The smartphone patent wars and competition policy

By 25 April 2012 13

Source: http://blog.thomsonreuters.com/index.php/mobile-patent-suits-graphic-of-the-day/

Last Wednesday (April 18, 2012), Lucy Koh, a US District Court Judge, may have paved the way towards a truce on one of the fiercest fronts of what is now commonly known as the “Smartphone Patent Wars”. She ordered Tim Cook and Choi Gee-Sung, the CEOs of Apple and Samsung, to meet and work out their bitter and prolonged patent disputes. The two firms have indeed spent the last months suing and countersuing each other, all over the world, for alleged patent infringements (this infographic nicely summarizes the main episodes of this “battle”).

As most companies in the smartphone industry are fighting similar battles (for a very effective presentation of the existing feuds, see the animated graphic proposed by the Financial Times), the peacemaking process that Lucy Koh initiated may prove crucial for saving the industry from a potential collective suicide.

The legal quagmire that currently plagues the smartphone industry results from a combination of forces that regular readers of this blog should be familiar with by now.

1. Smartphones are the archetypal example of a cumulative innovation. They exhibit indeed the two types of cumulativeness: complementarity and sequentiality.

  • Complementarity describes the fact that a second-generation product requires the combination of a number of different first-generation innovations (‘many-to-one’). This is clearly the case for smartphones as they result from the collision between computers and mobile-phones, which are themselves already cumulative in nature.
  • Sequentiality refers to the notion that a first-generation innovation leads to the creation of many second-generation innovations (‘one-to-many’). This is also the case for smartphones insofar as all handsets have to incorporate a number of existing standards (for, e.g., wi-fi access, email transfers or video display).

2. The previous technical features raise important-and potentially conflicting-economic issues regarding the allocation of intellectual property rights. On the one hand, complementarity raises the prospect of the ‘tragedy of the anticommons’: the allocation of strong property rights to separate right-holders results in higher prices (‘royalty-stacking’) and higher transaction costs. In this respect, some form of ‘collective’ or ‘shared’ property is more prone to favor interoperability and easy access to interfaces.

Sequentiality, on the other hand, is likely to create hold-up opportunities for first-generation innovators if intellectual property rights are defined too broadly (i.e., if the first-generation innovation confers the patentee rights over subsequent innovations).

3. The importance of the previous two problems is magnified by the sheer density and size of the ‘patent thicket’ that engulfs the smartphone industry: according to estimates, a smartphone is open to a quarter of a million patent claims. If you factor in the diversity of players (as companies flock from industries as diverse as equipment manufacturing and software development), the crucial need for interoperability (just try to imagine how painful your life would be if several incompatible email services were coexisting), and the high profitability of the whole market (the global mobile phone industry reached a value of US$1.18 trillions in 2011), you easily understand why even though private solutions to the previous problems do exist (patent pools and standard-setting organizations address the tragedy of the anticommons while licensing agreements may solve the hold-up problem), these solutions are very hard to achieve in the smartphone arena.

Accordingly, some players in the market have called upon the competition authorities to sort out the mess. Some observers have been rather critical of the authorities’ abilities to do so. For instance, Yann Ménière recently posted an article on this blog expressing doubts that competition authorities would be able to impose sanctions that address the fundamental problem(s).

What do you think?

Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where  consumers benefit more of inventions than patent litigators?

Under what circumstances could the litigation of patents (or other IP rights) become abusive and objectionable from a competition point of view? (In responding, you should refer, where possible, to the ECJ case law and take into account, among others, the fundamental right of private parties to defend their rights before the courts).

 

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13 Responses to The smartphone patent wars and competition policy

  1. Christophe Baekeland 10 August 2012 at 19:37 #

    PATENT – WARS: AN APOCALYPS FOR THE COMPETITION?

    The “Smartphone Patent Wars” demonstrate that relations between IP – rights and competition law are strained. Conflicts are inevitably serious. Blinded by the enormous stakes, chances of “shame litigation” to safeguard an IP – protected prime market position increase. Though everyone has the (constitutional) right to litigate when his (intellectual) rights are violated (articles 6, § 1 and 13 ECHR), litigations can disturb the workable competition on the marketplace. Therefore it can (exceptionally) be prohibited in case of abuse of a dominant market position (art. 102 and/or 106 TFEU).

    Relevant IP – cases of the ECJ are rare, unlike case law on the general concept of the “abuse of rights”. “IP shame litigation” can be present if a person (1) litigates without (any) interest (article 263, § 4 TFEU) or right, (2) continuously claims obviously based on inadmissible and/or unfounded applications and appeals (by reason of the same facts and/or unfounded allegations, (3) exclusively litigates to cause damage (to bully (financially) or as a result of reckless behaviour (good diligence principle) and (4) litigates without any chance of success or only to delay the execution of undisputed obligations. More difficult is the evaluation of behaviour aimed to avoid judgements within a reasonable period of time (art. 6, § 1 ECHR) and conflicts with the right of privacy (articles 8 ECHR and 16, § 2 TEU). In both cases the concrete circumstances will be determinative. Furthermore, litigations with the sole aim to ruin a competitor’s reputation, or (only) based on deception and/or fraud, are abusive and can be refused.

