ieee
From the SelectedWorks of Konstantinos Karachalios
Winter January 8, 2018
ENGAGEMENT RULES FOR
STANDARDIZATION ECOSYSTEMS
IN THE INTERNET Of THINGS
ERA: CAN WE ALLOW (F)RAND TO
HAVE MEANING?
Konstantinos Karachalios
Available at: https://works.bepress.com/konstantinos-
karachalios/2/
1
ENGAGEMENT RULES FOR STANDARDIZATION ECOSYSTEMS IN THE INTERNET Of THINGS ERA:
CAN WE ALLOW (F)RAND TO HAVE MEANING?
By Dr. Ing. Konstantinos Karachalios, Managing Director IEEE Standards Association
Contents
From Gentlemen’s Agreements to Global Transparency ....................................................................... 1
Necessary Governance Reform to Meet Complex Market Structures ................................................... 2
What the IEEE patent policy is About ..................................................................................................... 3
A definition of a “reasonable” rate ..................................................................................................... 3
A precise definition of the term “compliant implementation” .......................................................... 4
Further clarity regarding use of “prohibitive orders” ......................................................................... 4
Reciprocal licensing............................................................................................................................. 4
Overcoming the Ambiguity of the (F)RAND Promise .............................................................................. 5
The Communalities with the Recent E.C. Communication on SEPs 6
Take Away ............................................................................................................................................... 7
From Gentlemen’s Agreements to Global Transparency
Beyond the UN human rights convention there are probably no rules that have a universal
character. Even a thing as fundamental for survival of humanity as the Paris climate accord1
is not anymore universally supported. It is therefore quite strange that for a set of rules as
specific as the patents-related policies of standards developing organizations there are few
but loud voices2 advocating for a special case of uniformity: the uniformity of leaving patent
policies of all SDOs fundamentally ambiguous, in particular by keeping their central notion,
what is a reasonable and not discriminative (RAND) behaviour, totally undefined. This
reminds of Plato’s Politeia3, a very pyramidal social construction, where the position of each
individual at its top or bottom was legitimized by the criterion of “justice”. The only
weakness of this allegedly perfect system was that Plato nowhere defined the criteria of this
“justice” and who and how determined what is “just” or fair. Probably this is also the reason
why this concept never realized its great potential.
In contrast to dogmatic, one-size-fits-all visions, the reality is that complex social systems
build their own rules, including rules on how to build and change the rules. For the long-
term sustainability of an ecosystem as complex as a standards developing organization, it is
absolutely necessary to have rules of engagement that are understandable by all
participants, even if expectations may vary to a certain degree. In particular, if private
interests and claims are embedded into the standardized platforms, then it is very
important to agree on meaningful frameworks for negotiating fair rewards; how fairness
1
https://ec.europa.eu/clima/policies/international/negotiations/paris_en
2
See for example http://www.ip.finance/2016/09/self-interested-bias-of-committee.html
3
https://www.ellopos.net/elpenor/greek-texts/ancient-greece/plato/plato-politeia.asp
1
2
looks like for the proprietor of the private claims, for the implementers of the proprietary
technologies, and for the public.
There may be ecosystems around narrow and specific technologies involving relatively few
key players, where a stable inner circle knows more or less what is fair and reasonable
under their conditions, a kind of tacit “gentlemen’s agreement” or “comity device”, so to
say. The problem is that this dynamic reaches quickly its limits if this set of technologies
evolves beyond being applied in an isolated “vertical” sector and becomes “horizontal”; that
means an enabler applied in many other “verticals”. This is what is happening to
connectivity technologies in the era of the infosphere and of IoT (internet of things), where
“T” may be as variable as transportation systems, smart cities, smart homes, connected
persons, e-health, etc., that means virtually everything under the sun. Then many more
people must buy into the fairness concept of the inner circle. And, as in Plato’s construct,
people start to question their position in the food pyramid and want to understand why this
alleged “fair offer” sounds so unfair to them.
Necessary Governance Reform to Meet Complex Market Structures
The IEEE Standards Association is one of the most complex and broad standardization
ecosystems in the world. It is part of IEEE, with its +45 technical societies and councils,
covering virtually all IoT fields, horizontals and verticals. So, as IoT has been rising, IEEE had
to offer to its participants a broadly understandable framework to negotiate among
themselves what is a fair expectation for reward. Failure to do so would make IEEE’s
standardization ecosystem a formidable Jurassic Park, an allegedly “safe place” but with
insufficient safety rules, which is worse than the jungle. In the jungle, people at least know
from the beginning that there is no safety. This fundamental tension would tear apart our
system.
