Chapter 3 : Antitrust Analysis of Portfolio Cross ... ch… · ANTITRUST ANALYSIS OF PORTFOLIO CROSS-LICENSING AGREEMENTS AND PATENT POOLS I. INTRODUCTION In many industries, the

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CHAPTER 3

ANTITRUST ANALYSIS OFPORTFOLIO CROSS-LICENSING AGREEMENTS

AND PATENT POOLS

I. INTRODUCTION

In many industries, the patentrights necessary to commercialize aproduct are frequently controlled bymultiple rights holders. Thisfragmentation of rights can increase thecosts of bringing products to market dueto the transaction costs of negotiatingmultiple licenses and greater cumulativeroyalty payments. Portfolio cross licensesand patent pools can help solve theproblems created by these overlappingpatent rights, or patent thicket, byreducing transaction costs for licenseeswhile preserving the financial incentivesfor inventors to commercialize theirexisting innovations and undertake new,potentially patentable research anddevelopment (“R&D”).1

A portfolio cross license, underwhich two firms license large blocks oftheir respective patents to one another,can provide a partial solution to theproblem of patent thickets because itremoves the need for patent-by-patentlicensing. This bilateral licensingsolution, however, is not likely to bemuch help when a firm requires licensesto a small number of patents held by eachof many firms. In such cases, patent-pooling agreements may createsubstantial transaction efficiencies byenabling multiple patent holders to pooltheir patented technologies and, througha joint entity, license them as a group toeach other and to third parties. As aresult, patent pools may reduce thetransaction costs of multiple licensingnegotiations and may mitigate royaltystacking and hold up problems that canoccur when multiple patent holdersindividually demand royalties from alicensee.2

1 Carl Shapiro, Navigating the Patent Thicket: CrossLicenses, Patent Pools, and Standard Setting, in 1INNOVATION POLICY AND THE ECONOMY 119, 120(Adam B. Jaffe et al. eds., 2000) [hereinafter Shapiro,Navigating the Patent Thicket]; see also discussion infraPart II.A, II.B. See generally FEDERAL TRADE COMM’N,TO PROMOTE INNOVATION: THE PROPER BALANCE OF

COMPETITION AND PATENT LAW AND POLICY ch. 3(2003) (discussing circumstances under which patentthickets arise in various industries), available athttp://www.ftc.gov/os/2003/10/innovationrpt.pdf

[hereinafter FTC INNOVATION REPORT].

2 U.S. DEP’T OF JUSTICE & FEDERAL TRADE COMM’N,ANTITRUST GUIDELINES FOR THE LICENSING OF

INTELLECTUAL PROPERTY § 5.5 (1995), reprinted in 4Trade Reg. Rep. (CCH) ¶ 13,132, available at

PROMOTING INNOVATION AND COMPETITION58

Although both cross-licensing andpatent-pooling agreements have thepotential to generate significantefficiencies, they also may generateant icompet i t ive ef fec ts i f thearrangements result in price fixing,coordinated output restrictions amongcompetitors, or foreclosure of innovation.3

Pooling agreements typically warrantgreater antitrust scrutiny than do cross-licensing agreements due to the collectivepricing of pooled patents, greaterpossibilities for collusion, and generallylarger number of market participants.

The Agencies dedicated severalsessions of the Hearings to the subject ofcross-licensing and patent-poolingagreements. Participants discussed anumber of topics, including thesimilarities and differences betweenpooling and cross-licensing agreements,the potential procompetitive benefits andanticompetitive effects of pools and crosslicenses, and the safeguards that havebeen proposed to help ensure that patent

pools do not harm competition.4

http://www.usdoj.gov/atr/public/guidelines/0558.pdf [hereinafter ANTITRUST-IP GUIDELINES]; Robert P.Merges, Institutions for Intellectual PropertyTransactions: The Case of Patent Pools, in EXPANDING

THE BOUNDARIES OF INTELLECTUAL PROPERTY: INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY 123,129-30, 132, 144 (Rochelle Cooper Dreyfuss et al. eds.,2000), available at http://www.law.berkeley.edu/institutes/bclt/pubs/merges/pools.pdf at 10-11, 14,26 [hereinafter Merges, The Case of Patent Pools]. Amanufacturer may be required to pay royalties foreach patent his product, production process, ordevelopment process infringes. When theseindividually priced licensing fees are stacked togetherthey can represent a significant cost of production. See discussion of royalty stacking infra Part II.A; seealso discussion of hold up infra Part III.A.

3 ANTITRUST-IP GUIDELINES § 5.5.

4 Panelists addressing this topic at the April 17, 2002Hearing included: Garrard R. Beeney, Partner,Sullivan & Cromwell; Jeffery Fromm, SeniorManaging Counsel, Hewlett-Packard Company;Baryn S. Futa, Manager and Chief Executive Officer,MPEG LA, LLC; Peter Grindley, Senior ManagingEconomist, LECG, Ltd., London; Christopher J. Kelly,Special Counsel, Litigation Department, Kaye ScholerLLP; James J. Kulbaski, Partner, Oblon, Spivak,McClelland, Maier & Newstadt, PC; Josh Lerner,Jacob H. Schiff Professor of Investment Banking,Harvard Business School; David McGowan, AssociateProfessor of Law, University of Minnesota LawSchool; M. Howard Morse, Partner, Drinker, Biddle &Reath, LLP; Joshua A. Newberg, Assistant Professor,Robert H. Smith School of Business, University ofMaryland; Jonathan D. Putnam, Assistant Professorof the Law and Economics of Intellectual Property,University of Toronto School of Law; Lawrence M.Sung, Assistant Professor, University of MarylandSchool of Law, Baltimore. This panel was moderatedby Frances Marshall, Special Counsel for IntellectualProperty, Antitrust Division, U.S. Department ofJustice; Mary Sullivan, then-Assistant Chief, AntitrustDivision, U.S. Department of Justice; William Cohen,then-Assistant General Counsel, Policy Studies,Federal Trade Commission; and Raymond T. Chen,Assistant Solicitor, U.S. Patent and Trademark Office. Apr. 17, 2002 Hr’g Tr., Patent Pools and Cross-Licensing: When Do They Promote or HarmCompetition?, http://www.ftc.gov/opp/intellect/020417trans.pdf [hereinafter Apr. 17 Tr.].

Portfolio cross-licensing agreements werealso discussed at the afternoon session of theNovember 6, 2002 Hearing. The panelists included: Michelle Burtis, Director, LECG, LLC; Joseph Farrell,Professor of Economics and Chair of the CompetitionPolicy Center, University of California, Berkeley;Jeffrey Fromm, Former Senior Managing Counsel,Hewlett-Packard Company; Michael McFalls, Partner,Jones Day, Reavis & Pogue; Barbara M. McGarey,Chief Counsel, National Institutes of Health; JanuszA. Ordover, Professor of Economics, New YorkUniversity; Charles F. (Rick) Rule, Partner, Fried,Frank, Harris, Shriver & Jacobson; Carl Shapiro,Transamerica Professor of Business Strategy, HaasSchool of Business, Director and Professor ofEconomics, Institute of Business and EconomicResearch, University of California, Berkeley. Thispanel was moderated by David Scheffman, then-Director, Bureau of Economics, Federal TradeCommission; Gail Levine, then-Assistant GeneralCounsel, Policy Studies, Federal Trade Commission;Sarah Mathias, then-Attorney, Policy Studies, Office

http://www.ftc.gov/opp/intellect/

59Cross Licensing and Patent Pools

The Agencies continue to developscholarship and guidance on patent poolsand similar licensing agreements. As partof this process, the Hearing participantsand the Agencies identified a number ofkey concerns and best practices that maybe of benefit to patent licensors andlicensees contemplating entering intocross-licensing and pooling agreements.

II. PORTFOLIO CROSS LICENSES

Portfolio cross licenses arecommonly bilateral agreements betweentwo parties seeking to avoid infringementlitigation.5 They are licenses to broadportfolios of technology, generally relatedto a particular field of use.6 Somepanelists noted that cross licenses usuallygrant the licensee the right to use the

patented technology only in a limitedfield and for a fixed period of time. Crosslicenses often cover both existing patentsas well as those issued during the periodof the agreement. Panelists furthersuggested that most cross licenses requireroyalty payments and are granted on anon-exclusive basis so that the partiesretain the right to license their patents toothers.7

A. Efficiencies

Portfolio cross licenses may beespecially useful in industries, such as thesemiconductor and computer industries,that are characterized by large numbers ofoverlapping patent rights.8 The most

of the General Counsel, Federal Trade Commission;and Frances Marshall, Special Counsel for IntellectualProperty, Antitrust Division, U.S. Department ofJustice. Nov. 6, 2002 Hr’g Tr., Relationships AmongCompetitors and Incentives to Compete: Cross-Licensing of Patent Portfolios, Grantbacks, Reach-Through Royalties, and Non-Assertion Clauses(Afternoon Session), http://www.ftc.gov/opp/intellect/021106ftctrans.pdf [hereinafter Nov. 6 Tr.].

5 ANTITRUST-IP GUIDELINES § 5.5; see also Feb. 27, 2002Hr’g Tr., Business Perspectives on Patents: Softwareand the Internet (Morning Session) at 356 (Friedman)(“[In the software industry t]he maintenance of apatent portfolio serves mainly as a means of keepingdetente or for cross-licensing opportunities.”),http://www.ftc.gov/ opp/intellect/020227trans.pdf[hereinafter Feb. 27 Tr.]; Feb. 28, 2002 Hr’g Tr.,Business Perspectives on Patents: Hardware andSemiconductors (Afternoon Session) at 662 (Hall)(stating that software industry participants “pile up alot of patents because the other guy has a lot ofpatents” and can engage in cross-licensingnegotiations if threatened), http://www.ftc.gov/opp/intellect/020228ftc.pdf [hereinafter Feb. 28 Tr.].

6 Peter C. Grindley & David J. Teece, ManagingIntellectual Capital: Licensing and Cross-Licensing inSemiconductors and Electronics, CAL. MGMT. REV.,Winter 1997, at 8, 9 [hereinafter Grindley & Teece,Cross-Licensing in Semiconductors].

7 Peter Grindley, IP, Cross-Licensing and Patent Pools: Similarities and Contrasts (Apr. 17, 2002 Hr’g R.)(slides) at 6, http://www.ftc.gov/opp/intellect/020417petergrindley.pdf [hereinafter GrindleyPresentation]; see also Nov. 6 Tr. at 109 (Fromm);Grindley & Teece, Cross-Licensing in Semiconductors at17.

8 Nov. 6 Tr. at 97-98 (Shapiro); id. at 99-100 (Fromm). Panelists did not specifically discuss portfolio crosslicensing as a practice in the pharmaceutical orbiotechnology industries. Feb. 26, 2002 Hr’g Tr.,Business Perspectives on Patents: Biotech andPharmaceuticals (Afternoon Session) at 314-15(Blackburn), http://www.ftc.gov/opp/intellect/020226trans.pdf [hereinafter Feb. 26 Tr.]. But seeLawrence M. Sung, Greater Predictability May Result inPatent Pools (Apr. 17, 2002 Hr’g R.) (discussingconcerns with the proliferation and seemingly broadscope of some biotechnology patents and the benefitsof patent pooling and other cooperative licensingarrangements for biotechnology research anddevelopment (“R&D”)), http://www.ftc.gov/opp/intellect/020417lawrencemsung1.pdf [hereinafterSung Submission]. Others cautioned that a“proliferation of gene patents, including multiplepatents on various research tools” may eventuallycreate a patent thicket in biotechnology as well. ORGANISATION FOR ECON. CO-OPERATION & DEV.,GENETIC INVENTIONS, INTELLECTUAL PROPERTY RIGHTS

AND LICENSING PRACTICES: EVIDENCE AND POLICES 15(2002). More recent papers and presentations alsosuggest that patent licensing issues may become more


significant potential benefit of portfoliocross licensing is that it allows firmsoperating within a patent thicket9 to useeach other’s patented technology withoutthe risk of litigation, including the risk offacing an injunction that shuts downproduction.10 Panelists suggested that

this elimination of risk, or “patent peace,”can give firms the design freedom theyneed to improve current products ordesign new products without fear ofinfringement.11 Some commentatorsagreed that portfolio cross licensing mayencourage long-term investments in bothmanufacturing capacity and R&D becausethe parties to the portfolio cross license donot fear “unforeseen, and unforeseeable,infringement actions.”12 Portfolio cross

complex and difficult in the biotechnology industryin the future. See, e.g., COMM. ON INTELLECTUAL PROP.RIGHTS IN GENOMIC & PROTEIN RESEARCH &INNOVATION, NAT’L ACADS., REAPING THE BENEFITS OF

GENOMIC AND PROTEOMIC RESEARCH: INTELLECTUAL

PROPERTY RIGHTS, INNOVATION, AND PUBLIC HEALTH

2-3 (Stephen A. Merrill & Anne-Marie Mazza eds.,2006) (“[Although IP does not appear to behampering current research to any great degree,] thepatent landscape, which already is becomingcomplicated in areas such as gene expression andprotein-protein interactions, could becomeconsiderably more complex and burdensome overtime.”); James Simon, Dealing with PatentFragmentation: The SARS Patent Pool as a Model (May27, 2005), http://www.law.kuleuven.be/cir/27-05-05%20studiedag%20presentaties/SARS%20patent%20pool-JSimon.pdf [hereinafter Simon PresentationSlides].

