Patent Pools and Standards
Princo v ITC
“Hard facts make bad law”
“No facts make worse law”
David Healey, Principal, Fish & Richardson
One Houston Center, Suite 2800
1221 McKinney St.
Houston, Texas 77010
713-654-5300
Healey@fr.com
Slides can be obtained by email or
from website:
www.patentmath.com
Princo – the Stats
• Arose out of a patent pool
• De facto (private) standards on CD-R and
CD-RW
• 2 big companies: Phillips and Sony
• 2 choices of technology for CD-R and CDRW
– Analog (Phillips) or Digital (Sony)
• En Banc Federal Circuit – 3 decisions,
majority, concurrence in part, dissent
3
Part 1
Traditional Views of Antitrust and
Patent Misuse
Antitrust Statutes
– Sherman Act Section 1: Makes it a felony for two or more competitors
to collude with each other in a way that restrains trade in a relevant
market.
– Sherman Act Section 2: Makes it a felony for a competitor acting alone
using unfair business practices, or 2 or more competitors unfairly
colluding with each other, to attempt to monopolize a relevant market, or
successfully doing so.
– Clayton Act: Private cause of action for violations of Sherman Act,
requires proof of standing and damages resulting from harm to
competition in the impacted market.
– Private Attorney General: Sherman Act is a criminal/regulatory statute.
The Clayton Act gives private litigants standing to enforce it, and
rewards success with treble damages and attorneys’ fees.
– FTC Act: A regulatory unfair competition statute that allows only the
Federal Government to bring suit.
5
Antitrust Elements and Concepts
•
Relevant Market: A market for a product (which is all available substitute
products that compete with each other in a geographic area); or fungible
technologies that can compete with each other (e.g. competing technical
solutions for an interoperability standard); or possibly R&D (e.g., resources
and incentive to innovate in a specific technology).
•
Market power: The ability to force other competitors to take actions in the
relevant market that they would not otherwise do (e.g., reduce production,
increase price, etc.)
•
Monopoly power: The power to control output or price or both in a relevant
market.
•
“Rule of Reason”: In evaluating a restraint on trade as “unreasonable” for
purpose of Sherman Section 1: The anticompetitive harm caused in a
relevant market is balanced against the pro-competitive benefits of the
concerted actions challenged (e.g., does the restraint of trade alleged hurt
consumers and competition more than it helps to make more products
available at cheaper prices).
6
Decline of Per Se Rules in a Tech
Economy
• “Quick Look Rule”: Court takes a “quick look” at the balance of
negative and positive impact on the relevant market of the
defendants’ actions; and if on initial evaluation the balance of the
restraints on competition appear more harmful than helpful, the
burden of going forward by the plaintiff is met, and shifts to the
defendant.
• Per se violation: Practices that over time have been designated as
facially so destructive to competition that they are illegal without
having to show harm to relevant market: E.g.,
– Price-fixing between competitors at the same level of the
market (e.g., all retailers)
– Group boycott
– The movement in the law is away from per se liability except
where explicitly established in US Supreme Court case law.
7
Patents vs. Antitrust
• A patent is the exclusive right given to its owner to exclude others
from practicing the inventions in the issued claims for a period of
time.
• A “patent monopoly” is generally not (and in fact rarely is) the same
as a monopoly over a relevant market (economic market) because
typically there are alternative goods, methods, processes, etc. that
compete as substitutes with the claimed inventions.
• When there is no substitute that can compete with the claimed
invention, a patent monopoly may be co-extensive with an economic
monopoly.
• A patent owner acting alone and within the rights of his patent grants
is immune from antitrust liability.
8
Standards-Patents-Antitrust
•
Industry standards: Protocols typically created to permit for interoperability
of different manufacturers’ equipment to permit for more competition at each
level of the market: E.g., electrical outlets, wireless standards, USB,
semiconductor pin-out and size, etc.
•
Industry standards: Product specifications and certifications to meet
minimum safety and quality requirements to protect consumers or otherwise
needed for public welfare can also be standardized: E.g., U.L. Certification,
Fire Code Standards, “Clean Air” formulations for gasoline, etc.
