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STANDARD-SETTINGABUSE: THE CASE FORANTITRUST CONTROL
bruegel
policy brief 
ISSUE
2013/ 
01
FEBRUARY 2013
by
Mario Mariniello
Research Fellow at Bruegel
mario.mariniello@bruegel.org
POLICY CHALLENGE
This Policy Brief identifies and discusses the main sources of direct harmto European consumers that can arise as a consequence of standardisa-tion. Harm can occur through too-high prices for consumers, but can alsobe incurred if incentives to innovate are undermined. A consistent policyby the European Commission capable of tackling all sources of harmshould simply be based on Article 102 of the Treaty on the Functioning of the European Union regardless of whether FRAND commitments are given.Antitrust enforcement should hinge on the identification of a distortion inthe bargaining processaround technologyaccess prices, if it canbe shown that the distor-tion is determined by theadoption of the standardand is not attributableto the pro-competitivemerits of any of theinvolved parties.
Standard-setting timeline
THE ISSUE
Standards reduce production costs and increase the value of products to consumers; ultimately they significantly contribute toeconomic development. Standards however entail risks of anti-competitiveabuse. After the adoption of a standard, the elimination of competitionbetween technologies can lead to consumer harm. Fair, reasonable, non-discriminatory (FRAND) commitments made by patent holders have beenused to mitigate that risk. The European Commission recognises theimportance of standards, but European Union competition policy is stillseeking to identify well-targeted and efficient enforcement rules.
Source: Bruegel.
E
x
ante
Competition
E
x
post
Lock
-
inStandardisationprocess
 
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02
STANDARD-SETTING ABUSE: THE CASE FOR ANTITRUST CONTROL
1. Commission Staff working paper:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SEC:2011:0671:FIN:EN:PDF.2. Guidelines on theapplicability of Article101TFEU to horizontalco-operationagreements, section 7:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:011:0001:0072:EN:PDF. Article 101TFEU lists agreementsbetween undertakingsthat are prohibitedunder EU competitionlaw.3. See, for example,Teece and Sherry(2003).4. This policy brief isbased on the Bruegelworking paper: ‘Thecase for Europeanantitrust control instandard-setting’(Mariniello, 2013). Thetechnical discussion of the literature is to befound there.
STANDARDISATION
plays a crucialrole in fostering economic devel-opment. Standards ensureinteroperability of networks andoften bring about significantreductions in transaction and pro-duction costs due to economiesof scale and scope. They increaseefficiencies and limit asymmetricinformation between producersand consumers. They can pro-mote competition, making entryeasier into industries with strongnetwork externalities. By tailoringthe evolution of the developmentof a production technology and byspreading relative information,they make investment in innova-tion more viable, thus reducingthe uncertainty surrounding theoutcome of research and develop-ment. Economic studies haveattempted to qualify the macro-economic impact of standards,suggesting that a one percentincrease in the overall stock of standards in a country can be cor-related with up to one percentGDP growth
1
. There has been aconstant expansion in the portfo-lio of European standards, from1,280 deliverables in 1990 to18,286 deliverables in 2009(Figure 1). Most are industry-initi-ated. The proportion of standardsmandated by the European Com-mission has also increased,reaching 34 percent in 2009.The European Commission recog-nises the crucial role of standardisation, but has alsobeen wary about the risks thatstandardisation might entail, par-ticularly in respect to potentialloss of competition. Guidelinespublished in 2011 on the applica-tion of Article 101 of the Treaty onthe Functioning of the EuropeanUnion (TFEU) to cooperationagreements dedicate an entiresection to standardisation
2
. Theguidelines lay down the condi-tions under whichstandard-setting organisationsmay not, normally, infringe com-petition rules, that is: when theyminimise the risk of abuse byallowing unrestricted participa-tion by any willing party and byensuring that the process is fullytransparent and that access tostandardised patents is providedon fair terms (see the next sec-tion). The Commission'sDirectorate-General for Competi-tion, which is in charge of enforcing competition law in theEU, is also investigating, or hasinvestigated, a number of casesof abuse of dominant position(Box 1 on page 3).However, it is uncertain if antitrust, or competition law, isthe right instrument for correctingdistortions of the market inducedby the adoption of standards
3
.Abuses are very difficult toidentify. Even when patentholders are required to provideaccess to their essential patentson fair, reasonable and non-discriminatory (FRAND) terms,the definition of the fair level forthe price to access thestandardised technology is anextremely complex task andcompetition authorities maysimply lack the tools to perform it.FRAND commitments moreoverhave a contractual nature andshould normally be enforced viacontract law, rather thancompetition law. The timing of enforcement against unilateralabuse is also an issue, sinceunder EU law only ‘dominant’companies can be pursued forabuse. But the adoption of astandard can occur when thecompany in question does not yethave market power. It thereforedoes not necessarily follow thatabuses related to standardsshould result in EU competitionpolicy enforcement.This Policy Brief discusses thecompetition concern and how thatconcern can translate into harmfor European consumers (section1). The economics of unfairpricing abuse and a proposal toexpand the scope of Commissionantitrust enforcement againstexploitative abuse are detailed insection 2. Section 3 concludes
4
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20,00018,00016,00014,00012,00010,0008,0006,0004,0002,0000
Total
 
standardsHarmonised
Source: European Commission, Staff Working Paper SEC (2011) 671 final.
Figure 1: Evolution of standards in Europe
 
