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March 1994 issue of The Computer Lawyer: "Forming and Representing High-Technology Consortia: Legal and Strategic Issues"

Andrew Updegrove

The following article first appeared in the March, 1994 issue of The Computer Lawyer, and is copyrighted by that journal

Standard setting bodies have a long and important history in this country. Since the middle of the last century, interest groups ranging from producers and resellers to consumers and scientists have joined forces to set standards. 2 These groups have promoted everything from safety and quality standards to manufactured part specifications, the latter permitting the evolution of mass production techniques and cheaper goods. 3Throughout this history, the founding and activities of standards organizations have often also been motivated by proprietary and strategic considerations of individual players. In the rapidly changing world of high technology today, these motivations have been accentuated, and the formation of standard setting consortia has increasingly been seized upon as a means of seeking proprietary advantage for one or another promoter or manufacturer of a microprocessor, operating system, or other technological cornerstone necessary for the operation or sale of other products. 4

Due to the insights that these new consortia provide into the high stakes wars that have been fought in the high technology industry in recent years, it is interesting to look back today to reflect on what these entities set out to achieve, and to what degree they were successful. In the course of doing so, this article will offer some observations on how (and when) consortia of various types are best formed, and focus on the structural and legal factors which should be addressed in structuring and operating a successful consortium.

Standards and Standard Setters. Besides governmental agencies, standards in the United States have traditionally been developed by various types of groups, including trade associations, professional societies, general membership organizations and third party certifiers (currently, some 400 in all). 5 Those standards which are set by "official" organizations, such as the American National Standards Institute ("ANSI"), are referred to as de jurestandards, and are often granted the greatest recognition. De jurestandards are set through the development of voluntary, broad-based consensus by well-established organizations following characteristically detailed and formal procedures. At the opposite end of the spectrum are those product standards, no less influential, which have been established by shear market power or other dynamic forces by one or by a very small number of commercial vendors (e.g., the DOS operating system, the Microsoft Windows environment and the VCR video formats). In the middle lie those other variously formal and informal (and quite numerous) alliances of companies which set the " de facto " technical standards which are the primary focus of this article.

So many high technology industry associations of this type were formed in 1988 that a number of commentators dubbed it "The Year of the Consortium". Most often, these organizations were formed as a species of marketing partnership in response to intense competition among the largest computer companies, each jockeying to dominate (or at least maintain their position) in volatile market segments, such as the Unix-based workstation market. Despite such overtly commercial purposes, these organizations frequently found that the development of de factostandards and specifications provided a crucial method for seeking to achieve their ends.

Although the pace of formation of such organizations has abated somewhat in recent years, many of these organizations and the specifications created by them live on and continue to be maintained. Often these standards incorporate de jure standards (e.g., the X Window System used by Unix users incorporates certain standards developed by the Institute of Electrical and Electronics Engineers, Inc., or "IEEE"), and in some cases, de jure standards bodies accept de facto standards or link to them, such as Object Management Group's widely recognized Common Object Request Broker ("CORBA") specification. Finally, organizations like X/Open seek to develop environments, using a mix of de jure and widely supported de facto standards.

Continuing the give and take among such organizations, a de jure organization may opt not to develop a competing specification, if it is satisfied that the de facto organization is providing a useful standard. As a result, a de facto standard setting organization is effectively permitted to control an important area of technology. On the other hand, the endorsement or incorporation by de facto bodies of de jure standards augments the effectiveness of the latter standards.

WHY FORM A CONSORTIUM?

Consortia are to a degree merely old wine in new bottles. Trade associations among competitors have been formed for many years to promote the interests of their members, and in the building trades (for example) this promotion has often involved influencing the development and promotion of building standards for local adoption, thereby benefiting the membership. However, these associations also frequently engaged in lobbying and other activities primarily intended to protect the membership's business and market their collective wares. In the era of high technology, this traditional role has not been entirely abandoned. However, most often new organizations have been formed to set standards, leaving traditional trade association activities to other, independent combinations of competitors. For example, a new trade association is being formed to promote the Unix environment's X Window System technology, simultaneously with and independent from the spinning out from MIT of a new organization, The X Consortium, which will continue the development of the standard itself outside of MIT.

Of greater interest than traditional trade associations are the following new types of consortia, many of which have had the development of standards or the development of new technology as their primary focus, albeit for varying degrees of strategic purpose:

Research Consortia. A number of high-profile consortia (such as SemaTech and MCC, the Microelectronics and Computer Technology Corporation) have been formed largely as a result of heightened national pro-competitive concerns. Some have succeeded, some have failed to coalesce, and some have wandered from their original purposes as they have sought to sustain themselves. In some cases the concerns (e.g., national paranoia over loss of dominance in DRAM chip production) which helped launch the enterprises have already abated to a degree, and smaller groupings of companies (sometimes including Japanese or European partners) have since entered into joint ventures to produce specific products without the high profile, high budget, highly political trappings of their predecessors.

