1. Patent Pools – Issues of Dominance and Royalty Setting Marleen Van Kerckhove ABA Brown Bag Presentation March 20 th, 2007

2. Dominance  Definition of dominance: –there must be a position of economic strength on a market which –enables the undertaking(s) in question to prevent effective competition being maintained on that market by –affording the power to behave independently to an appreciable extent (82 DP, para 21)  Elements of dominance: –market share –barriers to entry –buyer power  Market shares that are indicative of dominance: –often above 50%; sometimes between 40 and 50%; less likely below 40%, rarely below 25% 2

3. Dominance and patent pools  Collective dominance –derives from the combined market power of two or more undertakings who from an economic point of view present themselves or act together as a collective entity, e.g. as a result of an agreement concluded between them  May derive from joint licensing of substitutable technologies  May derive from the combination of a patent pool that supports an industry standard because of the foreclosure effect on alternative technologies 3

4. Defining technology markets  « Technology markets consist of the licensed technology and its substitutes, i.e. other technologies which are regarded by the licensees as interchangeable with or substitutable for the licensed technology, by reason of the technologies’ characteristics, their royalties and their intended use. (…) Starting from the technology which is marketed by the licensor, one needs to identify those other technologies to which licensees could switch in response to a small but permanent increase in relative prices, i.e. the royalties. » (TTG, para 22) 4

5. Market share calculation  « (…) by dividing the licensing income generated by the parties with the total licensing income of all sellers of substitutable technologies. » (HCG, para 48);  « An alternative approach (…) is to calculate market shares on the technology market on the basis of sales of products incorporating the licensed technology on downstream product markets [irrespective of whether this is through licensing or own use by the proprietor of the IP and, where applicable, by also including sales of products incorporating the licensee’s competing technology]. » (TTG, para 23, para 70) 5

6. Market power – other indicators  « (…) the number of independently controlled technologies available in addition to the technologies controlled by the parties to the agreement that may be substitutable for the licensed technology at a comparable cost to the user.» (TTG, para 24, para 131)  should be at least 4 to avoid allegation of market power 6

7. Basic EU antitrust rules on royalty setting  Horizontally: –may amount to price fixing, e.g. in the case of joint licensing of substitutable technologies  Vertically: –as a matter of Article 81 EC, parties are in principle free to determine the royalty payable by the licensee and its mode of payment (e.g. lump sum payment, percentage of selling price, fixed amount per product) (TTG, para 156) –parties may agree to extend the royalty obligations beyond the period of validity of the licensed IPRs (TTG, para 59) 7

8. Setting of royalties amongst pool members  Pooling is believed to lead to lower royalties: –reduces transaction costs and allows to take account of royalties fixed by others in the pool –query whether members can set higher prices for patents offered outside the pool (e.g. US 6C DVD)  If the pool is compatible with Article 81 EC, members are normally free to negotiate and fix royalties for the technology package and each technology’s share of the royalties –in case of a pool supporting a standard it is preferable to determine each member’s share of royalties prior to the setting of the standard. 8

9. Setting of royalties to licensees  Royalties should be fair and non-discriminatory if the pool is dominant –level of royalties –no discrimination within the same application –different royalties for different uses are permissible –no discrimination in favor of licensors 9

10. Other potential issues with royalties  When royalty covers essential as well as non-essential complementary patents, third party technologies risk being foreclosed  Inclusion of complementary (non-essential) patents forces licensees to pay for technology that they may not need and as such amounts to collective bundling  Level of royalty should not amount to a de facto refusal to license  All of the above assume market power; assessment of essentiality should be an on-going process 10

11. Ways to deal with these issues  Separate license packages for distinct applications  Possibility to obtain a licence for only part of the package with the corresponding reduction of royalties  Possibility of terminating at reasonable notice part of the licence and obtain a corresponding reduction of royalties 11