9 See Feb. 28 Tr. at 667-68 (Detkin) (“[In thesemiconductor industry,] people are tripping overeach other’s patents right and left.”); id. at 684(Poppen) (“[T]hese [semiconductors] are verycomplex products; hundreds, thousands of patentscover a single product.”); id. at 676-77 (Barr) (“[T]heproliferation, sheer number of issued patents in ourfields [i.e., the semiconductor and computerindustries] makes it virtually impossible to search allpotentially relevant patents . . . .”); Nov. 6 Tr. at 100(Fromm) (“In any group of five or 10,000 patents, I’mreasonably certain that I can find [a patent of mineinfringing] somebody else’s product and viceversa.”).

10 Nov. 6 Tr. at 102 (Fromm) (“[T]he objective duringthat four-year period was to prevent any continuinglitigation over the patent portfolios during that periodso people would be able to design products and shipthem without the threat of injunctions . . . .”); see alsoid. at 98, 111 (Shapiro); COMM. ON INTELLECTUAL

PROP. RIGHTS IN THE KNOWLEDGE-BASED ECON., NAT’LACADS., A PATENT SYSTEM FOR THE 21ST CENTURY 37(Stephen A. Merrill et al. eds., 2004) (“[T]heavoidance of litigation is important, since litigationcan be especially damaging in an industry where anew product can provoke multiple infringement suitsand the capital investment required to produce it is

very large.”). In May 2006, the U.S. Supreme Courtheld that a categorical grant (or denial) of aninjunction in a patent case was not an appropriateapplication of the traditional rules of equity, whichgovern patent cases as well as other federal casesinvolving injunctions. eBay Inc. v. MercExchange,L.L.C., 126 S. Ct. 1837 (2006).

11 Nov. 6 Tr. at 111 (Shapiro) (“[M]ultiple companieswho are engaging in these cross-licenses have thedesign freedom and the freedom from payingroyalties and therefore, can make better, cheaperproducts.”); see also id. at 104-05 (Ordover) (“[I]f youwant to stimulate current product competition thencross-licensing is an obviously very effective way tominimize some of the dangers for firms making sunkinvestments.”). Consider, for example, AT&T’sliberal licensing and portfolio cross-licensing policy,which, according to some, “promote[d] new servicesand reduce[d] costs,” making AT&T one of the firstcompanies to have “‘design freedom’ as a corecomponent of its patent strategy.” Grindley & Teece,Cross-Licensing in Semiconductors at 12 (noting thispolicy was in place at the time AT&T entered its 1956consent decree). Grindley and Teece believe thatAT&T created the policy in part because it “figuredthat its service customers would be better off if itstechnologies were widely diffused amongst its actualand potential suppliers, as this would lower pricesand increase the performance of procuredcomponents.” Id.

12 DAVID J. TEECE, MANAGING INTELLECTUAL CAPITAL: ORGANIZATIONAL, STRATEGIC, AND POLICY

DIMENSIONS 139 (2002); see also Apr. 17 Tr. at 228-29(Grindley) (noting that broad cross licenses reduceuncertainty over future infringement litigation). Theneed for patents to cross license also may fosterfuture innovation by encouraging small companies toengage in research and development to obtain theirown patents. Nov. 6 Tr. at 108-09 (Fromm). But cf.Nov. 6 Tr. at 104-07 (Ordover) (noting that althoughbroad cross licenses encourage sunk investment from

http://faculty.haas.berkeley.edu/shapiro/thicket.pdf.;


licenses also can reduce transaction coststo licensors by allowing firms to licensemultiple patents at once.13

A portfolio cross-licensingarrangement among multiple patentholders may also mitigate the problem ofstacking royalties.14 Royalty stackingoccurs when access to multiple patents isrequired to produce an end product,forcing the manufacturer’s products “tobear multiple patent burdens,” usually inthe form of multiple licensing fees.15

Royalty stacking can make productionunprofitable and retard innovation. Butwhen a rights holder enters into aportfolio cross-licensing arrangement, itmay acquire access to all the blockingtechnologies required for production at alower royalty rate than if each input wereindependently priced.16 As oneeconomist has stated, a portfolio licensecan alleviate the “drag on innovation andcommercialization of new technologies”

that royalty stacking creates.17

One panelist questioned whetherpatent thickets are much of a problem andsuggested that, if a patent holder will notlicense a patent or tries to extract aroyalty that is too high, other firms mayrespond by designing around thetechnology covered by the patent.18 Heargued that when firms design aroundeach other’s intellectual property rights,they avoid royalties, and may be able tooffer newer, less expensive products toconsumers.19 Others were skeptical thatdesign-around attempts would besuccessful.20

B. Competitive Concerns

Portfolio cross licenses withprovisions that may facilitate the

incumbents, they could discourage R&D by entrantswho lack portfolios of patents to license).

13 Grindley Presentation at 10; see also Feb. 26 Tr. at208-09 (Teece) (“[W]hen you have a portfolio . . . youdon’t necessarily know which patents read on whichproducts, and that if in fact you force unbundling of aportfolio . . . you require the owner of the intellectualproperty to incur a tremendous amount of transactioncosts.”); Grindley & Teece, Cross-Licensing inSemiconductors at 9 (“It is simply too cumbersome andcostly to license only the specific patents you need forspecific products. The portfolio approach reducestransaction costs and allows licensees freedom todesign and manufacture without infringement.”). Butsee Grindley Presentation at 9 (noting that negotiatinga portfolio cross license is intense, with negotiationstypically lasting eighteen to twenty-four months).

14 Shapiro, Navigating the Patent Thicket at 123-24.

15 Id. at 124.

16 Id. at 123-24.

17 Id. at 124. Royalty-free portfolio cross licenses canreduce production costs, which may allow licenseesto offer lower prices to consumers because they donot have to account for per-unit royalties in the finalprice of the product. See Nov. 6 Tr. at 98 (Shapiro). Typically, however, these cross-licensing agreementsare not royalty-free. See Grindley Presentation at 6. The returns on a portfolio cross license vary. Returnscan be based on fixed fees or running royalties. In theformer case, there may be “balancing payments at theoutset to reflect differences in the strength of the twocompanies’ patent portfolios.” Shapiro, Navigating thePatent Thicket at 130; see also Nov. 6 Tr. at 102(Fromm); Grindley Presentation at 9.

18 Feb. 28 Tr. at 758-60 (Telecky).

19 Fredrick J. Telecky, Jr., Statement (Feb. 28, 2002Hr’g R.) at 3 (stating that a product created by design-around activity may cost the manufacturer lessbecause the payment of royalties is avoided),http://www.ftc.gov/opp/intellect/020228telecky.pdf [hereinafter Telecky Submission].

20 E.g., Feb. 28 Tr. at 676 (Barr) (“[D]esign-around isvery expensive . . . [and] is worse in industries wherea large number of patents have potentially read on agiven product because the likelihood of stepping on alandmine is so great.”).

http://www.ftc.gov/opp/intellect/020228telecky.


coordination of other activity—such asthe setting of prices, dividing markets, orlicensing to third parties—can raiseantitrust concerns.21 Some panelistssuggested that a portfolio cross-licensingregime can pose a barrier to entry ifexisting relationships make it harder for“new firms to come in and overcome thepatent thicket.”22 Other panelists doubtedt h a t p o r t f o l i o c r o s s - l i c e n s i ngarrangements create barriers to entrybecause, they said, companies engaged inportfolio cross licensing are generallywilling to license their portfolios to allinterested parties.23 Panelists also found

that new firms entering the marketfrequently develop their own patentswith their own R&D.24

C. Analysis

The Agencies continue torecognize that most of the nonexclusivecross-licensing agreements of the typediscussed herein generally do not raisecompetition concerns. When the licensingof intellectual property allows firms tocombine complementary factors ofproduction, such licensing can beprocompetitive.25 Accordingly, cross-licensing (and pooling) arrangementstypically are analyzed pursuant to therule of reason.26 Indeed, the case lawgenerally establishes that both cross-licensing and patent-pooling agreementsshould be so analyzed because, although

21 See, e.g., Nov. 6 Tr. at 116-17 (Rule) (noting thatpatent-pooling and cross-licensing arrangementscould serve as a mechanism for coordinating otheractivity, such as prices); John H. Barton, Patents andAntitrust: A Rethinking in Light of Patent Breadth andSequential Innovation, 65 ANTITRUST L.J. 449, 464 (1997)(“[Portfolio cross licenses can be anticompetitive if thecross-licensing system amounts] to the creation of acommon front in which, in a form of oligopolisticparallelism, members hesitate to license their ownpatents to outsiders, thus protecting the group’sposition even at the expense of the individual firm’sshort-term interest.”); see also ANTITRUST-IPGUIDELINES § 5.5 (“When cross-licensing or poolingarrangements are mechanisms to accomplish nakedprice fixing or market division, they are subject tochallenge under the per se rule.”).

22 Nov. 6 Tr. at 105 (Ordover). Claims of such anarrangement arose in the late 1980s when AlliedSignal alleged that Japanese firms had copied certainAllied technology (while Allied was waiting forJapanese patents on that technology) and then formeda licensing cartel to exclude Allied from exploiting itsown technology in Japan. See Janusz A. Ordover, APatent System for Both Diffusion and Exclusion, J. ECON.PERSP., Winter 1991, at 43, 47 n.4; see also A PATENT

SYSTEM FOR THE 21ST CENTURY at 37-38 (“Insemiconductors, for example, the need to havesubstantial patent assets to trade in order toparticipate in the pervasive cross-licensing ofportfolios probably acts as a barrier to new entrants,although the enormous capital required to establishsemiconductor manufacturing capacity is an evenmore substantial barrier.”).

23 See Jeffery Fromm, Statement (Apr. 17, 2002 Hr’g R.)

at 8, http://www.ftc.gov/opp/intellect/020417jefferyfromm.pdf (stating that such agreementsare pervasive in the high technology sector)[hereinafter Fromm Submission]; Telecky Submissionat 3.

24 Nov. 6 Tr. at 108-09 (Fromm) (“[Smallercompanies] take one hit for $10 million and then theyvery quickly start finding their own patents on theirown R&D.”); see also id. at 111-12 (Shapiro) (notingthat a patent thicket may give small firms with onepatent an advantage negotiating with largercompanies because the smaller firms are likely tohave less financial exposure from hold up in terms oftheir revenues than the larger firms); TeleckySubmission at 3 (“After [new firms] themselves havebecome technology contributors and have patents oftheir own, those patents can be used as tradingmaterial to obtain necessary patent licenses.”).

25 ANTITRUST-IP GUIDELINES § 2.3; see also RichardGilbert & Carl Shapiro, Antitrust Issues in the Licensingof Intellectual Property: The Nine No-No’s Meet theNineties, 1997 BROOKINGS PAPERS ON ECON. ACTIVITY,MICROECONOMICS 283, 325-26 (stating that assemblingcomplementary patents enhances their usage, whichin turn causes efficiency gains).