Specification Groups. Groups such as VXIbus Consortium ("VXI") and the MIDI Manufacturers Association ("MMA") are primarily concerned with assuring the development of a usable, robust standard for the benefit of the industry generally. Essentially apolitical, they direct the greatest part of their efforts to evolving and supporting a standard, and have low budgets in consequence. Where they work best, they successfully avoid proprietary influences and pressures and implement the best technological methods to produce sensible, practically implemented standards. While many such groups are formed and funded by vendors, some (such as the CAD Framework Initiative) were formed through the efforts of end-users, in order to lower acquisition costs of tools or other products which would otherwise be based on proprietary, non-interoperable technologies. Such groups are often formed to develop a standard to fill an important niche industry technical gap which is not large enough to merit the attention of a recognized standard setting body like IEEE (for example MMA was formed to provide an essential interface standard so that the electronic music industry could develop in an accelerated and orderly fashion).

Strategic Consortia. For purposes of this discussion, "strategic consortia" are deemed to be consortia initially formed and funded by a limited number of companies for their individual benefit in order to promote the adoption of certain technology (such as a chip architecture) as "open" technology. The primary mechanism of many such consortia for seeking to achieve this end has been the development and promotion of some type of standard, the efficacy (as compared to the marketing) of which has varied widely in practice.

Perhaps the greatest and most interesting flowering of consortia of this type has occurred in the Unix marketplace, relating not only to the operating system itself (e.g., Unix International and The Open Software Foundation, or "OSF"), but with respect to chip architectures (e.g., 88open - formed to promote the Motorola 88000 microprocessor; the Advanced Computing Environment consortium, or "ACE", which was based on a MIPS microprocessor; and SPARC International, a Sun Microsystems sponsored group, promoting the Sun-designed SPARC) and software environments (The X Consortium) as well. These consortia commonly were formed with one or more of the following specific characteristics and objectives:

  • they were usually formed by hardware vendors or chip manufacturer's seeking marketshare, either by attempting to control (or avoid a competitor's controlling) the evolution of Unix or by seeking to foster rapid porting of massive amounts of software to a specific chip environment in order to foster the adoption of that chip by as many computer manufacturers as possible.
  • they employed "hard" marketing tactics, such as avoiding the adoption of the proprietary standards promoted by other vendors. Prominent examples of such efforts include the virtually overnight industry adoption of the MIT X Window System standard to parry the threatened spreading of Sun Microsystem's NeWS technology, and the formation of the massively funded OSF to counter the perceived benefit which the industry feared Sun might reap from AT&T's ownership of Unix, following AT&T's purchase of a significant block of Sun stock (later sold). The latter example demonstrates the parlous life cycle of a consortium: AT&T eventually conveyed Unix to Unix Systems Labs and formed another consortium, Unix International, to more publicly control and promote the operating system. Most recently, USL was acquired by Novell (which has now made the "Unix" trademark widely available), and OSF - with a budget in the tens of millions of dollars and license fee income popularly assumed to cover less than half that amount - is today engaged in a process of self-examination to determine what its long-term mission should now be.
  • they employed "soft" marketing tactics, such as claiming: the development of standards (accurately or otherwise), the existence of large amounts of software embodying those standards (accurately or otherwise), and the achievement of real interoperability and open systems status (accurately or otherwise).

In some cases, consortia have had roots of one type and have grown branches of another: The X Consortium, as noted, was formally born in 1988 out of concern over a Sun Microsystems software product initiative. The technology itself had been under development within MIT since 1984, and the industry began adopting it as a standard in 1987. The organization and the standard then enjoyed over five years of comparatively ecumenical existence dedicated to the continued evolution of a usable standard. Today, as this consortium leaves its home at MIT to become an independent entity, the imminent release of Windows NT (announced by Bill Gates of Microsoft as the "Unix killer") gives new significance to this organization as a vehicle for collectively asserting and promoting the continued vitality of Unix and the X Window System standard.

Similarly, Object Management Group ("OMG") was founded to develop a family of standards to facilitate the adoption of object oriented programming ("OOP") methods and products. Today, the organization has broadened into a wide range of activities dedicated to nurturing and promoting the fledgling OOP industry, including the development of major annual tradeshows in six countries and four continents, development of training sessions and publishing ventures, and evolution of innovative joint marketing and electronic distribution projects. At the same time, OMG has been successful in becoming recognized as the preferred source of many types of specifications for the OOP industry, and therefore the focal point for industry efforts in this area.

A hallmark of the success of several consortia has been their good fortune in being "ahead of the curve"; in OMG's case, by seeking to establish a standard before any significant company had obtained a vested interest in promoting its own proprietary technology for adoption as a standard. As a result, the industry could follow OMG's lead, and cooperate to achieve the best technical result for mutual, rather than individual, benefit.

