understoodto be more harmful than granting the patent monopoly.

This initial patent deal is based upon disclosure, so thatothers can learn from and build upon a new idea. Lackof useful disclosure or advancement of public knowledgetranslates into the granting of a monopoly with no returnfor society.

Like patents, standards are closely related to disclosure.The root of the word standard appears to go back to her-aldry, where it refers to a symbol that is used to make arallying point visible in battle.

Modern use of the term keeps that meaning of pub-licly visible point of reference, although it has been trans-ferred to other areas. So among other things it is un-derstood as ”something established by authority, custom,or general consent as a model or example” or also ”astructure built for or serving as a base or support.” (fromMerriam-Webster On-line dictionary).

In Information and Communication Technologies, astandard has both the above meanings. According tothe British Standards Institution (BSI), a standard is ”anagreed, repeatable way of doing something. It is a pub-lished document that contains a technical specification orother precise criteria designed to be used consistently asa rule, guideline, or definition. [...] Any standard is acollective work. Committees of manufacturers, users, re-search organizations, government departments and con-sumers work together to draw up standards that evolve tomeet the demands of society and technology. [...]”

The underlying idea is that a standard establishes com-mon ground, it provides the means for interoperabilityand competition. This is especially true for ICT due totheir strong networking effects. If all participants in anICT market adhere to the same standards and make an ef-fort to guarantee interoperability, not only can customerschoose freely between various products and services, theycan also exchange information with one another withoutproblems.

In contrast, absence or failure of standardisation warpsnetworking effects in a way that monopolisation becomesalmost certain. Users of one product or service could onlyinteroperate with users of the same product or service.Over time, one solution would attain such a large user basethat other users are de-facto left with the choice to jointhis group, or be unable to communicate fully with the

majority of users. This could for instance be achieved bybundling software with a predominant hardware platform.

So standards are largely an instrument to enable com-petition for the public benefit. The purpose of standardsis intrinsicly anti-monopolistic.

It is also pro-innovative. Since derivation from a stan-dard automatically breaks it, standardisation and innova-tion seem opposed goals, and to some extent they are. Butwhere all changes are done in consensus between imple-mentors, the result is an updated version of the standardavailable to all. The second path is innovation on top ofthe standard, using the standard as a base for innovationrather than innovating inside the standard.

Due to its global, consensus-driven nature, the first pro-cess is comparatively slow. Another problem is the a sub-stantial barrier to entry into the standards process. As aresult, large companies are overrepresented in comparisonto small and medium enterprises (SME).

The second path is open to everyone, private person,SME, or large industry. It is also limited only by thespeed of development of the team making the innovation.If the innovation was made by just one party, there will bea temporary monopoly. But given a certain maturity, theinnovation is then likely to be formalised into a standardagain, forming the base for the next innovation to be builton top.

While the first path allows primarily for slow, small im-provements, the second path allows for full participationof the economic majority and is much better suited forgroundbreaking ideas and arguably the more importantto protect for society.

Conflict: Fundamentally opposed instru-ments

The fundamentally different goals for patents and stan-dards surfaced multiple times during the debate, for in-stance in the speech of Mr Karsten Meinhold, chairman ofthe ETSI IPR Special Committee, who summarised it as”IPRs and Standards serve different purposes: IPRs aredestined for private exclusive use, Standards are intendedfor public, collective use”.

Both patents and standards derive their justificationfrom the public benefit, yet upholding one deprives theother of its function. Standards seek to counteract monop-olies, patents establish them. Or, as Tomoko Miyamoto,Senior Counsellor of the Patent Law Section in the WorldIntellectual Property Organization (WIPO) said in herpresentation: Patent thickets and patent hold-ups mayarise from certain forms of legitimate exploitation of theexclusive rights conferred by patents.

In other words: Conferring these exclusive rights is theintended function of the patent system, and legitimate

usage of these rights brings about consequences of patentthickets and patent hold-ups. Allowing patents on stan-dards consequently is an intentional act to grant monopo-lies on standards to certain parties that includes the rightto block implementation by other parties.

