06 Feb 2006  Research & Ideas

Sorting Out the Patent Craze

Some companies patent anything that moves to block innovation by competitors. But what does this mean for standard setting organizations? Professor Josh Lerner explains the challenges facing SSOs in this HBS Working Knowledge Q&A.

 

The great thing about standards, tech industry pundit Andrew Tanenbaum once said, is that there are so many to choose from.

In fact, standard setting organizations (SSOs) are the unsung heroes of the technology age. Without standards, Web browsers could not display Web sites. Cell phones from different manufacturers could not talk to one another. PCs would cost $10,000 because each company would have to design its own software, as well as craft proprietary storage, memory, and display components.

But standards do not evolve naturally. Enter SSOs, which spring up in almost every industry and include bodies as varied in scope as the Financial Accounting Standards Board on one end to the DSL Forum on the other. On the tech side, SSOs work both with technology sponsors and users to develop a set of standards for products to follow. But standard setting is often a messy business. Take, for example, the current battle over the next-generation format for DVD. Will it be Blu-ray (Sony) or HD DVD (Toshiba)? Without an accepted standard in this case, and one does not appear likely, consumers will be forced to buy one format or the other, with the losing technology becoming obsolete and its users out of luck.

Harvard Business School professor Josh Lerner and his colleagues are studying how SSOs balance the interests of users against the interest of sponsors to gain widespread acceptance of new technologies. Their paper, "Certifying New Technologies," was published in the April-May issue of the Journal of the European Economics Association. The paper addressed this central question: When does the certification provided by an SSO's endorsement sway users to adopt a standard? Lerner and coauthor Jean Tirole have also studied the broader question of how a technology sponsor selects among potential SSOs and how the final standard is shaped by the sponsor's and SSO's design.

Sara Grant: In your paper, "Certifying New Technologies," it appears that things are becoming a lot more complicated when it comes to new technologies, certification, and SSOs. Could you explain a little bit about your research in this area?

Josh Lerner: By the end of World War II, the corporate research laboratory model was widely adopted in the United States. A corporation would have a centralized facility where it would do all the research relevant to its development of new products. The need to work with other manufacturers was quite limited.

Today, the world is much more complicated. Not only are many more firms pursuing innovations in key technologies, but firms are much more willing to patent these innovations. As a result, a company's research laboratory can no longer be an island apart from other firms. They must work with other firms to develop and exploit new technologies. Because this coordination process can be quite difficult, a variety of mechanisms have sprung up to facilitate this process.

One of the major challenges for standard setting bodies is that they must be double-faced.

My work with Jean Tirole of the University of Toulouse and MIT, along with several coauthors, is seeking to understand how these organizations, such as standard setting organizations, patent pools, and open source bodies are working, and the challenges they face.

Q: What is the advantage of SSOs for users? For tech companies?

A: The key advantage is that it allows them to coordinate with other firms in a way that might be very difficult if they had to negotiate individual deals on a one-by-one basis. For instance, if ten firms had patents in a key area, they might begin negotiating among themselves to develop a new standard. Without a standard setting body—and the commitments to patent disclosure and licensing—the firms might be tempted to behave in an opportunistic manner: going along with the negotiations until the others had committed to a technology, and then pulling out and demanding large royalties on their patent. Standard setting bodies can limit these "opportunism" problems.

Q: You discuss a couple of interesting issues with regard to SSOs: "Real authority" and "Sponsor strategy and standard design"—both affecting the outcome for users and owners of new technologies. How do SSOs balance these two groups and remain objective?

A: One of the major challenges for standard setting bodies is that they must be double-faced. On the one hand, the companies who have the technology and are bringing it to the standard setting body are an important audience: If they don't feel satisfied with the body, there are typically many hundreds of other standard setting bodies they can bring the technology to.

On the other hand, standard setting bodies must be sensitive to the needs of the end-users who will be adopting the technology. If the body adopts really one-sided rules that end-users object to, they are unlikely to be interested in adopting the standard.

Q: You mention "multiple self-fulfilling expectations" and SSOs. What exactly is meant by this?

A: One of the interesting aspects of standard setting bodies is that they are only likely to be as successful as people expect them to be. That is, if people expect a standard setting body to be effective in establishing a standard, they are much more likely to make serious commitments to the standardization process. If, on the other hand, they are initially skeptical about the group, success is unlikely. This suggests how important it is for companies seeking to build standards around their technologies to find credible standard setting bodies with well thought through policies to work with.