Unfortunately, the reverse has also been true. 88open, the first RISC chip consortium, was brilliantly successful on the technical level, achieving the highest degree of true interoperability of any of the competing organizations. Nevertheless, its technical success was insufficient to overcome certain other handicaps, such as the fact that the chip technology upon which it was based was introduced too late into the marketplace to achieve the momentum of adoption from which it otherwise might have benefited. The new PowerOpen Consortium (styled in many ways on the earlier 88open Consortium) is virtually assured of avoiding this fate, since both IBM and Apple (among others) have already announced on the PowerPC series RISC chips being designed and produced by Motorola, and the sales momentum which those companies represent should be more than sufficient to ensure speedy and efficient porting of massive amounts of software in short order.

The success of a consortium tends to correlate strongly and inversely to the degree of proprietary advantage which its founders sought to gain. This results from a variety of factors: not only do there tend to be more losers than winners in industries dominated by a small number of large players, but the word "standard", even when stretched to the limit of anyone's most liberal commercial definition (e.g, VCR formats, or PC operating systems), cannot usually accommodate more than a few instantiations on a long term basis in the same market niche. Again, many strategic consortia were formed as much for publicity as for definitive purposes, or were announced before a clear plan of action had been evolved, or fell apart as the strategic sands upon which they were based continued to shift (e.g., the ACE Consortium, which suffered from other problems as well). Finally, strategic consortia are more likely to be formed by companies which perceive that they are already at a disadvantage, and the odds are therefore often against success from the beginning.

Similarly, the success of consortia correlates highly and directly to the absence of perceived proprietary advantage to any individual company (e.g., VXI, discussed above, or OMG, which was formed long before any significant number of object oriented products were available, or even in the design phase) or, in some cases, with a very high degree of agreement among a critical mass of companies as to the existence of a common enemy (e.g., the wholesale and rapid adoption of the X Window System Standard in response to Sun).

HOW TO FORM A CONSORTIUM

A successful consortium must carefully address a number of structural issues in order to succeed. The approach to these issues will vary for a given organization depending on the goals, competitive position and other unique features of the particular group of companies involved.

Legal Structure. Although a consortium can be formed as a partnership or under a less formal contractual arrangement, various factors almost invariably recommend a corporate structure as soon as membership is contemplated to expand beyond a small number of participants. Those factors include limitation of liability concerns, ease of entry and exit, ensuring current deductibility of fees, and availability of detailed corporate statutes (as compared to less extensively defined partnership laws) to define the rights and liabilities of the participants, among others.

When this firm first began representing consortia, we performed a wide examination of variations on the corporate form under the laws of various jurisdictions, and settled eventually on the Delaware not-for-profit, non-stock membership corporation, which (unlike the non-stock statutes of many States) is broadly available to all types of organizations. This structure permits members to join and leave with ease, avoids securities law concerns, provides members (and their counsel) with a convenient and familiar body of corporate law to refer to, and provides a unique degree of flexibility of operation. Most of the largest East Coast-based consortia are now formed on this model, while many consortia formed on the West Coast use a similar format under California law. This structure has stood up extremely well in practice. A single draw-back is the almost total absence of case law or commentary on the non-stock sections of the Corporation Law. However, since the differences from the general Delaware statute are to be found in only a handful of provisions in the statute, there is still ample guidance on other matters.

One important feature of the Delaware statute is that virtually all authority can be sequestered in the board of directors, which becomes the "governing body" under Delaware law. As membership rises, this provision becomes increasingly important, particularly since consortia frequently have no need for regular in-person meetings where corporate governance votes can be taken. Even more significant in this regard is one particular divergence from general Delaware corporate law: Section 141(j) of the Delaware Corporation Law briefly and provocatively provides in relevant part that the Certificate of Incorporation of a non-stock corporation may:

"...provide that less than one-third of the members of the governing body may constitute a quorum thereof and may otherwise provide that the business and affairs of the corporation shall be managed in a manner different from that provided by this section . . . ." [emphasis added]

As the section in question regulates such basic corporate matters as the setting of quora, the means by which meetings may be held and the setting of rights to elect directors, these few words open the door (at least arguably) to a host of more flexible practices of great importance to large consortia, such as fax voting, designation of substitute directors, the taking of director actions by majority written consent, and e-mail voting, depending on the interpretive courage of the consortium's counsel.

Funding Issues. Frequently, the first reality to confront in structuring a consortium is economic. Where goals are ambitious, such as the mounting of certification as well as standards development programs, funding needs can be extreme and can only be satisfied either by enrolling very large memberships (e.g., The X Consortium, or OMG), or by requiring very large contributions from individual members (e.g., OSF and PowerOpen). Typically, large budget consortia have been strategic consortia, with proprietary vendors (i.e., computer or chip manufacturers) contributing the lion's share of funding. Where funding is of this magnitude, it is especially important that the organization be legally structured in such a way as to ensure that funds contributed are currently deductible, and not regarded as capital contributions.

