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Patent Pools Legal Structures That Combine Rights Foster Development of New Technologies but Could Raise Competitive Concerns

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Patent Pools Legal Structures That Combine Rights Foster Development of New Technologies but Could Raise Competitive Concerns A NEWA NEW YORK YORK LAWLAW JOURNAL SPECIAL SPECIAL SECTION SEC - TION Intellectual Property Web address: http://www.nylj.com MONDAY, APRIL 21, 2008 Patent Pools Legal structures that combine rights foster development of new technologies but could raise competitive concerns. BY JOEL E. LUTZKER make a standardized product or where product AND DARREN M. FRANKLIN compatibility is required. Patent pools can thus SK a layperson, and he or she might say help ease the bottleneck that results when that the phrase “patent pool” refers to a one or two key patent owners hold out for A table game played by patent lawyers at high royalties for the use of a patent needed a bar. Or it is what results when patent lawyers to produce a product that meets an industry bet on college basketball. standard. In this way, patent pools can lower But to patent lawyers and, increasingly, the transaction costs for licensees and foster the corporate in-house counsel, a “patent pool” acceptance of new technologies. In short, patent is an approach to patent licensing that can Joel E. Lutzker Darren M. Franklin pools promise a streamlined way for companies foster the development and acceptance of new to obtain licenses to multiple patents owned technologies, or alternatively, can raise serious by multiple entities. competitive and antitrust concerns. The topic On the flip side, however, patent pools can raise competitive concerns, especially of patent pools has received renewed attention Patent Pools: What Are They? of late with the recent move to create a patent when the package license offered to licensees pool for the 4G wireless communication Patent pools can take many forms, but includes patents that are not essential to standard, along with recent lawsuits by the generally involve the “pooling” of patents owned making the standardized product or includes patent pool administrator MPEG LA against by several companies for collective licensing and patents of questionable validity. Other possible certain licensors and licensees of its MPEG-2 enforcement. A patent pool thus results from anticompetitive practices include exclusive patent pool licensing program. a pact between multiple patentees to “pool” license agreements that bar patent pool This article discusses the current case law on their patent rights and to offer these rights as members from licensing their patents outside patent pools, the avoidance of antitrust pitfalls, a package to third parties for licensing. The of the pool, broad grantback agreements that and legal structures for creating patent pools. patentees themselves may manage the patent require patent pool licensees to disclose and pool, or the patentees may appoint a separate license back improvements that the licensees administrator to oversee the licensing of the develop, and requirements that patent pool Joel E. Lutzker is a partner at Sheppard Mullin patents. Patent pools overseen by separate members and licensees disclose confidential Richter & Hampton and heads the firm’s New York administrators include the MPEG-2 patent business data to the pool administrator. See intellectual property law practice; he specializes in pool (overseen by MPEG LA). Patent pools generally U.S. Department of Justice and Federal complex patent litigation, licensing and transactions. overseen by one of the patentees include the Trade Commission, Antitrust Enforcement Darren M. Franklin is an associate in the Los DVD 3C patent pool (overseen by Koninklijke and Intellectual Property Rights: Promoting Angeles intellectual property law practice of the firm Philips Electronics, N.V.). Innovation and Competition 64-85 (2007) and specializes in patent litigation, prosecution and Companies often form patent pools when (discussing competitive concerns raised by counseling. the rights to several patents are needed to patent pools). NEW York Law JOURNAL MONDAY, APRIL 21, 2008 Supreme Court (1931) compete in the relevant market for the good and the 3G patent pool (overseen by the 3G incorporating the licensed technologies; and Patent Platform Partnership). The 3G patent The seminal U.S. Supreme Court case (2) the pool participants collectively possess pool pertains to 3G (third generation) mobile analyzing patent pools is Standard Oil Co. market power in the relevant market. If these phone standards and technology. The DVD v. United States, 283 U.S. 163 (1931). The circumstances exist, then the DOJ and FTC 6C patent pool and the DVD 3C patent pool case established the basic groundwork for the will decide whether the pool’s restrictions on are described later in this article. economic analysis that courts continue to use participation are reasonably related to the The DOJ business review letters relating to in antitrust cases involving patent pools. efficient development and exploitation of these patent pools are available on the DOJ In Standard Oil, the federal government sued the pooled technologies and will assess the Web site at