Update on National Academies and Standardization

I went to the National Academies program on October 3 on Standardization and Intellectual Property, and served as a commenter on the presentations on standardization in the developing world – a link to the draft paper by Danny Breznitz and Michael Murphree “Shaking Grounds? Technology Standards in China” is on the National Academies website.

After reading the paper and hearing the presentations, the question that I was left pondering is: has China entered a turning point in its approach towards standardization similar to the turning point in intellectual property that some believe is already taking place.

I believe the data on intellectual property is still too early, and I am not yet convinced that a turning point in standardization is occurring.

I believe the IP turning point will occur when market forces drive innovation and protection, not one based on campaign-style  enforcement, patent subsidies, or similar management approaches. The evidence that such a change is necessary is found in data from a variety of areas, including patent data suggesting that when Chinese companies or research institutes react to market trends, they climb up the quality ladder, moving to more commercially viable rights. However, when patents are filed due to non-core commercial reasons (subsidies/quotas/recognition by the government), patent quality suffers as does commercial acceptance.

Similarly, the argument goes, when the Chinese government mandates development of indigenous standards using indigenous IP, the standard, which is not commercially incentivized, may not gain market acceptance. However the Breznitz and Murphree paper take a contrarian view by suggesting that government mandated standards also affect market driven standards by offering competitive standards that drive down market prices and thereby serve an important purpose.   However, isolating reasons for market acceptance can be extremely difficult: new technologies, costs of a work around, royalty costs, strength and remaining term of core patents, etc., can also affect the acceptance and utility of a dominant standard. Moreover, there can be huge costs imposed on companies that need to develop products to satisfy two standards: one imposed by the government, and one that is responsive to market trends.   Developing competing standards, obtaining core IP in those standards and launching competing products, as a tool of industrial policy to develop high tech competitiveness seems like a potentially risky and expensive approach to drive down the price of royalties for internationally dominant standards.

There are other points that Breznitz and Murphree make in support of their hypothesis.  For example, they take the position that restrictive foreign voting policies  in Chinese standards bodies are not as burdensome as foreign industry has suggested.  However, their report also demonstrates that such policies continue to exist.  Moreover, foreign companies may participate in Chinese standards setting despite restrictive voting practices,  for reasons unrelated to support of the standard: for example, they may already have cross licensed with their Chinese competitor, or be concerned about the risks of compulsory licensing or antitrust issues if they refuse to license, or they may recognize that damages for infringement of their rights already create an environment where their rights are not as valuable in China as in other markets and this may be their best chance at licensing their rights.  Finally, they may also have core patents that do not read on a dominant international standard, which could make the Chinese standard key to any real hope of monetizing their assets and supporting any on-going improvements in that technology.

There are other game changers in the works in China that can profoundly affect the relationship between standards and patents in China. For example, there are new rules on IP and standardization expected shortly from the Standardization Administration of China, and new draft guidelines from the State Administration of Industry and Commerce on the IP and antitrust now circulating.  Chinese companies such as Huawei and ZTE are becoming active players in international standards setting, with significant patent assets of their own to cross license.   In addition, the strong Chinese rhetoric of prior years on patents as a tool of oppression against China’s high tech industries and standards setting efforts appears to be subsiding.  All of these developments suggest that the balance between standardization as a tool of industrial policy could be changing.  Let’s see what happens….

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