•
De Jure Industry Standards: Standards or certification processes by
groups of competitors/industry players: E.g., JEDEC, ETSI, IEEE, ASME,
PIP, 3GPP, or even government bodies: E.g. Gasoline formulations.
•
De Facto Industry Standards: Standards created by individual competitors
or closed coalitions of competitors: E.g., SD Cards, “Orange Book”, CDMA,
VHS, etc.
9
Standards-Patents-Antitrust
•
Patent or patents that cover a successful standard generally give their
owner market or monopoly power over the relevant market for technology
and goods compliant with the standard.
•
Standards that do not promote a pro-competitive purpose on balance or that
do not provide other public safety benefits:
– Can be illegal restraints on trade violating Sherman Section 1; or
– Unlawful attempts to monopolize a market under Sherman Section 2; E.g.
standards for pasta; State Bar minimum fee schedules; Dental Association rules
on release of records and prices to insurers; etc.
– Violate the FTC Act
•
Corruption of standard-setting process or product certification process in a
standards setting organization (“SSO”) is unlawful even if the rules of the
group are followed by the wrong-doer. E.g., packing a vote, failure to
disclose patents the owner knows it will assert covers the standard.
•
Post-adoption leveraging of standards is unlawful: E.g., refusing to honor
commitments to license to standards groups ( In re N-data, Broadcom v
Qualcomm); onerous license provisions on price, grant-backs, etc.
10
Patent Misuse under 271(d)(5)
•
Patent misuse grows out of equitable “unclean hands”, and traditionally
applied to anticompetitive conduct of the patent owner in use of its patents
that had the effect of extending the patent monopoly beyond the statutory
grant.
•
271(d)(5) limited patent misuse for tying and other antitrust like conduct to
situations where the patent owner has market power.
•
Modern trend in the law of tying, as with most restraints in standard-setting,
as well as patent licensing, is to review licensing restraints and standardsetting conduct under the “rule of reason”: This trend is captured in DOJFTC guidelines.
11
Patent Misuse Compared…
• Patent misuse
– Applies to the patent’s
enforcement outside of
litigation, not litigation
conduct.
– Renders patent
unenforceable.
– Can be “purged”.
– No standing required:
• Anyone can raise it
even if not a victim
• Compared to…
– Unclean hands is
litigation conduct.
– Inequitable conduct
is in the application
process in PTO.
– Sherman/Clayton
claims require
standing
– FTC Act government
only has standing
– No “purging”
12
Actual Harm Required
•
If there are no acceptable substitutes for the claimed invention, then any
market power is the result of the invention not the collusion, even if the
invention is put into a de facto or de jure standard, or license terms are at
monopolistic prices.
•
But unlawful action and harm might be shown if:
– There are in fact substitutes for the technology or patent or product;
– “Design-arounds” or alternatives would or could be competitive, if either,
• A patent had been timely disclosed in the process prior to adoption or
implementation of a standard; or
• A license for a standard does not interfere with development of other
alternatives or unnecessarily diminish incentives of others to develop
alternatives.
– Product certification is unfairly denied to an acceptable substitute.
13
Part 2
Summary of Facts Leading
To ITC Action As
Determined From ALJ’s
Initial Determination
The Orange and Red Books
•
“Orange Book” is set of standards for different versions of CDs.
•
“Red Book” is a set of standards for manufacturers of devices that use CDs.
•
“Orange Book” and “Red Book” are the result of de facto standard-setting –
Phillips and Sony developed the standards outside of a standard-setting
group.
•
Standards for compatibility of CDs are critical for interoperability of CDs and
devices.
•
“Orange Book” is a “turn-key” technical specification for any
manufacturer to make compliant CDs:
– Covers specs both “essential” (no design around and required for
interoperability) and “commercially essential” (only practical way to
implement a feature required for functionality even if not required for
interoperability or design around is theoretically or actually possible).
15
De Facto CD-R & RW Standards
•
Phillips had an analog technology for CD-R and CD-RW.
•
Sony had a digital technology for CD-R and CD-RW.