26 ANTITRUST-IP GUIDELINES §§ 3.4, 5.5.


they have the potential to diminishcompetition in some circumstances,27 theyalso can be procompetitive mechanismsfor using technologies that require accessto a large number of patents.28 TheAgencies’ general approach in analyzinga licensing restraint pursuant to the ruleof reason is to inquire whether therestraint “harms competition amongentities that would have been actual orlikely potential competitors” in theabsence of the license and whether therestraint is reasonably necessary toachieve procompetitive benefits thatoutweigh those anticompetitive effects.29

“The Agencies apply the samegeneral antitrust principles to conductinvolving intellectual property that theyapply to conduct involving any otherform of tangible or intangible property.”30

In evaluating cross-licensing agreements,

patent pools, or any other IP-relatedconduct, the Agencies do not presumethat market power is necessarilyassociated with an intellectual propertyright.31 The Agencies also do not presumemarket power derives from a cross-licensing agreement (or patent pool)because there may be viable alternativesto participation in the licensingagreement that would preclude theassertion of market power. The Agenciesbelieve that antitrust concerns aboutexclusion from portfolio cross licenses areunlikely unless the parties to the portfoliocross licenses collectively possess marketpower.32

Of course, agreements that aredetermined to be mechanisms toaccomplish naked price fixing or marketdivision are subject to challenge under theper se rule.33 The Agencies would beconcerned, therefore, if a cross-licensingrelationship were a method for collusionon price or output by downstreamproducers.34

27 See supra Part II.B; infra Part III.B, D (discussinganticompetitive concerns that could arise with bothpatent pools and cross-licensing arrangements);Steven C. Carlson, Patent Pools and the AntitrustDilemma, 16 YALE J. ON REG. 359, 376-78, 383-84 (1999);Apr. 17 Tr. at 107-15 (Newberg). See generally M.Howard Morse, Cross-Licensing and Patent Pools (Apr.17, 2002 Hr’g R.) at 4-6, http://www.ftc.gov/opp/intellect/020417mhowardmorse.pdf [hereinafterMorse Submission]; Richard J. Gilbert, Antitrust forPatent Pools: A Century of Policy Evolution, 2004 STAN.TECH. L. REV. 3, ¶¶ 6-87 (2004),http://stlr.stanford.edu/STLR/Articles/04_STLR_3/index.htm (follow “Acrobat/PDF” hyperlink); JoshuaA. Newberg, Antitrust, Patent Pools and theManagement of Uncertainty, 3 ATLANTIC L.J. 1, 6-21(2000), available at http://www.ftc.gov/opp/intellect/020417joshuanewberg.pdf.

28 See supra notes 8-13 and accompanying text.

29 ANTITRUST-IP GUIDELINES § 3.1; see also id. at §§ 3.3,3.4, 5.5.

30 Id. § 2.1 (explaining that the flexibility of generalantitrust principles allows the Agencies to take intoaccount differences between intellectual property andother forms of property).

31 Id. § 2.2 (“Although the intellectual property rightconfers the power to exclude with respect to thespecific product, process, or work in question, therewill often be sufficient actual or potential closesubstitutes for such product, process, or work toprevent the exercise of market power.”). The U.S.Supreme Court recently adopted this view in thetying context as well. Ill. Tool Works Inc. v. Indep. Ink,Inc., 126 S. Ct. 1281, 1293 (2006). See also supraChapter 1, The Strategic Use of Licensing: UnilateralRefusals to License Patents Part II.B; infra Chapter 5,Antitrust Issues in the Tying and Bundling of IntellectualProperty Rights Part III.B

32 See ANTITRUST-IP GUIDELINES § 5.5 (“[E]xclusionfrom cross-licensing and pooling arrangementsamong parties that collectively possess market powermay, under some circumstances, harm competition.”).

33 Id. § 3.4.

34 Such a concern could arise, for example, ifcompetitors in a market entered into a sham cross-


The Antitrust-IP Guidelinesprovide a safe harbor if the parties to across license “collectively account for nomore than twenty percent of eachrelevant market significantly affected bythe restraint,” and the restraint is not“facially anticompetitive.”35 The Agenciesrecognize that, if a cross-licensingagreement were to affect a technologymarket, market share data may beunavailable or may not accuratelyrepresent the parties’ competitivesignificance in the marketplace. In suchcases, the Agencies would considerwhether “there are four or moreindependently controlled technologies inaddition to the technologies controlled bythe parties to the licensing arrangementthat may be substitutable for the licensedtechnology at a comparable cost to theuser.”36

III. PATENT POOLS

A. Efficiencies

Patent pools generally are createdwhen a group of patent holders eachdecides to license its respective patents toeach other and to third partiescollectively. They often are formed whenmultiple patented technologies areneeded to produce a standardized

product.37 One panelist noted that patent-pooling agreements usually last for thelife cycle of the technology or standardrather than for a fixed period of time.38

Patent pools also help to mitigate the“hold up” and “hold out” problems thatcan sometimes stymie industry efforts tomake a product that conforms to anindustry standard. According to somecommentators, hold up can arise whenfirms make relationship-specificinvestments, after which they may faceefforts by others to recontract for more ofthe surplus. The problem derives fromthe inability of parties to enter intocomplete (and costlessly enforced)contracts.39 Others explained that holdout can arise when buyers need multiplecomplementary rights, and sellers arrivein a sequenced fashion. In such asituation, players may strategically delaythe start of a negotiation so as to garnerthe greatest surplus by becoming the last

licensing arrangement in which each participantagreed to pay every other participant a large per unitlicensing fee. Such an arrangement would impose ahigh effective marginal cost on each competitor whichwould help facilitate a tacit agreement to limit outputand raise prices. Michael L. Katz & Carl Shapiro, Onthe Licensing of Innovations, 16 RAND J. ECON. 504, 512-13 (1985).


36 Id.

37 Grindley Presentation at 10; see also James J.Kulbaski, Comments on Patent Pools and Standards forFederal Trade Commission Hearings RegardingCompetition & Intellectual Property (Apr. 17, 2002 Hr’gR.) at 1 (“A patent pool is the most cost effective andefficient way of collecting and distributing royaltiesfor patents that are essential to an industrystandard.”), http://www.ftc.gov/opp/intellect/020417jamesjkulbaski.pdf [hereinafter KulbaskiSubmission]; Apr. 17 Tr. at 176-77 (Beeney) (“Thehigh cost of R&D and the increasing need in a globalcompetitive economy to reduce development costsand reduce risks that develop initiatives that lead tomarketable products has led to at least two significantdevelopments: First, product standardization asefforts are made to avoid format wars . . . ; second,joint development of single products as multipleindustry participants attempt to share the risk andcosts of new product development.”); id. at 50(Lerner) (“[F]acilitating the standard setting processseems to be an important motivation . . . .”).

38 Grindley Presentation at 13.

39 See OLIVER E. WILLIAMSON, THE ECONOMIC

INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS,RELATIONAL CONTRACTING 20-21, 388 (1985).


bidding seller.40 As a result, the totalburden of all royalty payments may behigher than if a single royalty isdemanded by a monopolist of all patentsessential to the production of a finalproduct.41

Panelists and commentators notedthat patent pools can reduce transactioncosts for licensees in several ways. Forexample, obtaining a pool license may beless costly than negotiating separatelicenses with each patent owner.42 By

licensing their pooled patents on a groupbasis, patent pool members can offer“one-stop shopping” to firms seeking tomanufacture products using thosepatents. According to panelists, thissimplified approach to licensing canenable more rapid development andadoption of new technologies than couldbe achieved with cross licensing alone.43

Some panelists and commentatorsargue that pools may reduce costs byeliminating infringement litigation44 and,by using an independent expert todetermine which patents to include in thepool, reassure licensees that the patentsbeing licensed are essential tomanufacturing products that comply withthe standard. Additionally, onecommentator suggested that pools caninstitutionalize the exchange of non-patented (or non-copyrighted) technicalinformation.45 For these reasons, panelistsnoted that patent pools “have become

40 Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective RightsOrganizations, 84 CAL. L. REV. 1293, 1298 n.9 (1996)(“A holdout is someone who refuses to agree to abargain for strategic reasons. For example, if a citygovernment needs to buy five parcels of land fromproperty owners A, B, C, D, and E, E might wait untilthe other four (A-D) have sold their land. This puts Ein the driver’s seat in bargaining with the city: E cannow charge a very high price—in theory, up to thetotal amount the city has to spend on the project,minus what was paid to A-D—for his or her land. Since this price will often be more than the averageprice paid to A-D, and in any event more than theprice E could have obtained if he or she were not thelast to sell, such a holdout strategy will be rational inmany cases. See generally, Guido Calabresi & A.Douglas Melamed, Property Rules, Liability Rules, andInalienability: One View of the Cathedral, 85 HARV. L.REV. 1089, 1106-07 (1972).”).

41 Shapiro, Navigating the Patent Thicket at 121, 123-24;see also AUGUSTIN COURNOT, RESEARCHES INTO THE

MATHEMATICAL PRINCIPLES OF THE THEORY OF

WEALTH 99-104 (1929) (noting that this problem isgenerally known as the “double margin problem”);Joseph J. Spengler, Vertical Integration and AntitrustPolicy, 58 J. POL. ECON. 347, 347-52 (1950).

42 Grindley Presentation at 10; see also Feb. 28 Tr. at733 (Barr) (stating that pools limit problems posed bystacking royalties by consolidating administration);JEANNE CLARK, JOE PICCOLO, BRIAN STANTON & KARIN

TYSON, U.S. PATENT & TRADEMARK OFFICE, PATENT

POOLS: A SOLUTION TO THE PROBLEM OF ACCESS IN

BIOTECHNOLOGY PATENTS? (2000) (asserting thatreducing transaction costs is particularly importantfor biotechnology firms), available athttp://www.uspto.gov/web/offices/pac/dapp/opla/patentpool.pdf [hereinafter CLARK ET AL., BIOTECH

PATENT POOLS]; Kulbaski Submission at 7 (suggestingthat the transaction costs for companies seeking tolicense seventy-five patents from fourteen licensorscould rival the cost of patent litigation); Merges, TheCase of Patent Pools at 134 (article), 17 (Internet).

43 Kulbaski Submission at 6-7; Merges, The Case ofPatent Pools at 144 (article), 25 (Internet) (stating thatone stop licensing for non-member licenses is animportant pool feature); see also Baryn S. Futa,Statement (Apr. 17, 2002 Hr’g R.) at 1 (“[A]s aconvenience to users who would like to acquirepatent rights from multiple parties in a singletransaction, MPEG LA offers a one-stop license.”),http://www.ftc.gov/opp/intellect/020417barynfuta.pdf [hereinafter Futa Submission].

44 Kulbaski Submission at 7; Carlson, 16 YALE J. ON

REG. at 379 (stating that patent pools arising fromlitigation settlements can reduce litigation costs); seealso Merges, The Case of Patent Pools at 136-37 (article),19 (Internet) (asserting that a chief function of theaircraft pool was to “eliminate ruinous litigation”).

45 Merges, The Case of Patent Pools at 139 (article), 22(Internet).


critically important mechanisms forenabling widespread use of newtechnologies.”46

B. Competitive Concerns

The panelists generally noted thatpools composed of pure substitutepatents, (i.e., patents coveringtechnologies that compete with each otherand that licensees can choose among), aremore likely to harm social welfare thanare pools of complementary patents, (i.e.,patents covering separate aspects of agiven technology that do not competewith each other). Pools composed only ofcomplementary patents tend to increaseefficiencies and lower prices toconsumers. The panelists addressedother areas that might raise competitiveconcern, including whether patentsincluded in the pool were essential andvalid, whether patent pool membersretained the ability to license their patentsoutside of the pool, whether grantback47

requirements reduce incentives toinnovate, whether access to competitivelysensit ive, proprietary businessinformation should be limited, whetherthe Agencies should review pool royaltyrates, and whether pools that refuse tooffer licenses to subsets of the pool’spatents cause competitive harm. Thepanelists also discussed severalmechanisms that could lower the risk ofcompetitive concerns.48 The followingsections review the Agencies’ guidance

regarding patent pools and analyzepanelists’ comments on specific issues ofcompetitive concern.

C. Existing Agency Guidance onPatent Pools

In recent years, the Agencies haveprovided substantial guidance regardingthe antitrust analysis used to evaluate thepotential harms associated with patentpools and, to a lesser extent, cross-licensing agreements.49 As explained in

46 Feb. 28 Tr. at 700 (Fox); see also Fromm Submissionat 1; Sung Submission at 4-6 (discussing the benefitsof patent pooling for biotechnology research anddevelopment); Futa Submission at 2.

