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

2. Patent Portfolio Dilemma  Patent portfolios can be used as a method of aggregating patent rights to add value to the patent system and promote innovation  On the other hand, patent portfolios can also be used as an anticompetitive mechanism that forecloses downstream markets and harms competition  Issue: How do we analyze patent portfolios to accurately condemn their anticompetitive uses while at that same time providing enough predictability in the analysis such that firms continue to create patent portfolios for procompetitive ends?

3. Patent Portfolio  “The real value of patents lies not in their individual significance, but instead in their aggregation into a patent portfolio: a strategic collection of distinct-but-related individual patents that, when combined, confer an array of important advantages upon the portfolio holder.” 1  Combining the “right to exclude” of many patents creates a “super patent” with broader protection than any individual patent could provide  Result = Value added to the patent portfolio >> marginal cost of obtaining the patent > value of the individual patent 1 Gideon Parchomovsky & R. Polk Wagner, Patent Portfolios, 154 U. Pa. L. Rev. 1, 15 (2005).

4. Strategic Non-Innovative Patents  Cost of Obtaining a Patent  $72,000 – estimated cost of a Euro-PCT patent 1  $49,000 – estimated cost of a Euro-Direct patent 2 1 European Patent Office, Cost of Euro-PCT Patent (2005), available at http://www.european-patent-office.org/epo/new/costs_eppct_2005_en.pdf 2 European Patent Office, Cost of Euro-Direct Patent (2005), available at http://www.european-patent-office.org/epo/new/cost_ analysis_2005_study_ en.pdf

5. Estimates of Patent Value Quantile Pharma- ceuticals ChemicalMechanicalElectronicsAll Technology 0.25515477638627557 0.51,6311,5942,9303,1592,329 0.755427580713,76916,32210,331 0.9011,78713,73540,84053,12229,871 0.9519,92024,36383,857113,40360,386 0.9952,13969,906321,966481,429231,360 Mean4,3134,96915,12019,83711,060 Mark Schankerman, How Valuable Is Patent Protection? Estimates by Technology Field, 29 RAND J. Econ. 77 (1998).

6. Patent Portfolio  Scale Effects  1) Creates room for future innovation under the broad scope of “super patent” protection  2) Attracts related external innovations  3) Creates significant bargaining power in licensing  4) Defensive patenting

7. Patent Portfolio  Diversity Effects  1) Increases ability to handle future technological, market and legal uncertainties  2) Expands scope of research and development into adjacent areas  2) Attracts investment by increasing predictability and confidence in the portfolio owner’s rights

8. Patent Portfolio  Effect on Small and Medium-Sized Enterprises  Unable to play the patent portfolio game in a meaningful way – entry barriers Forced to rely on the high risk method of obtaining only a limited number of patents to protect the most important innovations  Lack bargaining power in litigation and licensing  Find it difficult to enforce their own IP rights Navigating through a potential defendant’s patent portfolio is costly, risk of infringement counter-claim  Limited to filling the “gaps” between patent portfolios or creating disruptive technology (leap frog markets)

9. Patent Portfolio Implications  1) Patent intensity will remain high  2) Pressures on patent offices will increase  3) Patent thickets, blocking patents and bottlenecks will proliferate  4) Patent litigation will become increasingly complex and expensive  5) Patent system will favor large, well-funded firms Significant entry barriers created by the existence of portfolios  6) Value of individual patents will decline and become increasingly irrelevant

10. Mitigating the Anticompetitive Effects of Patent Portfolios  Antitrust and competition law are often suggested as mechanisms for mitigating certain anticompetitive consequences of patent portfolios  Compulsory licensing - with respect to refusals to deal patented goods  Refusals to deal can serve anticompetitive ends where they are employed to leverage patent rights beyond their appropriate scope

11. Shortcomings of Compulsory Licenses  Compulsory licenses are a very singular type of response to a specific situation  With compulsory licenses, firms may be unable to maximize individual benefits that could have been realized through open negotiations  Recognize the value of patent portfolio creators as “aggregators” of useful information  Recognize the value of a market capable of diverse responses to market changes

12. Antitrust in the United States  Antitrust laws are mainly concerned with actions that have anticompetitive effects on the market  Some conduct is considered to be inherently anticompetitive and therefore a per se violation of antitrust law  A plaintiff must prove only that the prohibited conduct occurred (i.e. naked horizontal price-fixing)  Most conduct is analyzed under a rule of reason  A plaintiff must demonstrate that the defendant’s actions had anticompetitive consequences in the marketplace

13. Anticompetitive Consequences in the Marketplace 1) Establish actual anticompetitive effects, or 2) Establish that the defendant has: market power  market share (30/60/90 paradigm) in the relevant market, thereby permitting an assumption of anticompetitive effect and harm to consumer welfare US antitrust analysis is therefore heavily focused on the market where the anticompetitive effect is alleged

14. Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997).  Plaintiff alleged that Kodak used its legitimate monopoly over patented parts to create a second, illegal, monopoly over the profitable service market  A patent holder’s desire to exclude others from its protected work is a presumptively valid business justification for a refusal to deal. HOWEVER - Business justification can be rebutted 1) Evidence that the IP protection was acquired in an unlawful manner 2) Evidence of pretext Pretext can be inferred from circumstantial evidence such as the subjective intent of employees in refusing to deal or refusal to deal both patented and unpatented goods

