Patent Licensing, Patent Licensing, Competition Law and the Competition Law and the draft Substantive Patent draft Substantive Patent

Law TreatLaw TreatyyFrederick M. AbbottFrederick M. Abbott

Florida State University College of LawFlorida State University College of Law2 March 20062 March 2006

Open Forum on the draft Substantive Patent Law Open Forum on the draft Substantive Patent Law TreatyTreaty

World intellectual Property OrganizationWorld intellectual Property OrganizationGenevaGeneva

Patent Licensing May Enhance the Development of New Patent Licensing May Enhance the Development of New Technologies and Making Them Available to the PublicTechnologies and Making Them Available to the Public

Patent licensing may facilitate access by researchers to third-Patent licensing may facilitate access by researchers to third-party technologies and facilitate experimentation with a view party technologies and facilitate experimentation with a view toward commercialization or public use;toward commercialization or public use;[1][1]

Patent licensing may facilitate movement of new technologies Patent licensing may facilitate movement of new technologies from the research phase to the commercialization phase as from the research phase to the commercialization phase as small and medium enterprises out-license inventions to more small and medium enterprises out-license inventions to more highly capitalized enterprises;highly capitalized enterprises;

Patent licensing may provide a means for enterprises to Patent licensing may provide a means for enterprises to negotiate the "patent thicket" so as to overcome obstacles to negotiate the "patent thicket" so as to overcome obstacles to incremental innovation;incremental innovation;

In areas such as standards-setting, sharing of patented In areas such as standards-setting, sharing of patented technologies may be necessary to maintenance of competitive technologies may be necessary to maintenance of competitive marketsmarkets

Patent licensing may facilitate joint research and development, Patent licensing may facilitate joint research and development, accelerating technology development and spreading risk;accelerating technology development and spreading risk;

Patent licensing may facilitate partitioning of R & D and Patent licensing may facilitate partitioning of R & D and production functions, allowing production at most efficient production functions, allowing production at most efficient locations without corollary investments in R & D. locations without corollary investments in R & D.

[1][1] Note that U.S. Supreme Court in Note that U.S. Supreme Court in Merck v. Integra LifesciencesMerck v. Integra Lifesciences, 125 S. Ct. 2372 , 125 S. Ct. 2372 (decided June 13, 2005), dramatically expanded scope of permissible non-(decided June 13, 2005), dramatically expanded scope of permissible non-infringing uses of patented pharmaceutical technologies during drug research and infringing uses of patented pharmaceutical technologies during drug research and development phase, reducing need for licensing prior to market entry.development phase, reducing need for licensing prior to market entry.

Patent Licensing Is a Tool for the Transfer of Technology Patent Licensing Is a Tool for the Transfer of Technology Between Developed and Developing CountriesBetween Developed and Developing Countries

• Positive welfare effects dependent on validity of underlying Positive welfare effects dependent on validity of underlying patent. Licensing and payment of royalties on technology patent. Licensing and payment of royalties on technology otherwise in the public domain is unjustified social expense; otherwise in the public domain is unjustified social expense;

• "Securitization" of invention encourages sharing of "Securitization" of invention encourages sharing of information based on rent or royalty stream expectation;information based on rent or royalty stream expectation;

• Forms of enterprise combination and licensing Forms of enterprise combination and licensing arrangements highly variable – parent-subsidiary, joint arrangements highly variable – parent-subsidiary, joint venture, independent entities, etc.venture, independent entities, etc.

• Extent to which patent licensing generates improvement to Extent to which patent licensing generates improvement to local technology capacity is context specificlocal technology capacity is context specific

Patent licensing may take place in closely-guarded Patent licensing may take place in closely-guarded intracorporate setting which may limit local diffusion, or intracorporate setting which may limit local diffusion, or may take place in open setting (may take place in open setting (e.g.e.g., to university , to university research institution) which may encourage diffusionresearch institution) which may encourage diffusion

Associated "know-how" licensing affects level of Associated "know-how" licensing affects level of technology transfertechnology transfer

Restrictive licensing terms may substantially affect Restrictive licensing terms may substantially affect economic and social value of patent license to transferee economic and social value of patent license to transferee countrycountry

Patent licensing is subject to Patent licensing is subject to anticompetitive abuseanticompetitive abuse

