Licensing and Competition: FTC/DOJ Views Presentation to: LES Washington, DC Chapter May 20, 2003

1

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Licensing and Competition:FTC/DOJ Views

Presentation to:LES

Washington, DC Chapter

May 20, 2003

Presented by:

Walt Bratic Shirley Webster

2

E C O N O M I C S V A L U A T I O N S T R A T E G Y

History of Views on IP and Competition

Overview of FTC/DOJ Hearings

Patent Pools

Grantbacks

Cross-Licenses

Standard Setting

Tying

Refusals to License

Agenda

3

E C O N O M I C S V A L U A T I O N S T R A T E G Y

History of Views on IP and CompetitionHistory 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

History of Views on IP and CompetitionHistory of Views on IP and Competition

1970 – Nine No No’s (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 licensee’s ability to sell products that

compete with patented product) Licensee veto power over licensor’s grant of future licenses Specifying prices a licensee could charge upon resale of licensed

products

5

E C O N O M I C S V A L U A T I O N S T R A T E G Y

History of Views on IP and CompetitionHistory 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

History of Views on IP and CompetitionHistory 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Overview of FTC/DOJ HearingsOverview 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

8

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Overview of FTC/DOJ HearingsOverview 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 R&D However,

• Patent Thicket – Is it a problem?• Increasing number of patents – too many?

9

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Overview of FTC/DOJ HearingsOverview 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pools

11

E C O N O M I C S V A L U A T I O N S T R A T E G Y

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

12

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pools – Patent Pools – Pro- or Anti-CompetitivePro- or Anti-Competitive

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

13

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pools – Patent Pools – Pro- or Anti-CompetitivePro- 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

14

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Business Review Letters on Patent PoolsBusiness 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

15

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pool -- How to be pro-competitivePatent 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pool -- How to be pro-competitivePatent 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pool -- How to be pro-competitivePatent 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Pool -- How to be pro-competitivePatent Pool -- How to be pro-competitive

Grantbacks Licensee’s 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Cross Licenses

20

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Cross LicensesCross Licenses

Considered similar to patent pools Many of the same considerations apply in

the analysis of pro- and anti-competitive effects

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Standard Setting

22

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Examples of Standard Setting OrganizationsExamples of Standard Setting Organizations

OrganizationOrganization AcronymAcronym Product AreaProduct AreaInternational Organization for

Standardization(umbrella organization for numerous standard-setting

groups)

ISO

American National Standards Institute(umbrella organization for numerous standard-setting

groups)

ANSI Communications and telecom technology

European Telecommunications Standards

ETSI Communications and telecom technology

International Telecommunications Union ITU Fax transmissionsand modem protocol

National Electric Manufacturers Association

NEMA Electrical equipment

Joint Electron Device Engineering Council

JEDEC Solid-State products

American Petroleum Institute API Oil field services equipment and petroleum products

23

E C O N O M I C S V A L U A T I O N S T R A T E G Y

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

24

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent Rights in Standard SettingPatent 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Dell Computer

Unfair competitionUnfair competition under Sec. 5 of Federal under Sec. 5 of Federal Trade Commission Act Trade Commission Act

Dell’s failure to disclose patents as required by a Dell’s failure to disclose patents as required by a standard-setting group’s rules and later attempt to standard-setting group’s rules and later attempt to enforce patent rights against users of a standard enforce patent rights against users of a standard adopted by the group found to be a violation.adopted by the group found to be a violation.

In re Dell ComputersIn re Dell Computers 931-0097 (F.T.C. 1996)931-0097 (F.T.C. 1996)• Dell entered into a consent order agreeing not to seek Dell entered into a consent order agreeing not to seek

royalties, but the FTC stated, “the relief in this case royalties, but the FTC stated, “the relief in this case should not be read to impose a general duty to search … should not be read to impose a general duty to search … The order should not be read to create a general rule that The order should not be read to create a general rule that inadvertence in the standard-setting process provides a inadvertence in the standard-setting process provides a basis for enforcement action.”basis for enforcement action.”

26

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Rambus v. InfineonRambus 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 participant’s 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.

27

E C O N O M I C S V A L U A T I O N S T R A T E G Y

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

Rambus’s 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.

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Tying

29

E C O N O M I C S V A L U A T I O N S T R A T E G Y

TyingTying

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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Refusals to License

31

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Refusals to LicenseRefusals 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Summary of Current Positions on Nine No-No’s

33

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Patent PoolsPatent 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Tying of Unpatented SuppliesTying of Unpatented Supplies

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

35

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Royalties not Reasonably Related to Royalties not Reasonably Related to Sales of the Patented Product 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Mandatory GrantbacksMandatory Grantbacks

Grantbacks may be pro-competitive and will be evaluated under a rule of reason

Grantbacks may adversely affect competition if they reduce the licensee’s incentives to engage in R&D, and limit incentive to innovate

Whether the licensee has market power in a relevant market is important to the agencies’ analysis

37

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Licensee Veto Power over Licensee Veto Power over Licensor’s Grant of Further LicensesLicensor’s Grant of Further Licenses

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

38

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Restrictions on Sales of Unpatented Restrictions on Sales of Unpatented Products Made by Patented ProcessProducts 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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Tie-OutsTie-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

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Restraints on DistributionRestraints on Distribution

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

41

E C O N O M I C S V A L U A T I O N S T R A T E G Y

Resale Price MaintenanceResale Price Maintenance

Only one of the Nine No-No’s 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.