    The difficulty of “IP shame litigation” is the open norm policy of the relevant conditions. Primarily, the treaties of Lisbon respect the ECHR (art. 6 TEU), according to which every limitation requires a legal interest and should be proportional with their goal. Despite this vagueness, the ECJ developed the concept “abuse of rights” and the inappropriate use of a legal position. Therefore, there will be no “shame litigation” unless both an objective (objective circumstances in which the purpose of the rules (of the European Union) has not been achieved) and a subjective (the (exclusive) intention to bully or to create artificially the required conditions to obtain a(n) (financial) advantage) element are fulfilled. To be abusive, an IP – litigation should be harassing, as well as reasonably create anticompetitive effects. In addition to a dominant market position, one can be guilty of “shame litigation” and possibly violate article 102 TFEU.

    However, these conditions are also free for interpretation. Furthermore, the ECJ refers to the national courts (possibly with ECJ guidance) to investigate (according the national rules of evidence but with respect for the EU – rules) if some of these conditions are specifically fulfilled. As national jurisprudence co – defines the concept of “shame litigation”, the risk of 27 different interpretations rises. Therefore the actual regulation seems insufficient and the risk of disturbance of the workable competition through abusive litigations stays real.

    Christophe Baekeland

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  2. Ewout Langerwerf 30 July 2012 at 20:57 #

    The ECJ has established that the rightful owners of IPR’s may protect their IPR’s by enforcing them through court actions. In IMS Health however, the ECJ has ruled that the enforcement of IPR’s may be restricted by article 102 TFEU. The Court specified that only under exceptional circumstances, the exercise of exclusive rights (such as IPR’s) may constitute abuse. The Court adopted three cumulative conditions, which where later confirmed in the Microsoft case : “that refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market.” Without the exceptional circumstances, there cannot be an abuse.

    Another abuse might occur in case of an exclusive licence. In Tetra Pak the Commission (upheld by the Courts) objected to the exclusive licence obtained by Tetra Pak since it strengthened the existing dominant position of Tetra Pak and severely weakened the already limited existing competition and possible exclusion of new entrants. Also here the exclusive licence in itself was not deemed problematic but the specific circumstances, being that competition could be seriously delayed or even prevented, of the case were.

    A “patent ambush” is another form of abuse which has received attention of the Commission. In the Rambus case, the Commission objected to the fact that Rambus intentionally concealed its patents relevant to a technology standard (for DRAMs) and subsequently claimed ‘excessive’ royalties. Rambus voluntarily committed to a cap on the royalty rates after which the case was closed.

    So-called “sleeping patents” may also form a serious impediment to effective competition. Firms often patent similar products to ensure that their exploited products cannot be copied in a similar non-infringing way. A fine example has been the Boehringer affair. The Commission there opposed the allegedly abusive improper filing of new patents by Boehringer regarding a specific substance which could restrict (generic) competitors. This point of view by the Commission seems however incorrect since article 102 TFEU may only counteract abuse of granted IPR’s as set out by the ECJ.

    Considering the foregoing, the Commission has been very wary of any anti-competitive aspects stemming from the pharmaceutical sector. Patent settlements (such as Lundbeck ) have been on the Commissions radar recently as they may delay entry of generic drugs and therefore restrict competition. Also AstraZeneca has been fined for supplying misleading information when applying for supplementary protection for one of its patents and for abusing regulatory procedures. The objection also incurred the delay of introduction of generic product versions.

    As a general note I would like to conclude that third parties can still exercise their rights even if there are IPR’s at stake in specific circumstances. Such an approach can be found in the Gilette case where a trademark cannot be opposed if the use is necessary to indicate the intended purpose of the third party product and this is the only means of providing the public with comprehensible and complete information on that intended purpose.

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  3. Azamat Abdulmenov (BSC student's exam response) 1 July 2012 at 03:02 #

    Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where consumers benefit more of inventions than patent litigators?

    Competition law solutions
    Patent relations of smartphone producers are very complex and difficult to resolve. However I believe that competition law could be of help for settling smartphone patent wars.

    In order to restrict abuse of dominant position of patent holders I would propose to legislatively impose an obligation on holders of essential patents to license their patents on FRAND terms for anyone who is willing to get such a license. In order to facilitate this process I believe that following steps should be taken:
    • Development by industry professionals, patent lawyers and competition specialists of a recommended sample of licensing agreement that would introduce standard terms and conditions. This sample could be used as a reference point during negotiations and court disputes.
    • Formulation of principles for calculation of royalties under FRAND terms. For example, maximum percentage of royalties for a patent could be legislatively introduced. Also a procedure for agreeing on percentage of royalties could include court examination of such royalties with respect to its compliance with FRAND principles.

    Another option is to legislatively oblige patent holders to set standards in smarthpone industry. For example a standard for smartphone could be developed by standard setting organizations. This procedure could be facilitated if an obligation would be imposed on patent holders to cooperate with standard setting organizations. Such an obligation would solve “hold-outs problem”.
    Standard for smartphone would promote following benefits for competition: increased downstream competition, lower costs and prices for downstream products, improved product quality.
    Such potential harms that could be caused by standards as risk of collusion through standard setting organization and potential royalty stacking should be specifically addressed. For example royalty stacking could be resolved by imposition of a maximum cap on royalties. Risk of collusion could be addressed by strict regulation of exchange of information between producers.

    Other solutions
    As a solution lying out of competition law I would propose to legislatively introduce the ban on permanent injunctions in smartphone (and other alike products) patent litigations.
    I believe that one of the main reasons of litigation mess in smartphone industry is availability of such a nuclear weapon as permanent injunctions.