To address this emerging tension, IEEE embarked in a two-year reform effort which led in
February 2015 to an update of its patent policy.4 As in every genuine reform there has also
here been a few but strong voices opposing the reform5, basically saying that the system
works, so why fix it?6 By doing so, the critics fail to acknowledge that IEEE’s reform was not
supposed to fix an old system, but to prepare the ground for IEEE’s standardization
engagement in the IoT era, where the fundamental principles need to become more explicit
and the whole system more accountable. At the core stand the still abstract but not
anymore trivial or tautological criteria about what would constitute a “reasonable”
expectation for monetary reward for patented technologies included in IEEE standards, and
what could constitute a discriminating licensing behaviour, giving thus substance to an
otherwise empty (F)RAND (fair, reasonable and non- discriminatory) acronym.
4
https://www.ieee.org/about/news/2015/8_february_2015.html
5
See for example. Nokia and Ericsson latest firms to confirm they will not license under the new IEEE patent
policy. http://www.iam-media.com/blog/detail.aspx?g=d07d0bde-ebd6-495a-aa72-4eecb9dac67d
6
See for example the concluding remarks of Keith Mallison, of Wise Harbour, Development of innovative new
standards jeopardised by IEEE patent policy - latest research. http://www.4ipcouncil.com/news/development-
innovative-new-standards-jeopardised-ieee-patent-policy-latest-research
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Strangely, some of the critics go beyond criticizing the updated RAND definition, and add to
its mandatory aspect one of three voluntary recommendations, making it even more
disadvantageous from their perspective. “Strangely”, because usually, even if one does not
like the outcome of a process (for instance a verdict of a court or a communication from a
regulator), one is still tempted to interpret it in one’s own interest, and not against it. Not so
in the case of IEEE’s “verdict”, where the critics construct a kind of “strawman patent
policy”, because they believe it can be more easily attacked. They do so by falsely
maintaining that the Smallest Saleable Practicing Unit (SSPU) is prescribed as mandatory
base for royalty calculations under all circumstances, in contrast to IEEE’s official
statements7.
It seems therefore useful to explain the contents and purpose of the IEEE patent policy in
the context of the broader innovation challenges global society is facing.
What the IEEE patent policy is About
The updated IEEE patent policy is built upon four pillars:8
• a definition of a “reasonable” rate
• a definition of the term “compliant implementation”
• further clarity regarding use of “prohibitive orders”
• reciprocal licensing.
A definition of a “reasonable” rate
Under the updated patent policy a “reasonable” rate is defined as “appropriate
compensation to the patent holder for the practice of an Essential Patent Claim excluding
the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in
the IEEE standard.9”
In doing so, the IEEE embraces the concept of determining the worth of the standard
essential patent as if the technology the patent reads on had not been standardized. Hence,
the IEEE patent policy takes a counterfactual approach and argues that the value of the
patent and the adequate compensation that the rightholder is entitled to should be based
on the worth of the patent prior to the acceptance of this technology as part of a standard.
In doing so, it reflects a rationale that the standardization process needs to be seen as a
concerted effort undertaken jointly by firms owning patents that read on a standard and
firms aiming to make use of such patents in their products. It hence conceptualizes the
standardization process as a joint effort where firms operating in an innovation eco-system
depend on each other for joint success. The notion of interdependence is probably
appropriate to describe the relations in place here. ‘Going solo’ does not work in
standardization and it is only the successful interplay of a host of different firms that will
7
See for example FAQs section of the IEEE. http://standards.ieee.org/faqs/patents.pdf
8
Lindsay, M., Konstantinos, K. (2015), “Updating a Patent Policy: The IEEE Experience,” Antitrust Chronicle, 3,
at pp.3-6
9
Supra 7
3
4
allow standards to be the backbone of successful technology take off. By embracing the
notion of an ‘ex-ante’ value of standard essential patents (SEPs) the IEEE seeks to
encapsulate these complex mechanisms.
A precise definition of the term “compliant implementation”
Under the updated IEEE patent policy, the notion of “compliant implementation” seeks to
ensure that makers of components that implement an IEEE standard can benefit from
“Letters of Assurance” (LoAs), but only for use of the component conforming to the
standard. Patent holders cannot refuse to honour their commitments to IEEE to grant
licenses to an unrestricted number of applicants, whereas product makers cannot force a
patent owner to grant a license beyond the scope of that commitment. This part of its
updated patent policy hence provides operational guidelines on what is meant by the
criteria of ‘non-discriminatory’ under the IEEE patent policy.
LoAs have been an instrument the IEEE has been operating with for a long time and are
hence not new to the Organization. What is however new is that these LoAs are
accompanied by voluntary assurances permitting following options:
- the SEPs owner licenses its SEPs to implementers for a reasonable royalty rate, or
- at the holder’s election, without charge,
- assures that it will not enforce its SEPs against implementers or
- state that it does not have SEPs or
- declines to provide assurance.’