A second economic concern is to ensure that those companies become members whose participation is essential in order to achieve success. Accordingly, a consortium's dues structure is commonly reflective of this concern, with some classes of members often bearing a disproportionate contribution obligation. The motivation of certain types of members to take up this burden is to increase the likelihood of those members later reaping a disproportionately high economic benefit in the marketplace. For example, while sponsor level membership in PowerOpen (a significant goal of which is to foster rapid porting of software to the PowerPC environment) requires $250,000 in annual dues and initiation fees of $750,000, software product developers ("independent software vendors", or ""ISVs" in industry parlance) may participate at a limited level for only $100 a year.

Conversely (as discussed in greater detail below under "Governance"), all types of consortia are likely to maximize revenue income by offering various levels of membership, with higher dues being required of those levels of membership which receive early access to technology and other benefits. Many consortia also charge different rates for companies with different revenue levels, in order to permit smaller companies to participate (or in order to charge more to their larger members, depending on your point of view).

Large budget consortia suffer from a number of diseases peculiar to the species, one of which may be described as the "cliff syndrome". Simply put, the larger the budget, the greater the likelihood that the organization will hurtle at full budget speed off a cliff of its own making and into oblivion. This syndrome is particularly prevalent among strategic consortia. The origin of the problem is that such consortia are typically formed to achieve a specific grand objective, at great expense. While this objective remains the focus of the dues paying members, little attention is given to whether their collective investment in the consortium merits the development of any long term goals as well.

Often, in fact, it does not, and the consortium should be promptly and efficiently wound down when the grand design has been achieved or failed. However, in other cases, such organizations could have useful long term lives as user groups, providers of certification services and the like. Unfortunately, when the major objective has either been realized or abandoned - or marketplace or technology shifts have made the objective irrelevant - it is often too late to downsize the organization to a sustainable level, since the original strategic proponents are then no longer interested in providing the funding necessary to transition the organization to fulfill more humble objectives. Those organizations which successfully make the transition are those which have used their high-profile years to quietly backfill their budgets with income and services by establishing more humble activities, such as publishing and joint marketing programs.

The most stable and longest-lived consortia are therefore those which require "modest" annual fees (modest being defined for such purposes as being on the order of $5,000 for a company with under $10 million in sales, and up to $50,000 for companies with sales of over $500 million). In this case, members tend not to send upper-level management to meetings or to examine the benefits received as aggressively or frequently. In consequence, management of the consortium can usually take a more aggressive part in the steering of the organization. Human nature being what it is, the direction of that guidance will usually be towards building a long-term, expanding organization.

Where this process works best, innovative executive directors roll out new programs on a regular basis to keep members happy and renewing. Where the process doesn't work, the organization rightfully withers and dies.

Technological Development. Standard setting consortia develop various types of technology and intellectual property, including not only specifications and standards, but working examples of specifications and software test suites as well (used for determining conformance to standards or achievement of interoperability with other conformant software and/or hardware). There are numerous models for developing technology and intellectual property, each with its own advantages. The spectrum of methods runs from the very expensive method of total in-house development (88open designed and built almost all of its own test suites), through use of contract parties (such as UniSoft or ApTest, an 88open spin-off company) and contributed employees (used by CAD Framework Initiative), to employment of an RFT ("request for technology") process (the OSF and OMG model). Other consortia, such as The X Consortium, use a mix of techniques, including reliance on member labor externally, internal development staff and acceptance of member contributions of technology.

Comparing the principal advantages and disadvantages of these methods, the following features stand out:

À in-house development by the Consortium's own employees can maximize control and planning and minimize time to completion, but requires the highest levels of funding. It also eases the job of legal counsel in protecting and auditing intellectual property rights. However, if "loaned" member employees are used, they can be hard to motivate, may be preoccupied with what is going on at the home office (if they are on site at the consortium), and are often not given ample time or credit by their employers to properly complete their assigned consortium tasks. The Consortium must also insist on a waiver of any preexisting inventions agreement which may be in force between the loaned employee and his or her employer; otherwise, resulting Consortium technology may be riddled by the ownership rights of third parties.

À Issuing an RFT can reap a rich offering of responses, but working through to a final acceptance can be a laborious and sometimes tendentious process to operate and administer. It also requires the most scrupulous legal scrutiny to avoid anti-trust problems, and often invites spirited pushing and shoving among members (in one instance, our firm found it necessary to recommend that we open sealed ballots on a final technical decision in secret, and announce only the final tally, in order to free smaller members from concerns over possible retribution from one or more powerful vendors who had broadly hinted that a vote against their submission could reap adverse consequences). Again, if the technology of others is accepted and incorporated into standards or actual software, clear agreements must be entered into specifying ownership of the original work and any derivative works, rights of use, required notices, any duties or rights of enforcement against infringement, exclusion of warranties and the like (see "Technology Ownership", below).

Governance. As with any other corporation, the important rules of governance should be crafted into the by-laws and charter, and particularly the former. A few important rules may come to rest in a membership application (e.g., a consent to receipt of notice by the Consortium under any filing under the National Cooperative Research and Production Act, an agreement to abide by the by-laws and charter, and an explicit agreement to pay fees while a member), but the prevailing practice, in order to facilitate member sign-ups, is to keep the application very brief and to the point (read: not needing to end up in the legal department for review).

