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

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

3. 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 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. 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

8. 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 R&D • 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

10. Patent Pools

11. 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. 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

14. 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

15. 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 • 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

19. Cross Licenses

20. 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

22. Examples of Standard Setting Organizations

23. Benefitsof 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. 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 • Dell’s failure to disclose patents as required by a standard-setting group’s 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 Computers931-0097 (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 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. 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.

28. Tying

29. 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

31. 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

32. Summary of Current Positions on Nine No-No’s

33. 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 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. Licensee Veto Power over Licensor’s 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-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.