Transcript Bearing the Burden: Small Firms & the Patent System Kathryn Foley May 21, 2008

Bearing the Burden:
Small Firms & the Patent System
Kathryn Foley
May 21, 2008
Patent Portfolio Dilemma
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Patent portfolios can be used as a method of aggregating
patent rights to add value to the patent system and promote
innovation
On the other hand, patent portfolios can also be used as an
anticompetitive mechanism that forecloses downstream
markets and harms competition
Issue: How do we analyze patent portfolios to accurately
condemn their anticompetitive uses while at that same time
providing enough predictability in the analysis such that
firms continue to create patent portfolios for procompetitive
ends?
Patent Portfolio
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“The real value of patents lies not in their individual
significance, but instead in their aggregation into a patent
portfolio: a strategic collection of distinct-but-related
individual patents that, when combined, confer an array of
important advantages upon the portfolio holder.”1
Combining the “right to exclude” of many patents creates a
“super patent” with broader protection than any individual
patent could provide
Result = Value added to the patent portfolio >> marginal
cost of obtaining the patent > value of the individual
patent
1 Gideon
Parchomovsky & R. Polk Wagner, Patent Portfolios, 154 U. Pa. L. Rev. 1, 15 (2005).
Strategic Non-Innovative Patents

Cost of Obtaining a Patent
$72,000 – estimated cost of a Euro-PCT patent 1
 $49,000 – estimated cost of a Euro-Direct patent2
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1
2
European Patent Office, Cost of Euro-PCT Patent (2005), available at http://www.european-patent-office.org/epo/new/costs_eppct_2005_en.pdf
European Patent Office, Cost of Euro-Direct Patent (2005), available at http://www.european-patent-office.org/epo/new/cost_ analysis_2005_study_
en.pdf
Estimates of Patent Value
Quantile
Pharmaceuticals
Chemical
Mechanical
Electronics
All
Technology
0.25
515
477
638
627
557
0.5
1,631
1,594
2,930
3,159
2,329
0.75
5427
5807
13,769
16,322
10,331
0.90
11,787
13,735
40,840
53,122
29,871
0.95
19,920
24,363
83,857
113,403 60,386
0.99
52,139
69,906
321,966 481,429 231,360
Mean
4,313
4,969
15,120
19,837
Mark Schankerman, How Valuable Is Patent Protection? Estimates by Technology Field, 29 RAND J. Econ. 77 (1998).
11,060
Patent Portfolio

Scale Effects
 1)
Creates room for future innovation under the broad
scope of “super patent” protection
 2) Attracts related external innovations
 3) Creates significant bargaining power in licensing
 4) Defensive patenting
Patent Portfolio

Diversity Effects
 1)
Increases ability to handle future technological,
market and legal uncertainties
 2) Expands scope of research and development into
adjacent areas
 2) Attracts investment by increasing predictability and
confidence in the portfolio owner’s rights
Patent Portfolio

Effect on Small and Medium-Sized Enterprises
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Unable to play the patent portfolio game in a meaningful way –
entry barriers
 Forced to rely on the high risk method of obtaining only a
limited number of patents to protect the most important
innovations
Lack bargaining power in litigation and licensing
Find it difficult to enforce their own IP rights
 Navigating through a potential defendant’s patent
portfolio is costly, risk of infringement counter-claim
Limited to filling the “gaps” between patent portfolios or creating
disruptive technology (leap frog markets)
Patent Portfolio Implications
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1) Patent intensity will remain high
2) Pressures on patent offices will increase
3) Patent thickets, blocking patents and bottlenecks will
proliferate
4) Patent litigation will become increasingly complex and
expensive
5) Patent system will favor large, well-funded firms
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Significant entry barriers created by the existence of portfolios
6) Value of individual patents will decline and become
increasingly irrelevant
Mitigating the Anticompetitive
Effects of Patent Portfolios
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Antitrust and competition law are often suggested
as mechanisms for mitigating certain anticompetitive
consequences of patent portfolios
Compulsory licensing - with respect to refusals to
deal patented goods
 Refusals
to deal can serve anticompetitive ends where
they are employed to leverage patent rights beyond
their appropriate scope
Shortcomings of Compulsory Licenses
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Compulsory licenses are a very singular type of
response to a specific situation
With compulsory licenses, firms may be unable to
maximize individual benefits that could have been
realized through open negotiations
Recognize the value of patent portfolio creators as
“aggregators” of useful information
Recognize the value of a market capable of diverse
responses to market changes
Antitrust in the United States
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Antitrust laws are mainly concerned with actions that have
anticompetitive effects on the market
Some conduct is considered to be inherently anticompetitive
and therefore a per se violation of antitrust law