STANDARD-SETTING ABUSE: THE CASE FOR ANTITRUST CONTROL
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03
5
. See, for example,Shapiro (2001), Layne-Farrar
et al
(2007),Farrell
et al
(2007), andMariniello (2011).
1EX-POST ABUSE AND EUCOMPETITION POLICY
The discussion about the role thatcompetition policy enforcementshould play in correcting marketdistortions arising from the adop-tion of standards has beendragged into case-specific mat-ters. Contributions by practition-ers and academics have beensponsored to support patent-holders’ and licensees’ opposingviews, given the lack of scientificconsensus on a unique methodol-ogy to enforce antitrust control.Companies have often beenaccused of using courts or com-petition authorities for strategicpurposes, in order to enhancetheir bargaining positions relativeto counterparts while negotiatingpatent access prices. Under-standing the role that competitionauthorities can play thereforerequires taking a step back.
1.1 FRAND and the ex-post/ex-ante comparison
After the adoption of a standard(ie ex-post), the chosen technol-ogy normally lacks crediblesubstitutes: switching to compet-ing technologies becomesrelatively too expensive for manu-facturers. The owner of thepatented technology might thushave additional market power rel-ative to locked-in licensees, andmight exploit this power to chargehigher access rates. In the eco-nomic literature this phenomenonis referred to as ‘hold-up’
5
. Toreduce the risk of hold-up, stan-dard-setting organisations oftenrequire patent holders to disclosetheir standard-essential patentsbefore the adoption of the stan-dard (ie ex-ante) and to commit tolicense on FRAND terms.Arguably, the primary purpose of FRAND is to render the adoption of the standard ‘competition-neutral’in that it should aim at strippingplayers of any additional marketpower accruing to them solelybecause the standard de-factorules out any other potentiallycompeting technology. At thesame time, patent holders shouldnot be deprived of the reward theyare entitled to for their R&D effortsunder normal competitive condi-tions. Making that effective inpractice is a tough challenge foracademics and practitionerssince it requires being able to dis-entangle the effect on prices dueto the restriction of competitionfrom the effect due to the qualityof the new technology. Swansonand Baumol (200
5
) have sug-gested benchmarking FRAND tothe price that would haveemerged ex-ante in the context of an auction-like setting in whichtechnologies bid (in the form of lower access prices) to becomethe standard. Although thatapproach has some merits, it hasan intrinsic limit: ex-ante, little isknown about the value of thetechnologies at stake (seeMariniello, 2011). The value of technologies materialises onlywhen the standard is effectivelyimplemented, when patent hold-ers weigh the relevance of their
BOX 1: THE MAIN EU ANTITRUST CASES
A brief description of the main antitrust cases investigated by the EuropeanCommission is given below. No substantial precedent has yet been set, andclear-cut guidance on enforcement against unilateral abuse is still missing.For more on types of infringements, see section 1.
The Rambus case:
A case of patent ambush. Rambus was accused of having intentionally withheld information about patents that later wereclaimed to be relevant to the standard. Rambus settled with the Commis-sion, agreeing on a five year cap on its royalty rates.
The Qualcomm case:
Qualcomm was alleged to have infringed its FRANDcommitments relating to UMTS*, the 3G mobile phone standard set by theEuropean Telecommunications Standards Institute (ETSI). After three yearsof investigation, the Commission closed the proceeding with no decision.
The Nokia vs IPcom case:
IPCom was accused of not abiding by the FRANDcommitment given to ETSI by the previous owner of its essential patents,Bosch. After Nokia’s complaint to the Commission, IPCom declared it wasready to abide by FRAND. The Commission welcomed IPCom’s public decla-ration without formally opening an investigation.
The Samsung case:
Samsung was accused of not abiding by its FRANDcommitment by seeking injunction relief in an attempt to block Apple’shandset sales. In December 2012, the Commission sent a formal State-ment of Objections to Samsung.
The Google-Motorola case:
As in the Samsung case, Google-Motorola wereaccused of not abiding by its FRAND commitment by seeking injunctionrelief against Apple and Microsoft. In January 2013, a settlement betweenGoogle and the Federal Trade Commission in the US limiting Google’s abilityto seek injunction relief was signed.
* Universal Mobile Telecommunications System

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