• "Patent pools" into which enterprises combine their "Patent pools" into which enterprises combine their technologies may be used to create prohibitive market technologies may be used to create prohibitive market entry barriers, facilitating cartelization of marketsentry barriers, facilitating cartelization of markets

• Restrictive third-party licensing terms (e.g., exclusive Restrictive third-party licensing terms (e.g., exclusive grantbacks) may be used to foreclose emergence of grantbacks) may be used to foreclose emergence of competitorscompetitors

• Patent licensing terms can be used to leverage market Patent licensing terms can be used to leverage market power, such as through product tying arrangements power, such as through product tying arrangements and block licensing and block licensing

• Patent licensing agreements may include terms Patent licensing agreements may include terms generally disfavored in competition law, such as fixing generally disfavored in competition law, such as fixing of resale prices, restricting output and dividing of resale prices, restricting output and dividing territories among horizontal competitorsterritories among horizontal competitors

• No-challenge clauses in patent licenses encourage No-challenge clauses in patent licenses encourage unearned surplus payments to holders of invalid unearned surplus payments to holders of invalid patentspatents

• Patent licensing agreements merit particular scrutiny Patent licensing agreements merit particular scrutiny in the context of licensors holding dominant position in the context of licensors holding dominant position on the relevant marketon the relevant market

Control of Anticompetitive Patent Licensing Is a Generally Control of Anticompetitive Patent Licensing Is a Generally Accepted Practice Among StatesAccepted Practice Among States

• The WTO TRIPS Agreement includes provisions which The WTO TRIPS Agreement includes provisions which recognize that intellectual property rights may be abused, recognize that intellectual property rights may be abused, that authorize Members to regulate anticompetitive that authorize Members to regulate anticompetitive licensing practices and that encourage cooperation in licensing practices and that encourage cooperation in enforcement (enforcement (e.ge.g., Articles 8.2, 31(k)-(l), 40).., Articles 8.2, 31(k)-(l), 40).[2][2] Concern Concern with anticompetitive patent licensing is reflected in the with anticompetitive patent licensing is reflected in the original International Trade Organization Charter.original International Trade Organization Charter.

• Paris Convention recognizes abuse of patents as grounds for Paris Convention recognizes abuse of patents as grounds for compulsory licensing (Article 5A(2))compulsory licensing (Article 5A(2))

• Developed country regulation specifically addresses Developed country regulation specifically addresses anticompetitive patent licensing arrangementsanticompetitive patent licensing arrangements

See, e.g., See, e.g., U.S. Department of Justice/Federal Trade U.S. Department of Justice/Federal Trade Commission, Antitrust Guidelines for the Licensing of Commission, Antitrust Guidelines for the Licensing of Intellectual Property (1995). Also, the Supreme Court has Intellectual Property (1995). Also, the Supreme Court has ruled that patent misuse is an equitable defense to the ruled that patent misuse is an equitable defense to the enforcement of patents (enforcement of patents (e.g., e.g., in the case of certain in the case of certain product tying arrangements). product tying arrangements). See alsoSee also U.S. Federal Trade U.S. Federal Trade Commission, To Promote Innovation: The Proper Balance Commission, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (2003)of Competition and Patent Law and Policy (2003)

[2][2] SeeSee Frederick M. Abbott, Frederick M. Abbott, Are the Competition Rules in the Are the Competition Rules in the WTO TRIPS Agreement Adequate?,WTO TRIPS Agreement Adequate?, 7 J. Int’l Econ. L. 685 (2005 7 J. Int’l Econ. L. 685 (2005 Oxford).Oxford).

