4

Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting Carl Shapiro,

Executive

University

of California

at Berkeley

Summary

In several key industries, and

software,

the

including our

Internet,

semiconductors,

patent

is

system

biotechnology, creating

a

patent

computer thicket:

an

overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees. The patent thicket is especially thorny when combined with the risk of holdup, namely the danger that new products will inadvertently infringe on patents issued after these products were designed. The need to navigate the patent thicket and holdup is especially

in industries

pronounced

ing inwhich to market.

Cross

licenses

and

patent

ods used by market participants volves

as

such

telecommunications

and

comput

formal standard setting is a core part of bringing new technologies

some

costs.

transaction

are

pools

two

natural

and

effective

meth

to cut through the patent thicket, but each in Antitrust

law

and

enforcement,

with

its

historical hostility to cooperation among horizontal rivals, can easily add to these transaction costs. Yet a few relatively simple principles, such as the desir ability package licensing for complementary patents but not for substitute pat ents, can go a long way toward insuring that antitrust will help solve the problems caused by the patent thicket and by holdup rather than exacerbating them.

I.

The Patent

Thicket

Is our patent

system

technologies? The essence

of science

slowing

acknowledge tablishing

the commercialization

of new

combined with investigation of cumulative each discov innovation, is central to the scientific previous findings, is cumulative

The notion

testing. on many ery building method. Indeed, no respectable hypothesis

down

the crucial a foundation

and would fail to recognize or es in her his by predecessors could be made. As Sir progress

scientist

role played from which

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120

Shapiro

Isaac Newton

put

it, each scientist

"stands

on the shoulders

of giants"

to reach new heights. are Today, most basic and applied researchers effectively standing on a on one not set of of shoulders. Of course, a top just huge pyramid, can rise to far greater heights than could any one person, es if the foundation is strong and broad. But what happens if, in pecially and place a new block on the top, a research order to scale the pyramid pyramid

of each person who previously placed a gain the permission a royalty or tax to gain such per block in the pyramid, perhaps paying mission? Would this system of intellectual property rights slow down er must

the construction

of the pyramid

or limit its height? research namely

and development Clearly, pyramid building, (R&D), is taking place at an impressive pace today, so there is no great cause for alarm, especially in the area of basic research where the "roy alty" move fairly

(but not always) nothing more from pure R to applied R and ultimately our legal and commercial ask whether

than a citation.

is often

one can to D, however, are in fact institutions

to promote the creation of rather than discourage designed and that draw on many strands of innovation and services

properly

products thus potentially

plete the analogy, ing blocks. Mixing concerns

As we

from multiple patent holders. To com build the role of the pyramid's blocking patents play

require

licenses

are

observers metaphors, thoughtful that our patent (and copyright) thicket, a dense web of overlapping

patent that a company new mercialize

must

hack

technology.

its way through With cumulative

expressing increasingly is in fact creating a system intellectual property rights in order to actually com innovation

can have

and multiple effect of

the perverse

patents, stronger patent rights not innovation.1 stifling, encouraging, a consensus is the In fact, even while that innovation has emerged we are witnessing somewhat of a main driver of economic growth, the patent system as it is currently operating. backlash Espe against as are patents on business such methods, cially unpopular on offers" conditional Priceline.com's patent purchase "buyer-driven blocking

(asserted shopping Trademark of patents standards

against Microsoft) (asserted system

or Amazon's

patent on a one click online The Patent and & Noble). a number seem to have allowed

Barnes

against (PTO) does indeed on ideas that would not appear Office

and nonobviousness, for novelty covers which reputedly Sightsound.com

offhand

to meet

the usual

such as the patent held by "the sale of audio or video re

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Navigating the Patent Thicket

in download

cordings

court

appeals method

121

over

fashion

decision

the Internet."

a by key for a business

Emboldened

a patent supporting for com software, patent applications have jumped from about 1,000 in 1997

in 1998

enabled

by computer business methods puter-related to over 2,500 in 1999. In an attempt to call a truce in what could other wise prove to be a mutually the destructive patent battle, Jeff Bezos, on that of Amazon.com, Chairman software recently suggested patents and Internet business methods be limited to 3 or 5 years, rather than the usual