Hence, these LoAs provide further clarity as to the licensing intentions of the SEPs holder.
However, they say nothing about the success of the IEEE as they do not constitute a Key
Performance Indicator or a way to measure success for the IEEE. Nothing inhibits namely a
patent holder declining to provide any assurance from continuing to engage in the
standardization process, and suggesting its patented technology to be included in the
standard. As a matter of fact, this is exactly what is happening with all companies that have
been using this latter option of the LoA template.
Further clarity regarding use of “prohibitive orders”
The update clarifies further the relationship between standards and patents by providing
insights into when prohibitive orders (also known as injunctions) are an appropriate means
of recourse. The update states that parties should negotiate over license terms and makes it
clear that a patent holder is not prohibited from seeking an injunction if an implementer
declines to participate in or comply with the outcome of an adjudication, as specified in the
policy.
Reciprocal licensing
The IEEE patent policy update states that a patent holder cannot require an implementer to
take a license to a non-essential patent or require an implementer to grant to the patent
holder a license to the implementer’s own patents (except essential patents on the same
IEEE standard). Patent holders and implementers are free, however, to negotiate any kind of
cross-license or portfolio licenses that they mutually wish to conclude.
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IEEE furthermore recognized that the degree of openness of a standard depends to an
important degree on how the patent rights retained by a SEPs owner are defined and what
could be the costs associated therewith. If usage is fraught with transaction costs and access
to the standard is not based on a “reasonable” licensing rate which is broadly
understandable, then the standard will be closed rather than opened to the wide
community.10 This peculiar aspect was addressed by IEEE through all four pillars of its
updated patent policy.
Overcoming the Fundamental Ambiguity of the (F)RAND Promise
In the absence of clear definitions, determining what “negotiating in good faith” means can
be a lengthy and hence a costly undertaking. The mere act of shedding light on what a
“reasonable” rate means, what “non-discrimination” entails, when prohibitive orders should
be available and what reciprocal licensing means, translates into a decrease in transaction
costs for SEPs owners and implementers alike. If core aspects of the SEPs licensing regime
were to remain unclear, ill-defined or ultimately opaque, it would likely result in lengthy
disputes, and potentially costly litigation might well ensue. Lemley thus argues that SSOs
bear the potential to become “transaction cost minimizing governance structures.11”
Simply said, a contract the terms of which are too vaguely defined, is hard to enforce.
Without sufficiently clearly defined patent policies of SSOs, the bargaining in the beginning
of a licensing negotiation is affected by potential court and other legal involvement later,
should the SEPs holder and SEPs user not come to an agreement. This bears an inherent risk
for both implementers and owners of SEPs and alters the economic stakes for the parties.
As Cooter et al. state in a 1982 paper on the topic: “A rational bargainer will make a demand
such that the gain from settling on slightly more favorable terms is offset by the increased
risk of a breakdown of negotiations. Thus, the optimal bargaining strategy of a litigant
balances a larger share of the stakes against a higher probability of trial.” 12
In other words, if all market participants operating in a technology field that relies strongly
on standards fail to determine the “rules of the game” in advance, then there is an inherent
risk of opportunistic behavior. Downstream innovators can find themselves using standards
protected by patents, only to face exceedingly high royalty rates later on. Equally, SEPs
owners may see their efforts in investing in the standard unrewarded. Significant
transaction costs that occur in the absence of adequate governance structures harm both
and in that sense erode the value proposition of patent law as the “right to exclude”,
already alone for the reason that it may become so costly to enforce a SEP that it becomes
ultimately unenforceable in practice.
10
Lemley, M. A. (2002), “Intellectual property rights and standard-setting organizations,” California Law
Review, 1889-1980.
11
idem
12
Cooter, R., Marks, S., & Mnookin, R. (1982), “Bargaining in the shadow of the law: A testable model of
strategic behavior.” The Journal of Legal Studies, 11(2), 225-251. At p.226
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Certainly, failing to provide further clarity to the meaning of (F)RAND does not mean that
SEPs owners can arbitrarily choose the royalty rate they wish to obtain. Such a failure
delegates, however, important policy decisions and governance structures to other actors,
mainly courts. This increases transaction costs, influences the respective bargaining
positions in SEPs negotiations and leaves both parties no choice, other than to negotiate
licensing terms in the shadow of ill-defined patent policies, a situation posing business risks
to everyone. In doing so, IEEE’s patent policy aligned with concerns raised by the European
Commission, which has sought to avoid “jeopardizing the adoption of the standard and
undermine the standardization process by creating uncertainty.”13
The Communalities with the Recent E.C. Communication on SEPs
On November 29, 2017, the European Commission issued a Communication “to the
Institutions on Setting out the EU approach to Standard Essential Patents” 14 with the aim of
offering further clarity on the licensing of standard essential patents. In doing so, the E.C.
has made a clear statement that it considers a need to improve many of the pending issues
surrounding the licensing of standard essential patents. In particular it took issue with what
it considers an over declaration of standard essential patents with standard setting
organizations and sought to provide some further clarity of what some key definitions of the
FRAND agreement entail. In doing so, it paid particular attention to issues around IP
valuation. The guidelines of the E.C. are not binding, however they have de facto soft law
character.