47 See definition of grantback infra Part III.D.3.a.

48 See infra Part III.C.3-6.

49 In addition, courts have reviewed antitrust claimslodged against numerous pooling and cross-licensingagreements over the past century. See, e.g., Broad.Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1(1979) (copyright pooling arrangement); United Statesv. Singer Mfg. Co., 374 U.S. 174 (1963); United States v.New Wrinkle, Inc., 342 U.S. 371 (1952); United States v.Line Material Co., 333 U.S. 287 (1948); United States v.U.S. Gypsum Co., 333 U.S. 364 (1948); Hartford-EmpireCo. v. United States, 323 U.S. 386 (1945); Standard OilCo. v. United States, 283 U.S. 163 (1931); StandardSanitary Mfg. Co. v. United States, 226 U.S. 20 (1912);Bement v. Nat’l Harrow Co., 186 U.S. 70 (1902); CarpetSeaming Tape Licensing Corp. v. Best Seam Inc., 616 F.2d1133 (9th Cir. 1980); Kobe, Inc. v. Dempsey Pump Co.,198 F.2d 416 (10th Cir. 1952); Baker-Cammack HosieryMills, Inc. v. Davis Co., 181 F.2d 550 (4th Cir. 1950);Cutter Labs., Inc. v. Lyophile-Cryochem Corp., 179 F.2d80 (9th Cir. 1949); King v. Anthony Pools, Inc., 202 F.Supp. 426 (S.D. Cal. 1962). The economic and legalanalyses articulated in these older cases are often lesssophisticated than contemporary antitrust doctrinedeveloped and applied by the Agencies in otherfields. For example, few earlier opinions givesignificant weight to the relationships among thepatents in the pool, whereas modern economicanalysis of patent pools examines whether the patentrights in the pool are complements or substitutes forone another. Also the courts’ terminology isinconsistent. Courts often have applied the term“patent pools” to arrangements that the Agencieswould now describe as portfolio cross licensesbecause these “pools” did not license to third parties. See, e.g., Hartford-Empire Co., 323 U.S. at 392, 413(describing licensing agreements where defendantscreated a multi-firm portfolio of patents and licensedthem only to each other, not to third parties, as a“patent pool”); see also Line Material Co., 333 U.S. at313 n.24 (“The words ‘patent pool’ are not words of


the Antitrust-IP Guidelines, the Agencieshave two primary concerns whenanalyzing the likely effects oncompetition of a potential or actual patentpool. First, horizontal coordinationamong the pool’s licensors could lead toa reduction in price competition amongdownstream products. In particular, apool that includes patents for substitutetechnologies could lead to increasedprices in the final goods market due to theabsence of competition among thosesubstitute technologies.50 In addition,participants in the pool might be able touse it to collude, for example, byexchanging competitively sensitiveinformation, such as pricing, marketing,or R&D information through themechanism of the pool.

Second, the Agencies areconcerned that combining patent rights ina pool could discourage R&D, newproduct development, and cost-reducing

process innovations. Licensors could bediscouraged from making investments ininnovation if “a pooling arrangement . .. requires members to grant licenses toeach other at minimal cost . . . becausemembers of the pool have to share theirsuccessful research and development andeach of the members can free ride on theaccomplishments of other poolmembers.”51 Licensees could bediscouraged from innovating if thelicensors do not retain the right to licensetheir patents independently or if licenseesare not adequately rewarded forinnovations that they grant back to thepool.52

The Agencies have supplementedthe pooling analysis found in theAntitrust-IP Guidelines in severalbusiness review letters issued by theDepartment of Justice53 and in the FTC’senforcement action against the patentpool formed by Summit Technology, Inc.and VISX, Inc. (“Summit-VISX”).54

art. The expression is used in this opinion to conveythe idea of a linking of the right to use patents issuedto more than one patentee.”). In recent years, only afew courts have reviewed antitrust claims involvingportfolio cross-licensing and patent-poolingagreements. See, e.g., Matsushita Elec. Indus. Co. v.Cinram Int’l, Inc., 299 F. Supp. 2d 370 (D. Del. 2004)(granting summary judgment on antitrustcounterclaims involving a six-company digital videodisc pool and holding pool participants providedrealistic opportunity for individual licensing ofpatents).

50 See ANTITRUST-IP GUIDELINES § 5.5. The Guidelinesstate that patent pools have the greatest potential tounreasonably limit competition among entities thatwould have been actual or likely potentialcompetitors in a relevant market in the absence of thelicense. Id. §§ 3.1, 4.1, 5.1, 5.5. According to theAntitrust-IP Guidelines, vertical license restrictionsmay harm horizontal competition if they forecloseaccess to, or significantly raise the price of, animportant input, or if they facilitate coordination toincrease price or reduce output among competitors. Id. §§ 4.1, 5.3, 5.4.


52 Id. The guidelines also note, however, that suchpooling arrangements can have procompetitivebenefits, especially if they do not include a largefraction of the potential research and development inan innovation market. Id.

53 See infra Part III.C.1.

54 Decision and Order, In re Summit Tech., Inc., 127F.T.C. 208, 217 (1999) (No. 9286), available athttp://www.ftc.gov/os/decisions/docs/Volume127.pdf [hereinafter Summit Consent Decree]; Decisionand Order, In re VISX, Inc., 127 F.T.C. 236 (1999) (No.9286), available at http://www.ftc.gov/os/decisions/docs/Volume127.pdf [hereinafter VISXConsent Decree]; Complaint, Summit, 127 F.T.C. at208 (No. 9286) [hereinafter FTC Summit-VISXComplaint].


1. U.S. Department of JusticeBusiness Review Letters

The Department analyzed patentpool proposals in three business reviewletters issued in the late 1990s: theMPEG-2 pool Business Review Letter,55

the three-member DVD pool (“3C DVD”)Business Review Letter,56 and the six-member DVD pool (“6C DVD”) BusinessReview Letter.57 In its 2002 3G BusinessReview Letter, the Department analyzeda patent platform arrangement thatinvolved five separate wirelesscommunication technologies and sharedsome characteristics of a patent-poolingagreement.58

a. The MPEG-2 Pool

MPEG-2 is a digital video

compression technology used in manydifferent products and services, includingDVDs and telecommunications, as well ascable, satellite, and broadcast television.59

When making products that meet theMPEG-2 standard, a company couldinfringe on the patent rights of manydifferent rights holders. As a result, firmsinterested in adopting the MPEG-2standard hired an independent patentexpert to search for the patents that were“essential” to its implementation.60 Ninecompanies61 that held twenty-sevenessential patents among them,62 alongwith one other company,63 formed MPEGLA, which acts as the pool’s licensingadministrator.64 MPEG LA retains anindependent technical expert todetermine whether other patents areessential to the MPEG-2 standard.65

MPEG LA assembles and offers a packageof hardware and software licenses to thepool members’ patents that are“essential” to comply with the MPEG-2

55 Letter from Joel I. Klein, Acting Assistant AttorneyGen., U.S. Dep’t of Justice, to G[a]rrard R. Beeney,Esq. (June 26, 1997), available athttp://www.usdoj.gov/atr/public/busreview/215742.pdf [hereinafter MPEG-2 Business Review Letter].

56 Letter from Joel I. Klein, Assistant Attorney Gen.,U.S. Dep’t of Justice, to Garrard R. Beeney, Esq. (Dec.16, 1998), available at http://www.usdoj.gov/atr/public/busreview/2121.pdf [hereinafter 3C DVDBusiness Review Letter]. The original name for thistechnology was “Digital Video Disc;” however, theword “video” was exchanged for “versatile” due toan expansion of applications for the technology. SeeDVD Forum, DVD Primer,http://www.dvdforum.org/faq-dvdprimer.htm (lastvisited Apr. 11, 2007).

57 Letter from Joel I. Klein, Assistant Attorney Gen.,U.S. Dep’t of Justice, to Carey R. Ramos, Esq. (June 10,1999), available at http://www.usdoj.gov/atr/public/busreview/2485.pdf [hereinafter 6C DVD BusinessReview Letter].

58 Letter from Charles A. James, Assistant AttorneyGen., U.S. Dep’t of Justice, to Ky P. Ewing, Esq. (Nov.12, 2002), available at http://www.usdoj.gov/atr/public/ busreview/200455.pdf [hereinafter 3GBusiness Review Letter].

59 MPEG-2 Business Review Letter at 2.

60 Id. at 3-5.

61 Id. at 1, 3 (noting that original pool members wereTrustees of Columbia University, Fujitsu Ltd.,General Instrument Corp., Lucent Technologies Inc.,Matsushita Electric Industrial Co., Ltd., MitsubishiElectric Corp., Philips Electronics N.V., Scientific-Atlanta, Inc., and Sony Corp.).

62 Id. at 3. As of April 2002, the MPEG-2 poolincluded 425 patents (100 patent families) owned bytwenty-one entities. Futa Submission at 2. As ofJanuary 10, 2006, the MPEG-2 pool had grown andincluded over 800 patents. See MPEG LA, MPEG-2Attachment 1, http://www.mpegla.com/m2/m2-att1.pdf (last visited Apr. 11, 2007).

63 MPEG-2 Business Review Letter at 3 (CableTelevision Laboratories, Inc.).

64 Id. at 3-4.

65 Id. at 5; see also infra Part III.D.1 (discussingessentiality as a method for excluding substitutepatents).


standard, and distributes royalty incomeamong the contributing patent holders ona per-patent basis.66 Pool members andthird parties can challenge the“essentiality” of patents in the pool, i.e.,whether access to the patents in the poolis indeed necessary to manufactureproducts in compliance with thestandard.67 The pool license agreementalso requires every licensee to grant backlicenses to the pool’s members on allMPEG-2-related patents the licensee mayhave or develop.68

b. The DVD Pools

The Department issued twobusiness review letters concerning patent-pooling arrangements related to DVD-Video and DVD-ROM standards. TheDepartment issued the first of these, the3C DVD Business Review Letter, onDecember 16, 1998. The 3C DVD poolwas created by three firms licensing atotal of 210 patents.69 In lieu of anindependent administrator, one of thelicensors, Philips, acts as the joint licensoron behalf of the other pool membersthrough bilateral agreements with therights holders.70 Pool members grantlicenses to essential patents (defined as“necessary (as a practical matter) forcompliance with the DVD[-Video orDVD-ROM] Standard Specifications”) to

the pool on a nonexclusive basis.71 Theessentiality of the patents is determinedby a patent expert retained by thelicensors.72 Royalties are distributed on anegotiated basis that is not contingent onthe number of patents contributed to thepool.73

The Department issued the secondof these letters, the 6C DVD BusinessReview Letter, on June 10, 1999. The 6CDVD pool was formed by six firms.74

Toshiba acts as the joint licensor for thepool through a multilateral agreementwith the other five firms.75 The partiesgrant to the pool, on a nonexclusive basis,licenses to essential patents (defined aspatents that are “necessarily infringed” orfor which “there is no realisticalternative” for “implementing the DVDStandard Specifications.”).76 Members ofthis pool are obliged to offer licensesindependently of the pool.77 Whether apatent is “essential” to the standard isdetermined by an expert retained by the

66 MPEG-2 Business Review Letter at 3-4, 6.

67 Id. at 5.

68 Id. at 7.

69 3C DVD Business Review Letter at 1-4 (poolformed by Koninklijke Philips Electronics, N.V., SonyCorp. of Japan, and Pioneer Electronic Corp. ofJapan).

70 Id. at 4-5.

71 Id. at 3, 4-5 (internal quotation marks omitted); seealso infra Part III.D.1 (discussing essentiality as amethod for excluding substitute patents).

72 3C DVD Business Review Letter at 3-4, 9-10.

73 Id. at 5-6.

74 6C DVD Business Review Letter at 1 (original poolmembers were Hitachi, Ltd., Matsushita ElectricIndustrial Co., Mitsubishi Electric Corp., TimeWarner Inc., Toshiba Corp., and Victor Company ofJapan, Ltd.); see also Christopher J. Kelly, Patent Poolsand Antitrust Enforcement – 1997-2001 (Apr. 17, 2002Hr’g R.) (slides) at 11, http://www.ftc.gov/opp/intellect/020417christopherjkelly.pdf [hereinafterKelly Presentation].

75 6C DVD Business Review Letter at 2-3.

76 Id. at 3 (internal quotation marks omitted); see alsoinfra Part III.D.1 (discussing essentiality as a methodfor excluding substitute patents).

