DOJ Takes Wait-and-See Approach on Antitrust Concerns for Patent License Trading Exchange

Authored by Kenneth M. Frankel and John C. Paul

The Justice Department Antitrust Division (DOJ) declined to state its enforcement intentions regarding a proposed trading exchange for licenses to patents in multiple fields of use. In its March 26, 2013 Business Review letter to Intellectual Property Exchange International (IPXI),¹ DOJ explained that it was premature to conclude whether antitrust concerns would be raised once the exchange became operational, in view of the undefined patents or markets that may be in issue. DOJ's letter provides guidance on its concerns, however, which appear to remain consistent with those DOJ discussed in prior Business Review letters² for patent pools and in intellectual property-antitrust guidelines.

Proposed Patent Exchange

IPXI proposed to establish a trading exchange for buying and selling patent license rights in individual units (ULRs). According to DOJ's letter, IPXI would obtain exclusive rights from patent owners in many industries to non-exclusively license the patents in defined fields of use, and would package those licenses in units, either alone or with other patents from the same or other patent owners. Each ULR would be a nonexclusive license for a single unit of a product for the defined field of use. IPXI would offer the ULRs for direct purchase through its primary market, and purchasers could use the ULRs or sell them to others through a secondary trading market that IPXI would establish. IPXI would choose the patents, analyze their validity, potential infringement, and marketability, package licenses to them, and offer licenses for the packages. IPXI and the patent owner together would set the price, number, and terms of ULRs offered, and bring infringement actions against non-licensees practicing a ULR patent in the field of use. IPXI would share with the patent owners the revenues from the ULR sales and infringement actions. IPXI also would make efforts not to simultaneously offer separate ULRs for technologies or products that compete with each other.

Some of the ULRs would be pools of patents. If IPXI packages multiple patents together in a ULR, each patent would be "reasonably relevant or beneficial" to the ULR's field of use. If it packages multiple patent owners' patents in the same ULR, each patent owner also must make its patents available in separate ULRs, unless the field of use is to conform to or implement a technical standard. For ULRs for technical standards, each patent must be technically or commercially necessary to conform to or implement the technical standard, i.e., effectively essential to practice the standard, as confirmed by an independent expert.

Purchasers of the ULRs (sublicensees) practicing the patents periodically would report to IPXI the number of units of ULRs that they consumed, i.e., the number of licensed products they made, used, or sold within the field of use. IPXI would publish data on these amounts only if the information is aggregated and individual sublicensees remain unidentified.

DOJ's Analysis and Concerns

DOJ concluded that the proposed exchange would provide potential competitive benefits, but also raised certain competitive concerns that DOJ could not evaluate fully before the exchange became operational.

• Procompetitive Benefits
  On the procompetitive side, DOJ found that the proposed exchange potentially could increase licensing efficiency and decrease transaction costs, avoiding the need for costly individual licensing programs and license negotiations, and some due diligence for licensees regarding the patent. DOJ also noted the benefits of publication of the prices for ULRs to allow potential sublicensees to anticipate costs and to see whether standard-essential patents are offered on (F)RAND terms. DOJ further recognized benefits of pooling of patents in reducing the transaction times and costs, reducing stacked royalties, clearing blocking positions, and integrating technologies needed to practice in a particular field of use or standard.
• Pooling—Lack of Options, Sharing Competitive Information, and Substitutes
  DOJ saw potential for competitive harm, however, in pooling patents of ULRs for competing technologies and multiple patent holders, the lack of options to license within the field of use but independently from the pool, and sharing of competitively sensitive information. DOJ could not resolve those concerns at this time.
  
  In particular, DOJ expressed concern about pooling in a single ULR licenses to patents for substitute technologies. While combining complementary technologies in the pool would be procompetitive in lowering total royalty rates, including substitutes could eliminate competition between patented technologies. DOJ recognized that including substitutes may not be anticompetitive, however, if it created efficiencies that outweighed the potential harm or did not increase market power. But IPXI would not exclude substitute patents in pooling patents that are "reasonably relevant or beneficial" to a field of use. Since the specific patent owners, patents, and fields of use would be determined in the future, DOJ concluded that it could not assess in advance the competitive effects of the pooled ULRs.
• Competing ULRs—Setting Prices and Terms
  Similarly for patents that are not pooled, DOJ expressed concern about competing ULRs, because IPXI and the patent owners setting the pricing and terms for licenses could reduce competition between ULRs. While IPXI proposed to take precautions to exclude competing ULRs thorough its own market research, DOJ did not conclude that that approach necessarily would be effective.
• Lack of Ability To Independently License in Field of Use
  DOJ also remained concerned about exclusive licenses granted to IPXI by patent owners. Consistent with earlier Business Review letters, DOJ explained that the option for a patent owner to license its patents independently from a pool can mitigate the potential market power of the pool, encourage competition, and create incentives to invent around other patents in the pool. These options would not be available, however, in view of the exclusive licenses barring the patent owners from licensing their patents separately from the IPXI ULRs in the ULRs' fields of use. In addition, while multiple patent owners in a pooled ULR would offer their patents in separate ULRs, their incentives to offer competitive terms was unclear. And while patent owners would retain the right to license patents outside a ULR's field of use, that scope would vary for each ULR and technology. DOJ felt that these abilities may not provide the competitive benefits of independent licensing that could be available if the patent owners non-exclusively licensed their patents to IPXI. Accordingly, DOJ again found it premature to assess the competitive effects.
• Standard—Essential Patents
  For pooled patents that are technically or commercially essential for a standard, DOJ found IPXI's definition of essentiality sufficient, if independent experts objectively and accurately make that determination, and the process is transparent and available for review by ULR purchasers. If that were to occur, DOJ felt that the ULRs likely would contain only complementary patents.
• Sharing of Competitively Sensitive Information—Possible Price Coordination
  DOJ also expressed concern about sharing of competitively sensitive information, which could lead to price coordination in products made with the licensed technology or result in lessened competition among technologies. The dissemination of historical and aggregated information, without identifying individual entities even implicitly, would mitigate that concern. IPXI would prohibit patent holders from communicating with each other about the price or quantity of ULRs, and limit disclosure of confidential information IPXI receives. DOJ explained that IPXI's rules should limit patent holders' access to competitively sensitive information.
• Premature to Analyze and Assess Competitive Effects
  In the end, DOJ found that, at this time, it could not determine that there would be no anticompetitive effects from the proposed patent exchange:

Due to the inherent uncertainties and potential competitive concerns associated with IPXI's novel business model that are discussed in detail below, the Department declines to state its present enforcement intentions regarding IPXI's proposal at this time. We simply do not know enough to conclude that IPXI's activities, once operational, will not raise competitive concerns.³

         Its press release added that:

because IPXI cannot predict in advance the patents or markets that might be at issue, the department is unable to engage in the fact-intensive analysis necessary to assess the likely competitive effects of the proposal. In addition, given the novelty of IPXI's proposal, it is possible that other potential competitive concerns may later emerge once IPXI's platform is operational.⁴

Lessons Learned

DOJ's response shows that the guidance from prior Business Review letters and the DOJ/FTC guidelines on patent pools still provides good advice on reducing competitive concerns when the relevant markets and technologies are narrowly defined. But when a proposal involves undefined relevant markets and technologies, the competitive effects are much harder to foresee.

• Prior DOJ Guidance and Concerns
  Over the past 15 years, DOJ has issued several Business Review letters in response to inquiries about specific patent pools in specific industries. In the late 1990s, letters addressed patent pools for MPEG and DVD technologies,⁵ and in the 2000s, letters addressed patent pools for 3G and RFID technologies.⁶ In each case, DOJ reviewed the proposals, found that the pools appeared to have proper safeguards against anticompetitive conduct, and told the parties that it had no intention at that time to take antitrust enforcement action against the pools described.⁷
  
  The antitrust concerns about pools expressed in the earlier letters are repeated in the recent letter to IPXI, discussed above. They also are summarized in the DOJ's and FTC's 2007 report on Antitrust Enforcement and Intellectual Property Rights, and their 1995 Antitrust Guidelines for the Licensing of Intellectual Property.⁸ The agencies consider patent pools to be generally procompetitive in reducing transaction costs, avoiding blocking patents, and reducing royalty stacking, if they combine complementary technologies (e.g., a pool of all standard-essential patents that are determined to be essential through an independent expert). Overall competitive concerns, however, are horizontal coordination among the licensors of the pool's patents and discouragement of competitive R&D. In particular, the agencies are concerned about inclusion of substitute technologies rather than complements and exchange of competitively sensitive information among competitors. They also see the ability of pool members to independently license their technologies as a useful tool to reduce antitrust concerns. In the end, the pools are reviewed under the antitrust rule of reason, balancing procompetitive benefits against anticompetitive harm.
• DOJ Has Same Concerns and Cannot Satisfy Them Without Specific Markets
  The lessons learned here are that DOJ continues its approach to patent pools, raising the same concerns as it has for nearly two decades. But parties seeking to lower risk through Business Review letters need to provide DOJ with specific relevant markets and technologies for analysis. In any event, regardless of DOJ's enforcement intentions, private parties can bring antitrust actions and relevant markets are important to evaluating the risk private actions present.

Endnotes
¹ http://www.justice.gov/atr/public/busreview/295151.pdf. The information about the IPXI exchange described in this article comes from that business review letter.

² DOJ's Business Review procedure allows the public to determine DOJ's current antitrust enforcement intentions about proposed business conduct. Persons requesting a business review submit information to DOJ, which often requests further information. DOJ will promptly issue a Business Review letter stating its then-present enforcement intentions regarding the conduct. The Business Review letter and information submitted is public, but confidential commercial or financial information submitted may remain confidential upon request. See http://www.justice.gov/atr/public/busreview/index.html.

³ http://www.justice.gov/atr/public/busreview/295151.pdf at 1.

⁴ http://www.justice.gov/opa/pr/2013/March/13-at-349.html.

⁵ http://www.justice.gov/atr/public/busreview/215742.htm (June 26, 1997, MPEG-2);  http://www.justice.gov/atr/public/busreview/2121.htm (Dec. 16, 1998, 3C DVD); http://www.justice.gov/atr/public/busreview/2485.pdf (June 10, 1999, 6C DVD).

⁶ http://www.justice.gov/atr/public/busreview/200455.htm (Nov. 12, 2002, 3G); http://www.justice.gov/atr/public/busreview/238429.htm (Oct. 21, 2008, RFID).

⁷ Outside of the Business Review context, the FTC brought an action in 1998 against a patent pool involving eye-laser technology, in which two patent owners pooled their patents for competing technology and shared the proceeds; the FTC complaint charged price fixing. In re Summit Technology, Inc. and VISX, Inc., Docket No. 9286 (FTC Mar. 24, 1998), http://www.ftc.gov/os/1998/03/summit.cmp.htm. The parties entered consent judgments; subsequently the complaint was dismissed. http://www.ftc.gov/os/1998/08/d09286suagr.htm; http://www.ftc.gov/os/1998/08/d09286viagr.htm; http://www.ftc.gov/os/2001/02/summitvisxorder.htm.

⁸ http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf at 64-85;  http://www.justice.gov/atr/public/guidelines/0558.pdf at 28-30.

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