Comments on the Commission s draft Guidelines on the application of Article 101 TFEU on technology transfer agreements

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Kory Gregory
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1 16 May 2013 Comments on the Commission s draft Guidelines on the application of Article 101 TFEU on technology transfer agreements I. Introduction France Brevets is grateful to be given the opportunity to comment on the European Commission s proposed new EU technology transfer competition regime. Created in March 2010 in the framework of the French public initiative named Programme d Investissements d Avenir aiming at building value for research activities and fostering increased transfers from research to industry, France Brevets is the first investment fund fully dedicated to patents promotion and monetization in Europe. It is a 100 million investment fund (split between the French State, 50 million and the Caisse des Dépôts, 50 million). 1 France Brevets mission is to enable universities, schools of engineering and research bodies, as well as private companies to exploit their patents more effectively on an international scale, primarily through patent clustering and licensing, and by promoting cross-fertilization of public and private-sector patents. France Brevets selective approach takes into account the strategic value of the patents as well as the expectations of patent holders in both promoting their patents and protecting the development of their business. France Brevets deploys a broad array of legal, financial, technical and commercial resources, and leverages its network of worldwide best-in-class experts. Bringing skills, network and financial resources, France Brevets allows public research and private companies to secure a fair return on their research efforts through joint licensing initiatives. Alternatively, France Brevets may acquire patent rights for innovative ecosystems and secure rights protecting freedom to operate. The main sectors of France Brevets are information technology and communication at large, aeronautics and space, alternative energy, chemistry, materials, and life sciences. II. General observations France Brevets generally supports the two documents that the Commission has published for consultation, namely the technology transfer block exemption regulation (the draft TTBER ) and the accompanying guidelines (the draft Guidelines ). France Brevets has 1 See 1

2 decided to focus its comments on the draft Guidelines and, in particular, on the section of the Guidelines dealing with patent pools as one of its objectives is to organize patents into technological clusters for licensing purposes. 2 Before turning to its specific comments, France Brevets would like to emphasize the great variety of business models that have emerged in the domain of innovation and, in particular, intellectual property ( IP ) monetization in this past decade. While vertically-integrated companies remain central players when it comes to technology transfers, other entities play a growing role in the field of IP licensing. Some companies, for instance, specialize in innovation and fund such innovation through a licensing regime. Other companies, such as France Brevets, help various institutions, including small and medium sized companies, to generate licensing revenues from their innovation. While these companies are sometimes pejoratively referred to as non-practicing entities or patent-assertion entities due to the abuses of a small number of them that are not engaged in bona fide licensing activities, many patent licensing entities play a fundamental role in the funding and dissemination of innovation by helping institutions, which do not necessarily have the resources and knowledge to license their patents, to draw revenues from their innovation. They play therefore a useful role in that they contribute to the dissemination of existing technologies, and the funding and development of new technologies. For instance, France Brevets has launched a near field communication ( NFC ) patent licensing programme, which is open to all holders of relevant patents, and comprises pioneers in the development of that technology, including Inside Secure 3 and Orange. 4 This licensing programme will make the NFC patents of its members available to device manufacturers building the next generation of products that will support a wide range of contactless payment, transit, access control, loyalty, ticketing, and other services. France Brevets has also concluded a partnership with French aerospace leader CNES to help monetize the numerous technologies developed by that company. 5 III. Specific observations France Brevets will focus its comments on the section of the Guidelines devoted to patent pools. France Brevets main observation is that, while the safe harbour regime is well tailored 2 See 3 See %20INSIDE%20SECURE%20-%20CP_ %20UK.pdf 4 See Program-Directed 5 See 2