Unlike the traditional for-profit corporation, by-law provisions will vary widely, depending on the goals and intentions of the organization. As a result, assisting the client in drafting a set of by-laws which will nurture and not restrict the evolution of the organization is one of the most crucial roles of the attorney in helping set up a consortium. Whether or not the by-laws are carefully conceived will determine whether the organization is easily managed, whether it incurs needless exposure under the antitrust laws, whether its members feel themselves fairly represented and therefore renew their membership, and whether or not the organization is sufficiently flexible to evolve and flourish.

A not insignificant challenge in drafting consortia by-laws is to craft a document which will pass muster with the legal counsel of many of the largest high-technology companies in the world. Since making changes to accommodate one company may result in amendments which other counsel may object to, there is always the dangerous prospect of an endless and expensive round of amendments which never lead to consensus. As a result, we have kept careful track of the "must have" provisions of various key industry players over the years to evolve a set of standard by-laws which we use as a starting point. Although this model must be tailored (often extensively) for each new client, we are careful to preserve those anti-trust, intellectual property and other more standardized provisions which we have learned from experience represent the base requirements of the most frequent sponsoring members. As a result, a simple assurance to legal counsel of a prospective member of a new consortium that the by-laws are carefully based on those of several other consortia of which the counsel's client is already a member will often save significant time and trouble for both sides.

A crucial factor in reaching a stable and sustaining organization is determining the appropriate method of representing members on the Board of Directors. Organizations which we have represented have developed a variety of radically different formulae (sometimes several divergent methods have been adopted by the same organization at different points in its evolution) which have worked. These have included avowedly economic models (those who pay the highest dues get most or all of the Board seats), arbitrary solutions (the first members to join receive the seats, while later members may stand in line for a turn-over opportunity), as well as models which place a premium on democratic values (seats are allocated to types of members - ISVs, hardware manufacturers and academics, in order to ensure that all interest groups are heard from) or upon preserving the appearance as well as the reality of neutrality (e.g., only non-affiliates of members can become directors, to ensure that the standards adopted are "pure").

Most (but not all) consortia have different categories of membership, with differing classes having different rights. These rights may include voting for (or the right to nominate) directors, the right to participate in technical or other committees, early access to technology or standards, and reduced (or free) access to standards, certification or other services (all of which can be permitted, within reasonable bounds and subject to certain constraints, without creating anti-trust exposure). In some cases, access to such rights is deliberately conditioned on paying higher dues, in order to boost funding levels. In all cases, setting the benefits appropriately in relation to the dues is essential in order for the enterprise to succeed, and some trial and error is sometimes engaged in before the appropriate formula is found by a given organization. Similarly, periodic readjustments are often necessary to keep member satisfaction at acceptable levels; many consortia have gone through periods of declining membership before realizing that recalibration of dues and services was necessary.

Typically, the actual activities of consortia are implemented by technical committees, work groups, and special interest groups, as well as by non-technical governing bodies, such as business, audit and executive committees. It is important that these groups have written rules of operation (and follow them!) in order to ensure compliance with anti-trust requirements.

Tax Issues. Many consortia elect to operate as tax-exempt trade associations under Section 501(c)(6) of the Internal Revenue Code. A few also qualify as public charities under Section 501(c)(3), which offers more advantages (e.g., less expensive postage, and deductibility of fees by individual members), but results in more restrictions at the State and Federal level. As a tax exempt trade association, most of the activities of consortia may be carried on without payment of income taxes on dues or related income. However, a number of activities (such as the inclusion of paid advertising in consortium publications) are deemed by the IRS to stand outside the tax exempt purposes of the organization, and to constitute "unrelated business taxable income". The income from these activities is taxable, and if too great a level of this type of income develops, it may endanger the tax-exempt status of the entire consortium. Accordingly, if it is important for the consortium to engage in taxable activities, it is often advisable to carry on these functions through a separate corporation (which can be owned by the tax-exempt parent, but not controlled at the Board level by a majority of directors who are officers, directors or employees of the parent). Fortunately, many common consortium fee-generating activities, such as certification testing and standards publishing, will usually be deemed to be related to the purpose of the consortium and thus fall within tax exempt parameters.

Although tax avoidance (as compared to tax evasion) is a legal and hallowed part of the American psyche, it is important for those forming a consortium to remember that tax avoidance was not their primary purpose for forming the organization to begin with. Where a consortium has an admittedly strong proprietary purpose identified with one or a small number of members, that purpose or affiliation will usually make obtaining tax exempt status difficult or impossible without crippling the purposes of the organization. Similarly, where an organization intends to embark upon many taxable activities anyway, the amount of tax structuring which may be necessary to avoid taxation of other activities can rise to a level of artificiality and inconvenience which ultimately outweighs the benefit of carrying on its other activities on a tax-exempt basis. Finally, it should be noted that we are aware of a few consortia which appeared quite eligible for 501(c)(6) qualification which have been denied that status by the Internal Revenue Service, for no convincing reason.