20 years from the date of application.2 But concerns about a patent thicket, and excessively loose standards at the PTO, are hardly confined to e-commerce and business method in the semiconductor such patents. For example, industry, companies as IBM, Intel, or Motorola find it all too easy to unintentionally infringe on a patent in a microprocessor, them potentially designing exposing an injunction to billions of dollars of liability and/or forcing to cease production So-called submarine of key products.3 pat to work their way through the Pat ents, that take years if not decades are another source ent and Trademark of anxiety, Office, great selves them

for large manufacturing firms. Plus, more and more compa especially in patent and engaging nies are following the lead of Texas Instruments to most out their the of them get patents by asserting mining, trying more than ever against possible firms, even infringing aggressively those who are not rivals. And considerable research shows that compa nies are increasingly to patent, propensity

inclined as well

to seek patents, causing an increase in the as an increase in the practice of defensive

patenting.4 over In short, our patent system, while surely a spur to innovation an on en in innovation all, is unnecessary danger of imposing drag by to "tax" new products, and processes, abling multiple rights owners even business methods. The vast number of patents currently being is sued creates fringe

that a single product

a very

on many

real danger patents. Worse

processes it harder

or service will

in

or cover products patents the patent is issued, making and manufac building businesses

yet, many used when

already being widely for the companies actually in the fact that a to invent around these patents. Add turing products relief, that is, can threaten to shut patent holder can seek injunctive for of the infringing company, and the possibility down the operations too real. becomes all holdup This paper by the PTO,

takes as given and assumes

the flood that

these

of patents patents

currently being issued are indeed creating a

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122

Shapiro

thicket

patent fringe whether

on

in the sense

multiple the PTO

that many

new

likely in products would about (but suspicious) agnostic software pat patents (especially

patents. Remaining is too lax in granting the courts are too generous

ents), or whether are I look at the business granted, cut through the patent thicket.

in upholding

arrangements

patents that that are being used to

I consider the evolving More specifically, and growing role of cross li censes and patent pools to solve the complements that arises problem a can I block when multiple holders patent given product. potentially in setting process, that increasingly over terms. I and patent rights complex negotiations licensing over in in which also consider other ways resolve disputes companies

discuss

specifically

the standard

volves

tellectual

property, including acquisitions. to describing in addition For each business the economics practice, of its use, I consider whether that practice and examples underlying to the problems antitrust caused by the patent limits are contributing antitrust law have a antitrust enforcement and system. Unfortunately, of cooperative activities direct com suspicion involving in one form or another, may be precisely petitors. But such cooperation, is required to navigate the patent thicket. As a result, unless anti what are quite sensitive to the problems posed by trust law and enforcement deep

rooted

effect of slowing down the patent thicket, they can have the perverse in and ultimately the commercialization of new discoveries retarding intent of both the laws the of the novation, patent opposite precisely and the antitrust laws. II. Market The Economic The generic as a matter

Responses Theory

to Overlapping

Patents

of Complements

inherent in the patent thicket is well understood problem of economic theory, at least in its static version. Consider,

a company for example, seeking to manufacture or video game for use in personal computers

a new consoles.

chip graphics a (Substitute or an e-com

tools for genetic engineering, firm using patented if you would firm using patented business methods, prefer.) this chip is likely to that for the preferred design company's Suppose methods the process manufacturing infringe on a number of patents; the chip infringe on a number of additional used to actually produce biotech

merce

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Navigating the Patent Thicket