•
Phillips and Sony engineers agreed the Phillips analog path was easier to
implement, with fewer errors and greater reliability than Sony’s digital
technology for CD-R and CD-RW.
•
Phillips and Sony decide to put Phillips’ analog technology in the “Orange
Book” as the specification for CD-R and CD-RW.
•
All CD versions in the “Orange Book” had to be and were backward
compatible with each other so that each would work with the consumer
devices made according to past and present “Red Book” specifications.
16
Orange Book Patent Pools
•
Phillips operates patent pool for package licenses needed to implement
“Orange Book” and “Red Book” specifications.
•
“Independent” evaluator decided what patents go in the pool and each
license, as “essential” and which as “commercially essential”.
•
Phillips only licenses patents in the pool for “field of use” of devices
compliant with “Orange Book” or “Red Book”.
•
Sony agrees not to license its patents in the pool to others outside of
Phillips’ licensing program (e.g., for development of alternative technology).
•
Sony gets large share of royalties from each pool.
•
Sony got large share of royalties from CD-R and CD-RW pools even though
its digital technology was inapplicable to the pools.
•
Phillips will not license individual patents or let licensees pick and choose
from among the patents.
17
Twisted History of the Specs…
•
Phillips and Sony do not disclose in the Orange Book which patents are
essential or commercially essential for which specifications or if any
specifications do not implicate infringement: “turn-key” approach.
•
Although the “independent” evaluator put one claim of one Sony digital
patent in the CD-R and CD-RW pool as “essential”, this claim clearly was
not applicable to analog specifications.
•
Phillips charges minimum fees for patent pool licenses regardless of selling
price of CDs.
•
Taiwan FTC in 2001 found these practices anticompetitive and ordered that
each pool member be required to also license its own patents separately
from the other members and in any combination requested by licensee.
•
Sony and its affiliates reduced their prices for patent licenses when forced
to license themselves in Taiwan.
•
Phillips charged same price for each package.
18
Patents of Other Companies In
Pool that Were “Non-Essential”
•
Phillips also included several ‘other patents’ that arguably were not
essential to implementation of the Orange Book interoperability
specifications (internal functions) in the patent pool.
– These ‘other patents’ related to specific operations within the
manufacturing process.
– Respondents presented evidence there was at least one technical
alternative to each of these ‘other’ patents.
•
Phillips licensed most of the market and makers of CD products, but could
never capture all manufacturers in its licensing program.
•
Phillips and Sony agreed that Sony would not license its digital technology
for CD-R or CD-RW development.
19
Commoditization and Princo
• Overtime, CDs became commodity products where price was not
directly driven by cost or margin, but mainly by market demand and
supply.
– CD manufacturing became focused in countries with low
manufacturing costs.
– CD manufacturers generally purchased “turn-key” equipment
systems and licenses.
– Phillips could tell CD manufacturers which package license each
needed based on the manufacturing equipment purchased.
• Princo got into the CD-R and CD-RW on a “turn-key” basis:
– Purchased manufacturing equipment.
– Purchased pool license from Phillips.
20
Princo’s Actions
•
Princo saw prices for CD-R and CD-RW fall as supply increased, but
minimum royalty remained constant.
•
Princo stopped paying royalties.
•
No evidence ever discussed in public opinions that Princo sought to:
– Implement alternatives to any non-essential patent (that is, to change
operation of manufacturing equipment to implement an alternative
technique at any step in the process).
– Develop or invest in development of digital technology.
– Asked Sony for license to the digital technology patent(s) separately
from the Phillips managed patent pool packages.
21
Part 3
THE ITC CASE, ALJ INITIAL
DETERMINATION AND
COMMISSION DECISION
Phillips Brings ITC Action
• Phillips brings ITC Action against Princo
and other CD manufacturers not paying
royalties.
• The ALJ finds all patents infringed.
• The ALJ finds all patents valid.
• But the ALJ finds Phillips Patent Pools are
riddled with various types of misuse.
23
Patent Pool Defined
24
Patent Pools: Good and Bad
25
What Belongs in a Pool?