15. In re Independent Service Organizations Antitrust Litigation v. Xerox Corp. 203 F.3d 1322 (Fed. Cir. 2000).  “We decline to follow Image Technical Services.”  Protection of patented material is a presumptively valid business justification for a patentee’s refusal to deal NOT going to inquire into the IP holder’s subjective motivation Presumptively valid business justification may only be overcome by proof of: 1) Illegal tying 2) Fraud on the PTO 3) Sham litigation

16. Compulsory Licensing in the United States  9th Circuit – protection of patent rights is a presumptively valid business justification for a refusal to deal that can be rebutted by a showing of:  1) fraud on the PTO, 2) pretext WILL analyze subjective motivation  Federal Circuit WILL NOT analyze subjective motivation  Burden of Proof is on the plaintiff to establish that the defendant’s conduct fits in one of three narrow categories: 1) fraud on the PTO, 2) illegal tying, 3) sham litigation  Supreme Court – (Verizon v. Trinko) spoke to the virtues of monopoly power, the dangers of forced sharing, the costs of antitrust litigation and limited the most liberal finding of liability for a refusal to deal  Trinko appears to create significant barriers to bringing a successful refusal to deal claim for a compulsory license  Some scholars interpret Trinko as essentially barring antitrust scrutiny for a refusal to deal intellectual property

17. Compulsory Licensing In the European Union  Article 82 (formerly 86) of the EC Treaty  “Any abuse of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.” Dominance = defined as the power to prevent effective competition from being maintained in the relevant market Significantly broader than US concept of market power which is more closely tied to price and output, and requires a showing of anticompetitive effects, harming consumer welfare EC places more of an emphasis on protecting competition as an institution and does not require a showing of actual anticompetitive harm to consumers

18. Volvo v. Erik Veng, Case 238/87, [1988], E.C.R., 6211.  Volvo refused to license design rights for car wings to Mr. Veng, who allegedly used to manufacture and import spare parts without Volvo’s authorization  ECJ clarified that “manufacturing and selling or importing products incorporating the design constitute the very substance of the exclusive right, and that a refusal to grant such a license, cannot in itself constitute an abuse of a dominant position.”  However, the court noted that the existence of different circumstances than those in the Volvo case might have justified a finding of abuse 1) an arbitrary refusal to supply spare parts to independent repairers 2) overcharging for spare parts 3) ceasing to produce spare parts for a particular model when there were many vehicles of that model on the road

19. RTF, IPT v. Commission, Case C-242/91, C-242/91, [1995], ECR 1141  Three television stations, each sold their own weekly programming guide  Plaintiff attempted to create a single, weekly guide to the programming on all three stations  ECJ held that “mere ownership of an intellectual property right cannot confer a dominant position”  Nonetheless, ECJ went on to find that the television companies had a dominant position over the information  Dominant position was abused because the television companies strategically employed their copyrights to prevent marketing of a new product for which there was consumer demand  Emphasis: Dominant position over a scarce resource

20. Magill “Exceptional Circumstances” Test  Where the legitimate owner of intellectual property rights is also in a dominant position in the market, abuse of the position may be found where: A) exclusive holder of a raw material or input essential to run a certain business in the market and such input is not duplicable B) behavior prevents the coming into the market of a product for which there is potential consumer demand C) the refusal to deal has no legitimate business justification D) behaviors deliberately pursued the goal of reserving a downstream market by foreclosing competition to other rivals

21. NDC Health v. IMS Health, Case C- 418/01, [2004] E.C.R., I-5039.  IMS was the leading supplier of market reports for pharmaceutical sales in Germany and held a copyright over the modular structure used to create the report  Commission concluded that IMS’s modular structure was a de facto standard, essential for operating in the relevant market industry standard (network effects)  Unlike Magill, IMS’s refusal to license did not prevent a new product from coming on the market, instead it prevented a competitor from offering the same product

22. NDC Health v. IMS Health  Commission reasoned that Magill did not require a cumulative application of the “exceptional circumstances” and instead found that IMS had other significant circumstances that allowed the situation to be deemed “exceptional” Mixture of legal and economic barriers making entry into the market essentially impossible  Exclusionary conduct to preserve dominant position: Dominant company = leveraging market power from an upstream market to a downstream market IMS’s refusal to license the IP protected modular structure was abusive as it was necessary to operate in the downstream market

23. 2005 Discussion Paper on the Application of Article 82 of the EC Treaty  Non-binding guidelines  Refusal to License IP Rights – “vertical foreclosure” “A dominant company denies a buyer access to an input in order to exclude that buyer from participating in an economic activity” where the excluded buyer is also a rival to the dominant company in the downstream market for which the input is needed.”  Overall, reinforces the rulings of Magill and IMS  Advantage = arguably applies a more balanced approach than the US, taking into consideration such factors as network effects and market realities  Disadvantage = difficulty in predicting the existence of “exceptional circumstances” and the low threshold for dominance

24. Predictability v. Flexibility  Inherent Tension Between:  Creating a flexible model capable of effectively taking into account the realities of the marketplace Network effects Secondary Markets Procompetitive effects of patent portfolios  Creating a predictable model upon which firms can reasonably rely when making business decisions Evaluating market power or dominance not on a threshold “per se” number, and instead conducting a nuanced analysis of the relevant market in each case