Control of Anticompetitive Patent Licensing Is a Control of Anticompetitive Patent Licensing Is a Generally Accepted Practice Among StatesGenerally Accepted Practice Among States

See, e.g., See, e.g., European Commission Regulation No 772/2004 European Commission Regulation No 772/2004 of 27 April 2004 on the application of Article 81(3) of the of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements Treaty to categories of technology transfer agreements and Guidelines on the application of Article 81 of the EC and Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements (2004/C/ Treaty to technology transfer agreements (2004/C/ 101/02)101/02)

See, e.g., See, e.g., Fair Trade Commission of Japan (FTCJ), Fair Trade Commission of Japan (FTCJ), Antimonopoly Act Guidelines Concerning Joint Research Antimonopoly Act Guidelines Concerning Joint Research and Development, 20 April 1993and Development, 20 April 1993

Developing countries address anticompetitive patent Developing countries address anticompetitive patent licensing through regulation and court decisionlicensing through regulation and court decision

See, e.g., See, e.g., Andean Community, Decision 291, Andean Community, Decision 291, Article 14Article 14

Abuse of patent is common grounds in developing Abuse of patent is common grounds in developing country patent legislation for grant of compulsory country patent legislation for grant of compulsory licenselicense

As a general proposition, developing countries As a general proposition, developing countries have a lower level of competition law enforcement have a lower level of competition law enforcement capacity than the OECD countries. Competition capacity than the OECD countries. Competition law enforcement tends to be fact intensive, law enforcement tends to be fact intensive, complex and expensive.complex and expensive.

Control of Anticompetitive Patent Licensing Is a Control of Anticompetitive Patent Licensing Is a Generally Accepted Practice Among StatesGenerally Accepted Practice Among States

• Proposals from leading experts on competition law for Proposals from leading experts on competition law for international antitrust regulation routinely address international antitrust regulation routinely address anticompetitive patent licensing practices, anticompetitive patent licensing practices, seesee International International Antitrust Working Group (W. Fikentscher, Antitrust Working Group (W. Fikentscher, et alet al.), Draft .), Draft International Antitrust Code, at Article 6: Restraints in International Antitrust Code, at Article 6: Restraints in Connection with Intellectual Property RightsConnection with Intellectual Property Rights[3][3]

• Trend of regulation in OECD is to evaluate patent licensing Trend of regulation in OECD is to evaluate patent licensing restrictions under "rule of reason" approach and to limit restrictions under "rule of reason" approach and to limit inquiry where market share of parties is below defined inquiry where market share of parties is below defined threshold. Nonetheless, certain threshold. Nonetheless, certain per seper se (or hardcore) (or hardcore) prohibitions remain (prohibitions remain (e.g.,e.g., in EU, against exclusive in EU, against exclusive grantbacks).grantbacks).

Specific doctrinal issues are continuously re-examined. Specific doctrinal issues are continuously re-examined. For example, U.S. Supreme Court currently considering For example, U.S. Supreme Court currently considering presumption of patent-based market power in context of presumption of patent-based market power in context of tying arrangements (Illinois Tool Works v. Independent tying arrangements (Illinois Tool Works v. Independent Ink, No. 04-1329)Ink, No. 04-1329)

[3][3] Reprinted in Public Policy and Global Technological Integration (eds. F. Abbott & D. Gerber Reprinted in Public Policy and Global Technological Integration (eds. F. Abbott & D. Gerber 1997)(Kluwer), at Appendix 2. 1997)(Kluwer), at Appendix 2. See also,See also, Wolfgang Fikentscher, Wolfgang Fikentscher, The Draft International Antitrust The Draft International Antitrust Code (DIAC) in the context of international technological integrationCode (DIAC) in the context of international technological integration , , idid. at 211.. at 211.

Current Regulatory Approach of OECD Competition Law Current Regulatory Approach of OECD Competition Law Authorities Is Not Necessarily the Best Approach for Authorities Is Not Necessarily the Best Approach for

Developing Countries which Tend to Have Lower Levels of Developing Countries which Tend to Have Lower Levels of Enforcement CapacityEnforcement Capacity

Developing countries may benefit from greater use of Developing countries may benefit from greater use of per per sese rules and other positive prohibitions such as rules and other positive prohibitions such as characterized EU competition and technology law until characterized EU competition and technology law until 2004.2004.[4][4]

• Developing countries are more likely to be patented-Developing countries are more likely to be patented-technology importers than exporterstechnology importers than exporters

• Developing country markets are generally more Developing country markets are generally more susceptible to market power concentration among susceptible to market power concentration among dominant enterprises than developed country marketsdominant enterprises than developed country markets

• Competition law risk assessment should account for Competition law risk assessment should account for these factorsthese factors

[4][4] SeeSee elaboration in F. Abbott, elaboration in F. Abbott, supra supra note 2.note 2.