123

to produce the chip as designed, the company needs from a number, call itN, of separate rights holders. is precisely the classic complements This situation problem origi in Cournot 1838. Cournot studied considered the problem nally by two key inputs, faced by a manufacturer of brass who had to purchase In order patents. to obtain licenses

and zinc, each controlled by amonopolist.5 As Cournot demon was the of brass than would arise if a sin strated, resulting price higher firm in and trade controlled both copper zinc, and sold these inputs gle copper

to a competitive brass industry (ormade the brass itself). Worse yet, the combined profits of the producers were lower as well in the presence of So, the sad result of the balkanized complementary monopolies. rights to copper and zinc was to harm both consumers The and producers.6 same applies today when multiple control blocking patents companies for a particular product, process, or business method. can the inefficiency How associated with multiple blocking patents be eliminated? One natural and attractive solution is for the copper and zinc suppliers to join forces and offer their inputs for a single, package to the brass industry. The two monopolist price suppliers will find it in their joint interest to offer a package price that is less than these two com sold for when priced separately. The blocking patent version of ponents to create a is that the rights holders will find it attractive this principle to simply engage license or patent pool, or in some situations package in cross licensing so they can each produce final products themselves. The appendix offers a short, modern, and more general version of cast in terms of blocking of complements patents. in fixed of (used gives theory complements proportions) to adopt, and for competition authorities strong support for businesses to welcome, either cross licensees, package licenses, or patent pools to If two patent holders are the only compa clear such blocking positions.

Cournot's This

theory

basic

that utilize their products realistically capable of manufacturing a royalty-free cross is license ideal from the intellectual property rights, But any cross license is superior to point of view of ex post competition. a world in which the patents holders fail to cooperate, since neither nies

and sale in that world without proceed with actual production on if the two patent hold the other's patents. Alternatively, infringing

could

ers see benefits

to make

that uti products under which all the property pool, rights, a a can are as in licensed coordinated fashion package, blocking patents be an ideal outcome. The simple theory, which is sketched out in the from enabling

lize their intellectual

many

others

a patent

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124

Shapiro

appendix, royalty

that coordinating suggests rates than would independent

such

licensing

pricing

can lead to lower

(licensing)

of the two

patents. companies' cross licenses or patent pools, there is a ten In other words, without to bear multiple patent burdens. The buildup of li dency for products can have unattractive fees several First, the consequences. censing are costs of static monopoly well-known power magnified: prices are low use of these prod above marginal costs, causing inefficiently in the appendix, with N rights holders, ucts. As shown equilibrium a are N the is merely times level. Of this course, monopoly markups of the from the version burden patent resulting magnified monopoly well

lesson that the multi system itself, but it iswell to remember Cournot's and the profits of patentees reduce both consumer welfare ple burdens these in comparison with a coordinated Second, approach. licensing burdens

may

cause

at all, if that not to be produced products to economies of scale. Third (this is a dynamic

certain

is subject production version of the previous point), the return reduces necessarily

such royalties the prospect of paying to new product and develop design and commercializa be a drag on innovation

ment, and thus can easily tion of new technologies. Heller and Eisenberg (1998) discuss

in the the complements problem a to nice comparison the clas context of biotechnology patents, making commons of the sic tragedy of the commons. The well-known tragedy if it is not protected by refers to the fact that a resource can be overused

are standard exam and clean water property rights; fishing grounds a different and Eisenberg problem point out that quite ples. Heller arises when there are multiple blocking patents; they label this problem the tragedy of the anti-commons. The tragedy of the anti-commons arises when

each of whom must grant there are multiple gatekeepers, a resource can be used. With such excessive property

before

permission rights, the resource novation The Holdup

is likely

to be underused.

In the case of patents,

in

is stifled. Problem

the is at its worst when above, the complements problem each firms using the various input to inputs truly require if a manufacturer finds it In the patent context, make their products. a that the easy to design around given patent, the royalties relatively As

noted

downstream

patentee

can assert

are necessarily

limited.