It is particularly laudable that the E.C. has recognized the need to promote transparency and
provide further clarity in the FRAND debate. Clearly, it has recognized that the status quo,
characterised by over declaration of standard essential patents, ill-defined terms and lack of
clear IP valuation principles is not satisfactory and requires change, last but not least
because the Internet of Things requires a governance framework that will be accessible to
both small and big players, early stage and mature firms. In this regard it is also encouraging
to see that the E.C. has in its guidelines paid particular attention to the role of SMEs and the
need to raise awareness among the SME community on the topic. One can hope that also
other regulators may recognize that such a status quo undermines the process of
standardization by perpetuating fundamental uncertainties.
13
EC Patents & Standards. Bekkers, R. Birkman, L. et al. (2014), “Patents and Standards: A modern framework
for IPR-based standardization.” A study prepared for the European Commission Directorate-General for
Enterprise and Industry. Brussels: European Commission. Doi: 10.2769/90861; European Commission.
Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (2014).
14
Setting Out the EU Approach to Standard Essential Patents.
https://ec.europa.eu/docsroom/documents/26583
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Take Away
More often, SSOs have been criticised for failing to better clarify what the (F)RAND promise
entails15 as this vagueness can lead to abuse and antitrust issues.16 The situation is further
complicated by clandestine licensing markets and the absence of publicly available royalty
rates that could be used as benchmarks to determine the value of a royalty rate of SEPs. 17
The fundamental ambiguity of the (F)RAND commitment translates into significant
transaction costs, which has led David J. Teece of the University of California, Berkeley, to
argue that the costs of the transfer of technology between competing enterprises can be so
high as to mitigate the value of the transfer altogether.18 Lack of clarity can also lead to a
host of other unresolved challenges, such as negotiations potentially taking place in the
shadow of the law19 and potential asymmetrical bargaining power20 in licensing
negotiations.
The (F)RAND promise is intended to offer a middle ground that eases the inherent tension
between standards and patents. The better this promise is defined, the lower transaction
costs and the higher transparency in markets for technology. By providing a better
understanding of what some core elements of the (F)RAND promise entail, it allows for
more clarity and hence a reduction of transaction costs for both sides of the debate. That
standards developing organizations cannot continue to ignore the issue is evidenced by
some simple numbers. For example, the number of SEP holders for 3G and 4G standards
grew from 2 in 1994 to 130 in 2013 and the number of patents declared essential to a
standard rose from a fewer than 150 in 1994 to more than 150 000 in 2013. 21 The sheer
amount of SEPs owners and patents declared essential to a standard requires a governance
framework anchored in core principles of transparency, accountability and clarity, principles
that are of fundamental importance for open and democratic systems and processes. The
updated IEEE patent policy meets these criteria by taking an undoubtedly necessary step to
assure the future functioning of markets for technology.
15
ITC Commissioner Scott Kieff said that “infinite and zero are not acceptable answers when assessing what
should be an appropriate rate,” speaking at Qualcomm’s leadership conference in March 2015.
16
Lemley, M. A. (2002),” “Intellectual property rights and standard-setting organizations,” California Law
Review, 1889-1980; Miller, J. S. (2006), “Standard setting, patents, and access lock-in: RAND licensing and the
theory of the firm,” Indiana Law Review, 40, 2007-6., p.11. In “Rambus Inc. v. Infineon Technologies,” 318 F.3d
1081 (Federal Circuit 203) cert. denied 540 US 874 (2003), the inherent uncertainty of the (F)RAND agreement
also played a major role. Cited according to Miller (2006).
17
McClure, D. (2011). The value of efficiency and transparency in IP licensing: let the market decide.
Intellectual Property Magazine.
18
Teece, D. J. (1998), “Capturing value from knowledge assets: The new economy, markets for know-how, and
intangible assets,” California Management Review, 40(3), 55-79.
19
Michel, S. (2010). Bargaining for RAND royalties in the Shadow of Patent Remedies Law. Antitrust LJ, 77, 889.
20
Hew, S. L., & White, L. B. (2008). Cooperative resource allocation games in shared networks: Symmetric and
asymmetric fair bargaining models. IEEE Transactions on Wireless Communications, 7(11).
21
Ernst, D. (2016). Standard-Essential Patents within Global Networks-An Emerging Economies Perspective. At
p.4