A plaintiff must prove only that the prohibited conduct occurred
(i.e. naked horizontal price-fixing)
Most conduct is analyzed under a rule of reason

A plaintiff must demonstrate that the defendant’s actions had
anticompetitive consequences in the marketplace
Anticompetitive Consequences
in the Marketplace
 1)
Establish actual anticompetitive effects, or
 2) Establish that the defendant has:
market power  market share (30/60/90 paradigm)
 in the relevant market,
 thereby permitting an assumption of anticompetitive
effect and harm to consumer welfare
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US antitrust analysis is therefore heavily focused on
the market where the anticompetitive effect is
alleged
Image Technical Services, Inc. v. Eastman
Kodak Co., 125 F.3d 1195 (9th Cir. 1997).
Plaintiff alleged that Kodak used its legitimate monopoly over
patented parts to create a second, illegal, monopoly over the
profitable service market
 A patent holder’s desire to exclude others from its protected
work is a presumptively valid business justification for a
refusal to deal.
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HOWEVER - Business justification can be rebutted
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1) Evidence that the IP protection was acquired in an unlawful manner
2) Evidence of pretext
 Pretext can be inferred from circumstantial evidence such as the
subjective intent of employees in refusing to deal or refusal to deal
both patented and unpatented goods
In re Independent Service Organizations Antitrust Litigation v.
Xerox Corp. 203 F.3d 1322 (Fed. Cir. 2000).
“We decline to follow Image Technical Services.”
 Protection of patented material is a presumptively valid
business justification for a patentee’s refusal to deal
 NOT going to inquire into the IP holder’s subjective
motivation
 Presumptively valid business justification may only be
overcome by proof of:
 1) Illegal tying
 2) Fraud on the PTO
 3) Sham litigation