3 to the traditional patent pools where patent holders aggregate and collectively license their patents with the help of an independent third party (such as, for instance, Via Licensing or Sisvel), it is not well suited to alternative, yet increasingly frequent, licensing models involving private or public investors. A. There are few successful patent pools France Brevets would like to observe that, although patent pools are not a new phenomenon, there is only a relatively small number of traditional patent pools in activity and, among these pools, 6 few have been successful in terms of attracting a large percentage of the relevant patent holders. For instance, in the area of mobile standards, the WCDMA/UMTS pool only attracted a small number of licensors and small percentage of standard-essential patents. The vast majority of essential patent holders decided to license their patents on their own. While the creation of patent pools may be a source of efficiencies, there are several reasons for this relative lack of success of the patent pool model: - The formation of patent pools is not an easy process (because patent holders may have different business models and sets of incentives, and many complex decisions have to be taken, including licensing terms, enforcement against infringers, methods to allocate royalties, etc.) and it requires significant resources. This is why patent pools make most sense when the expected market size is large. - Pools make particular sense when patent ownership is fragmented with many licensors and many potential licensees. Small pools do not generally make sense as the costs of forming and operating them may be prohibitive. - The manner in which royalties are allocated may be a contentious subject. For instance, allocation of royalties based on numerical proportionality rules, 7 where members receive a share of the royalties in relation to the number of patents they contribute to the pool, may discourage certain patent holders to join, in particular where they own particularly valuable patents. Moreover, this method of royalty allocation may incentivize members of the pools to inflate their portfolio so as to increase their share of the royalties generated by the pool. 6 See, for instance, the list included in R. Bekkers, E. Iversen, K. Blint, "Emerging ways to address the reemerging conflict between patenting and technological standardization", (2012) 21(4) Ind Corp Change Such rules are used in several patent pools (e.g., 1384, AVC, DVB-T, MPEG-2, etc.). 3

4 16 May Pools operating on a royalty free (RF) basis or setting their royalties at a very low level may be unrealistic for firms that have licensing business models, i.e. for which all or a majority of their revenues are generated through licensing. These reasons explain why, although theoretically attractive, traditional patent pools have not succeeded in a number of important areas, such as mobile communications standards, to attract a critical mass of patent holders and thus to fulfill their expected missions. Given the difficulties created by the formation and operation of patent pools as described above, alternative patent monetization models have developed. Private and public investors (as in the case of France Brevets) increasingly fund such alternative arrangements. For instance, investors may decide to provide the funds necessary to set a licensing entity and gain a return through the profits this entity generates via its licensing activities. Alternatively, investors can acquire patents from innovators on the basis of a revenuesharing agreement where the innovators are paid by receiving a part of the royalties generated by the licensing entity. Such arrangements may have significant merits by, for instance, accelerating the funding of innovation (when, for instance, royalties are paid in advance to innovators), and thus its life-cycle, while avoiding the pitfalls (in terms of patent inflation, inefficient price mechanisms, etc.) that reduce the attractiveness of traditional patent pools. To the extent they aggregate and collectively license patents that belong to distinct innovative companies, these models fall under the concept of patent pools as defined in the draft Guidelines. Yet, as will be seen below, some of the conditions that need to be met for a patent pool to benefit from the safe harbour do not sit well with the characteristics and operations of these models, hence forcing them to carry out an uncertain individual assessment on the basis of Article 101(3) TFEU. B. The problematic notion of essentiality Paragraph 236 of the draft Guidelines observe that: [a] technology can be essential either (a) to produce a particular product or carry out a particular process to which the pooled technologies relate or (b) to produce such product or carry out such a process in accordance with a standard which includes the pooled technologies. In the first case, a technology is essential (as opposed to nonessential) if there are no commercially or technically viable substitutes for that technology inside or outside the pool and the technology in question constitutes a necessary part of the package of technologies for the purposes of producing the 4

5 16 May 2013 product(s) or carrying out the process(-es) to which the pool relates. In the second case, a technology is essential if it constitutes a necessary part (that is to say, there are no viable substitutes) of the pooled technologies needed to comply with the standard supported by the pool (standard essential technologies). Technologies that are essential are by necessity also complements. This formulation is not free from difficulties: - First, independent evaluators may not be able to easily assess the technical or commercial essentiality of patents because it requires a subjective judgment of what is commercially or industrially required to implement the patents, which may be uneasy to make at the time of pool formation. 8 This may lead to the creation of pools that are under-inclusive as essentiality cannot be fully determined at the time of pool formation. - Second, essentiality will generally be based on reading patents as granted. The validity aspects of these patents will typically not be contemplated by the evaluators as it requires a subjective interpretation of the scope of the patents. If one considers that, according to statistics, a very significant proportion of the patents are not valid or their scope is more limited than what was granted, we can consider that many patents declared as essential should not be considered as such. 9 This has led some critics to consider that patent pools should not be encouraged in that they may be used to shield invalid patents. 10 Companies which fear that their patents will be invalidated in court may indeed be eager to settle by creating a patent pool. This, in turn, would force the public to pay royalties on technology that would have become part of the public domain if the patents were actually litigated in court. C. The conditions attached to the safe harbour France Brevets makes hereafter a number of specific comments on some of the conditions which, pursuant to the draft Guidelines, need to be met in order for a patent pool to fall under the safe harbour. 8 In addition, there is no 9 As legal and economics scholars have for a long time recognized, patents are probabilistic instruments that are regularly traded with uncertain knowledge as to their validity and, in the case of SEPs, their essentiality. See Carl Shapiro and Mark Lemley, Probabilistic Patents, 19 (2005) Journal of Economic Perspectives See Steven C. Carlson, Note, Patent Pools and the Antitrust Dilemma, 16 (1999) Yale Journal on Regulation 359,