Ex-Ante Disclosure

There are multiple attempts through which the standard-isation community has tried to mitigate these effects overthe years. One of these mechanisms is called ”Ex-AnteDisclosure.” The parties working on a standard use thismechanism to commit to licensing terms while the stan-dard is still being drafted. If these terms are not accept-able to the other parties working on the standard, thetechnology that is covered by the patent is not includedin the standard.

What are acceptable terms is highly subjective. A largecorporation with big patent portfolio and existing cross-licensing agreement with the holder of the relevant patentsmight consider adding one more patent to the agreementa minor inconvenience. The same situation looks substan-tially different from the perspective of a small or mediumenterprise that typically has at most a small patent port-folio and has to expect extortionate licensing.

Since SMEs are strongly underrepresented in standard-isation, Ex-Ante Disclosure is likely to bring more sat-isfactory results to large corporations with large patentportfolios that compete in the same area. The economicmajority generally has no say about the acceptability ofthe terms.

Another issue of ex-ante disclosure is difficult enforce-ment, as Suzanne Michel, Assistant Director Office of Pol-icy and Coordination of the U.S. Federal Trade Commis-sion (FTC) pointed out in her presentation. The FTChad found that Rambus Incorporated had joined and at-tended standardisation meetings of the Joint Electron De-vice Engineering Council (JEDEC) in order to modifytheir patent applications to cover technology that was un-der discussion for inclusion in future standards. In theopinion of the FTC, this behaviour was deceptive, vio-lated JEDEC’s disclosure policy, and illegaly gave Ram-bus monopoly power.

The D.C. Circuit Court disagreed with the interpreta-tion of the FTC in their April 2008 decision. Accord-ing to Ms Michel, the court said that avoiding so-called”Reasonable and Non-Discriminatory” (RAND) licensingterms does not constitute abuse, and that there is no proofthat JEDEC would have avoided technologies if it hadknown that Rambus was planning to use its patents tothe fullest extent allowed by law. The court also expressedreluctance to make patents unenforceable based on vaguedisclosure policies.

Both patents and standards derive their justification

from the public benefit. There was no additional dis-closure of new technology provided by the patents thatRambus filed on the standards that were about to bepublished. Giving Rambus monopoly power over stan-dards developed by JEDEC is also detrimental to publicinterest. So it seems likely that a full public interest eval-uation of this situation would give that indeed the publicinterest did not prevail in this case.

So it would appear that the FTC was correct in its eval-uation, and so was the court, because establishing time-limited monopolies is the very purpose and function ofpatent law. The role of courts does not extend to the un-doing of laws and most legislators have not given the pub-lic interest conflict between patents and standards consid-eration.

JEDEC has meanwhile updated its disclosure policy,which may help to avoid similar issues in the future. Con-sidering the value that patent law has in relation to stan-dardisation for many courts, only a future court case candemonstrate whether the issue has been resolved in a waythat holds up to formal legal review.

(F)RAND

This is true for all standardisation bodies that requireex-ante disclosure, which most of them don’t. Insteadthe majority of bodies appear to rely on purely voluntarydisclosure and the assurance that patent holders involvedin the process will agree to so-called RAND or FRAND(”Fair, Reasonable and Non Discriminatory”) terms.

One common criticism of (F)RAND terms is the lackof a definition of what is reasonable and for whom. Dur-ing the 2006 Internet Governance Forum (IGF) in Athens,Susy Struble of Sun Microsystems pointed out that whatis reasonable for one party may not be reasonable to an-other.

Licensing practices do indeed vary, and are influencedby various factors, including, but not limited to, whetheror or not a company has a stake in the relevant market,and how aggressively it pursues its patent revenues.

Additionally, patents can be sold or acquired as part ofa business restructuring or acquisition. A future patentholder may consider different terms reasonable, so coulda patent holder who did not participate in the standardis-ation process and never committed even to RAND terms.

RAND terms generally amount to a vague assurance tolicense upon request. Such an assurance does not consti-tute a perpetual license on the patent and is not valid forthe new holder of a patent. So a new holder can choosefreely how to enforce the patent, including patent hold-ups on all existing implementations of the standard.