Competition Regulation and the SPLTCompetition Regulation and the SPLT

Rules regarding anticompetitive aspects of Rules regarding anticompetitive aspects of patent licensing are within the reasonable patent licensing are within the reasonable potential subject matter scope of a Substantive potential subject matter scope of a Substantive Patent Law Treaty. Such rules might take a Patent Law Treaty. Such rules might take a positive form, prescribing certain types of positive form, prescribing certain types of conduct or establishing presumptions regarding conduct or establishing presumptions regarding certain types of conduct. Such rules might take certain types of conduct. Such rules might take a negative form, making clear that a negative form, making clear that governments are permitted to regulate governments are permitted to regulate anticompetitive licensing practices anticompetitive licensing practices notwithstanding positive obligations regarding notwithstanding positive obligations regarding the grant of patents. Such rules might include the grant of patents. Such rules might include illustrative list of potentially anticompetitive illustrative list of potentially anticompetitive licensing practices.licensing practices.

Positive and Negative RulesPositive and Negative Rules

• The negotiating history of the GATT Uruguay Round and The negotiating history of the GATT Uruguay Round and subsequent efforts within the WTO to establish subsequent efforts within the WTO to establish mandatory positive competition rules suggest obstacles mandatory positive competition rules suggest obstacles to that approach in the context of SPLT negotiations.to that approach in the context of SPLT negotiations.

In TRIPS Agreement Art. 40, listing of anticompetitive In TRIPS Agreement Art. 40, listing of anticompetitive licensing conditions is illustrative of subject matter that licensing conditions is illustrative of subject matter that may be addressed, not prohibited as mandatory positive may be addressed, not prohibited as mandatory positive obligation.obligation.

WTO Trade and Competition Working Group manifested WTO Trade and Competition Working Group manifested disagreement on limited set of positive rules, with disagreement on limited set of positive rules, with differences between governments at all levels of differences between governments at all levels of development.development.

• Approaches to regulation of competition tend to vary Approaches to regulation of competition tend to vary over time within the same jurisdiction as industrial policy over time within the same jurisdiction as industrial policy considerations shift. This may argue in favor of considerations shift. This may argue in favor of preserving regulatory flexibility.preserving regulatory flexibility.

• Industrial policy considerations of developed and Industrial policy considerations of developed and developing countries with respect to application of developing countries with respect to application of competition law to patent licensing may differ. competition law to patent licensing may differ. Developing countries at different stages of development Developing countries at different stages of development may also maintain differing industrial policy interests.may also maintain differing industrial policy interests.

A Negative Approach Would Permit Maintenance A Negative Approach Would Permit Maintenance

of Regulatory Flexibilityof Regulatory Flexibility For example:For example:

““Nothing in this [SPLT] shall prevent or hinder a member Nothing in this [SPLT] shall prevent or hinder a member state from prescribing or enforcing measures to address state from prescribing or enforcing measures to address patent licensing conditions or practices determined to be patent licensing conditions or practices determined to be anticompetitive. Such measures, which may be anticompetitive. Such measures, which may be preventive and remedial, may be enforceable by private preventive and remedial, may be enforceable by private and government action, and may include civil damages and government action, and may include civil damages and criminal penalties.”and criminal penalties.”

Note that the foregoing does not address patent misuse Note that the foregoing does not address patent misuse in general because the subject matter of this presentation in general because the subject matter of this presentation concerns patent licensing. However, it is reasonable to concerns patent licensing. However, it is reasonable to assume that additional negative provision should be assume that additional negative provision should be included in SPLT to permit maintenance of regulatory included in SPLT to permit maintenance of regulatory flexibility regarding patent abuse in other contexts, such flexibility regarding patent abuse in other contexts, such as abuse of patents by dominant enterprises.as abuse of patents by dominant enterprises.

Combination ApproachCombination Approach A combination approach mightA combination approach might

• negatively preserve regulatory negatively preserve regulatory flexibility, andflexibility, and

• positively list potentially anticompetitive positively list potentially anticompetitive practices, along the lines of the WTO practices, along the lines of the WTO TRIPS AgreementTRIPS Agreement

An SPLT provision might also address An SPLT provision might also address enhanced enforcement cooperation enhanced enforcement cooperation and capacity-building and capacity-building