In balance, where an organization is a true standards setting organization, seeking tax exempt status will usually be well worthwhile. Where the purpose is proprietary or the plans complex, it sometimes proves to be better to forgo filing, or to later abandon tax exempt status, if this can be accomplished without adverse consequences. Where tax exempt status is not sought or is surrendered, taxes may be minimized or eliminated by managing the budget as closely as possible to a break-even point annually. To minimize the uncertainty of operating a business which cannot conveniently retain capital, some consortia secure multi-year member commitments to facilitate long-term planning relating to issues such as hiring of management and entering into leases (OSF's multimillion dollar, multi-year commitments - recently renewed by many original members - continue to lead the pack in this regard). Obviously, long-term issues are most problematic for the "cliff syndrome" consortia mentioned above, and least troublesome for stable, large member base consortia with smaller annual dues, such as OMG, which is now the world's largest software consortium with over 370 members.

Antitrust Issues. By definition, consortia are combinations of competitors. As such, they must operate with careful regard to the federal and state laws which they are subject to, as well as to the threat of treble damages suits from private parties. Further, there is the possibility of criminal liability for individuals and corporations found to have violated these laws. As this area of law is complex, the following is but a brief and superficial review of only a few relevant antitrust issues.

Most consortia can safely operate by being mindful of a limited number of rules which are, on reflection, logical and obvious. These rules include not operating in a manner which might shut nonmembers out of the marketplace, not excluding otherwise eligible companies from membership, and not trading price information or seeking to set or influence prices. However, at times, consortia seek to carry out new practices for which there are no (or only poorly analogous) precedents, and careful analysis must then be undertaken to ensure that risks are not inadvertently taken. Nevertheless, companies may safely become members of consortia without fear of adverse judgments if those consortia are prudently managed and legally monitored.

Happily, standard setting is presumptively deemed to be an appropriate activity for joint activity. Engaging in certification services, while less explicitly favored, may be carried on so long as proper controls are established to ensure non-discriminatory pricing and access to testing. As a generality, non-members may be charged higher fees for certification testing and other services and products than members, so long as there is a rational relation between dues already paid by members and expended on the establishment of the services or products in question.

One method of minimizing risk under the antitrust laws is for the consortium to seek registration under the recently amended National Cooperative Research Act of 1984. Under that Act, certain types of activities (such as, arguably, the development of standards) are protected from the risk of treble damages and liability for a plaintiff's attorneys' fees. In June of 1993, an expansion of the activities which the Act covers was signed into law, and it was renamed the National Cooperative Research and Production Act of 1993. Although the Act still does not cover all types of activities in which a consortium is likely to engage, it will protect those activities which fall within its ambit. However, public disclosure of members is required, and this is not always acceptable for a strategic consortium where members may not yet have announced their commitment to a given proprietary technology; in such a case, the ability of their competitors to discover their strategic direction as a result of their membership in the consortium may outweigh the benefits of registration under the Act.

As with many pieces of legislation, there are a number of inartfully, or politically influenced, aspects to this Act which make it difficult to tell whether liability may be eliminated in a given situation or for a given member. For example, the ability of some non-US members of a consortium to take advantage of certain aspects of the Act's protection will probably be impossible to reliably determine. Further detracting from the utility of the Act is the fact that there has thus far been little or no decided litigation interpreting the Act (although we are aware of one suit in progress challenging the validity of a registration under the Act), and a recent request by this firm for a letter ruling interpreting one provision of the Act has just been declined. Contrary to earlier oral advice, the written reply averred without explanation that letter ruling guidance is unavailable under the Act.

Finally, it is worth noting that there is no guarantee that the predominantly laissez-faire antitrust policies of the last two administrations will continue (in fact, the Clinton administration has already indicated that at least some stiffening of enforcement may be expected). Even under the Bush administration, OSF and Microsoft were the subjects of federal antitrust investigations, and it was rumored that the government agency in question also undertook a more broad investigation of high-technology consortia generally (thus far without public result). Although pro-competitive activities will presumably continue to receive at least some measure of government sympathy, if not outright legislative encouragement, the potential activities of private litigants (such as competitors) should not be forgotten: OSF was sued by private parties concurrently with the commencement of the government investigation, and it is likely that the government inquiry was inspired by private party complaints.

For these reasons, every consortium should have an active program of antitrust oversight, such as the distribution of appropriate educational memoranda to officers, directors and members and, where the budget permits, attendance of counsel at director meetings. (See "Ongoing Legal Review", below.) Consortia should also investigate the obtaining of directors and officers insurance which, in contrast to profit-making company rates, may often be obtained for under $5,000 per year, including coverage for some types of anti-trust liability.

Technology Ownership. Consortia may or may not plan on developing technology when they are formed, but they often nevertheless find themselves creating intellectual property as they evolve. Since members may come and go, and the organization itself may at some point dissolve, careful consideration must be given to the current and eventual ownership of technology.

