Licensing and Competition:

1
Licensing and Competition FTC/DOJ
Views Presentation to LES Washington, DC
Chapter May 20, 2003 Presented by Walt
Bratic Shirley Webster
2
Agenda

• History of Views on IP and Competition
• Overview of FTC/DOJ Hearings
• Patent Pools
• Grantbacks
• Cross-Licenses
• Standard Setting
• Tying
• Refusals to License

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History of Views on IP and Competition

• Early 1900s Patent Rights viewed as paramount,
  overcoming all antitrust concerns
• Patents a government endorsed exception to
  antitrust laws
• Market Power inferred from existence of a patent
• This immunity from antitrust scrutiny decreased
  over time

4
History of Views on IP and Competition

• 1970 Nine No Nos (per se prohibitions)
• Grantbacks
• Royalty payment unrelated to sales volume of
  patented product
• Patent Pools (Mandatory Package Licensing)
• Tying of unpatented supplies
• Restrictions on sales of unpatented products made
  by a patented process
• Post-sale restrictions on resale by purchasers of
  patented products
• Tie-outs (restrictions on licensees ability to
  sell products that compete with patented product)
• Licensee veto power over licensors grant of
  future licenses
• Specifying prices a licensee could charge upon
  resale of licensed products

5
History of Views on IP and Competition

• Current view both patent law and antitrust law
  have the goal of encouraging innovation, industry
  and competition
• 1995 Antitrust Guidelines for the Licensing of
  Intellectual Property
• Same general antitrust principles applied to IP
  as to conduct involving any other form of
  property
• Intellectual Property NOT assumed to create
  market power
• Intellectual Property Licensing generally
  pro-competitive

6
History of Views on IP and Competition

• Rule of Reason Analysis
• Is restraint likely to adversely affect
  competition?
• If so, do pro-competitive benefits or
  efficiencies outweigh anticompetitive effect
• What is the relevant product and geographic
  market
• Market Power the ability to profitably
  maintain prices above, or output below,
  competitive levels for a significant period of
  time.

7
Overview of FTC/DOJ Hearings

• Hearings held in 2002 to explore the
  interrelationships between competition and patent
  policy
• Both IP law and antitrust law seek to promote
  innovation and enhance consumer welfare but
  questions exist as to the proper balance to
  achieve goal
• Role of the Federal Circuit

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Overview of FTC/DOJ Hearings

• Antitrust Community
• Antitrust Laws eliminate monopolies and
  encourage competition
• IP Laws reward creators and inventors with
  limited monopoly
• IP Community
• IP Rights protect investment, encourage RD
• However,
• Patent Thicket Is it a problem?
• Increasing number of patents too many?

9
Overview of FTC/DOJ Hearings

• Topics of interest in hearings included
• Interrelationships between competition and patent
  policy
• Standard setting
• Patent pools
• Cross-licensing
• Unilateral refusals to license
• Proliferation of patents
• Changing scope of patents
• Role of the Federal Circuit

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Patent Pools
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Patent Pool - Definition

• Sometimes referred to as Mandatory Package
  Licensing
• Agreements among two or more owners of different
  items of intellectual property to license third
  parties, and one another

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Patent Pools Pro- or Anti-Competitive

• May provide competitive benefits
• One Stop Shopping
• Integrate complementary technologies
• Reduce transaction costs
• Clear blocking position
• Avoid costly infringement litigation

13
Patent Pools Pro- or Anti-Competitive

• May restrict competition
• Reduce competition among IP rights within the
  pool
• Reduce competition between products incorporating
  the pooled patents
• Reduce innovation among parties to the pool
• Collective price or output restraints may be
  deemed unlawful

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• Business Review Letters on Patent Pools

• MPEG-3 June 26, 1997
• DVD (Philips, Sony and Pioneer) December 16,
  1998
• DVD (Hitachi, Matsushita, Mitsubishi, Time
  Warner, Toshiba, and Victor) June 10, 1999
• 3G November 12, 2002

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Patent Pool -- How to be pro-competitive

• Integrate Complementary Patent Rights
• License Essential Patents
• Necessarily or practically infringed in order to
  comply with standard
• Determination of essentiality by independent
  expert
• Open pool to any owner of an essential patent
  willing to license on the programs terms and
  conditions

16
Patent Pool -- How to be pro-competitive

• Retain Independent Patent Expert to Determine
  Essentiality
• Do Not Restrict Licensing to the Pool
• Allow licensing directly with each entity that
  has patents in the patent pool (separately from
  pool)
• Allow licensing of individual patents (no
  requirement to license all patents included in
  the pool)

17
Patent Pool -- How to be pro-competitive

• Royalty Rates
• Royalty should be small relative to the total
  costs of manufacturing the product
• Offer fair, reasonable, and non-discriminatory
  terms to Licensors and all other licensees of the
  pool
• Offer most-favored-nations clause to allow
  licensee to opt for more favorable royalties
  offered another licensee, if licensee agrees to
  any additional benefits to Licensor included in
  terms and conditions for that royalty rate