6 Before turning to these conditions, France Brevets would like to make the following observations: - While the conditions that are set in the draft Guidelines make sense for the traditional patent pools, some of these conditions may be problematic for alternative arrangements, such as those described in Section A above. - While France Brevets recognizes that arrangements that do not fall under the safe harbour may still be justified under Article 101(3) TFEU pursuant to an individual assessment, such individual assessment is a source of uncertainty. In particular, France Brevets would like to express its concerns about conditions (a) and (d) of the safe harbour. Condition (a): participation in the standard or the pool creation process is open to all interested parties. This condition creates particular challenges for licensing arrangements that are supported by investors, which, for instance, take a commercial risk by paying royalties in advance to the patent holders in order to fund their innovation cycles faster than through traditional licensing. The obligation to accept new patent holders may indeed affect the predictability of future revenues, as well as reducing these revenues due to a dilution effect created by adding new patents. This does not mean that licensing arrangements funded by investors will lead to royalty stacking when other patent holders exist as they can adjust their rates based on the percentage of essential patents they hold compared to the total number of patents essential to a standard. Condition (d): pooled technologies are licensed into the pool on a non-exclusive basis. This condition also creates particular challenges for licensing arrangements that are supported by investors, which advance funds to support the creation of a licensing programme or take a commercial risk by paying royalties in advance to the patent holders. When licensing schemes are funded by investors supporting a commercial risk, it is unrealistic to expect that investors will allow the patent holders to license their patents on their own as it would hurt the predictability of future revenues and even jeopardize the very financial viability of their investment. Considering the growing role of investors in the funding of licensing activities, France Brevets considers that conditions (a) and (d) should be relaxed when investors taking a 6

7 commercial risk are involved. Alternatively, the draft Guidelines should clearly indicate that licensing arrangements falling outside the safe harbour that limit openness and/or provide for exclusive licensing due to the commercial risk supported by investors should be favourably analyzed under Article 101(3) TFEU. D. Pools as a benchmark to the determination of FRAND rate A particularly contentious issue relates to the determination of whether an offer made by a standard-essential patents (SEPs) holder complies with its commitment to license at fair, reasonable and non-discriminatory terms. A variety of approaches have been suggested to determine whether a specific licensing offer is FRAND among which figure reliance on benchmarks. For instance, in a recent judgment, 11 a US federal judge, which was asked by Microsoft to determine a FRAND rate for SEPs held by Motorola, decided to rely, amongst other factors, on the rates charged by patent pools (the MPEG LA H.264 pool and the Via pool) as relevant indicators of a royalty rate that falls within the range of royalties consistent with the RAND commitment. 12 By contrast, the judge considers that several factors militate against using patents pools as the de facto RAND royalty rate. 13 France Brevets considers that this view is correct and that courts should refrain from equating patent pools rates with the FRAND rate for at least two reasons: As explained above, the essentiality review process through a third party makes it difficult to consider the commercial essentiality of a patent or its validity. More important, the revenues sharing agreements between licensors based on numerical proportionality of patents create a strong incentive for patent holders to adopt specific patent strategies to artificially increase the number of patents essential to the relevant standards through the filing of divisional applications and/or continuations in part. A recent study is clearly demonstrating this phenomena. 14 ***** 11 See Microsoft Corporation v. Motorola Mobility, Inc. And Motorola Mobility, Inc. V. Microsoft Corporation, United States District Court, Western District of Washington at Seattle, 25 April 2013, available at 12 Id. at para Id. at paras See

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Standard-Essential Patents Richard Gilbert University of California, Berkeley Symposium on Management of Intellectual Property in Standard-Setting Processes October 3-4, 2012 Washington, D.C. The Smartphone