Competing while collaborating petri kuoppamäki

C ompeting while C ollaborating
IFC LA C onference, Helsinki June 9 2010

D r. P etri Kuoppamäki
Vice P resident Legal & IP, Nokia C orporation
P rofessor of C ompetition Law,
University of Helsinki
C ompany C onfidential
1 © 2008 Nokia V1-O penInnovationLegalR ole.ppt / 2008-09-01 /JL

O verview
•C ompeting while collaborating (=coopetition)
•O pen and proprietary solutions
•O pen innovation
•C ompetition law and proprietary vs. open innovation
•New E U draft horizontal guidelines re. standardization
•FR AND and ex ante
•C onclusions


P ro prieta ry a nd O pen S o lutio ns
• P roprietary solutions
• O ne company drives the innovation and product development
• C losed ecosystem
• E xclusion of others
• C ompetition for the market: ”Winner takes it all!”
• O pen solutions
• C ollaboration between several players
• S hared results, e.g. open source, open innovation
• Fixing certain common parameters while competing on others
• C ompetition in the market
• Hybrid models (= most cases )
• C losed ecosystems supported by platforms
• C ompanies open certain interfaces to gain valuable external inputs while keep other
interfaces closed (platform competition)

C lo s ed I nnova tio n vs . O pen I nno va tio n –
T he T heory
R esearch Development

Corporate boundaries

M arkets
O pen Innovation combines internal and
external ideas and innovations and internal
and external commercialization for promoting
new technology development.
S ource: C hesbrough, 2005

R esearch Development

In closed innovation, new business New M arkets

development and marketing of new products
happens within company borders . R esearch projects
Existing markets

Corporate boundaries



C lo s ed I nno va tion vs . O pen I nnova tio n – T he
Princ iples o f C lo s ed I nno va tio n
P
rinc iples P rinc iples o f O pen I nno va tio n

All the best in class work for us. We work with the best talent both inside and
outside of our company.
To profit from R &D we have to develop the E xternal R &D can create significant value:
innovations ourselves put into our own internal R &D is needed to take our share of
products. this value.
If we invent it ourselves, we can be first in We don’t need to be the first to research and
market. develop to benefit from new innovation.

First in market will win. A better business model is more important
than being first in market.
The one who creates the bes t ideas will win. If we make the best possible use of internal
and external innovation, we’ll win.
We should control our intellectual property in We s hould create profit from letting others
order to stop competitors from gaining from use our intellectual property and we s hould
our innovations. buy others’ intellectual property when it
advances our own business.

C lo s ed I nnova tio n vs . O pen I nno va tio n –
I P c o m pa ris o n

I P in C lo s ed I nno va tio n I P in O pen I nno va tio n
IP used for market exclusion IP licens ing on FR AND terms including
s tandardization, used to prevent patent hold up
while allowing income. Value created through
comparative benefit and licensing income.

IP used for market exclusion IP us ed to generate new businesses outs ide
of existing businesses, through, for example,
s pin offs or sale.
C onflicting claims lead to patent fight. C onflicting claims may indicate an
opportunity for collaboration.
IP is acquired for protecting own business P articipation in markets for intellectual
only property (i.e. patent auctions)


Fro m I dea to P ro duc t Business
Strategy
Internal,
Business
External, or Joint
model Manufacturing or
Internal, Idea Business Process
External,
or Joint Functional or
Invention
Technological

Innovation Form or
Internal, Appearance
(Tech/Non-tech)
External or Joint
Marketing (Branding)
Technology (Internal, External or Joint)

Financial, legal or
organizational
Product (Internal, External or Joint) 7

C o m petitio n L a w a nd P ro prieta ry
S o lutions
• C ompetition for the markets may lead to (super) dominant position that is abused
to exclude more efficient competitors from the market, ripe supra-competitive
profits and slow down technological development to the detriment of consumers

• Access to an ”essential facility”; offensive and defensive ”leveraging”

• Fourt part test of the E U C ourt in M agill/ S / icrosoft cases:
IM M
1. Indispensability of the information/ R that is refused for activity on an adjacent
IP
market
2. E limination of (all) effective competition on that market
3. R efusal prevents appearance of a new product or service or new feature for which
there is potential consumer demand
4. Lack of objective justification


C o m petitio n L a w a nd O pen I nno va tio n
• G enerally a positive view of regulators if no bottlenecks are created

• Fixing of too many parameters between competitors may be problematic

• C an forcing of dominant open source licensing terms lead to exclusion of
proprietary solutions?

• The current E U R &D block exemption (2659/ 2000 be reneved by end of 2010) is
rather restrictive by forcing a joint acess/utilization of results (except in case of
research institutes). What is the economic reasoning behind that approach and
is it still valid?