    Two major factors make the companies abuse their IP rights through litigations in smartphone industry: sheer number of patents used for production of a smartphone and existence of such an instrument as permanent injunction.

    It is relatively easy to be granted with injunction in the court for an alleged infringement of a patent which even could be not so essential for a final product. Yet such injunction causes unproportionally huge losses for a defending company given the lengthy court disputes. Thus the strategy of suing each other rather than agreeing on mutually beneficial terms of cooperation is actively used in competition with rivals.

    I believe that if the smartphone producers would be deprived of a possibility to block the sales of their competitors through permanent injunctions there would be less litigation and more cooperation.
    Such a solution was used successfully against patent trolls in Supreme Court decision on the “eBay v. MercExchange” case in 2006. I think now it is time to expand this rule on the whole industry.

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  4. Stijn Huijts 29 June 2012 at 15:49 #

    Some of the disputes between smartphone manufacturers relate to standard-essential patents (SEPs), in particular the not-honouring of FRAND commitments and the seeking of an injunction for an SEP, despite a FRAND commitment. In certain cases FRAND commitments were given by SEP-holders, only for them to later turn around and file an injunction.
    Where this behaviour leads to the blocking of access to SEPs, it is anti-competitive and should be addressed under Article 102 TFEU. By setting clear precedents fining SEP-holders, the Commission will clear up part of the patent thicket, as national judges deciding in smartphone disputes will be inclined to follow the Commission’s decision. Parties involved in these disputes will factor in the likelihood of the judge following the Commission precedent and will likely withdraw or settle.

    Secondly, although it is unlikely that competition law could play a role in forcing Apple and Samsung to settle, as litigation is not abusive unless it is “manifestly unfounded” (Court of First Instance, ITT Promedia), competition law can ensure that a settlement between them is pro-competitive and enhances consumer welfare.
    The settlement is an agreement between competitors which will likely contain elements of (cross-)licensing that could breach Article 101(1). To benefit from 101(3), the settlement will have to be pro-competitive on balance.
    To this end, the parties should address both hold-up problems and the ‘tragedy of the anticommons’. Hold-up problems can be solved by (cross-)licensing the relevant sequential innovations. These licenses should be drafted in line with the Commission’s TT Guidelines. Moreover, as far as the patents are essential, the parties should agree to make them available to third parties on a FRAND basis.
    The tragedy of the anticommons, a problem of complementary patents, can be solved by standard-setting. Standard-setting could also pose competition issues, which the settlement should address. Competing patents are more likely to raise competition issues than blocking patents, the resolving of which is generally pro-competitive and essential to clear up patent thickets.
    If the standard relates to competing patents, it could reduce or eliminate inter-technology competition. To ensure the settlement does not eliminate competition in the downstream product markets, patents that are considered essential to the settled standard must be licensed on FRAND terms (see Horizontal Guidelines, para 280).
    It is essential, finally, that the settlement covers full disclosure between the parties, so that it will not be possible to block implementation of the settlement on the basis of undisclosed blocking patents not part of the settlement.

    As regards methods other than competition law, the Supreme Court held in its decision eBay v. MercExchange that the traditional four-factor test for a permanent injunction applies equally in patent cases: (i) irreparable harm; (ii) inadequate remedies in law; (iii) balance of hardships; and (iv) public interest.
    If this approach were to be widely adopted in the EU and US, the usage of patent injunctions as a bargaining tool (which is not limited to ‘patent trolls’, but also seems to happen in the smartphone wars) could be limited.

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  5. Charmaine Lobo 29 June 2012 at 11:10 #

    1) Could competition law play a useful role in achieving a truce in the smartphone patent war? or are there any other solutions that could push the industry back to the path where consumers benefit more of inventions that patent litigators?
    The latest developments in the smart phone patent wars has so far prompted the European Commission to open investigations into the behaviour and anti competitive business practices of Samsung, putting the other global players in the spot light as well (31 January 2012). The commission is to first specifically determine if Samsung has abused a dominant position breaching Article 102 of the TFEU. Second, the commission will analyse if Samsung is in contravention of a license it gave to the European Telecommunications Standards Institute (ETSI). This investigation is being eagerly watched as further clarity is seen as essential. Further on 3 April 2012 in response to complaints from Apple and Microsoft, the EC began investigating Motorola Mobility.
    Licensing of standard patents that are seen as essential is possible on fair, reasonable and nondiscriminatory (FRAND) terms. Technical Standards that arise from FRAND licenses ensure commonality as well as promote market penetration and competition. However, as the stance taken by Samsung has shown implementation is often fraught with difficulties. Also in its investigation the EC is analyzing whether Motorola Mobility violated Article 102 of the TFEU and also whether it offered unfair licensing conditions to competitors.
    It is hence essential that there is more clarity on FRAND principles and implementation. If there is no clear policy that outlines competitor actions in an open standards environment patent litigation is likely to continue (See in general in the US – Rambus v. Infineon, 222 F.R.D. 280 2004). In the EU in particular clarity is required as the meaning of FRAND is not clearly defined and there has also been a lack of decided cases as most cases have ended in settlements e.g. the Commission accepted commitments from Rambus to lower memory chip royalty rates (Case COMP/38.636). So also the EC decided to close formal antitrust proceedings against Qualcomm Incorporated, a US chipset manufacturer, concerning an alleged breach of EC Treaty rules on abuse of a dominant market position (Article 82) after terms were agreed with complainants (EC MEMO/09/516).
    A thorough investigation that would result in a large fine could act as deterrent not only for the offending company but also for potential offenders (e.g. huge fines imposed on Microsoft – Microsoft v. EC 2004 Case COMP/C-3/37.792). Commission Guidelines on Standardization Agreements could be a medium of enabling other players in the market to gain access to standard essential patents, hence enabling effective competition and market penetration – however, in order to be effective, proper, stringent and uniform interpretation and implementation is required, but at the same time, one must not lose sight of the incentive to the patent holder as well as the need to maintain market competitiveness. The EC’s 2011 Guidelines for horizontal agreements provide for a safe harbour from Article 101(1) of the TFEU for standard setting conduct that is transparent and does not impose unnecessary obligations. FRANDS, cross-licensing and patent pool initiatives though existent are unlikely to quell the ongoing litigation as major players like Apple, Microsoft and Google acquire more patents to shore up their patent portfolio for defensive litigation (See, Case M.5529- Oracle/Sun, fn.458 – large patent pools are required to maintain peace between big players). Competition law and the competent authorities will have to play a more proactive role to ensure healthy competition, consumer trust as well as innovation. However, competition law on its own is unlikely to be the solution as cross licensing, FRANDS and the settling down of the patent acquisitions market will all play a part.