Compulsory Licensing
in the United States
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9th Circuit – protection of patent rights is a presumptively valid business
justification for a refusal to deal that can be rebutted by a showing of:
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1) fraud on the PTO, 2) pretext
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Federal Circuit WILL NOT analyze subjective motivation
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Burden of Proof is on the plaintiff to establish that the defendant’s conduct fits in one
of three narrow categories:
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WILL analyze subjective motivation
1) fraud on the PTO, 2) illegal tying, 3) sham litigation
Supreme Court – (Verizon v. Trinko) spoke to the virtues of monopoly
power, the dangers of forced sharing, the costs of antitrust litigation and
limited the most liberal finding of liability for a refusal to deal
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Trinko appears to create significant barriers to bringing a successful refusal to
deal claim for a compulsory license
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Some scholars interpret Trinko as essentially barring antitrust scrutiny for a refusal to
deal intellectual property
Compulsory Licensing
In the European Union
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Article 82 (formerly 86) of the EC Treaty
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“Any abuse of a dominant position within the common market or in
a substantial part of it shall be prohibited as incompatible with the
common market in so far as it may affect trade between Member
States.”
 Dominance
= defined as the power to prevent effective
competition from being maintained in the relevant market
 Significantly broader than US concept of market power which
is more closely tied to price and output, and requires a
showing of anticompetitive effects, harming consumer welfare
 EC places more of an emphasis on protecting competition as
an institution and does not require a showing of actual
anticompetitive harm to consumers
Volvo v. Erik Veng, Case 238/87,
[1988], E.C.R., 6211.
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Volvo refused to license design rights for car wings to Mr. Veng, who
allegedly used to manufacture and import spare parts without Volvo’s
authorization
ECJ clarified that “manufacturing and selling or importing products
incorporating the design constitute the very substance of the exclusive
right, and that a refusal to grant such a license, cannot in itself constitute
an abuse of a dominant position.”
However, the court noted that the existence of different circumstances
than those in the Volvo case might have justified a finding of abuse
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1) an arbitrary refusal to supply spare parts to independent repairers
2) overcharging for spare parts
3) ceasing to produce spare parts for a particular model when there were
many vehicles of that model on the road
RTF, IPT v. Commission, Case C-242/91,
C-242/91, [1995], ECR 1141
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Three television stations, each sold their own weekly programming
guide
Plaintiff attempted to create a single, weekly guide to the
programming on all three stations
ECJ held that “mere ownership of an intellectual property right
cannot confer a dominant position”
Nonetheless, ECJ went on to find that the television companies
had a dominant position over the information
Dominant position was abused because the television companies
strategically employed their copyrights to prevent marketing of a
new product for which there was consumer demand
Emphasis: Dominant position over a scarce resource
Magill “Exceptional Circumstances” Test
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Where the legitimate owner of intellectual property rights is
also in a dominant position in the market, abuse of the
position may be found where:
 A) exclusive holder of a raw material or input essential to
run a certain business in the market and such input is not
duplicable
 B) behavior prevents the coming into the market of a
product for which there is potential consumer demand
 C) the refusal to deal has no legitimate business
justification
 D) behaviors deliberately pursued the goal of reserving a
downstream market by foreclosing competition to other
rivals
NDC Health v. IMS Health, Case C418/01, [2004] E.C.R., I-5039.
 IMS
was the leading supplier of market reports for
pharmaceutical sales in Germany and held a copyright
over the modular structure used to create the report
 Commission
concluded that IMS’s modular structure was
a de facto standard, essential for operating in the
relevant market
 industry
 Unlike
standard (network effects)
Magill, IMS’s refusal to license did not prevent a
new product from coming on the market, instead it
prevented a competitor from offering the same product
NDC Health v. IMS Health
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Commission reasoned that Magill did not require a cumulative
application of the “exceptional circumstances” and instead found
that IMS had other significant circumstances that allowed the
situation to be deemed “exceptional”
 Mixture of legal and economic barriers making entry into the
market essentially impossible
Exclusionary conduct to preserve dominant position:
 Dominant company = leveraging market power from an
upstream market to a downstream market
 IMS’s refusal to license the IP protected modular structure was
abusive as it was necessary to operate in the downstream
market
2005 Discussion Paper on the Application
of Article 82 of the EC Treaty
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Non-binding guidelines
Refusal to License IP Rights – “vertical foreclosure”
 “A dominant company denies a buyer access to an input in order
to exclude that buyer from participating in an economic activity”
where the excluded buyer is also a rival to the dominant company
in the downstream market for which the input is needed.”
Overall, reinforces the rulings of Magill and IMS
Advantage = arguably applies a more balanced approach than
the US, taking into consideration such factors as network effects
and market realities
Disadvantage = difficulty in predicting the existence of
“exceptional circumstances” and the low threshold for dominance
Predictability v. Flexibility
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Inherent Tension Between:
 Creating
a flexible model capable of effectively
taking into account the realities of the marketplace
 Network
effects
 Secondary Markets
 Procompetitive effects of patent portfolios
 Creating
a predictable model upon which firms can
reasonably rely when making business decisions
 Evaluating
market power or dominance not on a
threshold “per se” number, and instead conducting a
nuanced analysis of the relevant market in each case