Standard-Essential Patents

Article Source: Institut d'Economie Industrielle (IDEI) Working Paper 803, 2014 (revised)
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This paper proposes a solution to the problem of inefficient license pricing for patents included in standards.


Policy Relevance:

Regulators can overcome high license fees for patents included in standards by mandating <em>ex ante</em> structured price commitments for patents submitted for inclusion in standards.


Key Takeaways:
  • Unremarkable patents may become important upon inclusion in a technological standard; call these standard essential patents (SEPs).
  • Inclusion in a standard grants significant pricing power to the holder of a patent. Standard-setting organizations (SSOs) insist that patent holders agree to “fair, reasonable, and non-discriminatory” licensing practices. This language is imprecise and intense litigation often results.
  • Patent holders are reluctant to explicitly discuss licensing during the standard setting process, because the standard-setting organization hold significant power over patent holders before the standard is set. If licensing rates were discussed, the SSO would be in a position to demand a large share of licensing fees.
  • One solution to this problem is for SSOs to insist that patent holders announce price caps on their licensing before the standard is set. The SSO would select patents for the standard taking this cap into consideration.
  • However, patent holders would likely respond to unilateral SSO insistence on price caps by “forum shopping”, seeking out an alternative SSO that did not demand advance commitment to price caps on licensing fees.
  • This problem calls for a regulatory mandate for advance price commitments by firms submitting patents for inclusion in a standard.



Jean Tirole

About Jean Tirole

Jean Tirole is Honorary Chairman of the Jean-Jacques Laffont - Toulouse School of Economics (TSE) Foundation, Scientific Director of TSE-Partnership, and Honorary Chairman, Executive Committee, of the Institute for Advanced Study in Toulouse (IAST). He is also affiliated with MIT, where he holds a visiting position, and the Institut de France. Professor Tirole’s research covers industrial organization, regulation, finance, macroeconomics and banking, and psychology-based economics.

Josh Lerner

About Josh Lerner

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School and head of the Entrepreneurial Management unit. He graduated from Yale College with a Special Divisional Major which combined physics with the history of technology. He worked for several years on issues concerning technological innovation and public policy, at the Brookings Institution, for a public-private task force in Chicago, and on Capitol Hill. He then earned a Ph.D. from Harvard's Economics Department.