    2) Under what circumstances could the litigation of patents (or other IP rights) become abusive and objectionable from a competition point of view?
    The ultimate goal behind smartphone patent litigation is to increase market share in a fast paced technology industry. Here, competing products are immediately taken out of the market by bigger global players with a temporary or permanent injunction. It is no longer seen as sufficient to obtain compensation after one’s patent rights are infringed, instead the aim is to get competing products out of the market or at least diminish them in the eyes of potential customers. Also the threat of litigation is also being used for monetary gains, e.g. Microsoft receiving license payments from companies using Android despite Google being the creator. Given the bundle of IP rights smart phones incorporate, not detecting an infringement in some form is going to be very rare. Also lack of clarity on licensed standards adds to this mix. This as a whole can be seen as objectionable from a competition point of view. Litigation can be used as a serious threat to eliminate effective competition, lead to consumer harm in the form of lack of innovation or suppression of innovation and impose dominance over the market (Dominant firm deserves revenues but not ex post by excluding rivals from markets, Microsoft v EC 2004, Case COMP/C-3/37.792).
    Another issue is that such disputes of global bearing are being brought to courts with local jurisdiction, which might not have the necessary expertise to decide them and give and effective ruling e.g. Apple v. Samsung, Motorola Mobility v. Apple in Germany (Karlsruhe Higher Regional Court) and Apple v Samsung in the Netherlands (Hague District Court). Antitrust issues in smartphone’s have so far been dealt in the US though approvals of three transactions where the US Department of Justice found that competition was unlikely to be affected. The three approvals are: Google’s acquisition of Motorola Mobility, Apple’s acquisition of patents from Novell and Rockstar Group’s (Apple, Microsoft and RIM) acquisition of patents from Nortel.
    The purchasing of patents have two effects – one it can strengthen dominance and act as a deterrent while two it can also lead to patent balance between rivals. However, patent purchases that create an imbalance and likely to create vertical concerns have to be prevented.
    Despite the current flood of patent litigation ongoing between the global players it has not had any detrimental impact on their market share as yet, hence the continued use of this strategy. However, the continued focus on defensive patenting is likely to result in higher costs, less innovation and more importantly less competition in variably affecting the customer. It will also be interesting to see how antitrust issues develop in the US as compared to the EU where there has been a flurry of litigation.

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  6. alicia dominguez-contreras 25 June 2012 at 09:35 #

    In italics wording from study material (i.e. ppt, books, articles)

    If wrongly analyzed one can think that intellectual property rights (IPRs) and competition law (comp.law) sit on opposite sides because IPR confer exclusive rights upon their owners, whereas comp.law strives to keep markets open. But truly, IP and comp.law share a similar objective: promoting consumers’ welfare by facilitating competition and investment in innovation.

    An IPR holder should only be able to exercise its IPRs within the limits of comp.law; in this case, comp.law can throughout (i)public intervention, (ii)judicial decisions or (iii)agreements between competitors play a truce in the smartphone-patent-war.

    Public authorities can try to control firm conducts by (i)fostering the application of comp.law; (ii)pushing when appropriate standard-setting with FRAND obligation and (iii)creating/modifying the legal frame to caught anticompetitive practices. For example when parties try to settle a patent dispute through a merger, the public authority should only approve such a merger if competition (i.e. control of key patents) is not affected (ex-post intervention). If a competitor push another to leave the market by paying the other to drop its claims (avoiding risk of having its patent challenged) public authority can create legal texts that prohibit this kind of practice (ex-ante intervention) and at the same time tackle that practice through comp.law litigation (i.e. abuse of dominant position).

    Courts could (i)introduce the IP injury concept (linking IPRs claims to the underlying goal of the law: encourage innovation); (ii)decide to withdraw a patent right to a firm based on its benefit-or-detriment to consumers welfare; (iii)reduce patent life time period (software industry 3 to 5 years instead of 20y) to balance between incentive to innovate and diffusion of the results.