A related issue arises where consortia make use of contributed employees, as noted above. Usually, those employees will be subject to agreements with their employers which provide that all inventions and other developments created by them will belong to the employer. Similarly, many consortia permit the contribution of technology which becomes part of a specification, a standard or an implementation of a standard, which is then made freely available to the world. In situations where technology is developed over time as a result of the contributions of many individuals and corporate members, unscrambling the ownership of that technology and the ultimate liability for any error or infringement can become nightmarish.

To give one example of how complicated such matters can become, the X Window System Standard was initially developed within MIT by MIT staff, and then supported by industry financial contributions. Member (and other) technical contributions were then often accepted, modified, and incorporated into the standard (although actual ownership of the technology contributed was not necessarily transferred), at the same time that further technology was being developed within The X Consortium (still by MIT staff). Since certain software representing the standard is licensed by the Consortium to the world at large at a minimal fee, actual code is thus released to commercial users, who then incorporate it into their products. The software distributed by the Consortium also includes third party commercial software (such as fonts), which is similarly distributed and reused. To complete this complex picture, MIT is now transferring its ownership rights to the new, independent X Consortium, which has recently been formed.

Where the espoused goal of a consortium is to develop and support an open, non-proprietary standard, any actual clouds on ownership and control are much to be avoided, even if developmental convolutions like those described above may prove to be inevitable. As a result, every consortium should institute a careful program of technology procurement, documentation, protection and labeling, as well as the inclusion of conclusive warranty disclaimers. Usually, such disclaimers can be very broad, since typically technology is made available on a no-cost or very low-cost basis. Unfortunately, implementing some elements of such a program can at times be tedious, as individual member companies and their counsel must be convinced as to the importance of ownership issues in the consortium context and the reasons why members should be expected to vary from standard, and otherwise prudent, internal practices. Anyone who has ever seen an X/Open agreement will have noted the unfamiliarly broad disclaimers which that non-profit organization has been able to include in its agreements of all types. In fact, many X/Open agreements require the licensee to indemnify X/Open for many types of claims which the licensor typically stands behind instead.

A consortium must also decide whether or not to throw its standards into the public domain, or copyright them and make them freely available. Usually, the latter is the better course, since it permits the consortium to maintain better control of the standard.

Trademark Protection. To truly control standards, a rigorous program to select, register and maintain trademarks is often advisable. Where certification is intended, trademark registration is even more important. Trademark practice, as it applies to certification, is an unusually arcane and complex area of intellectual property law, due in part to the comparatively small number of consortia and other entities which have conducted activities in this area over the years. As such, a detailed review is beyond the scope of this brief article. However, the following should be noted by anyone otherwise tempted to dabble in this area: the choices of registration by a consortium range from the classic product trademark (relating, for example, to a specification), through service marks (relating perhaps to advisory services) to collective membership marks (relating to use of the mark to indicate membership in the consortium) and certification marks (relating to actual certified products). To some extent, there are alternative methods within this spectrum for registering a mark which is to be used in a given way, with differing advantages and strategic justifications. As a result, two consortia engaging in basically the same types of activities may elect to use a different avenue of protection of marks which are in fact being used in much the same way.

Whatever strategy for trademarks and certification marks is selected, the consortium's use of the mark in its literature and contracts and in its certification program, must be conducted in strict adherence with applicable trademark regulations and practices. Failure to comply can result in loss of rights in the mark. A consortium must also consider whether or not to seek registrations in other countries - which can become a vastly expensive process. For this reason, the practices of actual consortia range from mere reliance on common-law "first use" rights (employed by many purely standard setting bodies) to world-wide registration programs (embarked upon, not surprisingly, primarily by strategic consortia).

Ongoing Legal Review. Representation of large, dispersed and active combinations of competitors poses special challenges, many of which are exacerbated by funding constraints. While some organizations (such as OSF) have large legal budgets and even in-house counsel, other quite active and important organizations have very low dues and budgets, relying instead on contributed staff, use of member facilities for meetings, communication by e-mail and other cost-saving practices. Even for a large organization with high sensitivity to anti-trust compliance monitoring, attendance by legal counsel of all technical committee meetings will not be economically possible (since meetings of various work groups and committees may be occurring internationally on almost a weekly basis) or even technically feasible (where much interchange is in real-time over the Internet). As a result, a determination must be made by the client as to how much legal review can be afforded within the budget of the organization.

As a practical matter, the following represents a cost-effective balancing of concerns and costs where an organization has an annual budget in the $1.5 - $3 million range:

  • attendance by counsel at quarterly Board meetings, usually in person, but by telephone for less important meetings. Counsel takes detailed rather than short, cryptic minutes.
  • drafting and periodic amendment of all by-law, charter, membership and similar operative documents by legal counsel.
  • review by legal counsel of guidelines and rules of all working group, committee and other bodies, ideally before adoption (often retroactive review is all that is feasible).
  • review of minutes of executive committee and key technical committees (at least), before general distribution, if possible.
  • attendance at general member meetings, if possible.