As Ms Miyamoto from WIPO pointed out, a patenthold-up is a legitimate and intended use of the patent

system. So even in a RAND regime, there is a substantialamount of uncertainty that invariably favors large compa-nies, which not only have deeper pockets, they also havelarger legal departments and patent portfolios.

It is this uncertainty that has caused great frustrationamong SMEs, which Charles Schulz of Ars Aperta sum-marised as RAND referring to ”RANDom licensing atthe sight of competitors.” In his presentation, Mr Schulzalso pointed out that (F)RAND terms are discriminatingagainst Free Software. Even RAND terms linked to zeroroyalties, the so called RF-on-RAND (”Royalty Free onRAND”), RAND-RF (”RAND Royalty Free”) or RAND-Z (”RAND with Zero royalties”) terms often exhibit thesame problems because they do not permit sublicensing.

Free Software (a.k.a. Open Source, FOSS or FLOSS) isbased on the principle that every living person and everylegal entity can be a user, developer, distributor, or anycombination of the above. Only conditions which permitthis to take place are acceptable to Free Software, whichis estimated to reach 32% of all IT services and 4% ofEuropean GDP by 2010.

In her presentation, Amy Marasco, General ManagerStandards Strategy of Microsoft, emphasised that shedoes not consider Free Software a business model. That istrue to the same extent that proprietary software itself isnot a business model. Business models are what is builton top of both Free Software and/or proprietary software.

Ms Marasco continued to point out that all these busi-ness models are legitimate. And while there are strongdifferences in opinion about which software model is thebetter and more sustainable choice for economy and so-ciety, from the perspective of a political analysis of stan-dards, all business models based upon proprietary soft-ware, Free Software, or a mixture of the two need to beconsidered valid and legitimate.

As mentioned before, the Free Software related parts ofEuropean GDP are estimated to reach 4% by 2010. Allparties agree that all business models, including those in-corporating Free Software, are legitimate. This raises thequestion whether it can be considered Fair, Reasonableand Non-Discriminatory to exclude this legitimate partof economy by choice of patent licensing terms.

Harm from exclusion?

The situation bears an odd semblance to the situationwith counterfeit pharmaceuticals, where the argument forpatent enforcement is generally accompanied by publichealth considerations. But only effective pharmaceuticalsthat are identical to the patented product would actuallyviolate the patent. Health risks arise primarily where thepatents are not being violated.

In standards, the situation is somewhat similar. If

patents are part of a standard, only an implementationthat is covered by the patents provides an effective an-titdote to monopolisation. Having to circumvent patentswill generally break standards compliance and harm thepublic benefit that is the driving force behind standardi-sation.

So patents in standards have the potential to makefull interoperability impossible for legitimate businessesin some markets. As the aforementioned BSI points out:”Standards are designed for voluntary use and do not im-pose any regulations. However, laws and regulations mayrefer to certain standards and make compliance with themcompulsory.”

Once a technology has been standardised, certainchoices are no longer made for technological quality. Evenwhere a better solution exists that would have the ad-ditional value of not violating a potential patent on thestandard, an implementor would choose to follow the tech-nologically inferior standard in order to have full access tothe market. Such a case reverts the initial idea of patent-ing: The technology is valuable because it is patented, notpatented because it is valuable.

There are also cases where certain standardisationorganisations, e.g. the International Organisation forStandardisation (ISO) have a priviledged position withgovernments for procurement decisions. Due to patentsand insufficient (F)RAND conditions, not all standardspriviledged in this way can be implemented by all legiti-mate market participants that should be able to competein public tenders.

So through the special priviledge for organisations likeISO which accept terms insufficient to guarantee com-petition, the monopoly right conferred by patents trans-lates into an oligopoly or even a monopoly for public pro-curement. This exclusion of competition from tenders bymeans of patents on standards is detrimental to the publicbenefit because it leads to higher prices and consequentlyhigher taxes.

Remedies for this situation would have to address theway in which governments grant procurement preferencesto standards, the way in which patents are handled instandards, the patent system itself, or a combination ofall of the above.