    Agreements between competitors can bring a solution, but they should safeguard basic individual objective of both areas of law -finding the equilibrium between on-one-hand avoidance of competition foreclosure and on-the-other-hand permitting the inventor to obtain financial compensation for his creative work by granting exclusive use of its invention for certain period of time- but not forgetting common objective: promoting innovation.

    Patent pools can reduce transaction costs, avoid costly infringement litigation (sometimes after high investments is done) and promote technology dissemination. Should be guaranteed that all possible interested firms can access the pool, substitutable technologies should not be accepted (only complementary ones) and that R&D should not be discouraged.

    Standard setting risk to restrict (i)inter-technology competition and (ii)access to market for products that do not comply with standard. Therefore, attention should be paid to the licensing terms and requested royalties (i.e. excessive royalties). Two solutions to avoid these risks are imposition of RF (royalty free) and FRAND (fair/reasonable/ non-discriminatory) conditions.

    FRAND licensing under article 101 TFEU: objective of standardization must be legitimate (i.e. efficiency inter-operability) /include only indispensable restrictions /fair share of benefits to consumers /legal duty to license on non-discriminatory and reasonable terms. FRAND licensing under article 102 TFEU: Prohibits competition foreclosure through exclusionary licensing practices (i.e. raising rivals’ costs, margin squeeze).
    Cross licensing. Risk: ongoing royalty payment should be discouraged in order to avoid price increase, cartels and abuse of dominant position; Solution: use small or no running royalties (i.e. fixed up-front payment). Risk: licenses to future patents could reduce incentive to innovate (i.e. rival will access improvements). Solution: same level playing field: both parties have access to the other firm’s patent portfolio.

    Abusive and objectionable practices identified by the ECJ are:

    Practices preventing free movement of goods (using a national IPR to prevent the free movement of goods around the EU: exhaustion of rights’ doctrine); only applicable to goods placed within the EU (not outside). In Moosehead/Whitbread an exclusive license of a trade mark, prohibited active selling outside the UK. The Commission decided that the exclusive trade mark and the restriction on active sales infringed article 101 (1) TFUE (art.101).

    Practices looking to divide the single market (i.e. absolute territorial protection)
    The mere grant of territorial exclusivity in a license of an IPR does not necessarily infringe art.101(1); this will depend on the effect that this would have on the market (Maize seeds case: art.101(1) applies only to agreement which have as their object or effect the prevention, restriction or distortion of competition).

    But, if licensee grants absolute territorial protection against any form competition there will almost certainly be an infringement of art.101(1) and it is unlikely that terms of art.101(3) will be satisfied. Nevertheless, in Coditel vs Cine Vog Films, the ECJ recognizes that, in the special circumstances…. a licensee may need absolute territorial protection (i.e. re-transmissions of films from neighboring MS).

    Practices looking to control certain market: In the case of Sega and Nintendo the Commission required the deletion of clauses in licenses of computer software with publishers of video games which, in the Comm.’s view, enabled Sega and Nintendo to control the market of video games.

    Practices using a pool to block competition: MPEG-2 is a tech that improves the quality of video signals; to apply this tech it is necessary to have access to a number of patents. These were pooled by their respective owners, who agreed to access to the pool would be permitted on a non- exclusive and non-discriminatory basis. This meant that the pool, far from foreclosing the market to 3rd parties, would enable them to gain access to the tech with a beneficial effect on tech and economic progress: therefore, it was approved by the Commission.

    Practices using standard setting to block competition: When a firm participates in a standard setting process owning an essential patent that is needed to comply with the standard is obliged to allow 3rd parties to access the patent. A deliberate concealment of the “essential character of a particular patent” during the standard-setting procedure, or a refusal to license the patents on FRAND terms, might amount to an infringement of article 102 TFEU.

    In summary: “No legal policies are more important for innovation, competition and economic development than the antitrust and intellectual property laws” ( by Bohannan & Hovenkamp)

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  7. Tamas Somlai (BSC-LLM) 12 June 2012 at 21:16 #

    Q1: Intellectual Property (IPR) is a fundamental right which is however not absolute. It must respect others’ rights like the freedom to conduct business (C-70/10 Scarlet v SABAM). The balance between different fundamental principles must be rightly struck. Just like every fundamental right, IPR can turn into a double edged sword if not exercised properly.

    It also means reasonable, proportionate and sound conduct from rightholders regarding IP enforcement, litigation and competition law. Therefore competition policy has great relevance in controlling the behaviour of competitors and trying to achieve peace in IP battles. The case United States v. Microsoft clearly stated that “Intellectual property rights do not confer the privilege to violate the antitrust laws”. According to the Court of First Instance in C-111/96 ITT Promedia, ‘litigation is not abusive unless manifestly unfounded’. Limiting technical development on the prejudice of consumers is an example of abuse of dominant position under Art 102 a) TFEU. The Court of Justice made it clear in Volvo v Veng (1988) that competition law cannot say anything on the subject matter of the exclusive right but it can on the exercise of that right. Under “exceptional circumstances” and in case of “abusive conduct” even the exercise of a right can distort competition. The Court found in C-241/91P (Magill), although in relation to copyrights, that ‘preventing the production or marketing of a new product and thereby excluding competition from the market solely to secure the monopoly granted by IPR clearly goes beyond the essential function of the protection’. The main question is whether it is possible to come to the same products or solution without the protected information from the rightholder. Along these lines competition law has the potential to set certain barriers for the abusive conduct of exercising rights. No right can be exercised on the detriment of others according to basic principles.

