At USC Gould School of Law November 11, 2017 Hiroyuki Odagiri

1. IP Licensing and Competition Policy: Guidelines and the Cases in Japan At USC Gould School of Law November 11, 2017 Hiroyuki Odagiri Special Advisor, Japan Fair Trade Commission and Emeritus Professor, Hitotsubashi University

2. Difficulties Royalty Stacking and the Tragedy of Anticommons With royalty stacking, commercial development may not take place, resulting in the loss to all the parties -- consumers, producers, and the patent holders. The Hold-up Problem When a ‘hold-up’ behavior (e.g., the demand for exorbitant royalty payment) is expected to take place ex post, no one will invest in sunk assets to develop and commercialize products, again resulting in the loss to all the parties. IP Licenses, particularly in relation to SEP To solve the problems Patent Pool An efficient device for saving transaction costs and setting an aggregate royalty at a reasonable rate, but the outsider problem can be serious. FRAND Declaration Widely used but agreeing on a ‘fair, reasonable, and non-discriminatory’ rate can be difficult. Both over-declaration and under-declaration (including the outsider problem) can occur.

3. JFTC’sGuidelines on Standardization and Patent Pool Arrangements (2005, Revised 2007) • “Pooling patents for specifications is an effective means of granting the necessary licenses efficiently and adjusting the licensing fees so that they do not become excessive when summed. In this way, pooling patents encourages competition by facilitating the production and marketing of new products.”

4. JFTC’sGuidelines on Standardization and Patent Pool Arrangements (continued) • “However, in licensing agreements through a pool, imposing differential conditions on specific businesses without due cause, such as refusing to license the patents, requiring extremely high licensing fees compared with other licensees and limiting the scope of authorized use of the patents, is at risk of violating the AMA when such activities have a direct and serious impact on the competing functions of licensees that are suffering discrimination. (Private monopolization and discriminatory treatment on transaction terms)” • The Pachinko Machine Patent Pool Case (JFTC Decision, 1997) • The refusal to license its essential patents to new entrants was deemed to be in violation of AMA’s prohibition of private monopolization.

5. Pachinko machines, in the old days and today

6. JFTC’sGuidelines for the Use of Intellectual Property (2007, Revised 2016) • “Refusal to license or bringing an action for injunction against a party who is willing to take a license by a FRAND-encumbered Standard Essential Patent holder, …, may fall under the exclusion of business activities of other entrepreneurs by making it difficult to research & develop, produce or sell the products adopting the standards.”

7. ○　Whether a party is a “willing licensee (who willing to take a license on FRAND terms)” or not should be judged based on the situation of each case in light of the behavior of the both sides in licensing negotiations etc. • For example, • ◆ the presence or absence of the presentation of the infringement • designating the patent and specifying the way in which it has been infringed • ◆　the presence or absence of the offer for a license on the conditions • specifying its reasonable base • ◆　the correspondence attitude to the offers such as prompt and reasonable • counter offers • ◆　whether or not the parties undertake licensing negotiations in good faith in • light of the normal business practices • ○　Even if a party which intends to be licensed challenges dispute validity, essentiality or possible infringement of the Standard Essential Patent, the fact itself should not be considered as grounds to deny that the party is a “willing licensee” as long as the party undertakes licensing negotiations in good faith in light of the normal business practices. JFTC’sGuidelines for the Use of Intellectual Property(cont.) Still, the difficulty of defining a ‘willing licensee’ remains.

8. Two FRAND-related cases in Japan, both involving foreign companies • The case of Apple – Samsung (civil litigation), 2014 • The case of One–Blue Patent Pool (both civil litigation and JFTC action), 2016

9. The Apple - Samsung Case: The Decision by the IP High Court of Japan (May 16, 2014) On Injunction “The exercise of the right to demand an injunction based on the FRAND-encumbered patent is an abuse of rights (paragraph 3, article 1 of the Civil Code) if the other party could prove that it was willing to take a license under the FRAND conditions.” On Damages “The claim for damages filed by Samsung Electronics constitutes the abuse of right to the extent exceeding the amount of the FRAND royalty, but does not to the extent of the amount not exceeding the FRAND royalty.” Accordingly, the Court calculated the FRAND royalty in this case to be ￥9,955,854 (approximately $100,000) and ordered Apple to pay this amount to Samsung.

10. The One-Blue Case • One-Blue, a New York-based patent pool for SEPs on BD (blu-ray disks), and Imation, a manufacturer of recordable BDs, had been negotiating licensing since 2012 but could not reach an agreement. • In order to advance the negotiation, One-Blue sent “Notice” to 3 major retailers that were selling Imation’s BDs, notifying them that One-Blue had the right to seek injunction against their infringement of the patents. • In 2013, upon Imation’s filing a lawsuit, the Tokyo District Court ruled that One-Blue was not allowed to exercise the right to seek such an injunction because it constituted an “abuse of rights.” • In November 2016, JFTC decided that One-Blue unjustly interfered with the transaction between Imation and the retailers, which falls under Paragraph 14 of the Designation of Unfair Trade Practices (Interference with a Competitor’s Transactions) and is in violation of Article 19 of the Antimonopoly Act. • However, JFTC decided that it is unnecessary to issue a cease and desist order against One-Blue because the transaction between Imation and the retailers was restored after the Court decision and because, actually, Imation had exited from the BD business in 2015.

11. Willing to take a license on the FRAND terms One-Blue, LLC Patent Pool for Recordable BD SEP etc. Imation Corp. Japan Manufacture for Recordable BD License Negotiation Suspended the sales of Imation’s recordable BDs. Sold BDs without License Commission Notification to retailers that One-Blue Licensors could seek injunction Retailor Ｃ Retailor Ａ Retailor Ｂ Patent Holders of Recordable BD Manufactures of Recordable BD Continued to sell Interference with Imation’s transaction Consumers

12. Thank you !! • For more, see JFTC’s contribution to the Dec. 2014 OECD Competition Committee meeting entitled “Intellectual Property and Standard Setting: Note by Japan,” DAF/COMP/WD(2014)114. • For the revised IP Guidelines and the One-Blue Case, see JFTC’s website. Dokkin