Antitrust and Unfair Competition Law

Competition: Fall 2018, Vol 28, No. 1

THE HOLD-UP TUG-OF-WAR—PARADIGM SHIFTS IN THE APPLICATION OF ANTITRUST TO INDUSTRY STANDARDS

By Benjamin Hendricks & Brian P. Quinn1

I. INTRODUCTION

The oft-debated question of whether to apply competition law to the use and abuse of standard essential patents ("SEPs") has divided academics, private practitioners, and public officials along familiar battle lines: some are skeptical of the legal and factual underpinnings of antitrust enforcement in the context of SEP licensing negotiations, others view standard-setting and negotiations over fair, reasonable, and non-discriminatory ("FRAND") licenses as areas in which antitrust enforcement acts as a critical safeguard, and still others come down somewhere in the middle.2 SEP-owners often view their FRAND commitments as contractual and beyond the reach of competition law, while those that must license SEPs to implement an industry standard often advocate for the robust application of the antitrust laws to safeguard against excessive royalties or the outright exclusion of competitors. The arguments for applying competition law to guard against the abuse of FRAND-encumbered SEPs are rooted in "hold-up"—the theory that SEP-owners may leverage their position and power to exclude competition in standardized markets in which compatibility, interconnection, and network effects play essential roles.

With the two camps at odds and seemingly far apart, the common law approach under the U.S. antitrust laws has yet to provide a bright line (or workable) rule to guide SEP-owners and implementers in standardized markets. The crux of the debate is whether hold-up is exclusionary market conduct cognizable under the antitrust laws, or whether the right to pick and choose licensees and royalty rates are sticks in the bundle of property rights that ownership of an SEP confers on its owner, any waiver of which is governed exclusively by private contract law. The answer to that riddle is beyond the scope of this article, which instead examines recent developments in the law with respect to the application of antitrust law to patent hold-up and provides a prospective look at the future of hold-up in the patent context and elsewhere. Given the rapid development of the Internet of Things ("IoT"), the onset of the 5G mobile standard, and the torrid pace of development in networked industries, it is more than likely that courts, antitrust enforcers, and policymakers will need to grapple with the practical, legal, and economic underpinnings of hold-up outside of the formal standard-setting context.

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