26
The CD-R and RW Pools
27
Digital v Analog
28
ALJ’s Patent Misuse Definition
29
Patent Misuse > Antitrust Law
30
ALJ’s Relevant Markets
• 2 relevant markets found:
– Standardized product for which no other
product is compatible (CD-R and CD-RW).
– Patent licenses to manufacture product
according to interoperability standards.
31
ALJ’s Decision on Essentiality
• Phillips said essential and non-essential patents
were in the Pool to allow manufacturers to buy
equipment, tweak it, and produce CD-R and CDRW on a “turn-key” basis.
• Respondents said Pool should be limited to
those patents for a required standard for which
there was no substitute.
– Pointed out Orange Book does not match standards
and patents.
– Opposite of Phillips’ “turn key” approach.
32
The Scam?
• Independent patent advisor called Sony’s
Lagadec patent essential.
• ALJ found the patent was not essential but in
fact was wholly inapplicable to Orange Book CDR and CD-RW.
• And as a result was an available alternative
technology if manufacturing process changed.
• Other patents on very specific features were
found non-essential and that potential
alternatives existed to implement each feature.
33
Phillips Meets 271(d)(5)
34
Rates Sound Bad?
35
Minimum Fees Show Market Power
•
Pool charged minimum fees.
•
Fees and rates were high (1/3-1/2 or more of sales).
•
ALJ said minimum fees put a cost squeeze on manufacturers, and was
something they would not agree to in a market unless distorted by
anticompetitive conduct.
– Taiwan FTC’s order to allow individual patent/patent owner
licensing resulted in drop in royalties for non-essential patents.
•
Phillips minimum royalty prevents CD-R and CD-RW product prices from
going down below certain point.
•
Phillips sold CDs made for it by Taiwan manufacturer royalty-free.
36
Some License is Needed
37
Commission Focused Only On
Tying—Both Per Se and “R of R”
38
Balance: Impact v. Injury
39
Commission Finds Harm
40
Was there actual harm?
41
Digital Patents Not Asserted
42
43
Part 4
Fast-Forward to the August 30,
2010 Federal Circuit En Banc
Same Facts:3 Opinions, 3 Theories
• Majority: Phillips and
Sony have a joint
venture:
– Agreeing between themselves
not to license their own
patents to compete with the
“Orange Book” is not an
unreasonable restraint.
– Since the engineers agreed
that the analog technology is
better, there is no harm no
foul.
– Other non-essential patents
were on minor specifications
and proof of alternatives was
thin.
• Dissent: Phillips has paid
off Sony to keep the
competing technology off
the market:
– Even if Sony had no interest in
developing the digital
technology, others might have
but for Phillips’ paying off
Sony.
– The Sony Lagadec patent did
not belong in a pool with the
Phillips analog patents, and
forcing manufacturers to
license is tying.
– Even if other alternative
patents are thin, can’t
prevent choice or
development of choice.
45
Majority: Patent
misuse limited to
“leverage” of patent in
suit: Extend term or
scope (tying) – no
“leverage” of Lagadec
patent and did not sue
on Lagadec Patent
Concurrence: No
proof of harm to
competition so no
violation of 271(d)
Dissent: Pool’s
agreements among
members and
licensees fail quick
look test because
collusion excludes
competing
technologies
Factually: No harm, no Decide case on facts
foul
only for failure of
proof of harm to
markets
Enough proof of harm
to competition to
develop facts and go
past “quick look”
Legally: Sherman 1
1)
violation is not the
same as patent
misuse even when
2)
based on conspiracies
on patent licensing
Absurd to hold that in
theory an antitrust
violation (a felony
crime) based on
patent licenses is not
patent misuse.
No proof there
was a viable
digital alternative
No proof Princo
wanted to
develop any
alternatives
(choose turn key)
46
Final Comments
• Cert. petition window is still open for
another month or more.
• Patent leveraging theory is too narrow –
especially for the ITC where no
counterclaims can be brought for Antitrust
violations. (ITC is place you need the
defense of patent misuse).
• If something is an Antitrust violation but
not patent misuse can you still enforce the
patent?
47
Discretion is the Better Part of
Valor….
For slides or discussion see
www.patentmath.com or email or call
David Healey
713-654-5300 and healey@fr.com