Two US reports were published in April 2007 that deal with the interface between competition and intellectual property issues. In a Joint Report entitled “Antitrust Enforcement and Intellectual Property Rights, Promoting Innovation and Competition”, the US Department of Justice (DOJ) and Federal Trade Commission (FTC) issued their findings on the analysis of pooling agreements. At the same time, the US Antitrust Modernization Commission (AMC) issued its Report and Recommendations, some of which are aimed at improvements to the US patent system with a view to ensuring competition and innovation going forward.
In April 2004, the European Commission adopted Guidelines on the application of Article 81 to technology transfer agreements which included a section on the analysis of technology pools. There is relatively little case law to date on the application of these Guidelines and perhaps as a consequence, European lawyers refer frequently to US precedents when dealing with similar issues that arise in the European Union.
Although there are some areas of convergence and divergence between the US and EU approaches, if the recommendations of the two US Reports are followed, there will be more convergence than divergence. According to the EU Guidelines, technology pools are arrangements with two distinctive elements: (i) two or more parties assemble a package of technology which (ii) is licensed not only to the contributors of the pool but also to third parties. The first feature distinguishes patent pools from unilateral licensing, and the second feature distinguishes patent pools from cross licensing.
Technology pools can have pro-competitive effects, such as reductions in transaction costs by allowing “one stop” licensing of the technologies covered in the pool, eliminating infringement litigation, limiting cumulative royalties and reducing uncertainty which can prevent or delay market entry. Technology pools can also be restrictive of competition.
The creation of the pool results in joint licensing. Where the technologies contributed by different parties are solely or predominantly competing, or are substitutes for one another, it can easily be seen that the result is akin to a price fixing cartel. A second issue here is the foreclosure effect the pooled technologies may have on third party technologies outside the pool.
Substitute Technologies and Essentiality
The EU Guidelines distinguish between technological complements and substitutes and between essential and non-essential technologies.
Technologies are complements when both are required to produce a product or carry out a process. They are substitutes when either technology allows the holder to produce the product or carry out the process.
A technology is “essential” if it is necessary and there are no substitutes for it either inside or outside the pool.
Pools Containing Only Essential Technologies
The closest thing to a “safe harbour” to be found in the EU Guidelines is the statement that, when a pool is composed only of technologies that are essential, the creation of the pool falls outside of Article 81(1) irrespective of the market position of the parties.
In this case, competition law can only apply to the conditions on which licences are granted. There is no requirement for individual licences for part of the pooled technology. In the United States, the Joint Report notes that the US DOJ has outlined a slightly different test for essentiality in each of its Business Review Letters on patent pools to date. These Business Review Letters, which supplement the agencies’ Intellectual Property Guidelines, provide useful guidance on the enforcement intentions of the antitrust authorities. As parties seeking a favourable review may have incorporated mechanisms designed to eliminate or minimise the risk of anti-competitive effects, the Joint Report reminds us that failure to include all the safeguards set out in the existing Business Review Letters will not automatically lead to the conclusion that a pool is anti-competitive.
Pools Containing Substitute Technologies
The EU Guidelines state that where a pool is “substantially” composed of substitute technologies, it amounts to price fixing between competitors and is unlikely to gain an Article 81(3) exemption. In a US DVD patent pool case, the DOJ found that the inclusion in the pool of “two or more” substitute patents would risk turning the pool into a price fixing mechanism. There is quite a difference between “substantially” and “two or more” but, in its recent Joint Report, the US agencies clarify that the inclusion of some substitutes would be analysed under the rule of reason. Similarly, in Europe, the inclusion of some substitutes would be analysed under Article 81(3).
Partial Pool Licences
The consideration of whether pools should be required to grant licences to part of the pooled technology/ patents is often raised by licensees.
The general US approach is that a refusal to license less than all of a pool’s intellectual property would not raise competition concerns provided that the licensors retain the ability to licence their patents individually and the pool’s design is otherwise pro-competitive. The Joint Report acknowledges that the combined price of the individual licences may be more than the price of the pooled patents which benefit from lower transaction costs. It considers that there are more efficient mechanisms than partial pool licences that can be used to exclude non-essential patents from the pool and, accordingly, partial licences need not be made available, let alone at reduced rates.
However, the EU Guidelines appear to take a different view in the context of pools comprising non-essential technologies. One of the factors that will be taken into account is whether licensees can obtain a licence for part of the package with a corresponding reduction in royalties payable. Another factor is whether licensors remain free to licence independently from the pool, although in this case, no requirement is made regarding a corresponding reduction in royalties.
Standard Setting Organisations
The EU Guidelines acknowledge that undertakings setting up a technology pool are normally free to negotiate and fix royalties for the technology package and each technology’s share of the royalties either before or after the standard is set. These Guidelines recognise that such an agreement is “inherent” in the establishment of the pool and, in some cases, it may be more efficient if the royalties are agreed in advance (avoiding hold up issues by those contributing essential technologies). It seems that, in the United States, some standard setting organisations (SSOs) had avoided joint ex ante negotiations with patent holders out of concern that such conduct would be considered a per se violation of the Sherman Act. However, in its April 2007 Recommendations, the US AMC considers that joint negotiations with intellectual property owners by members of an SSO with respect to royalties prior to the establishment of the standard, without more, should be evaluated under the rule of reason.
Despite the wording of the EU Guidelines, the Commission appears more “hands on” in this area than the United States, which prefers the view that SSOs are best placed to decide on issues such as early disclosure and ex ante licensing. Commissioner Kroes has been quoted as saying: “It is crucial that standard setting bodies establish rules which ensure fair, transparent procedures and early disclosure of relevant intellectual property. We will continue to monitor the operation of standard setting bodies in this regard”. The Commission has also stated that it intends to follow European Telecommunications Standards Institute’s ex ante licensing issues “with interest”.