77 6C DVD Business Review Letter at 3.


pool.78 The licensing program alsoprovides for a quadrennial review by thepatent expert as to whether the pool’spatents remain essential to practicing thestandard. It further provides for interimreview of individual patents if theiressentiality is questioned.79 Royalties areallocated on a per-patent basis, with someadjustments for the age of the patent.80

Both DVD pools require licenseesto grant back to the licensors, as well as tothe other pool licensees, licenses on anyessential DVD patents that they may ownor control during the term of the license,on reasonable and nondiscriminatoryterms.81

c. The 3G “Patent Platform” LicensingProgram

The Third-Generation MobileCommunication System (“3G”) is a digitalwireless communication technology. Atthe time the Department issued the 3GBusiness Review Letter, there were fivedifferent 3G technologies82 rather than asingle standard, which was the case in thepatent pools discussed above. As manyas forty-five companies claimedownership of patents essential to at leastone of the 3G technologies.83 A nineteen-company partnership formed a licensingarrangement dubbed a “patent platform,”which proposed creating five separate

and independent licensing “platformcompanies,” one for each 3G technology,with a separate licensing administratorand board of directors for each.84 Theplatform companies make licensing androyalty decisions independently, butcoordinate through a single managementcompany for functions such as promotingthe 3G platform concept and evaluatingpatents in order to exclude those that arenot essential to any relevant 3Gtechnology.85

Each 3G platform company sharesmany features with patent pools. Theplatform companies, however, do notaggregate the essential patents relevant toa particular 3G technology into a singlelicense. Instead, each patent is licensedindividually. A licensee may choose touse “a default Standard License”established by the relevant platformcompany “separately with each essentialpatent licensor.” Or a licensee maychoose to use “an Interim License, onterms similar to the Standard License,while negotiating terms bilaterally withthe essential patent licensor for a finallicense that may vary from the StandardLicense.”86 The platform arrangementsare “structured to take into accountsubstitutability between 3G technologiesby creating an independent PlatformCo tohandle all licensing matters, including[the] setting of actual royalty rates, withrespect to each individual 3Gtechnology.”87 Over time, each platform78 Id. at 3-4.

79 Id. at 4-5.

80 Id. at 6-7 & n.33.

81 3C DVD Business Review Letter at 6; 6C DVDBusiness Review Letter at 8.

82 3G Business Review Letter at 2.

83 Id. at 3.

84 Id. at 4.

85 Id. at 5.

86 Id. at 7.

87 Id. at 10; 3G Business Review Letter at 1 n.2 (“PlatformCo is the generic name for several entities


company may modify the license termsfor the technology it is administering andeach platform company “independentlydetermine[s] the key values used tocalculate royalties.”88

d. The Department’s Review

The Department concluded thateach of these patent-pooling proposalswere likely to create substantialintegrative efficiencies by reducing thetime and expense of disseminating thepatents to interested licensees, clearingblocking positions, and integratingcomplementary technologies. TheDepartment expected the 3G platformproposal to deliver somewhat fewerlicensing efficiencies because the patentrights would not be integrated into asingle bundle.89 To address theDepartment’s concern that the poolingarrangement could reduce horizontalprice competition between licensors,which could result in an increase in pricesof products that used the licensed patentsor in a decrease in price competitionb e t w e e n d o w n s t r e a m m a r k etparticipants,90 each entity engaged anindependent expert to review the patentsand exclude substitute technologies fromthe licensing arrangement by admitting tothe pool only those complementary

patents essential to manufacture productscomplying with the standard.91 Theproponents sought to ensure that thelicensing agent did not have access tocompetitively sensitive proprietaryinformation, such as cost data, andincluded provisions that prevented suchinformation from being shared with anyof the licensors or licensees.92

The Department relied on severalfactors to assess whether the pools werelikely to harm innovation.93 The first wasthe statutory presumption that issuedpatents are valid,94 a presumptionreinforced by the mechanisms created bythe pool and platform proponents toexclude invalid patents from the licensingarrangements.95 The Department alsor e l i e d up o n t h e p r o p o ne n t s ’representations that the licensors would

that would be established with licensing-relatedresponsibilities for essential patents concerningspecific 3G technologies, while ManCo is an entitythat would be established to oversee certain definedcommon functions related to 3G patents such asevaluation of essentiality.”).

88 Id. at 10.

89 See id. at 11.

90 MPEG-2 Business Review Letter at 11; 3C DVDBusiness Review Letter at 9; 6C DVD BusinessReview Letter at 10; 3G Business Review Letter at 9.

91 MPEG-2 Business Review Letter at 10-11; 3C DVDBusiness Review Letter at 10-13; 6C DVD BusinessReview Letter at 12-13; 3G Business Review Letter at10. The distinction between complementary andsubstitutable goods arises from a perspective ofconsumer demand. More generally, A and B areeconomic complements if the demand for A rises asthe price of B falls. A and B are economic substitutesif the demand for A rises as the price of B rises. HAL

R. VARIAN, INTERMEDIATE MICROECONOMICS: AMODERN APPROACH 110 (4th ed. 1992); see also MorseSubmission at 3; Roger B. Andewelt, Analysis of PatentPools Under the Antitrust Laws, 53 ANTITRUST L.J. 611,612-14 (1985).

92 MPEG-2 Business Review Letter at 12; 3C DVDBusiness Review Letter at 13; 6C DVD BusinessReview Letter at 14; 3G Business Review Letter at 13.

93 MPEG-2 Business Review Letter at 9, 11; 3C DVDBusiness Review Letter at 9; 6C DVD BusinessReview Letter at 10; 3G Business Review Letter at 9.

94 35 U.S.C. § 282 (2000) (“A patent shall be presumedvalid.”).

95 MPEG-2 Business Review Letter at 9 & n.40; 3CDVD Business Review Letter at 9; 6C DVD BusinessReview Letter at 10-11; 3G Business Review Letter at9.


retain the right to license their patentsindividually,96 the scope of grantbackclauses would be limited,97 the licenseagreement would be available to allinterested licensees,98 and the pool wouldprovide a clear understanding of thecontents of the license.99

Following extensive review of thepotential efficiencies and competitiveharms, as well as the safeguardsimplemented by the proponents to guardagainst these harms, the Departmentissued a business review letter in eachcase stating that, based on the informationprovided, “the Department is notpresently inclined to initiate antitrustenforcement action against the conductyou have described.”100

The Department’s analyses of theanticipated competitive effects of thesepools and the 3G Patent Platformpursuant to its business review proceduremay differ from decisions made in thecontext of enforcement investigations.101

Business review letters inform parties ofthe Department’s enforcement intentionsbased largely on the parties’ descriptionof the relevant facts before the proposedactivity has commenced. Parties desiringa favorable business review oftenincorporate mechanisms designed toeliminate or minimize the risk ofanticompetitive effects, in order to givethe Department sufficient confidence inits assessment of the likely competitiveeffects of the proposed activity to permitthe issuance of a favorable letter.102

Investigations of conduct, by contrast,typically address whether a party isviolating, or has violated, the antitrustlaws. In an enforcement investigationexamining a patent pool currently ineffect, failure to incorporate all thesafeguards set forth in the poolingbusiness review letters will notautomatically lead to the conclusion thata pool is anticompetitive. Rather, theAgencies will evaluate the particular factsand circumstances to determine whether

96 MPEG-2 Business Review Letter at 12; 3C DVDBusiness Review Letter at 13-14; 3G Business ReviewLetter at 12; see also 6C DVD Business Review Letterat 14 n.66.

97 MPEG-2 Business Review Letter at 13-14; 3C DVDBusiness Review Letter at 14; 6C DVD BusinessReview Letter at 14-16; 3G Business Review Letter at12.

98 MPEG-2 Business Review Letter at 11; 3C DVDBusiness Review Letter at 13-14; 6C DVD BusinessReview Letter at 15-16.

99 MPEG-2 Business Review Letter at 12; 3C DVDBusiness Review Letter at 15; 3G Business ReviewLetter at 13.

100 MPEG-2 Business Review Letter at 17; 3C DVDBusiness Review Letter at 15; 6C DVD BusinessReview Letter at 16; 3G Business Review Letter at 13. The Department’s response to a business reviewrequest will almost always fall into one of threecategories: (1) the Department does not presentlyintend to challenge the proposed conduct, (2) theDepartment “declines to state its enforcementintentions,” or (3) the Department finds that it“cannot state that it would not challenge theproposed conduct if it is implemented.” In thesecond case, the Department might or might notchallenge the conduct if implemented. In the thirdcase, such a challenge is probable. U.S. DEP’T OF

JUSTICE, ANTITRUST DIVISION MANUAL ch. 3, pt. H.1.g.

(3d ed. 1998, rev. 2002), available athttp://www.usdoj.gov/atr/foia/divisionmanual/three.htm.

101 See Antitrust Division Business Review Procedure,28 C.F.R. § 50.6 (2002). The FTC’s advisory opinionprocedure is similarly differentiated from itsenforcement investigations. See 16 C.F.R. §§ 1.1-1.4(2003) (FTC advisory opinion procedure).

102 Fromm Submission at 2 (“The MPEG LA and DVDletters delineate basic rules that can minimizeantitrust risk and that are now widely employed.”);Morse Submission at 7 (“[The Department’s poolingbusiness review letters] set forth a road map ofpractices that should minimize antitrust risk.”).


the actual conduct has an anticompetitiveeffect.

2. The Summit-VISX Pool

In 1998, the FTC challenged a poolformed by Summit Technology, Inc. andVISX, Inc. that contained patents relatingto the manufacture and use of lasersemployed in performing photo-refractivekeratectomy (“PRK”), which is a form ofvision-correcting eye surgery.103 At thetime, Summit and VISX were the onlyfirms whose laser equipment hadreceived marketing approval from theU.S. Food and Drug Administration forperforming PRK.104 Through the pool,Summit and VISX relinquished the rightto license their patents unilaterally, buteach received the right to prohibit thepool from licensing any third party. Thepool issued no third-party licenses overits six year existence.105 In addition, thepool agreement required each companyto pay a $250 fee for each PRK procedureperformed with its laser equipment. Thatfee functioned as a price floor for the“per-procedure fee” that each companycharged ophthalmologists using itsequipment. As a result, Summit andVISX both charged doctors $250 for eachPRK procedure they performed.106

The FTC alleged that the pooleliminated competition between Summit

and VISX in the sale or leasing of PRKequipment, and in the licensing oftechnology related to PRK.107 The partiescontended that the pool reduced theuncertainty and expense of patentlitigation because it included potentiallyblocking patents.108 The FTC rejected theargument that the parties’ patentportfolios justified the pool’s completeelimination of price competition. As theAnalysis to Aid Public Commentexplained, “Summit and VISX could haveachieved these efficiencies by any numberof significantly less restrictive means,including simple licenses or cross-licensesthat did not dictate prices to users orrestrict entry.”109

The Complaint further alleged thatpatent infringement would not haveprecluded either firm from coming tomarket, in part because VISX hadprocured a key patent through fraud onthe U.S. Patent and Trademark Office(“PTO”), rendering it unenforceable.110

103 FTC Summit-VISX Complaint paras. 8, 25-30.

104 Id. para. 6.

105 Id. paras. 9-10; Analysis of Proposed ConsentOrder to Aid Public Comment para. 8, In re SummitTech., Inc., No. 9286 (F.T.C. Aug. 21, 1998), available athttp://www.ftc.gov/os/1998/08/d09286ana.htm[hereinafter Summit-VISX Analysis].

106 FTC Summit-VISX Complaint paras. 11-12.

107 Id. paras. 8, 25-30.

108 Summit-VISX Analysis para. 10.

109 Id.; see also ANTITRUST-IP GUIDELINES § 4.2 (“Theexistence of practical and significantly less restrictivealternatives is relevant to a determination of whethera restraint is reasonably necessary. If it is clear thatthe parties could have achieved similar efficiencies bymeans that are significantly less restrictive, then theAgencies will not give weight to the parties’efficiency claim. In making this assessment, however,the Agencies will not engage in a search for atheoretically least restrictive alternative that is notrealistic in the practical prospective business situationfaced by the parties.”).