http://www.usdoj.gov/atr/public/ four patentees and 46 licensees, alleging that net effect of those limitations in the relevant busreview/. the defendants violated the Sherman Antitrust market. Antitrust Guidelines at 28-29. Federal Circuit Weighs In Act by creating and licensing a pool of patents (2005) pertaining to the “cracking” of gasoline. The xxxxxxxxxxxxxx Supreme Court rejected the government’s claim There are several ways Despite the guidance given by the courts, that, by dividing the patent royalties between to form a patent pool that are DOJ and FTC, questions have remained about them, the four patentees showed monopolistic the standard of review that should be applied intent. The Court stated that, if the patentees likely to combine complementary to patent pools and about the inclusion of non- made the patents available “on reasonable terms patent rights and are not likely essential patents in package licenses offered to all manufacturers, such interchange may to prospective licensees. The U.S. Court promote rather than restrain competition.” to impede competition. Whether of Appeals for the Federal Circuit recently Id. at 171. This did not necessarily mean that other structures are likely to pass confronted these and other questions in U.S. the patentees had to charge reasonable rates: antitrust scrutiny will Philips Corp. v. International Trade Commission, “Unless the industry is dominated, or interstate 424 F.3d 1179 (Fed. Cir. 2005). commerce directly restrained, the Sherman Act of course depend In U.S. Philips, the Federal Circuit reviewed does not require cross-licensing patentees to on the facts of the case. an International Trade Commission (ITC) license at reasonable rates others engaged in xxxxxxxxxxxxxx decision finding a package license unenforceable interstate commerce.” Id. at 172. due to patent misuse. Patent misuse is an During the decades following Standard equitable defense to patent infringement that Oil, courts grappled with the questions that Additionally, the Antitrust Guidelines bars a patent owner from using the leverage of the Supreme Court left unanswered. May the noted that patent pools might have an the patent “to derive a benefit not attributable administrator of a patent pool include non- anticompetitive effect if the pool deters or to the use of the patent’s teachings.” Zenith essential patents in a package license offered to discourages participants from engaging in Radio Corp v. Hazeltine Research Inc., 395 U.S. prospective licensees? What pooling practices research and development. For example, a 100 (1969). The ITC used a per se standard of do pose a possible problem? patent pool might reduce the incentive to review because the package license included engage in research and development if the pool “non-essential” patents. The per se rule refers Antitrust Guidelines (1995) requires members to grant licenses to each other to categories of anticompetitive behavior that In 1995, the U.S. Department of Justice for current and future technology at minimal are simply presumed to create an unreasonable and the Federal Trade Commission reviewed cost. Such a requirement might motivate pool restraint on trade. In contrast, under the rule the case law and released a set of antitrust members to free ride on the accomplishments of reason, a practice is impermissible only if enforcement policies concerning patent of other pool members. Antitrust Guidelines at it can be shown that its effect is to restrain licensing. In the Antitrust Guidelines for the 29. See generally Daniel P. Homiller, “Patent competition in a relevant market. See U.S. Licensing of Intellectual Property, the DOJ and Misuse in Patent Pool Licensing: From National Philips, 424 F.3d at 1185 (Fed. Cir. 2005). FTC generally stressed the positive features of Harrow to ‘the Nine No-Nos’ to Not Likely,” The Federal Circuit reversed the ITC, patent pools, but noted a few practices that 2006 DUKE L. & TECH. REV. 7 (discussing stating that patent pools should generally be might cause problems. For example, courts may the Antitrust Guidelines). reviewed under the rule of reason, regardless deem collective price or output restraints in Thus, from the Antitrust Guidelines, it of whether the pools comprise “non-essential” pooling arrangements to be unlawful if the appears that the DOJ and FTC will examine patents, and further finding that Philips’ CD- restraints fail to promote the integration of most patent pools under the rule of reason, R and CD-RW patent pools did not comprise economic activity among the participants. Such which require that the agencies analyze a any “non-essential” patents in any event. In restraints may take the form of joint marketing pool’s anticompetitive effect. To obtain greater its opinion, the Federal Circuit distinguished of the pooled intellectual property rights with certainty as to whether a particular patent patent pools from the practice of block-booking collective price setting or coordinated output pool meets antitrust scrutiny, some pools have movies, noting that patent pool licensees are restrictions. Naked price fixing and market requested “business review letters” from the not required to use every patent in the pool division are also certainly subject to challenge.
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