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Article Excerpt
This article empirically explores standard-setting organizations' policy choices. Consistent with our earlier theoretical work, we find (i) a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors and (ii) a positive correlation between the sponsor friendliness of the selected SSO and the quality of the standard. We also develop and test two extensions of the earlier model: the presence of provisions mandating royalty-free licensing is negatively associated with disclosure requirements, and the relationship between concessions and user friendliness is weaker when there is only a limited number of SSOs.
1. Introduction
**** The economic importance of technological standards has grown tremendously over the past two decades. The growing recognition of the importance of the standardization process has been attributed in large part to the growth of the information technology and communications industries, for which standards are critical. At the same time, there has been substantial flux among these organizations: for instance, over the past fifteen years, consortia and informal standard-setting bodies have in many cases supplanted formal national and international standards-development organizations (Cargill, 2002).
Because commercial stakes attached to standards and patents have become so important, the adoption of technical approaches covered by specific patents, the requirement of backward compatibility with earlier technologies, and the relative emphasis on cost and performance have all been highly contentious issues. Unsurprisingly, the financial resources devoted by firms to standardization and patenting has increased sharply. (1) As discussed in more detail below, firms' strategic behavior in standard-setting organizations has frequently been the subject of litigation in recent years.
Despite their growing role, few statistical studies have examined differences between the rules and operations of different standard-setting organizations (SSOs). Understanding the workings of SSOs is important, because they can have a profound impact on the abilities of innovators to coordinate in developing new technology, on the incentives to innovate, and so forth. This article seeks to address this gap by investigating the relationship between these organizations' characteristics and their policies governing the disclosure and licensing of intellectual property such as patent awards.
Lerner and Tirole (2006) analyze forum shopping by technology sponsors. The basic idea is that the sponsor of an attractive technology can afford to make few concessions (such as royalty-free licensing) to prospective users and to choose an SSO that is relatively friendly to his cause. The model thus predicts a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors, as well as a positive association between the sponsor friendliness of the selected SSO and the quality of the standard.
We extend this model in two ways. First, introducing disclosure policies, we show that a higher licensing price should be associated with more disclosure. Second, we show that in settings where there are only a limited number of SSOs, the relationship between concessions and user friendliness may not hold: sponsor-friendly SSOs may demand substantial concessions in order to attract weak standards; by contrast, user-friendly SSOs may make weak demands so as to appeal to sponsors with stronger technologies. This suggests that the relationship between concessions and user friendliness is likely to be weaker when there are fewer SSOs.
To test these predictions, we built the first database of SSOs. Combining information from the SSOs' websites, records of standard-setting bodies, and information collected from surveys and interviews, we compiled a database of nearly sixty bodies.
Our results are largely consistent with theoretical predictions:
(i) First, we find a negative relationship between the SSOs' orientation toward sponsors and the strength of the concessions they demand. This significant negative relationship continues to hold even when we control for industry effects.
(ii) Second, the data reveal a statistically significant association between sponsor friendliness and the maturity of the technological subfield in which the standard is located, which we suggest should be a proxy for attractiveness.
(iii) Third, we find that the presence of a provision mandating royalty-free licensing is negatively associated with the presence of a disclosure requirement, whereas weaker "reasonable-and-non-discriminatory" (RND) licensing requirements are strongly associated with such a provision.
(iv) Finally, when we divide the SSOs into those with above and below the median number of other SSOs in their technological subfield, we find that the relationship between user friendliness and concessions is considerably tighter among SSOs located in classes with many other organizations.
The plan of this article is as follows. Section 2 discusses strategic interactions between firms during standardization. The related literature is reviewed in Section 3. Section 4 presents the theoretical framework. The data are discussed in Section 5. Section 6 presents the empirical analysis. The final section concludes the article.
2. Strategic interactions and standard-setting bodies
**** Coordination through standardization frequently has substantial economic benefits. These include larger markets with greater economies of scale and the greater ability to sell complementary goods. Standards can emerge in a variety of ways. First, de facto standards emerge as firms offer competing, incompatible technologies and consumers gravitate to a particular technical solution, such as the emergence of the Microsoft operating system. Second, some de jure standards are selected by government agencies, as was done, for instance, by the United States in the context of high-definition television (Farrell and Shapiro, 1992). Although government standard setting is a fascinating topic in its own right, the very different institutional environments and incentives suggest that it should be analyzed separately. Throughout this article, therefore, we will focus on the de jure standardization process through SSOs organized by private parties.
The complexity of the decision-making process and the impact of standards design on firm profitability can make the standardization process intensely competitive:
(i) Standards are frequently formed at an early stage of a technology's evolution. In many cases, there are a variety of promising alternatives among which the standard-setting body must choose. These alternatives' relative virtues may still be uncertain.
(ii) Being included or excluded from an important standard can have a substantial impact on a firm. For instance, having one's intellectual property deemed essential to a new standard can help insure a steady stream of licensing revenue in future years. A standard that demands backward compatibility can insure ongoing revenues for a legacy product for many years.
As a result, established and new firms alike are willing to devote substantial effort to the standardization process. Standard-setting bodies have established a variety of rules to help adjudicate this process. Industry observers often distinguish between traditional standards-development organizations, which often are open to all willing participants and have detailed, often cumbersome procedures for adopting new standards, and special-interest groups, which are often small, invitation-only bodies which can move rapidly to a consensus. Despite the frequently ponderous pace at which traditional standards-development organizations move, they are often perceived to provide a more effective "stamp of approval" than special-interest groups dominated by technology sponsors. Looking more generally across standard-setting bodies, it is clear that these organizations fall along a spectrum, with some bodies being more oriented toward technology sponsors and others that reflect more the perspectives and concerns of end users.
