Standards, Patents, and the National Smart Grid

The National Institute of Standards and Technology (NIST) is charged with overseeing the identification and selection of hundreds of standards that will be required to implement the national Smart Grid project. However, the benefits that could be realized from Smart Grid standardization could be threatened by a growing number of patents that cover Smart Grid architecture and technologies. If such patents are not revealed until technology is broadly distributed throughout the network (“locked-in”), significant disruption could occur when patent holders seek to collect unanticipated rents from large segments of the market. Moreover, even if patents are revealed early in the standardization process, there is currently no efficient way for market participants to assess the cost of implementing the standardized technologies covered by these patents before lock-in. As a result, costs to consumers can increase, competitors can be shut-out from the market, and the standardization process itself can be subverted. And far from being hypothetical, each of these scenarios has already occurred in industries that rely heavily on standardization, such as computer memory and telecommunications. In the case of the Smart Grid, however, the risk is even greater, as Smart Grid standards are mandated by law and have the potential to be adopted into both federal and state regulation, making lock-in nearly impossible to avoid and providing even greater leverage to patent holders. Given the critical importance of the national Smart Grid, it is imperative that the governmental agencies overseeing the identification and development of Smart Grid standards take appropriate measures to ensure that broad, national implementation of standardized Smart Grid technology is not hindered either by undue economic burdens imposed by patent holders or the threat of costly and disruptive patent litigation. In this article, I lay out a number of legal options available to the U.S. federal government for addressing potential patent encumbrances on Smart Grid standards. These range from relatively modest measures such as priority-setting within existing regulatory frameworks to more interventionist approaches, such as federal march-in rights, compulsory licensing, legislative exclusions of injunctive relief and the formation of patent pools