Q: What are some of the challenges facing SSOs today?

A: One of the biggest challenges has been the unwillingness of the courts to sanction firms that manipulate the standard setting process for their own ends, thereby degrading the effectiveness of the process for everyone.

One such case is that of Rambus. Rambus is a small company that designs—but doesn't manufacture—computer memory systems. It makes money by licensing its patented designs to other companies, who manufacture computer memory and sell it to computer makers. Over the course of the 1990s, however, Rambus engaged in an extended campaign to abuse the patent system and essentially extort licensing royalties from memory manufacturers. The basis of this campaign—which a trial judge eventually described as "employing a combination of blitzkrieg and Sherman-esque tactics"—was a single patent application filed in 1990. As is increasingly common, the PTO permitted Rambus to file many "divisional applications" derived from this original 1990 application, in which aspects of the original application were put forward as inventions in their own right. Over the course of the next decade, the PTO granted at least fifteen separate patents based on this 1990 application.

This process of filing divisional applications is intended to shape the patents and claims that are ultimately granted so as to fit the invention or inventions that have been made into the appropriate legal form. But the opportunity to file divisional applications is also used strategically by patent applicants, because it allows the applicant to shape its patents to evolving circumstances while retaining the priority date associated with the original application. In Rambus' case, as late as 1999 it was modifying its patent claims to try to ensure that they covered new generations of memory chips. But the 1990 priority date, retained from the original application, meant that the novelty of these claims was evaluated relative to the "prior art" of a decade earlier. In a rapidly evolving field such as semiconductors, this gave Rambus a huge advantage.

Two important features of the computer memory industry are that many different companies manufacture both memory and computers, and that computer makers and consumers benefit greatly if memory made by different companies is interchangeable. This requires that memory chips be designed consistent with industry "standards," which are technical specifications that ensure that memory made by any company, so long as it meets the standard, will work as expected in any computer design. To this end, the Electronic Industries Association established a Joint Electron Devices Engineering Council (JEDEC), a voluntary association of memory and computer companies to establish such standards for semiconductor devices. Because interchangeability is so important, most memory products are made to be consistent with the relevant standard. This means that any company that has a patent that covers technology required by such a standard is in a very strong position—it can insist on royalties from the entire industry. For this reason, standard setting groups like JEDEC are very sensitive to the existence of patents that might cover technology incorporated into a standard. Further, they would like to know about patent applications that cover technology that might be incorporated in the standard, because otherwise they might establish a standard, move the entire industry toward using that design, and then find that a patent is granted that allows someone to hold the entire industry hostage.

In the early 1990s, when the standards for SDRAM chips were being discussed at JEDEC, Rambus was a member of the organization. The JEDEC committee working on standards for DRAM knew that one patent from the 1990 application had been issued. But Rambus did not disclose to the committee that it had additional divisional applications pending. Worse, unbeknownst to the other members of JEDEC, Rambus was crafting yet more applications (still retaining the 1990 priority date) in which it attempted to cover the features of the JEDEC SDRAM standard as that standard was being discussed at committee meetings attended by Rambus representatives.

Ultimately, however, the centralized appellate court for patent cases in the U.S., the Court of Appeals for the Federal Circuit, decided that Rambus' behavior was acceptable. In effect, the appeals court did not dispute that Rambus tried to commit fraud, but ruled that they didn't succeed: Despite Rambus' best efforts to craft their patent claims around the elements of the standard, it was, in the court's judgment, possible to comply with the standard without infringing any of the Rambus patents. And the court ruled that, as a legal matter, there could be no fraud in this case because the JEDEC policy only required disclosure of patent applications on inventions necessary for the standard. Rambus was thus free to sue—and demand huge settlements from—rivals who took part in the JEDEC's standard setting process in good faith.

Q: What are you working on next in this area?

A: One of the fascinating challenges today is in the life sciences. In many areas related to biotechnology, there are conflicting patents covering areas such as the tools necessary to do research. Yet there is far less of a tradition of using mechanisms such as standard setting bodies and patent pools to solve these problems in the life sciences. We hope to better understand whether and how this industry can address these problems.

About the author

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School. He is the author, with HBS professor Paul A. Gompers, of The Money of Invention.