    Other solutions could be to encourage settlement agreements which shorten the expiry of exclusive rights and thus considered pro-competitive. The long and costly litigation process is forcing companies to enter into agreements. Competition authorities have competence in scrutinising such agreements but the area is not developed yet. The general problem is access to innovation especially in sectors where interoperability and standardisation are crucial. In such areas patent thickets are usual and the ways-out involve the identification of essential patents, licensing, creation of patent pools, technology transfer, standard setting, FRAND commitments which should be transparent and scrutinised by competition authorities.

    Some claim that the patent system has been limiting innovation instead of encouraging it which is also due to the ever increasing litigation costs. The abusive exercise of litigation rights is not tackled well by competition law similarly to other identified problems like pricing, the increasing number of dubious patents and the growing problem of non-producing entities, “patent-trolls”. Therefore the need is rising for differentiated legal protection more suitable for the characteristics of the different fields of innovation. At the same time higher scrutiny would be necessary to filter the granting of protection.

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  8. Oscar Iván Lanza (BSC student) 30 May 2012 at 16:18 #

    - Litigation against infringement of illegal use of standard essential patents (SEP’s) licenses (European Commission versus Samsung 2012): This is an abuse of a dominant position in SEP licensing by refusing to negotiate patents in FRAND terms and seeking a permanent injunction on the infringement of these SEP licenses. This case is still in progress.
    - Patent trolls trying to get a permanent injunction or sanctions for illegal use of a patent (eBay versus MercExchange): The main purpose of patent trolls is to maximize the licensing fees from the patents they possess, which may be a minimal part of a product. Sometimes they threaten companies with permanent injunctions or sanctions. This is use as a bargaining tool in order to charge exaggerated licensing fees. The US Supreme Court found this behavior to be illegal and contrary to consumer welfare. Competitors can litigate for permanent injunction in patent cases but patent trolls are forbidden from taking this course of action.
    - Refusal to license: Design issue, possibility to control an aftermarket (Volvo versus Veng): A demand for infringement of design may have other abusive purposes apart from protecting IP rights: a monopoly of an aftermarket, the fixing of monopoly prices in this aftermarket and the probability of stopping the supply to this aftermarket even if there is real demand for the product.
    - Refusal to license: Copyright issue. Prevention of a new product, downstream monopolization, no other alternative (Magill case): Litigation for copyright infringement may be considered an abuse of a dominant position if the following conditions are fulfilled:
    1. The birth of a potential new downstream product is negated by the copyright holders: Since the copyright holders are in possession of the essential raw material needed for the manufacturing of the new product, are refusing access of these materials to undertakings interested in entering the new market and are not interested at this moment of manufacturing the new product themselves, the new market cannot take off, even though there is evidence that there is a constant potential demand for this new product.
    2. No justification for refusal from the main market or new market point of view.
    3. The copyright holders, judged by their behavior, want to reserve the new market to themselves in the near future by excluding all competition from it.
    - Refusal to license: Copyright issue. Essential facility. (IMS Health): A dominant undertaking which is an intellectual property owner of an essential facility may abuse its dominant position within the meaning of article 102 EC if it refuses to license the essential facility under the following conditions:
    1. The undertaking which requested the license intends to offer new products or services not offered by the owner of the intellectual property right and for which there is a potential consumer demand.
    2. The refusal is not justified by objective considerations.
    3. The refusal has the objective of reserving the new market to the IP owner by eliminating all of the competition on that market.

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  9. Oscar Iván Lanza (BSC student) 30 May 2012 at 16:16 #

    Although competition and IP law seem to come from separate ways and into a collision course (the legal monopoly IP law grants IP owners contradicts competition law) they really complement each other and are part of the solution to the smartphone patent rights problem. This problem can be described as the fight between the protection of these rights (a task commissioned to the various IP rights granting institutions and courts all over the world) versus the probable abuse of this protection (this is where competition law intervenes, limiting IP rights and preventing abusive behavior of a dominant position from IP holders that can limit innovation and reduce competition). For this reason, the European Commission has issued competition regulation and guidelines that focus on the IP problem (for example, the 2004 Technology Transfer Regulation and the 2010 Horizontal Agreements Guidelines regarding Article 101) and specifically has attacked the smartphone patent war by actively pursuing competition infringement cases of abuses of a dominant position in standard-essential patent (SEP) licensing (either by refusing to negotiate in FRAND terms and seeking a permanent injunction on the infringement of these SEP licenses (European Commission Vs. Samsung) or by charging unreasonable high prices for SEP technology (European Commission Vs. Qualcomm, although the Commission abandoned the case and couldn’t reach a final decision)). Even though the European Commission has authorized mergers or acquisitions of leader smartphone patent owning companies (the most recent case is the acquisition of Motorola by Google), it has issued warnings that it will be observing very closely the patent licensing behavior of these new formed undertakings. Still, competition, patent granting and justice authorities need to work hand in hand to find a rapid and definitive solution to the smartphone patent problem.
    Other possible solutions to the smartphone patent tickets problem are described in the following points:
    - Reduce patent duration for fields in constant innovation: 20 years of a legal monopoly seems a lot of time for industries in constant cumulative innovation. A 5-10 year period seems a more logical answer.
    - Stop granting patents of dubious validity or for minor developments: Poor quality granted patents are proliferating all over the world and companies, especially patent trolls, are benefitting from them in malicious manner.
    - Create an “ultimate” SEP pool: The entire SEP’s needed to build a regular smartphone could be included in this patent pool and have the same licensing price for each patent.
    - Create an international patent tribunal: Judges specialized in patent and competition law can give rapid verdicts about conflicts between undertakings regarding patent problems. For this to become a reality, a big part of the patent licensing companies and judicial authorities from around the world need to unify basic concepts and search for an agreement. Patent trolls will resist this idea and authorities too, as evidence from this Court of Justice of the European Union Press release: http://curia.europa.eu/jcms/upload/docs/application/pdf/2011-03/cp110017en.pdf

