Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory of the Firm

Abstract

Many leading voluntary standard-setting organizations (SSOs) have adopted intellectual property (IP) policies under which participants must promise to license any patents on technology that they contribute to a standard, and to do so on reasonable and nondiscriminatory terms (RAND). The standard setting literature includes a substantial focus on the widespread use of this RAND promise. A common refrain in these analyses of the RAND promise is that its meaning is dysfunctionally uncertain. We know more about the RAND promise, however, than the existing literature suggests. I show that we already know the RAND promise's core meaning, and why it remains attractive to SSOs. Specifically, I demonstrate that, although framed by reference to patent rights, the RAND promise's core function is to achieve a business organization goal that all SSOs confront - namely, removing the threat of post-adoption hold-up, thus inducing group production of a viable standards-based technology platform. One can solve the organizational problem by transferring a property right from threatener to threatenee(s). Corporate law scholars have shown that the corporate form enables group production of complex goods by giving contributors a way to lock in their capital to a separate property-holding entity, precluding both subsequent withdrawal and hold-ups from threatened withdrawal. In the IP domain, for example, patent pools usually form new companies to hold patent licensing rights centrally. Similarly, in the standards context, SSOs enable production of a standards-based technology platform by conditioning contributors' participation on making the RAND promise, i.e., on granting the whole of the adopter community a property-like access right to contributors' patented contributions to the standard. This access lock-in, whereby participants cast themselves into a common venture, makes possible post-standardization, mutually-beneficial bargaining over patent license terms by precluding both subsequent patent-based shutouts and holdups from threatened shutouts. In other words, every participating patent owner has, by making the RAND licensing promise, irrevocably waived its right to seek that most traditional of intellectual property law remedies, a court injunction against unauthorized access. The only relief a frustrated patent owner can seek against an adopter thereafter is the reasonable royalty expressly contemplated. Moreover, the RAND promise must run with the patent if the patent is sold to another party; only in this way does the RAND promise ensure that the standard can flourish without hold-up for as long as the market supports the technology.