University of Toronto Patent Colloquium:

Illustration of Sequential Innovation Processes Application 1 Application 2 Application 4 Application 5 Application 3 Application Input-Owner 3

Litigation Thicket in Smartphones

Legal Rules and Private Negotiations

Legal rules that affect the “threat points” Patentability standards (inventive step, nonobviousness) Breadth of Patent Patent Life Patent Strength Injunctive Relief

Sequential Innovation (Green-Scotchmer) Application 1 Application 2

The Benefits: Why Litigate when you can Cooperate? When the background legal principles threaten to waste resources, people often rearrange rights sensibly and create order through private arrangements. (Heller and Eisenberg, 1998)

Complex Technologies and Patent Thickets

Patent Thickets or Blocking Technologies (Hall, et al; Minns; Galasso-Schankerman) Telecommunications Telecommunications Audiovisual Technology Audiovisual Technology Semiconductors Semiconductors Computer Technology Computer Technology Medical instruments (and Biotech) Medical instruments (and Biotech)NOT Chemical (including genes), pharmaceuticals, Mechanics

Patent Pools: Benefits and Costs

Anti-Commons Framework (Heller and Eisenberg) Application

Benefits from Pool Allows efficient pricing if complements Pools risks Avoids litigation Helps SMEs reliant on large firms for regulatory expertise, marketing, distribution.

Sewing machine Combination (1856) National Harrow (1890) Standard Oil Cracking Pool (1911) Manufacturers Aircraft Association (1917) Radio Corporation of America (1919) Hartford-Empire (1919;1942 antitrust) National Lead (1920; 1947 antitrust) Line Material (1938; 1948 antitrust) MPEG-2 and MPEG-4 Patent Portfolio (1997,1998) DVD3C and DVD6C (1998,1999) 3G Patent Platform Partnership (1999) Patent Pools: A Brief History (U.S.)

Current Antitrust View of Patent Pools “Patent pools may provide pro-competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation” (US-DOJ Guidelines, 1995) “... setting up a patent pool does not immediately constitute an unreasonable restraint of trade.” (Guidelines on Standardization and Patent Pool Arrangements, 2005)

Anticompetitive Concerns re: Patent Pools 1.Harbour weak patents (Choi, Gilbert) 2.Foreclose rivals from the downstream or input markets (Aoki and Nagaoka, Kim, Lerner and Tirole, Schiff and Aoki) (Aoki and Nagaoka, Kim, Lerner and Tirole, Schiff and Aoki) 3. Reduce innovation incentives (Lampe and Moser) (Lampe and Moser) 4. Cooperate on prices outside the scope of the patent pool

Antitrust Concerns with Strategic Collaborations Patent Pool of Complements Firm 1 Firm 2 Firm 1 Firm 2 X 1 X 2 X 1 X 2 W1W1 W 2 Z 1, Z 2

Potential Substitutes of DVD Pool Members Potential SubstitutesPool Member VHS ( )JVC, Panasonic Second-Run Movie TheatresTime Warner Netflix ( )Samsung HD-DVD ( )Toshiba Blu-Ray ( )Hitachi, Mitsubishi, Panasonic, Samsung, Sharp, Warner Brothers

Encourage Strategic Alliances between Competitors 1.Structural Genomics Consortium Eli Lilly Canada, Pfizer, GlaxoSmith Kline, Novartis, Wellcome Trust, Canadian Institutes for Health Research 2.Pre-Competitive Partnerships in Drug Discovery: AstraZeneca and Roche, Abbott, AstraZenec, Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Johnson & Johnson, MSD, Novartis, Pfizer, and Sanofi 3. Canadian Oil Sands Innovation Alliance (COSIA): Shell Canada, BP Canada, Imperial Oil, Suncor Energy, and 9 others 4. Eco-Patent Commons: Dow, DuPont, GlaxosmithKline, Hitaci, IBM, Sony, Xerox, Nokia, HP, Bosch, Fuji-Xerox

Screens used to identify Welfare-Increasing Patent Pools Historically Used: Contractual Restrictions: Are there restraints on trade? Modern Approach Validity: Are all pooled patents valid? Product Rule: Are the pooled patents substitutes? (Are the members competitors in the relevant market?) Pool Restrictions: Is there Independent Licensing? Are there Grant-backs? Innovation: Will the patent pool reduce incentives to innovate?