Attempted remedies

Good patent research costs around 100.000 EUR per caseaccording to Rigo Wenning, Legal Counsel & Patent Pol-icy Team Contact of the W3C/ERCIM who spoke about”Standards, Patents and the Dynamics of Innovation onthe Web.” The W3C is indeed the only Standards SettingOrganisation (SSO) that has a sufficient patent policy forits standards in order to accomodate all legitimate busi-ness models.

From the perspective of most SMEs, 100.000 EURpatent research costs are prohibitively expensive. Buteven large companies will find this cost considerable,which is only one of the cost generators. More damagecan be caused by injunctions against a product, or claimsfor damages. In his presentation of IBM’s ”SoftIP” con-cept, Roger Burt, Senior Counsel of IBM Europe intro-duces the issues with a quote from a BSA et al. Amicusbrief in eBay v MercExchange. The quote summarises theproblems of large industry rather well:

”Technology products typically consist of hundreds orthousands of patented components. It therefore is im-possible for technology companies to investigate all of thepatents, and pending patent applications that may be rel-evant to a new invention (product), notwithstanding theirbest efforts to do so. When, as frequently occurs, the claimof infringement is not made until after the new product isreleased or the industry standard has been adopted, design-ing around the claim is no longer a realistic option. Be-cause an injunction will issue automatically upon a findingof infringement even if the claim relates to an insignifi-cant part of the product the target of the claim is forcedto pay an extortionate settlement in order to preserve itsbusiness.”

Another attempt to keep patents fees from becom-ing exorbitant even for the largest corporations was in-troduced by Tim Frain, Director IPR regulatory affairs,Nokia in his presentation about ”FRAND Best Practice.”Mr Frain advocates a system based on ”Aggregated Rea-sonable Terms” & ”Proportionality” (ART+P).

The underlying idea of this approach is that if everypatent holder individually charges patent fees they con-sider Fair, Reasonable and Non-Discriminatory, the re-sulting fees may easily add up to 50% or more of the costfor the end product. So all patent holders should commitex-ante that the aggregate licensing cost for all patentsshould be reasonable. As an example, Mr Frain cited thatin Nokias view, the patent licensing fees on the communi-cation technology for mobile phones should be below 10%per handset.

Both approaches are attempts to control the use of mo-nopolies granted by patents and as such are trying to getvoluntary buy-in from other parties to not exercise rightsthat the patent system has granted them.

Unfortunately they both fall short of the criterion ofnon-discrimination against legitimate business models,and the ART+P approach also has the practical weaknessthat convergence joins more than one kind of technologyper device, so the total patent royalties on a smart phonemay still reach 50% even if the cost for GSM & Co arelimited to 10%. But even these 10% can be considerablefor laptops with included UMTS modems, or embeddeddevices, an area in which the profit margins are typicallyfar below 10%.

To put it in the form of a controversial question: Isit fair and reasonable that patent holders receive a highermonopoly rent than an innovative company stands to gainby bringing out a new product and bearing all the riskassociated with it?

Cui bono?

So who benefits? As explained before, patents are de-signed as a trade-off. Their benefits are often explainedwith the lone inventor having a genius idea. Would itbe fair if this inventor published the idea only to see alarge company bring it to market faster than the inventorcould, with no financial reward for the inventor? Mostpeople would agree this is not fair.

In the absence of patents, such an inventor could onlychoose between accepting fate, or keeping the innovationsecret for as long as possible while trying to bring it tomarket. Patents grant a temporary monopoly for the in-ventor in return for publication, such that the inventor canfind investors, set up a company, finish product develop-ment, bring it to market, and enjoy a head start beforeothers can compete normally.

This mechanism seems to have worked reasonably wellfor some time in the past. But some basic parametershave changed, while patents have been extended in anessentially unreflected way to more areas. This is partic-ularly true for software, where patents play no meaning-ful role in disclosure, breaking the patent deal for societywhereas the time of bringing new innovation to the mar-ket and the time between groundbreaking discoveries hasbeen decreasing.

