Technical standards are a necessary exception to a competitive marketplace based upon feature differentiation, but they pose risks because of the market power they confer on holders of standard-essential patents ("SEPs," which generally speaking are technically essential and must be licensed in order to implement the standard). This is particularly true when the standard is widely adopted and there are no reasonable alternatives to its use. In such circumstances, a SEP owner can use the threat of an injunction to extract supracompetitive royalties or exclude competition entirely. This "lock-in" and related market power is what distinguishes SEPs from typical "differentiating patents" that are not incorporated into a formal standard-and is what makes Section 2 of the Sherman Act a powerful and appropriate tool to regulate SEP abuse.
The basic aim of the patent system is to create strong incentives to innovate and compete through feature differentiation, leading to consumer choice and competitive markets. As part of the patent grant, owners of differentiating patents may license their patents for a royalty, or enforce their rights to exclude infringers through an injunction or an action for damages. These rights, on their own, do not confer market power on the owner of a differentiating patent. Free riders (would-be infringers) can choose to work around differentiating patents or license the patented technology if it is available. And when disputes arise and a differentiating patent holder seeks to exercise its right to exclude via an injunction, the usual eBay factors protect the parties’ interests.
By contrast, standards—which are, after all, the result of concerted action by a group of would-be competitors in a standard-setting organization—effectively end competition among differentiated solutions. They can create tremendous value by allowing competing platforms and devices to interoperate. Innovation and differentiation may migrate and expand from the standardized space to new technologies on top of or adjacent to standardized technology. But when a SEP is adopted into a standard, implementing the standard requires implementing the patented technology. This in turn confers significant market power on the patent and its holder. To deal with this problem – and to avoid antitrust liability, SSOs typically require SEP owners to promise to license to all on fair, reasonable, and non-discriminatory terms.
In patent and contract cases, courts have rejected injunctions as violations of the SEP owner’s FRAND promise. But SEP injunctions also threaten competition, by raising prices, reducing output, and undermining confidence in standard-setting. Concerns over such harms prompted the FTC to pursue two high-profile cases under Section 5 of the FTC Act, but courts and agencies also should not hesitate to employ Section 2 of the Sherman Act. Section 2 prevents the "willful acquisition or maintenance of [monopoly] power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident." Seeking injunctions on FRAND-encumbered SEPs easily satisfies that standard. The elements of Section 2 and their applicability to SEPs are discussed in more detail below.