C o m petitio n L a w a nd S ta nda rdiza tio n
• S tandards create complementarity benefits and can accelerate the
dispersion of new technologies
• E limination of certain parameters of technology competition by a
group of competing firms is accepted by antitrust law because of
substantial efficiencies relative to harm, provided certain
safeguarding conditions are met
• S tandards create a a lock in to selected technologies and can lead
to market power by holders of (claimed) essential patents that can
be abused
• To ens ure benefits outweigh risk of harm; S tandardization O rganizations
typically impose specific obligations on members:
1.O bligatory ex ante disclosure of es sential patents
2.C ommitment to license on royalty-free or fair, reasonable, and non-dis criminatory
(FR AND ) terms
3.There is a more lenient view towards ex ante disclosure/ discussion of royalty
terms


D ra ft E U H o rizonta l G uidelines
• S cope of Application
• General Exemption Requirements
• P ossible E fficiencies
• How standards may limit competition
• E xamples of P rohibited R estrictions by O bject
• Assessment of the R estrictive E ffects
• Unrestricted P articipation and D ecision-making
• Transparency
• R equirements on IP R P olicies
• FR AND C ommitment
• Fair and R easonable Value of E ssential P atents
• E x Ante D isclosure of the M ost R estrictive Terms
• Inclusion of S ubstitute Technologies
• C ompeting standards vs. one standard
11 © 2008 / JL

R equirem ents on I P P o lic ies in S S O ’s
• There should be no bias in favour or against royalty free s tandards , depending on the relative benefits
of the latter compared to other alternatives (para 278)
• S S O rules mus t seek to avoid the misuse of the standardization process through hold-ups and the
charging of abus ive royalty rates by IP R holders .
• These objectives should be ens ured through rules which are binding on the members (para 280)
• This requires a clear and balanced IP R policy (para 281)
• The IP policy should require
• good faith ex ante disclos ure of those IP R s that might be essential (inc. patents and patent applications) (para
281)
• that the IP R holders make reasonable efforts to identify existing and pending essential IP R (para 281)
• S S O rules s hould not exclude or discriminate against specific groups of IP R holders (para 278).
• that all holders of essential IP R in technology which may be adopted as part of a s tandard provide an
irrevocable commitment in writing to license their IP R to all third parties on fair, reasonable and non-
discriminatory terms ("FR AND commitment") (para 283)
• That all IP R holders who provide such a commitment take all necess ary meas ures to ensure that any
undertaking to which the IP R owner transfers its IP R (including the right to license that IP R ) is bound by that
commitment (para 287)


FR A N D C om m itm ent
• The aim of FR AND commitments in the context of standard-setting is to ensure
that patented technology incorporated in a standard is accessible to the users of
that standard on fair, reasonable and non-discriminatory terms and conditions
(para 283)
• FR AND commitments are intended to prevent IP R holders from making the
implementation of a standard difficult by refusing to license or by requesting
unfair or unreasonable fees (in other words excessive fees) after the industry has
been locked-in to the standard and/ charging discriminatory royalty fees (para
or
283).
• An abuse of the market power gained by virtue of IP R being included in a
standard constitutes an infringement of Article 102 (former Article 82). (para 284)


A s s es s m ent o f FR A N D a c c o rding to the
D ra ft G uidelines
• The assessment of whether fees imposed for patents are unfair or unreasonable,
will be based on whether the fees bear a reasonable relationship to the economic
value of the patents.
• Various methods to assess
• C ost-based methods are not well adapted to this context because of the difficulty in assess ing
the cos ts attributable to the development of a particular patent or groups of patents.
• P os sible to compare the licensing fees charged by the undertaking in question for the relevant
patents in a competitive environment before the industry has been locked into the standard (ex
ante) with those charged after the industry has been locked in (ex post). This assumes that the
comparison can be made in a consistent and reliable manner.
• P os sible to obtain an independent expert asses sment of the relevant IP R portfolio's objective
quality and centrality to the standard at issue.
• It may als o be possible to rely on previous unilateral ex ante dis closures of most restrictive
licens ing terms. This also as sumes that the comparison can be made in a consistent and reliable
manner.
• These guidelines do not seek to provide an exhaustive list of appropriate
methods to assess whether the royalty fees are excessive.


E x a nte D is c lo s ure of m o s t res tric tive
term s
• To allow parties involved in the selection of a standard be fully informed not only
as to the available technical options and the associated IP R , but also as to likely
cost of that IP R , the S S O s can require, or allow, IP R holders to individually
disclose their most restrictive licensing terms , including the maximum royalty
rates they would charge, prior to the adoption of the standard.
• This will not lead to a restriction of competition as long as the rules do not allow
for the joint negotiation or discussion of licensing terms in particular royalty rates.
• S uch unilateral ex ante disclosures of most restrictive licensing terms would be
one way to enable the S S O s to take an informed decision based on the
disadvantages and advantages of different alternative technologies, not only from
a technical perspective but also from a pricing perspective.


T rue I ntero pera bility

C o m pletenes s
C omplete technical
disclosure (AP Is , protocols,
formats)

C o ntro l C os t
Fair & trans parent O pennes s Feasible licensing of
multilateral governance essential IP R (s ingly and
cumulatively)

C o m plia nc e
Adherence to specifications,
extens ions contributed to
standards

M ultivendor environment is a permanent characteristic of an open environment -
I 3 = I ndependent I ntero pera ble I m plem enta tio ns a va ila ble

C o nc lus ions
• There is no bright line test between proprietary and open business models or
closed and open innovation; most business models in practice are hybrids
• The tradiditional competition law critisism of closed, proprietary models relates to
abuse of dominance that leads to the exclusion of smaller albeit more efficient
competitors to the detriment of consumers
• The traditional competition law risk of open models relates to ”too much
cooperation” between rivals; the practical necessities of network industries have
alleviated these concerns at least to some extent
• While standardization is based (mostly) on open model, without necessary
safeguards it can lead to similar (or worse) bottlenecks than proprietary models
• New E U Horizontal guidelines expect that S tandardization O rganizations
have/enact IP R guidelines that aim to prevent abused of hold up positions and
patent ambust and contain provisions relating to assessment of FR AND
• S tandards aim to create true interoperability by coopetition of industry players


Competing while collaborating petri kuoppamäki

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