It is also quite useful to attend at least one technical committee meeting a year (perhaps where the meeting is being held at the same time and place as a member or board meeting) to witness first hand how fairly and openly important activities, such as the adoption of standards or the acceptance of submissions by rival members, are being carried out.

As a practical matter, anyone interested in representing consortia well should also plan on learning how to use the Internet, and logging on regularly to download his or her e-mail.

A Final Note. Although their trendiness as strategic vehicles may ebb and flow, the utility of the "less strategic" consortia such as OMG and The X Consortium for establishment of useful standards can scarcely be seriously questioned (otherwise, why would so many of their standards and specifications be recognized by the de jure standard setting organizations?) . This conclusion is sometimes attacked in the trade press, most often as a result of the penchant of some strategic consortia for hyping the development and implementation of standards which were often neither complete nor as effective as claimed. Similarly, some standards which have or are being developed by non-strategic consortia have lagged in both development and implementation. Finally, the much abused term "open" has far too often been applied to standards which do not in fact permit the achievement of any level of interoperability or other performance which the market itself would regard as "open" in any meaningful sense.

Nevertheless, real work and valuable implementations may easily be found, and some consortia have improved upon the record of their predecessors by either requiring commercial availability of an implementation concurrent with tendering of a specification for adoption (this is OMG's policy), or by developing and offering an implementation themselves (this is The X Consortium's practice). Accordingly, it seems quite certain that this type of group will continue to soldier on, to the benefit of the industry, while the flashier strategic consortia predictably rise and fall.

Further Reading:

The strategic consortia discussed in this article are of recent enough vintage that there has been (as yet) little academic or other thorough analysis of them. Consequently, most sources are to be found in the trade press and in information disseminated by the consortia themselves. However, the following are useful sources for data:

For a somewhat different treatment by the author of much of the same material contained in the above article, see "Forming, Funding, and Operating Standard-Setting Consortia," IEEE MICRO , Dec. 1993, pp. 52 -61, a special issue dedicated to the analysis of standards setting issues in high technology industries.

The Evolution of Open Standards . 88open Consortium, Ltd., San Jose California, 1992, 16 pp. Good, concise review of the history and evolution of open systems, with emphasis on the current role of binary compatibility standards.

Gomez-Casseres, B., "Computers, Alliances and Industry Evolution," Beyond Free Trade: Firms, Governments and Global Competition , D.B. Yoffe, ed., Harvard Business School Press, Boston, 1993, pp. 79-128. Analyzes computer industry alliances with specific reference to RISC consortia.

The World of Standards . 88open Consortium Ltd. (San Jose, 1991, 2nd ed.: 1991). 243 pages, plus introduction. This is an excellent source book, containing detailed descriptions of over 100 important recognized standards and the organizations which sponsor them, as well as various products which are significant in the industry, such as WINDOWS, Motif, PostScript, Unix SVR4, etc.

The Evolution of Open Systems . 88open Consortium Ltd. (San Jose, CA: 1992; 16 pages). Good, concise review of the history and evolution of open systems, with some emphasis on the current role of binary compatibility standards.

FOOTNOTES:

1. Andrew Updegrove is a partner in the Boston law firm of Gesmer Updegrove, LLP, which concentrates its practice in the representation of high technology companies and consortia. He has formed and represented or consulted with many of the largest high technology consortia now in existence, including Object Management Group, The X Consortium, 88open, Interactive Multimedia Association, CAD Framework Initiative, and many others.

2. For an excellent historical review of the evolution of standards and standard-setting bodies, see L. Garcia, "Standard Setting in the United States: Public and Private Sector Roles," IEEE Micro , Dec. 1993, 28-35.

3. For example, the formation of the American Society of Mechanical Engineers in 1910 and its subsequent evolution of boiler standards resulted in the decrease of an average of 1,400 boiler explosions per year to almost none. A. Nesmith, "A Long, Arduous March Towards Standardization,"Smithsonian Magazine , Feb. 1985, p. 185, cited in Garcia, supra.

4. For an interesting discussion of the pursuit of standards in the context of current litigation between those advocating limited and expansive application of the copyright laws, see G. G. Davis III, "War of the Words: Intellectual Property Laws and Standardization," IEEE Micro , Dec. 1993, 19-27. Davis laments the use of copyright laws in the computer industry to stifle the free exchange and use of ideas. A counter view may be found inSoftwars: The Legal Battles for Control of the Global Software Industry . Anthony Lawrence Clapes (Quorum Books, Westport CT: 1993, an interesting and opinionated book by an IBM patent attorney, which has an excellent chapter (pp. 261 - 274) on the current "open systems" debate and the way that this controversy has played out in the consortia trenches.

5. Office of Technology Assessment, US Congress, Global Standards: Building Blocks for the Future , Report TCT-512, US Government Printing Office, Washington, D.C., Mar. 1992.

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DATE: 03/01/1994

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