110 See FTC Summit-VISX Complaint paras. 14-21, 29-30. In economic terms, a patent blocks “another whenthe second cannot be practiced without using thefirst;” the patent can neither be substituted for nor, asa practical matter, invented around. ANTITRUST-IPGUIDELINES § 2.3; see also Ian Simmons, Patrick Lynch& Theodore H. Frank, “I Know It When I See It”:


The FTC’s allegations concerning the poolwere settled through consent orders thatdissolved the agreement.111

D. Specific Issues of CompetitiveConcern

1. Substitutes Within a Patent Pool

a. Competitive Concerns

The panelists generally agreedthat pools composed of pure substitutepatents are more likely to harm socialwelfare than are pools of complementarypatents, which tend to increaseefficiencies and lower prices toconsumers. As one panelist stated, “[b]ycombining substitute patents, a pool canbe used as a price-fixing mechanism,ultimately raising the price of products

and services that utilize the pooledpatents”112 and thus harming competitionand consumers.

Panelists noted, however, thatcategorizing patents as complements orsubstitutes is not a simple task. In manycases, patents in a pool are not purecomplements or pure substitutes, butdisplay characteristics of both. As onepanelist explained, “as much as we longto categorize intellectual property neatlyin the conceptually distinct categories ofcompeting, complementary, [and]blocking, patents[,] like facts[,] arestubborn things that frequently defy suchconvenient classifications. They maystraddle one or more classifications.”113

The panelists also discussedvarious tests for determining whether apatent is essential to a standard ortechnology. They noted that each of thepools that received a business reviewletter from the Department used a slightly

Defining and Demonstrating “Blocking Patents,”ANTITRUST, Summer 2002, at 48, 49 (“A patent isblocking if circumventing it (1) is not commerciallypracticable, or (2) will not produce a commerciallyviable product.”) [hereinafter Simmons et al., BlockingPatents].

111 VISX Consent Decree at pt. II; Summit ConsentDecree at pt. II. The Consent Decrees also requiredeach company to license to each other, on a royalty-free and nonexclusive basis, the patents each firmcontributed to the patent pool. According to theAnalysis to Aid Public Comment, although theComplaint contended that VISX and Summit couldhave competed absent the pool, subsequent sunk-costinvestments in reliance on the pool made a crosslicense desirable in order to approximate thecompetitive conditions that would have beenachieved had the pool not been formed. Summit-VISX Analysis para.7. The FTC’s litigation continuedagainst VISX on allegations that it had procured a keypatent through fraud on the PTO. After the PTOissued a Reexamination Certificate concerning thedisputed patent, the Commission dismissed thecomplaint on this issue. See Order Reopening theRecord and Dismissing the Complaint, In re VISX,Inc., No. 9286 (F.T.C. Feb. 7, 2001), available athttp://www.ftc.gov/os/2001/02/summitvisxorder.htm.

112 Morse Submission at 7; see also CLARK ET AL.,BIOTECH PATENT POOLS at 10-11 (stating that concernsabout a patent pool expanding monopoly pricing canbe addressed by carefully evaluating whether thepatents are truly “blocking” as outlined in theAntitrust-IP Guidelines); Josh Lerner, Patent Pools: Some Policy Considerations (Apr. 17, 2002 Hr’g R.)(slides) at 9 (asserting that pools containing direct orperfect substitutes harm social welfare),http://www.ftc.gov/opp/intellect/020417joshlerner.pdf [hereinafter Lerner Presentation]; Garrard R.Beeney, Pro-competitive Aspects of Intellectual PropertyPools: A Proposal for Safe Harbor Provisions (Apr. 17,2002 Hr’g R.) at 5, http://www.ftc.gov/opp/intellect/020417garrardrbeeney.pdf [hereinafterBeeney Submission]; Shapiro, Navigating the PatentThicket at 134 (“[I]nclusion of truly complementarypatents in a patent pool is desirable andprocompetitive, but assembly of substitute or rivalpatents in a pool can eliminate competition and leadto elevated license fees.”).

113 Apr. 17 Tr. at 107-08 (Newberg); see also id. at 38-39(Lerner).


different test for essentiality. In onepanelist’s view, the DVD pools’“economic test” is more efficient than theMPEG-2 pool’s “technically essential test”for licensees and, therefore, should bepreferred by antitrust enforcers.114

Another panelist stated that eitherdefinition is acceptable and that fewcompetitive issues would arise so long aseach definition was faithfully applied.115

A third panelist noted that the practicalimplementation of the differentdefinitions of essentiality is “pretty muchthe same.”116 Using the criteria that apatent must contain a claim essential toimplementing the standard was describedby some panelists as an effective means ofassuring that the patents included are notsubstitutes.117 In one panelist’s view,where no standard has been set, it shouldbe sufficient to define a clear and limitedfield of use for a pool’s license in order todetermine whether the included patentsare complements or substitutes and to“assess the competitive impact of a pool .. . on . . . innovation and downstreamproduct markets.”118

A number of panelists discussedwhether, and under what circumstances,substitute patents should be allowed in apatent pool. One panelist urged theinclusion of multiple substitutetechnologies into pools when licensees

using the pool’s patents must alsoinfringe one of the substitute technologiesin order to produce or create adownstream product that complies withthe standard. Including this limited classof substitutes, he argued, would decreasetransaction costs and increase the pool’sefficiency.119 That might be the case, hesuggested, when the manufacturing steps,calculations, or processes that produce adefined product could be accomplished inmore than one way.120

The same panelist asserted thatbarring the substitute patents that coverthese functions required licensees to bothacquire a license from the patent pool andnegotiate a license from one of the patentholders of the competing technologies,which increases transaction costs.121

Instead, this panelist suggested that allcompeting options be allowed into thepool and licensees could select whichmethod to use under the pool license.122

To retain choice among the competingtechnologies, the pool’s members couldrequire that the portion of the licenseroyalty attributable to the competingprocess be distributed proportionate toactual use by the licensees, he said.123

This panelist suggested as analternative, albeit a less desirable one, that

114 David McGowan, Enforcement Issues RegardingPooling and Cross-Licensing (Apr. 17, 2002 Hr’g R.) at 4,http://www.ftc.gov/opp/intellect/020417davidmcgowan.pdf [hereinafter McGowan Submission].

115 Beeney Submission at 8.

116 Apr. 17 Tr. at 210-11 (Kulbaski).

117 Id. at 160-61 (Kelly).

118 Beeney Submission at 5; see also Apr. 17 Tr. at 232-33 (Beeney).

119 Apr. 17 Tr. at 181-85 (Beeney); Beeney Submissionat 5-7.

120 Apr. 17 Tr. at 181 (Beeney); Beeney Submission at6.





the pool’s members select one of thecompeting technologies for inclusion inthe pool, provided the process of selectiondoes not disproportionately reward onepatent holder, exclude the others from themarket, or limit licensees’ choice of whichmethod to employ.124

Panelists’ reactions to theseproposals were mixed. One paneliststated that including only one of severalsubstitute patents in a pool “risksforeclosing markets to competing patentsoutside the pool” because a licenseewould not purchase both a pool licenseand a license for a substitute patent, evenif that substitute were a superiortechnology.125 One economist on thepanel asserted that pools containingpatents that inhabit the middle ground ofimpure complements and substitutes canbe welfare-enhancing,126 while anotherpanelist stated that, although includingpartial substitutes in the pool “mayincrease transactions efficiency, [it could]increase [both] administration costs and

antitrust concerns.”127

b. Analysis

The Antitrust-IP Guidelines statethat “combin[ing] complementary factorsof production . . . is generallyprocompetitive.”128 Analyzing thecompetitive effects of a patent pooldepends in substantial part on thecharacterization of the patents within thepool. Accordingly, the Department’sfavorable business reviews of pools haverelied heavily on assurances from theparties that the pools contain onlycomplementary patents, stating that “acombination of complementaryintellectual property rights, especiallyones that block the application for whichthey are jointly licensed, can be anefficient and procompetitive method ofdisseminating those rights to would-beusers.”129 Similarly, the FTC’s Summit-VISX Complaint challenged thecombining of patents in a pool that werealleged to cover substitute technologies.130

124 Apr. 17 Tr. at 184 (Beeney); Beeney Submission at6-7.

125 Morse Submission at 8; see also Michael R.Franzinger, Latent Dangers in a Patent Pool: TheEuropean Commission’s Approval of the 3G WirelessTechnology Licensing Agreements, 91 CAL. L. REV. 1693,1723 (2003) (recommending that 3G licensingagreements include a clause requiring removal of anessential patent if a patented improvement is devisedso the improvement and the formerly essential patentcan compete for the license fees); cf. Regis C. Worley,The MPEG LA Patent Pool: A Rule of Reason Analysisand Suggestion to Improve Procompetitiveness, 24 T.JEFFERSON L. REV. 299, 316 (2002) (arguing that themost procompetitive outcome is to substitute a newimprovement patent for the original essential patent).

126 Apr. 17 Tr. at 38-39 (Lerner); Lerner Presentationat 9; see also Merges, The Case of Patent Pools at 164(article), 49 (Internet) (“[S]trict complementarity,based on industry standards, should not be deemedessential to future pools.”).

127 Grindley Presentation at 12.


129 MPEG-2 Business Review Letter at 9; see also 3CDVD Business Review Letter at 8-9; 6C DVD BusinessReview Letter at 11. One panelist critiqued theDepartment’s terminology, arguing that reviewshould focus on patent claims, not whole patents. Apr. 17 Tr. at 215 (Fromm). Although review of thepatents does indeed examine the independent claimswithin the patent, once such a claim is deemedcomplementary it is not separated from the rest of thepatent so the entire patent is placed within the pool. Id. at 218-19 (Kulbaski) (“[T]he evaluator looks at oneindependent claim and usually picks the broadestclaim . . . . And if that claim is found to be essential,then I believe the letter issued by the evaluator saysthat this patent is then essential to thestandard . . . .”).

130 FTC Summit-VISX Complaint paras. 14-21, 29-30.


In short, a pool containingcomplementary patents, i.e., patentscovering technologies that performdifferent functions but are usedcollectively to produce the licensedproduct, may have the pro-competitiveeffect of lowering the total royalty rate tolicensees, thereby lowering the finalproduct cost to consumers.131 As noted inthe DOJ business review letters and in theFTC’s VISX case, a pool containingsubstitutable patents, i.e., patentscovering technologies that compete witheach other and that licensee producerswould choose between, may have theanticompetitive effect of increasing thetotal royalty rate to licensees.132 Thus, animportant part of the analysis of a patentpool is whether, and to what extent,licensees use the patents in the pool ascomplements or as substitutes.133

(i) Determining Which Patents May“Swim” in the Pool

The enforcement conclusions ofboth Agencies depend heavily on theparticular facts of each pooling proposalor existing pool. The Agencies continueto believe that pools consisting only ofcomplementary patents are least likely toprove anticompetitive. One way toapproach the issue of excluding substitutepatents from a pool is to determinewhether a patent is essential for purposes

of complying with a particularstandard.134 The pooling proposalsapproved by the Department have eachdefined the term “essential” to thestandard in a slightly different manner. The MPEG-2 pool limits essential patentsto those that are “technically essential” toproduce a product pursuant to thestandard’s specifications, whereas theDVD pools also include patents that arepractically (or economically) essential.135

Although there is a slightly greaterdegree of subjectivity in the criterion usedby the DVD pools than in the criterionused by the MPEG-2 pool, both werefound reasonable based on the factspresented at the time.136 If properlydetermined, essentiality should guaranteethat the patents in the pool arecomplements.137

The Department has stated that ifseveral patented technologies could beused to comply with part of a standard,then including any of these technologicalsubstitutes in the pool could raisecompetitive concerns.138 The Agencies

131 See supra notes 14-17 and accompanying text(concerning royalty-stacking in connection withportfolio cross licenses).

132 See Josh Lerner & Jean Tirole, Efficient Patent Pools,94 AM. ECON. REV. 691, 695-98, 706 (2004).

133 MPEG-2 Business Review Letter at 15-16; 3C DVDBusiness Review Letter at 15; 6C DVD BusinessReview Letter at 16; 3G Business Review Letter at 13;see also FTC Summit-VISX Complaint para. 8.

134 See 6C DVD Business Review Letter at 10; 3C DVDBusiness Review Letter at 8-9.

135 MPEG-2 Business Review Letter at 9-10; 3C DVDBusiness Review Letter at 3; 6C DVD BusinessReview Letter at 3.

136 See Apr. 17 Tr. at 168 (Kelly).

137 Whether a patent is essential to a standard ortechnology also depends on when the determinationis made. For example, a patent may be essentialwhen the pool is first formed, but as a result ofinnovations or changes in the standard, over time thatsame patent may no longer be essential. TheDepartment’s review of the MPEG-2 and 6C DVDpools noted that both pools had mechanisms forreviewing essentiality at the formation of the pooland at later points in time. MPEG-2 Business ReviewLetter at 5; 6C DVD Business Review Letter at 3-5.