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  10. Jan Mangeleer 28 May 2012 at 17:40 #

    Intellectual property rights are used as a stick to beat the competition in the smartphone patent wars. As in any jurisdiction where the rule of law prevails, the parties to a dispute meet each other in court. So it is up to the judicial system to resolve the issue. Whilst the concept of abuse of dominance could limit the way in which a patent holder can seek to enforce his intellectual property rights, as may be possible as discussed hereunder, competition law should not be regarded as the only solution in this matter. The consequences of establishing that one has abused the rights exclusively attributed to him by law can be too harsh as it can lead to severe penalties. In my opinion the defending litigators should rather look for defenses in civil law, for example the simple concept of an unfair abuse of a legal claim as exists in certain jurisdictions, than to target the patent holder with a competition law defense than is more a public matter.

    On the other hand, it might be that competition law might be the only resort to alleviate this absurd situation. The Commission itself, by means of the statement of Commissioner Almunia on the Google/Motorola merger in February 2012, has taken a very clear position on this matter. He stated that, if patented technology is commonly accepted as a standard (a “standard essential patent” or “SEP”), “This may create competition concerns because it enables them to “hold up” competitors or even an entire industry to the detriment of consumers and innovation.” This suggests that the Commission considers the refusal to license IPR’s, and in this case specifically SEP’s, is incompatible with article 102 TFEU.

    The commission therefore often requires the owners of SEP’s commit to license the patents under FRAND (Fair, Reasonable and Non-Discriminatory). However, to be able to require commitments, the refusal to license the patent should constitute an abuse of a dominant position.

    To establish whether a patent owner abuses its intellectual property right, some criteria set by the European Courts should be taken into consideration. In the IMS Health case certain criteria were set, which were later refined in the Microsoft Interoperability case. First of all the competitor must require the license for new products, not offered by the IP owner. As smartphones evolve at an immense speed, this requirement seems to be mostly met. Further, the refusal to license must eliminate effective competition. Considering that litigation with the purpose to enjoin the cessation of the marketing of a device paralyses the release of an important product of an undertaking, competition would be likely to suffer severely from such action. Finally, there must be a lack of any objective justification for the refusal to grant a license. As we observe what is happening in the market, the only reason for an undertaking to seek injunctive relief through patent litigation is the fact that others are doing the same. Hence, such litigation seems to be quite abusive.

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  11. Mirna Hidalgo 14 May 2012 at 14:03 #

    Responding to question 1):

    1. When a patent war is already declared, cross-licensing, transfer/exit payments can be explored, but these will not provide a radical solution to structural IP litigation strategies. We need to look for the roots of the problem and find long-lasting solutions.
    2. There is room for improvement in preventing the negative effects of overlapping patents which result in increased costs for consumers. As a matter of general policy, both IP and Competition law share the same objectives of promoting consumer welfare through innovation. The challenge is to find the balance between rewarding a fair exploitation of IP rights and placing limits to abuse.
    3. I believe Competition law has a valuable role to play (see below) but it is not going to solve the problems by itself. I advocate the up-front validation of patents rather than leaving the issue to courts. IP law should be revised to set fair boundaries to the exercise of IP rights:
    (i). patents should be granted only where there is real novelty and claims covered are not excessively broad (i.e. not cover prior art) ( particularly a US issue),
    (ii). revising rules on transparency and enhancing opportunities to challenge pending applications,
    (iii). considering whether all inventions deserve a 20 year long protection or it should be limited depending on the invention/investment cycle,
    (iv). developing procedural tools whereby courts can limit abusive use of injunctions and penalize sham litigation (eg cost awards, claims in tort, summary judgements) (this is a challenge in Europe as long as the system remains at national level).
    Competition law can effectively help by:
    (i). clarifying the boundaries of permitted cooperation in patent pools and standardisation. For industries where the proliferation of patents is already irreversible, I believe authorities should provide more guidance to assist in determining what FRAND terms really are. Standard setting organisations should feel more comfortable in clarifying FRAND commitments with less fear of horizontal infringements.
    (ii). Understanding FRAND terms is not easy, requires reliance on technical/industry know-how to identify essential patents, and a fair price is difficult to assess in cross-licensing scenarios. The patent value will always depend on the specific market conditions, but there should be ways to help parties agree a FRAND price by themselves without lawsuits. Litigation strategies should be discouraged by imposing more binding rules around standardisation processes and helping SMEs to participate in the establishment of new standards. There should also be a more intensive cooperation between Patent Offices, Standards Bodies and Competition Authorities, fostering recourse to reliable independent experts and alternative dispute resolution mechanisms.
    4. However, the degree of involvement of the Commission ex-ante will depend on a cost-benefit analysis and policy priorities. The cost of detailed involvement in FRAND determination case-by-case would be unaffordable, but better guidelines based on authorities’ more technical and business insight might help the industry come up with their own FRAND terms without creating an innovation chilling effect. Ex-post, the Commission should continue to act as a safety valve to ensure abuse is cured.