Raymond Kurzweil found an exponential pattern in in-novation reaching back all the way to single-cell organ-isms. Concluding that this must be a universal principle,Mr Kurzweil has been making predictions for the futureof which several have turned out to be largely accurateso far. When applying this principle to patents, from theconstant duration of the monopoly guaranteed follows anexponential growth of the value of an individual patent.

The price that society is paying for granting patents hasbeen growing exponentially since the time that the initialpatent bargain was struck. This would explain why theprice for the patent system seems increasingly exorbitantwith growing calls for reform, which have led to the re-cent announcement of the ”First in Series of Hearings onEvolving Intellectual Property Marketplace” by the U.S.Federal Trade Commission (FTC).

Remedies to this problem could be to decrease the lifes-pan of patents, adapt them to the specific situation in thefield, and exclude fields from patenting in which patentsprovide no meaningful disclosure.

When it comes to standards, it was An Baisheng,

Deputy Director of the Division of Technical RegulationsDepartment for WTO Affairs of the Chinese Ministry ofCommerce who raised the question of public vs privatebenefit in his presentation titled ”Strike the Right Bal-ance between Public and Private Interests in IPR in ICTStandardization”.

Taking our ”lone inventor” scenario above, the questionthat we’d have to ask for patents on standards is: Wouldit be fair if our inventor could prevent someone else frombringing to market an innovation of their own that some-how interacts with the initial invention? To make it lessabstract: Should a patent on a typewriter extend to car-bon copy paper that has the right size to be used in thattypewriter? Most people would agree this goes too far.

Potential Remedies

1. Interoperability trumps patent

During the software patent debate in the European Unionthere was consensus among SME, Free Software and bigbusinesses representatives from companies such as IBMor Sun Microsystems that patents which limit or preventinteroperability should be unenforceable.

In the European Union, this could be introduced intothe ongoing Community Patent debate. On a global level,WIPO should consider this as part of its ongoing Devel-opment Agenda discussions.

Once implemented, this would solve the most harmfulside-effects for all legitimate business models and give in-teroperability and competition preference over monopolyrights. Considering the extraordinary networking effectsthat exist in this market, such a preference seems justified.

2. Update policy in SSOs

Secondly, Standard Setting Organisations (SSOs) couldupdate their patent policies to ensure that their standardsare usable in all business models. Many SSO representa-tives in the meeting maintained that it was not their placeto mandate certain patent policies. At the same time, theCommon Patent Policy of ITU-T, ITU-R, ISO and IECalready states the principle that ”a patent embodied fullyor partly in a Recommendation — Deliverable must be ac-cessible to everybody without undue constraints.” As thisanalysis demonstrates, current application of RAND fallsshort of that principle.

There is additional precedence supplied by the com-mon way in which SSOs protect standards against poten-tial later claims from Copyright holders by requiring allparticipants to a standardisation process to assign theircopyright to the SSO. Applying appropriate similar mea-sures on patents for similar reasons seems justified.

3. Provide intermediate and migration possibili-ties

Many patent-encumbered standards already exist, andeven if WIPO ends up agreeing on a general interoper-ability preference, it will take decades for this to becomelocal law.

As an intermediate solution, (F)RAND needs to be en-forced in a way that the license terms do not disciminateagainst any valid business model, as is still common today.A potential solution could be to tie (F)RAND royalties tothe downstream licensing revenue.

Business models that are based on proprietary licensingbased on copyright or patents for revenue would continueto operate as they do today. Business models that donot rely on such licensing revenue would be enabled tointeroperate and compete.

Taking this step would also realign ITU-T, ITU-R, ISOand IEC again with their declared Common Patent Policy.

4. Update governmental procurement guidelines

Governments and Inter-Governmental Organisationsshould update their procurement guidelines to procureonly products based upon standards that do not discrimi-nate against any legitimate business model. This means areview of blanket approval for certain standard setting or-ganisations, and only a limited approval for organisationsthat have not updated their patent policies appropriatelyby the time of the review.

DISCLAIMER: This paper was written from the per-spective of an expert in the field of software. The conclu-sions may apply in their entirety, partially, or not at allto areas other than software.