So, unless

the patent

in

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Navigating

the Patent Thicket

125

is quite broad, one might think that any burden on the manu question to be modest, and arguably facturer would the very return we wish as a reward for innovation. to the provide patentee this rather romantic view of patents is less and less Unfortunately, in our economy, tax is for three reasons. First, even amodest was if the if the that is, patent counterproductive improperly granted, a or new not if did made and useful the patentee patent truly discovery, applicable

as granted was too broad, covering some prior art as well as something new. can be taxes small the cumulative effect of Second, many truly come quite large; there are sound reasons to believe that the static is increasing and con these royalties loss associated with deadweight vex in the tax rate, at least over some range of royalties. The danger of a owners to is theoretical curi patent multiple hardly paying royalties as in in such which of industries semiconductors thousands many osity are issued each year and manufacturers can potentially in a on hundreds with of patents single product. fringe that our repre is timing. Suppose and most Third, important, sentative manufacturer could, with ease, invent around a given patent,

patents

were aware of the patent and afforded if that manufacturer sufficient contributes little lead time. Clearly, in this case the patented technology to the final product, if anything and any reasonable would be royalty at best. But, oh, how the situation changes if the manufacturer modest its product and placed it into large scale produc designed issues. In this case, even though the timing is the patent did not in fact rely on the that the manufacturer suggestive

has already tion before

strongly for the design of its product, invention patented a far weaker The patentee position. negotiating very likely backed up with greater royalties, down

the manufacturer

if the Court

indeed

the manufacturer

is in

can credibly seek far the threat of shutting finds the patent valid and

could go back infringed and grants injunctive relief. The manufacturer and redesign its product, but to do so (a) could well require a major re cause a significant to production, (b) disruption design effort and/or after would for sold the still leave potential any products pat liability ent issued before

are available for sale, and (c) products or between problems with other products

the redesigned

could present compatibility In other words, for all of these rea of this product. different versions to holdup by the patentee. is highly susceptible sons, the manufacturer is very real today, and that both pat I submit that this holdup problem as a problem of ent and antitrust policymakers should regard holdup first order

significance

in the years

ahead.

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126

Shapiro

in industries where is worst hundreds if not The holdup problem some can thousands of patents, poten already issued, others pending, on a In read these the that a industries, tially given product. danger manufacturer will step on a land mine is all too real. The result will be that some

that is, refrain avoid the mine field altogether, companies from introducing for fear of holdup. Other companies certain products will lose their corporate that will be forced to pay royalties on is, legs, patents that they could easily have invented around at an earlier stage, had they merely been aware that such a patent either existed or was the expected value of these royalties Of course, ultimately pending. must be reflected in the price of final goods. patents, and under a system in overlapping are secret and patents slow to issue (relative we have a volatile mix of introduction), product

In short, with multiple which patent applications to the speed two powerful

of new

(1) types of transaction costs that can burden innovation: of which the complements solution the coordination, requires problem, and (2) the holdup problem, which is perhaps large scale coordination; quite resistant to solution in the absence of either (a) better information at an earlier stage about patents (b) the ability of likely to issue, and/or interested parties to challenge patents at the PTO before they have is of validity by the Courts. sued and are given some presumption about Clearly, these concerns form the basis for a serious discussion reform of the patent system.7 However, my intention in this paper is to can the patent system we how best navigate explore private companies can our in a way be antitrust enforced and how laws currently have, our current pat to the transaction costs associated with that is sensitive can do to over ent system. I see relatively little that private companies come the holdup problem without reform of the patent system itself. But there is quite a bit they can do to solve the complements problem, which

itself is greatly Patents

Overlapping To solve

exacerbated and Business

the complements thicket

problem

by the holdup Strategy

problem.

in Practice

generally, coordination

to cut through the among rights holders.

and

patent requires specifically, Such coordination itself faces two types of obstacles. costs that must be overcome. coordination evitably

First,

there are in

Second, antitrust are invariably heightened in the same or when companies set fees of any combine their assets, jointly related lines of business sort, or even talk directly with one another. Because such coordination sensitivities

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Navigating the Patent Thicket

127

we have a complex inter involve the elimination of competition, may as action between interests. Even coordination be private and public we tween rights holders is critical, from a public policy perspective cannot presume that private deals are in the public interest. Antitrust will

authorities

legitimately

want

to know

whether

consumers

or harmed injured parties may helped by any arrangement; dress under the antitrust laws or by alleging patent misuse.