18
Patent Pool -- How to be pro-competitive

• Grantbacks
• Licensees grantback obligation to be limited to
  essential patents
• Licensee to grant non-exclusive licenses to
  essential patents on fair, reasonable and
  non-discriminatory terms
• Open pool to any owner of an essential patent

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Cross Licenses
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Cross Licenses

• Considered similar to patent pools
• Many of the same considerations apply in the
  analysis of pro- and anti-competitive effects

21
Standard Setting
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Examples of Standard Setting Organizations
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• Benefits of Standard Setting

• Consumers more likely to embrace new product
  (reluctance to repeat VHS/Beta format problems)
• Allows multi-industry coordination of products
• Efficiency in technological advancement as
  companies share the risks and costs of new
  product development

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• Patent Rights in Standard Setting

• Standards that rely on IP may be argued to
  present a danger to competition
• Inclusion of a patent in a standard can provide
  that technology with market power that it
  previously lacked
• Refusal to issue standard because only one or a
  small number of manufacturers patent or make
  product can also limit competition

25
Dell Computer

• Unfair competition under Sec. 5 of Federal Trade
  Commission Act
• Dells failure to disclose patents as required by
  a standard-setting groups rules and later
  attempt to enforce patent rights against users of
  a standard adopted by the group found to be a
  violation.
• In re Dell Computers 931-0097 (F.T.C. 1996)
• Dell entered into a consent order agreeing not to
  seek royalties, but the FTC stated, the relief
  in this case should not be read to impose a
  general duty to search The order should not be
  read to create a general rule that inadvertence
  in the standard-setting process provides a basis
  for enforcement action.

26
Rambus v. Infineon

• Rambus accused of fraud from failure to disclose
  patent applications in a meeting of a standard
  setting body
• Federal Circuit 2003 Duty of disclosure as a
  JEDEC participant applies only to patents
  containing claims reasonably necessary to
  practice proposed standard and arises only when
  work formally begins on proposed standard. Duty
  to disclose did not cover a participants future
  plans or intentions. Since Rambus withdrew from
  participation before proposals on the DDR-SDRAM
  standard had been submitted and before formal
  consideration of the standard had begun, no duty
  of disclosure had arisen.

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Rambus FTC Complaint

• Commission challenges a pattern of
  anticompetitive acts and practices undertaken by
  Rambus over the past decade through which Rambus
  has engaged in unfair methods of competition
  related to DRAM
• Rambuss anticompetitive scheme involved
  participating in JEDEC without letting it be
  known that Rambus had a patent and patent
  applications ultimately adopted in the relevant
  standards. Once the standards became widely
  adopted, Rambus proceeded to enforce its patents
  against companies manufacturing memory products
  in compliance with the standard.
• This conduct has caused or threatened to cause
  substantial harm to competition.

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Tying
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Tying

• Requiring a licensee to purchase or use unwanted
  products or services in order to receive a
  desired IP license
• Concern is projection of market power from
  market of licensed IP to other market
• There must be a showing of market power for
  concerns to arise

30
Refusals to License
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Refusals to License

• Courts have held that failure to license a
  patent, standing alone, is not an antitrust
  violation
• Refusals to license can rise to the level of an
  antitrust violation if
• Part of a scheme to acquire or maintain an
  unlawful economic monopoly or
• Concerted action among two or more independent
  parties

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Summary of Current Positions on Nine No-Nos
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Patent Pools

• May provide competitive benefits
• Integrate complementary technologies
• Reducing transaction costs
• Clearing blocking positions
• Avoid costly infringement litigation
• Can restrict competition
• Reducing incentive to innovate
• Reducing competition within pool
• Reducing competition for pooled patents

34
Tying of Unpatented Supplies

• Without a showing that the patent actually
  conveys market power, antitrust concerns do not
  arise

35
Royalties not Reasonably Related to Sales of the
Patented Product

• Royalties based on other measures, such as units
  produced by the licensee may be found to be more
  efficient
• Any antitrust concern depends on the presence of
  market power

36
Mandatory Grantbacks

• Grantbacks may be pro-competitive and will be
  evaluated under a rule of reason
• Grantbacks may adversely affect competition if
  they reduce the licensees incentives to engage
  in RD, and limit incentive to innovate
• Whether the licensee has market power in a
  relevant market is important to the agencies
  analysis

37
Licensee Veto Power over Licensors Grant of
Further Licenses

• Absent showing of market power or foreclosure,
  this type of restriction may have a net
  pro-competitive effect

38
Restrictions on Sales of Unpatented Products Made
by Patented Process

• These restrictions are unlikely to raise concerns
  to the extent that
• the licensee and the licensor would not be actual
  or potential competitors absent the licensing
  relationship, or
• the licensor does not have market power

39
Tie-Outs

• Anticompetitive concerns are unlikely to arise
  unless patentee has market power in the relevant
  market for the patent or patented product, under
  the patent misuse statute

40
Restraints on Distribution

• Restrictions on single use only label license
  or prohibition on resale are subject to Rule of
  Reason analysis

41
Resale Price Maintenance

• Only one of the Nine No-Nos remaining as a per
  se violation
• According to Section 5.2 of the IP Licensing
  Guidelines, it is per se illegal for a patentee
  to fix the minimum resale price for a good that
  has been fully sold to dealers.