    Responding to question 2):

    The right to exclusionary litigation is essential to the nature of patent rights and is not easy to restrict. Access to courts is a fundamental right under the European Convention of Human Rights and the Charter. In ITT Promedia [1998] the CFI held that litigation should be lawful unless (i) the action “cannot be reasonably considered an attempt to establish the rights of the undertaking but can therefore only serve to harass the opposite party “and (ii) was “part of a plan to eliminate competition”, but the General Court did not finally rule on the correctness of these criteria. In Astra Zeneca the Commission said that use of public procedures, including judicial processes may constitute abuse. Rambus’ patent ambush is also an example that could be considered abuse of process.

    The Commission is determined to combat abuse as shown by the Samsung and Motorola ongoing investigations. This is an important ex-post control, but I think Competition law is not the most appropriate tool for vexatious litigation: it is too time-consuming and the ITT Promedia criteria are debatable: isn’t the fact that a patent has been granted already a reasonable argument to establish the rights of the patent holder? Once rights have been granted it is difficult to say a person who legally acquired them cannot defend them in court, even in the case of deplorable practices like the patent troll’s. Not all NPEs are patent trolls. I think restricting the ability to enforce patent rights to those who manufacture or sell products would chill innovation. The system should protect inventors and patents are in essence transferable. A reform should not penalise those with legitimate interests, but at the same time should not allow for enforcement of rights of which validity is still questionable or which are vague and so broad as to block any other complementary innovation.

    Long lasting solutions lead back to a combination of:
    - more discipline in granting less, but only high quality patents,
    - a good (i.e. enforceable) standardisation system,
    - effective judicial process controls (less injunctions, courts awarding damages that are proportional to the value of the patent invention and not exorbitant), and
    - strong ex-post competition action against abuse.

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  12. Marcel Barby 6 May 2012 at 20:48 #

    The smartphone patent wars are to me an archetypical example of an abusive exercise of rights, be it from a competition or general law point of view.

    IP-rights serve as incentive to engage in the inventive process by conferring an exclusive/exclusionary right to inventors and thereby enabling them to obtain some compensation for costs and risks taken while researching. However, IP-rights, as any other rights – except maybe for certain (core) natural/fundamental rights – are a creation of societies, i.e. there is nothing inherent or God-given about them. Even high ranking property rights are not absolute as there are – immanent and relative – boundaries; prominently the limited duration of patents. Consequently, it is upon the society to decide on the scope and consequences of their entitlement.

    One way of dealing with excrescences of IP-rights could be by (re-)defining the scope of IP-rights in the light of the current reality; e.g. different, mostly shorter, sector specific duration. Some facts suggest that the 20-year-period dates back as early as fifteens century; Henry VI for the production of coloured glass. However nowadays inventions seem to have a different life and objective. The world today is much faster moving and interconnected which casted serious doubt onto the established duration of patent protection. Also cumulative innovations have become rather the rule than the exception.

    Another way could be addressing the consequences of IP-right exercises, by balancing the rights of incumbent IP-rights-holders with the rights of (future) inventors in such a way that hold-ups are not possible any more. Holders of IP-rights which are essential for further development and for which there are potential licensees can be seen of having a dominant position. If such right holders refuse on arbitrary grounds to grant licences to other market participants, competition law could be used to force them to open up their right(s) to the market; behavioural remedies perhaps together with the appointment of a trustee which overlooks the implementation.

    One could also declare certain behaviour of IP-right-holders as abusive e.g. on grounds of competition law policy. It seems that these days IP-rights are not so much used to recoup the inventors investments, but much more to – strategically/systematically – exclude others (from making profits and/or engaging in follow-on inventions); e.g. by defensive patenting, creation of questionable patents or warlike patent litigations. This appears to go against any (economic) logic – but market power abuse – as these actions are complicated, protracted, expensive and resource intense while offering little realistic prospects of obtaining any (substantial) revenues. Moreover, IP-rights seems to become some kind of commodity among (strong) market player, thereby putting a even further distance between the incumbent right holder and the (original) inventor, which again cased doubts onto the inherent justification of their exclusive/exclusionary nature.

    Finally, a more drastic way could be to expropriated IP-right-holders under certain circumstances. They would – similar to land owners – be compensated for their loss on the basis of transparent terms or could even stay partially entitled to the proceeds of the use of their former rights.

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  13. Alain Strowel 1 May 2012 at 14:53 #

    On the economics of patent litigation, you might consult a new post of the IPKat: http://ipkitten.blogspot.co.uk/2012/04/katonomics-15-economics-of-ip.html

    The post discusses the effects of patent litigation, in particular when initiated by Non-Practising Entities (sometimes called “trolls”; on trolls, see the posts of Paul Belleflamme on ipdigit: http://www.ipdigit.eu/2011/10/what-to-think-of-patent-trolls-the-return/).

    It ends with an interesting question: ” NPEs represent a business model based on a particular litigation strategy. Are they a nasty side effect of the litigation system or merely another means to keep the system in check?”

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