Standards are critical to innovation in information technology – both for making components of products work together and for enabling different systems to interoperate and exchange data. Standards help create new markets by giving suppliers and buyers confidence that there will be competing producers of new technology and that lock-in or stranding will be minimized. While standards development is a collaborative process, ambitious standards may include proprietary technology, especially given the low threshold for obtaining patents. Accordingly, participants are required to license standards-essential patents on royalty-free or on “[fair,] reasonable and nondiscriminatory terms. Royalty-free is more appropriate for software standards that will be implemented by large numbers of users, whereas (F)RAND is widely accepted where manufacturing and marketing costs create natural barriers to entry. Recently, the procedure for (F)RAND licensing has stirred controversy in the context of the smartphone wars.
In general, standards development should be led by the private sector, and while a more inclusive process may slow the development of the standard, the result is more likely to be adopted quickly and widely. The “openness” of a standard is determined by several factors: the process by which the standard is developed, the terms under which it is made available, and the practical availability of competing implementations in the market. Government involvement is appropriate to the extent that the government is a major user but also when coordination costs are high, as when standards must enable operation across industry boundaries.
Competition agencies should be aware increasing availability of patents has made standards development increasingly susceptible to gaming by companies that fail to disclose patents and patent applications or attempt to evade licensing commitments by selling patents to third parties. Competition agencies should address policy concerns surrounding patent ambush, royalty-stacking, and the calculation of (F)RAND royalties. However, absent imbalances in litigation capacity, agencies should refrain from intervening in royalty disputes.