Because there are typically multiple technological approaches to the same problem, standard-setting groups frequently find themselves in competition, whether with other standard-setting bodies or even with other standard-setting efforts within the same organization. To be sure, these bodies are to a certain extent differentiated, for instance, by end-user orientation, the standardization process followed, and the geographic composition of the membership. However, often SSOs face the difficult choice of whether to endorse a standard developed by a different standard-setting body, or instead to proceed with the development of a standard of their own.
A natural question is the extent to which the rules of standard-setting bodies are enforceable. If the commitments that firms make in the standard-setting process were not binding, the value of these commitments would be minimal. Three bodies of law are potentially relevant. (2) The first of these is contract law. SSOs often do not require members to sign detailed contracts stipulating their obligations relating to intellectual property. Either the firms are asked to sign general statements agreeing to conform to the organization's rules, or else do not need to sign any statement whatsoever. (Formal policies were quite rare as recently as the early 1990s; Updegrove, 2006.) Furthermore in these agreements, critical phrases--such as "reasonable" and "non-discriminatory"--are typically undefined. As a result of these considerations, contract law is not always the mechanism chosen to enforce SSO's rules.
Fortunately for the workings of SSOs, there are two alternatives. Two doctrines in patent law are particularly relevant. "Equitable estoppel" covers situations where a patent holder leads another party to believe that it will not enforce a patent against him through misleading actions. This doctrine has been used to invalidate suits in instances when SSO members failed to disclose relevant patent holdings. Another doctrine, termed by Lemley (2002) "implied license," covers situations when a firm discloses its patent holdings but then fails to comply with the restrictions on licensing to which it concurred. Once again, the firm's ability to extract substantial damages from other SSO members may be limited.
As a second alternative, the members of the SSO can assert two torts against an SSO member who behaves in an opportunistic manner. Members can claim that the failure to disclose relevant intellectual property is a violation of the anti-monopolization provisions of the Sherman Antitrust Act. Alternatively, they can claim that the failure to comply with the provisions of the SSO is a form of fraud, or misrepresentation.
Most of the cases to date involving technology-based SSOs have revolved around disclosure issues. (3) One much-discussed case involved Dell Computer's patent covering the "VL-Bus" standard (a bus is a mechanism to transfer instructions between a computer's central processing unit and its peripherals). Dell, a leading manufacturer of personal computers, was a member of the Video Electronic Standards Association (VESA), which also included virtually all other major U.S. computer manufacturers. In the early 1990s, the body began considering a design for computer bus architecture that would enable faster graphics displays. VESA approved the VL-Bus standard, which was primarily employed in the 486 family of IBM and "IBM clone" personal computers, in 1992. As part of the approval process, representatives of member companies certified that they knew of no intellectual property that the standard would violate.
Not until after 1.4 million personal computers were sold employing the VL-Bus standard, the Federal Trade Commission alleged, did Dell begin contacting VESA members and indicating that they were violating a patent that it had obtained in 1991. The FTC claimed that the standard-setting body could have readily adopted an alternative design, had they known of Dell's patents. Dell settled the FTC complaint in November 1995, agreeing not to enforce its patent against manufacturers employing the VL-Bus architecture. The firm also agreed not to enforce any other technology that it had failed to disclose to standard-setting organizations. (4)
Similarly, Rambus had sued three manufacturers of dynamic random-access memory (DRAM) semiconductors of violating its patents covering its Sync-DRAM (SDRAM) technology. These manufacturers--Hyundai Electronics Industries, Infineon Technologies, and Micron Technology--counterclaimed, charging the firm with having engaged in fraud and violating the Sherman Act. In particular, they asserted that the company had failed to disclose its most relevant patent applications to the standard-setting body in which it was an active member. Rambus had participated in the Joint Electron Device Engineering Council (JEDEC) standard-setting body from 1992 to one month after the Dell consent decree was finalized in mid-1996 (when it stepped down). Rambus's critical SDRAM patent application, which had been filed in 1990, was not disclosed to the standard-setting body. Indeed, internal company emails referred to the firm's intention not to disclose this filing to the JEDEC group despite its apparent relevance. Furthermore, executives discussed strategies to demand that other manufacturers undertake licenses once the standard had become established. Although the initial trial found that Rambus has indeed committed fraud, the Court of Appeals for the Federal Circuit concluded in Rambus v. Infineon that Rambus's obligation to disclose pending patent applications under the JEDEC SSO's policy was very narrow. (5) Because the trial record established clearly that Rambus explicitly modified the language of its patent claims to try to cover devices with features that were revealed to Rambus in JEDEC meetings, there can be no doubt that Rambus violated the intent and spirit of the JEDEC policy, but not, in the eyes of the appellate court, the legal obligation to disclose. In August 2006, the Federal Trade Commission unanimously ruled that Rambus deceptively was able to distort the standard-setting process and "hold up" the computer memory industry. (6)
3. Related literature
**** Despite the copious research on standards, relatively little cross-sectional work has addressed the question of how these organizations are or should be organized. Many of the papers (e.g., Farrell and Saloner, 1985) focus on de facto standard setting, where there is no role for an SSO. Alternatively, a number of works, both in economics and political science, have focused on settings where government bodies adjudicate between the desires of different parties about possible standards (e.g., Farrell and Shapiro, 1992). (7) In addition, several papers have considered which settings (e.g., the extent of buyer...
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