138 6C DVD Business Review Letter at 11-12.


acknowledge, however, that it might bereasonable to include substitute patents ina pool in certain situations. Evaluatingthe competitive costs and benefits of apool containing substitute technologywould depend, of course, on the factsavailable to the Agencies. In the contextof a DVD patent pool, the Departmentfound that “[i]nclusion in the pool of twoor more [substitute] patents would riskturning the pool into a price-fixingmechanism.”139 At that time, however,the Department also noted that it wouldnot challenge the inclusion of substitutepatents in a pool without taking intoaccount whether such inclusion createssignificant efficiencies.140 The Agencies’previous guidance should not beinterpreted to exclude the possibility ofincluding some substitute patents in thepool. The Agencies will consider theinclusion of some substitutes as one of themany factors in their rule of reasonanalysis of any pooling agreement.

(ii) Patent Validity

An invalid or unenforceable patentis not in a complementary relationshipwith other patents in the pool. TheDepartment’s positive view of patent-licensing agreements in its businessreview letters assumes that the licensedpatents are valid. Some of the poolingproposals approved by the Departmentinclude a process to eliminate patentsheld to be invalid or unenforceable by acourt in order to ensure that only validpatents are included in the license.141 Such

mechanisms are important because thepresence of invalid patents in a poolcould raise competitive concerns. Forexample, the Summit-VISX poolingagreement raised competitive concernsfor the FTC in part because a key VISXpool patent was allegedly obtained byfraud on the PTO.142 According to thecomplaint, the pooling arrangementprevented competition that otherwisewould have occurred, and inter alia,served as a price-fixing mechanism forPRK technology.143

2. Exclusive and NonexclusiveLicensing


According to some panelists,exclusively licensing patents to a pool canreduce innovation. As one panelist noted,“licensors and licensees [need to] be freeto combine technology either to improveor compete with the pooled technology,”so that products are made at lower costover time.144 Panelists identified both

139 Id. at 12; 3C DVD Business Review Letter at 10.

140 6C DVD Business Review Letter at 12 n.64.

141 MPEG-2 Business Review Letter at 5; 6C DVD

Business Review Letter at 11. Noting the possibletrade-off in increased administrative costs, onepanelist proposed using independent experts toevaluate the validity or enforceability of the patentsin the pool as part of the admission process or toresolve disputes. David McGowan, Enforcement IssuesRegarding Pooling and Cross-Licensing (Apr. 17, 2002Hr’g R.) (slides) at 10, http://www.ftc.gov/opp/intellect/020417mcgowan.pdf [hereinafter McGowanPresentation]; see also Apr. 17 Tr. at 75-77 (McGowan). The proposed pools reviewed by the Department allengage an expert to determine essentiality but notpatent validity or enforceability. MPEG-2 BusinessReview Letter at 5; 3C DVD Business Review Letter at4; 6C DVD Business Review Letter at 3-4.

142 See supra notes 103-11 and accompanying text.

143 See FTC Summit-VISX Complaint paras. 14-21, 29-30.

144 Apr. 17 Tr. at 79, 97-100 (McGowan); McGowan


licensors and licensees as sources ofresistance to licensing outside the pool.145

Panelists observed that, if the size of thepool is small, licensees will have greateropportunity and incentive to licenseoutside the pool. According to onepanelist, potential licensees will have lessopportunity and incentive to seek licensesoutside the pool as the number oflicensors in the pool grows, because thetransaction costs associated withseparately acquiring the pool’s patentswill tend to increase.146 Another panelistclarified that, although the amount ofindependent licensing may decrease asthe size of the pool increases, the size ofthe pool would not necessarily affect thewillingness of pool members to support

rival standards or to join other pools.147

A third panelist explained thatnonexclusivity “leave[s] open thepossibility of some rights that are in thatpool becoming part of differentstandards, competing standards, productsthat might become substitutes even ifthey’re not now, for the pool product.”148

This panelist noted that whether a poolmember has the incentive to licenseindependently depends on whether thelicense will maximize profits. Heexplained that the decision will be based,in part, on “the expected value of theinnovation on an alternative standard.”149

b. Analysis

In the pooling proposals reviewedby the Department, each licensorproposed granting a nonexclusive licenseto the pool and retaining the right tolicense its patent outside the pool.150 Bycontrast, VISX and Summit grantedexclusive licenses to the pool and eachcompany retained veto power to preventthe other company from licensing thepooled intellectual property outside thepool.151 Exclusive licenses may bedesirable, and thus potentiallyprocompetitive if they are necessary toprovide a significant incentive for thelicensees to invest in complementaryassets (e.g., when complementary assets

Presentation at 12; see also Apr. 17 Tr. at 157 (Kelly);Beeney Submission at 14.

145 Apr. 17 Tr. at 69, 85 (McGowan); id. at 86 (Lerner). One panelist asserted that some licensors are notmotivated to license independently. Id. at 92-93(Fromm). One court has held that patent poolingdoes not violate sections 1 and 2 of the Sherman Actwhen independent licensing is a realistic option,finding $.06 per DVD disk royalty differentialbetween cost of the pool license and cost of multipleindividual licenses meant that independent licensingwas a realistic alternative because the differential wasnot higher than the value of relevant rights conveyed. Matsushita, 299 F. Supp. 2d at 377, 379.

146 Apr. 17 Tr. at 86-87 (Lerner) (“To the extent that . .. the number of . . . licensors in the pool is small, thenthe propensity to license outside the pool is high. Tothe extent that the number of licensors in the pool isvery large, large being a number, say, greater thanfour . . . essentially licensing from, say, five or six orten different licensors, the probability of someonebeing able to invest the effort and the time . . . goesdown. The opportunity in a large pool to actually dothis licensing outside the pool is in fact . . . for manyfirms not a real opportunity. Even firms that havesignificant economic incentive to do so, they simplydon’t have the number of hours in the day before aproduct has to be introduced.”); id. at 93 (Fromm)(“[T]he practical realities tend to push [licensees]towards the pool . . . because of time and cost.”).

147 Id. at 87-88 (Kelly).

148 Id. at 84 (McGowan).

149 Id. at 85 (McGowan).

150 MPEG-2 Business Review Letter at 4; 3C DVDBusiness Review Letter at 5-6; 6C DVD BusinessReview Letter at 3, 6.

151 FTC Summit-VISX Complaint para. 9.


would be subject to free-riding absent theexclusive license). Allowing independentlicensing outside the pool, however,permits innovators that invent aroundone or more pool patents to compete withthe pool.152 Determining the competitivesignificance of the exclusive nature oflicenses granted to the pool thus dependson the specific facts of the case.

Creating the opportunity forindependent licensing does not guaranteethat such a license will be granted. Apool’s licensors generally are free tochoose both whether to grant separatelicenses and to set the royalty rates forany such licenses. A competitive concernwould arise, however, if decisions onlicensing outside a pool were part of aconcerted attempt by the pool’s licensorsto hinder the ability of others (outside thepool) to offer a competitive product orprocess.

3. Grantbacks


The Antitrust-IP Guidelines definea grantback as an agreement by which alicensee extends to the licensor the “rightto use the licensee’s improvements to thelicensed technology.”153 According topanelists and commentators, however,licensors may define a grantback’s scopemore broadly to cover “inventions whichrelate in any way to the subject of thelicensed patent,”154 or even to cover

inventions entirely unrelated to thelicensed technology.155 Some panelistsnoted that broadly written grantbacks candeter innovation by reducing the returnsavailable to the follow-on innovator.156 Ofparticular concern to some panelists is thescope of the rights to be granted back tothe licensor and whether the innovatorretains the right to license to others.157

b. Analysis

Grantbacks can promotecompetition within patent pools byenabling l icensors to practiceimprovements that licensees make to the

152 See Lerner & Tirole, 94 AM. ECON. REV. at 698-700.


154 Richard E. Donovan, Antitrust Issues in Licensing,in ADVANCED LICENSING AGREEMENTS FOR THE NEW

ECONOMY 2001, at 643, 660 (2001).

155 Morse Submission at 14; Nov. 6 Tr. at 117-18(McFalls) (“[A] grantback is . . . a licensing provisionin which a licensee agrees to license back . . . some IPwhich may or may not be related to the initial IPlicensed, for some period of time, in some or all partsof the world.”).

156 Beeney Submission at 11-12 (suggesting thebreadth of grantbacks should be negotiabledepending on the intellectual property investments oflicensees); Kulbaski Submission at 4-5; FrommSubmission at 6-7. One panelist suggested that agrantback licensor should be guaranteed, in mostcircumstances, that it will receive a reasonable royaltyfor its patents. Beeney Submission at 11-12 & n.16(noting that a “reasonable” royalty could be thatcollected by the licensors and that in at least onecontext a grantback need not be royalty-bearing); seealso McGowan Presentation at 12 (asserting thatgrantbacks should bear royalties); ANTITRUST-IPGUIDELINES § 5.6.

157 McGowan Presentation at 12 (asserting thatgrantbacks should be nonexclusive). Anotherpanelist urged the Agencies to more strictly enforcethe limitations on grantbacks articulated in thebusiness review letters, in particular those that coverunrelated technologies, future patents, andnonessential patents. Apr. 17 Tr. at 205-06 (Morse);see also ANTITRUST-IP GUIDELINES § 5.6 (“Comparedwith an exclusive grantback, a non-exclusivegrantback, which leaves the licensee free to licenseimprovements [in] technology to others, is less likelyto have anticompetitive effects.”).


licensed technology.158 Grantbacks canlimit the ability of licensees to refuse tolicense patented improvements.159 As aresult, a pool’s licensors (and otherlicensees) can continue to produce goodsconforming to the pool’s patents.Grantbacks can promote innovationincentives by rewarding first innovatorsfor enabling follow-on innovation byothers.160 They also can promote thesubsequent licensing of the results of theinnovation.161

The Agencies, however, recognizethe concerns raised by the panelists.Indeed, the pooling proposals reviewedby the Department contained mechanismsdesigned to narrow grantbacks, makingthem more likely to be procompetitive.These grantbacks are limited toinnovations within the scope of theexisting patents in the pool and arefurther limited to include only essentialpatents, so as to add only complementarypatents to the pool.162 In addition, the

grantbacks are nonexclusive, so licenseesmay freely use their own inventions andlicense them to others.163 Such narrowlytailored grantbacks are unlikely to raisecompetitive concerns.

4. Access to Information


Administering a patent pool mayrequire the pool’s licensing agent to haveaccess to competitively sensitiveproprietary information of licensors andlicensees, many of which may competeagainst each other in downstreammarkets. Such was the case in the DVDpools, for example, where many of thepools’ licensors and licensees werecompetitors in the DVD disc and playermanufacturing markets. Many of themwere also competitors in the market forcontent, such as recorded music, films,and entertainment software, that areincorporated in the DVDs.164 A patentpool could serve as a mechanism thatfacilitates downstream price coordinationamong the licensors if it were used todisseminate information between themabout one another’s use of the pool’stechnologies.165 Innovation incentives

158 See infra Chapter 4, Variations on IntellectualProperty Licensing Practices Part III.A (discussing theefficiencies associated with grantbacks).

159 ANTITRUST-IP GUIDELINES § 5.6; GrindleyPresentation at 13; Beeney Submission at 12; see alsoApr. 17 Tr. at 79-80 (McGowan) (asserting thatgrantbacks help standards evolve); 1 HERBERT

HOVENKAMP, MARK D. JANIS & MARK A. LEMLEY, IPAND ANTITRUST: AN ANALYSIS OF ANTITRUST

PRINCIPLES APPLIED TO INTELLECTUAL PROPERTY LAW §25.2, at 25-2 (2002).

160 Suzanne Scotchmer, Standing on the Shoulders ofGiants: Cumulative Research and the Patent Law, J.ECON. PERSP., Winter 1991, at 29, 31 (stating that firstinnovators will have the correct incentive to investonly if they receive some of the social surplusprovided by second-generation products).


162 MPEG-2 Business Review Letter at 13; 3C DVDBusiness Review Letter at 8, 14; 6C DVD BusinessReview Letter at 8-9, 14-16; see also ANTITRUST-IP

GUIDELINES § 5.6.

163 MPEG-2 Business Review Letter at 12-13; 3C DVDBusiness Review Letter at 14; 6C DVD BusinessReview Letter at 14-15.

164 3C DVD Business Review Letter at 2 n.2; 6C DVDBusiness Review Letter at 2 n.2.

165 The Agencies have found U.S. markets conduciveto coordinated interaction when certain marketfactors are present, including the ready availability ofreliable competitive information, homogeneousproducts, and high concentration levels. U.S. DEP’T OF

JUSTICE & FEDERAL TRADE COMM’N, COMMENTARY ON

THE HORIZONTAL MERGER GUIDELINES 18-23 (2006),


might also be reduced if concerns aboutothers in the pool misappropriatingproprietary information leads rivalswithin the pool to invest less in areas suchas product development.166

b. Analysis

Pooling agreements that limitlicensors’ access to each others’competitively sensitive proprietaryinformation, such as cost data, outputlevels, and prices of final products, lowersthe risk that licensors will be able tocoordinate their activities in final productmarkets.167 Limiting access to suchinformation also makes it less likely thatrivals within the pool will have concernsabout others misappropriating their data.Existing pools have used severalmechanisms to keep these types ofinformation confidential. In the MPEG-2pooling proposal, the pool hired anindependent licensing administrator sothat the licensors would not be privy toinformation gathered from other poolparticipants.168 In both DVD poolingproposals, where one of the pool’slicensors also acts as the programadministrator, the parties designed so-called “walls” to sufficiently limit accessto each others’ sensitive information.169

5. Royalties for the Pool’s Patents


Panelists raised several concernsabout the amount of royalties charged bypatent pools. Some panelists suggestedthat licensing terms should be reviewedover time, set as a reasonable percentageof the downstream price, or capped inorder to ensure that the royalties remainreasonable.170 One panelist suggested thata pool that charges smaller royalties tolicensors that are also licensees (insiders)than it charges to pure licensees( o u t s i d e r s ) m i g h t p r o d u c eanticompetitive effects in downstreammarkets. He argued that doing so would“allow inefficient [licensor] competitors todominate downstream markets bycombining the power of the patents in thepool to the exclusion of efficientindependent competitors.”171

b. Analysis

The Agencies generally do notassess the reasonableness of royalties setby patent pools.172 Rather, the Agencies

available at http://www.usdoj.gov/atr/public/guidelines/215247.pdf.

166 See U.S. DEP’T OF JUSTICE, ANTITRUST DIVISION

POLICY GUIDE TO MERGER REMEDIES 23 (2004), reprintedin 4 Trade Reg. Rep. (CCH) ¶ 13,171, available athttp://www.usdoj.gov/atr/public/guidelines/205108.pdf.

167 3C DVD Business Review Letter at 11-12; 6C DVDBusiness Review Letter at 14.

168 MPEG-2 Business Review Letter at 4, 11.

169 See Beeney Submission at 13; 3C DVD Business

Review Letter at 7-8, 13; 6C DVD Business ReviewLetter at 9-10, 14.

170 Morse Submission at 12; see also FrommSubmission at 3-4.

171 Morse Submission at 12-13; see also FrommSubmission at 3; Apr. 17 Tr. at 249-50 (Fromm).

172 See R. Hewitt Pate, Assistant Attorney Gen., U.S.Dep’t of Justice, Competition and IntellectualProperty in the U.S.: Licensing Freedom and theLimits of Antitrust, Address Before the 2005 EUCompetition Workshop 9 (June 3, 2005), available athttp://www.usdoj.gov/atr/public/speeches/209359.pdf (“Bringing a complaint to the Antitrust Divisionabout ‘excessive’ royalties, without more, is a losingstrategy.”). Several panelists were adamant that theAgencies should not involve themselves in the setting


focus on the pool’s formation andwhether its structure, including the termsof the contract among pool participants,would likely enable pool participants toraise prices or restrict output in a relevantmarket. In the MPEG-2 and DVDBusiness Review Letters, the Departmentnoted that when royalties are a smallportion of the downstream price, it isunlikely that they are being used tocoordinate downstream prices.1 7 3

Royalties that are a significant portion ofthe downstream price, however, do notnecessarily raise concerns, and otherindications of coordination ofdownstream prices would be requiredbefore the Agencies would be likely toinvestigate further. Indeed, theoreticaleconomic models show that if onlycomplementary patents are pooled, theroyalties the pool charges should belower than those that would be charged ifno pool were formed.174

The Agencies will not presumethat different royalty payments faced bydifferent licensees (e.g., insiders andoutsiders) are anticompetitive. Whethersuch an arrangement could beanticompetitive would depend upon the

specific facts of the case. The Agenciesmay examine the structure and amount ofroyalties as one of the many factors wheninvestigating alleged price coordination.

6. Requests for Partial-Pool Licenses


Panelists also discussed whether itharms competition if patent pools do notoffer licensees the option of licensing onlysome of a pool’s patents, a partial-poollicense at a lower royalty rate, instead ofoffering only a single comprehensiveblanket license.175 One panelist assertedthat partial licenses are needed because,even if a pool were originally devised toinclude only those patents deemedessential to a standard, over time some ofthose patents would no longer beessential to all the pool’s licensees.176 Inaddition, some licensees may desirepartial licenses if they already have accessto some of the necessary technologythrough pre-existing licenses. In suchinstances, one panelist asserted thatrequiring a blanket license forces licenseesto pay for access to intellectual propertythey do not need.177

Other panelists responded thatoffering only a blanket license is notharmful to those seeking a partial license,provided that the pool members retainthe right to license their contributedpatents independently, thereby creatingthe opportunity to enter into bilateral

of pools’ royalties. According to one panelist: “Marketplace acceptance is the best gauge of fair andreasonable [licensing terms] . . . . Every license mustbe priced to sell. In the end, we are dealing with verysophisticated users who have many market choices.” Futa Submission at 3; Apr. 17 Tr. at 245 (Futa). Another panelist stated that lawyers are not well-equipped to set royalties and that pools woulddisappear if the freedom to set royalties disappeared. See Apr. 17 Tr. at 283 (Beeney).

173 MPEG-2 Business Review Letter at 11; 3C DVDBusiness Review Letter at 13; 6C DVD BusinessReview Letter at 14.

174 Shapiro, Navigating the Patent Thicket at 123-24,149-50; Lerner & Tirole, 94 AM. ECON. REV. at 695-97.

175 Apr. 17 Tr. at 246-77 (Futa, Fromm, Kelly, Beeney,Grindley, Morse).

176 Id. at 251 (Fromm).

177 Fromm Submission at 4-5.


agreements for particular patents.178

Furthermore, one panelist argued, if poolswere required to let firms pick and choosewhich patents they wanted and then hadto vary the royalties accordingly, the pooladministrator could be required to offermany different permutations of licenses,perhaps at differing royalties.179 In suchsituations, some panelists suggested thata pool offering partial licenses in additionto the broader pool license may not createthe efficiencies that flow from reducingtransaction costs.180

b. Analysis

In general, a refusal to license lessthan all of a pool’s intellectual propertywill not raise competitive concerns,provided that the licensors retain theability to license their patents

individually and the pool’s design isotherwise procompetitive. In this way,licensees are not required to purchaseaccess to more technology than they need.However, the combined price of theindividual licenses may be more than theprice of the pooled patents which benefitsfrom lower transaction costs. In addition,although partial pool licensing could beused to cull nonessential patents from thepool over time, requiring such partiallicenses would tend to undermine thechief efficiency benefit of poolingarrangements, namely, the ability to offeras close to “one-stop shopping” aspossible for a given technology.181 Othermore efficient means to accomplish thisgoal are available, such as continuousreview of the licensed patent portfoliothat is designed to exclude patents fromthe pool that have become nonessentialover time.

IV. CONCLUSION

Both cross licenses and patentpools are based on reciprocal agreementsto share patent rights,182 and they canachieve similar efficiencies,183 includingintegrating complementary technologies,reducing transaction costs, clearingblocking patents, decreasing infringementlitigation and the uncertainties related to

178 Apr. 17 Tr. at 262-63 (Futa). But see id. at 252(Fromm) (asserting that the possibility of negotiatingindividual licenses is “more illusory than real”);Fromm Submission at 5 (“[Individual licensing isproblematic due to] major transaction costs and timerequired for multiple negotiations; holders’disincentives to entertain negotiations; likelihood thatthe sum of individually negotiated royalties wouldsignificantly exceed the prescribed package licenseroyalty; and the likely necessity of exchangingcompetitively sensitive information with one’scompetitors in the administration of individuallicenses.”).

179 Apr. 17 Tr. at 275-76 (Beeney); see also FutaSubmission at 5 (stating licensees could attempt tocustomize, in myriad ways, number of patents, lengthof term, and parts of the standard).

180 Apr. 17 Tr. at 267-68 (Grindley); id. at 274-77(Beeney). Moreover, according to one pooladministrator, the market develops subset licenseswhen multiple firms request such a license. Id. at 262-63 (Futa). In response, one panelist noted that theability to license fewer than all the patents in a pool isimportant for the first mover, who will have lost theinnovation advantage once multiple firms startrequesting a specific subset license. Id. at 264-66(Fromm); see also Fromm Submission at 5.

181 See supra Parts III.A, III.C.1.d.

182 See Joel I. Klein, Acting Assistant Attorney Gen.,U.S. Dep’t of Justice, Cross-Licensing and AntitrustLaw, Address Before the American IntellectualProperty Law Association 3 n.3 (May 2, 1997),available at http://www.usdoj.gov/atr/public/speeches/1118.pdf; Andewelt, 53 ANTITRUST L.J. at611.

183 ANTITRUST-IP GUIDELINES § 5.5; Apr. 17 Tr. at 178(Beeney); McGowan Submission at 2; KellyPresentation at 5.


it, and promoting the dissemination oftechnology. Although pools and crosslicenses seek to achieve these benefits viamethods that differ in fundamental ways,the competitive analysis set forth in theAntitrust-IP Guidelines is robust enoughto take these differences into account.Indeed, the panelists generally agreedthat the Agencies’ guidance regarding theantitrust analysis of patent pools andcross-licensing agreements is sound.184

That analysis acknowledges thatcross licensing and patent pooling canoffer substantial efficiencies, but also thatthey sometimes present certaincompetitive risks. Provisions in portfoliocross licenses that may facilitate pricefixing, for example, can raise antitrustconcerns. The Agencies generally reviewportfolio cross licenses under the rule ofreason.

The Agencies likewise generallyreview patent pools under the rule ofreason. As noted above, patent pools canhelp firms cut through overlappingpatent rights and bring products tomarket. However, in certaincircumstances, they can also facilitatehorizontal coordination among the pool’slicensors or discourage innovation. Forexample, there may be an anticompetitiverisk in a pool containing substitutepatents. One solution is to excludesubstitute patents from the pool by

ensuring that each patent is essential tothe standard, or principle, around whichthe pool is organized. Likewise,exclusivity in patent pools can provideincentives for procompetitive investment,but may also pose competitive concernsregarding reduced innovation. Similarly,broadly written grantbacks in a patent-pooling agreement can promotecompetition by giving licensors access todownstream improvements, or they canerode incentives for future innovation.Moreover, limiting licensors’ access to thecompetitively sensitive information ofothers in the pool can minimize theanticompetitive risk of improperinformation sharing in the pool.

Despite concerns voiced about theanticompetitive potential of “high”royalty rates in a pool, the Agenciesgenerally wil l not police the“reasonableness” of pool royalty rates.Likewise, pool licensing provisions thatrequire the licensing of all (not just some)of the pool’s intellectual property do notgenerally raise competitive concerns if thelicensors retain the ability to license theirpatents individually and the pool’s designis otherwise procompetitive.

184 Apr. 17 Tr. at 193 (Morse); Feb. 27 Tr. at 512(Shapiro) (“[B]y and large the [A]gencies have donewell to recognize the benefits of cross-licenses andpatent pools, and they should affirm those benefitsgoing forward. . . . [T]he DOJ’s . . . business reviewletters in the MPEG and DVD patent pools . . . wereexemplary in that respect.”); Apr. 17 Tr. at 175(Beeney); id. at 57 (McGowan); id. at 40 (Lerner); Feb.28 Tr. at 700 (Fox).

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Chapter 3 : Antitrust Analysis of Portfolio Cross ... ch… · ANTITRUST ANALYSIS OF PORTFOLIO CROSS-LICENSING AGREEMENTS AND PATENT POOLS I. INTRODUCTION In many industries, the