seek

are re

are negotiated Cross licenses commonly when each of or two companies that may read on the other's products has patents or ceas court to Rather than each other and processes. going blocking

Cross Licenses

the two enter into a cross license. Especially with a roy ing production, cross license, each firm is then free to compete, in both alty free in of and its without its fear designing products pricing infringement the burden of a per unit royalty due to the other. products without can solve cross licenses at least the complements Thus, problem, two and thus be firms, among highly procompetitive. A cross

is simply an agreement between the right to practice the other's patents.

license

grants each or may not

two companies that Cross licenses may

involve fixed fees or running royalties; running royalties run in one direction or both. Cross in principle in licenses may or volve various restrictions restrictions. Cross field-of-use geographic can

licenses may involve some but not all relevant patents held by either are not uncommon. carve-outs And cross licenses, like regular li party; as of the date of to issued be confined censes, may (or pending) patents the license, or they may time in the future.

include

patents

to be granted

through

a certain

con two or more Patent Pools and Package Licenses When companies tomake a given product, and when at least some trol patents necessary hold any such actual or potential manufacturers may not themselves license can be the natural solution patents, a patent pool or a package a patent an entire group of to the complements problem. Under pool, a one in is of the licensed either patent holders or patents by package, to anyone willing for this purpose, usually by a new entity established a package to pay the associated license, two or more royalties. Under agree to the terms on which they will jointly license patent holders exam the and divide their complementary up patents proceeds. A nice a Association formed Aircraft patent pool is the Manufacturers ple of in 1917 to license

a number

of patents

necessary

for the production

of

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128

Shapiro

Aircraft Corpora controlled by The Wright-Martin airplanes, patents & Motor the and others.81 discuss Curtiss tion, Corporation, Aeroplane below some more recent patent pools that have been used to help es tablish compatibility standards. The need to solve the complements Cooperative Standard Setting prob in context lem tends to be especially the of standard great setting. For when the Union International Telecommunications (ITU) es example, tablishes

a new

standard

or modem

for fax transmissions

protocols, that can be controlled

are loath to agree to a standard its patents. Thus, standard any single through tions like the ITU or the American National Standards

participants

firm

the by

setting organiza Institute (ANSI)

agree to license all patents essential on "fair, reasonable, and nondiscrimi such as this are explicitly to reduce or intended

typically require that participants to compliance with any standard terms. Rules natory" eliminate any holdup problems. standard setting organizations

it is well

to note

that many of sanctioning any specific of licensing terms for fear of anti

However, are wary

the magnitude agreement regarding as price trust liability, as such agreements might be construed fixing. terms this the caution vague, by leaving Perversely, precise licensing can in fact lead to ex post holdup by particular contrary rights holders, and to consumers' both to the goal of enabling innovation interests. The case

to a stan firms control patents essential multiple dard fits well with the formal economic above. In es analysis described a to sence, any manufacturer seeking compliant product must produce to avoid facing an infringe obtain a license from each rights holder ment

in which

is typically impractical, as itwould pre are compliant from claiming that its products consumers the and thus assuring that they are fully compatible with standard. Thus, standard prevailing setting very often has especially both elements of the and the holdup strong complements problem clude

action.

Inventing the manufacturer

around

problem. Cross licenses (or simply licenses) are a of Patent Disputes in which But other resolve patent disputes. way companies on two forms of settlement which I below. of touch arise, First, I discuss one firm simply acquires in which the other, thereby re acquisitions,

Settlements common

and assembling the the dispute a single company. Second, for exit, a strategy whereby to exit the market, and thus to company solving

various

rights within in exchange

I comment

intellectual

property on cash payments one company pays the other

drop

its challenge

to the first

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Navigating the Patent Thicket

In each of these cases,

patent.

company's to whether

129

any particular

private

arise as questions in is the truly public

legitimate

agreement

interest. Limits

Antitrust

to the complements solutions indicated, many of the business raise antitrust issues. and the Quite generally, problem holdup problem or com that either do compete, among companies agreements might each other raise antitrust warning pete, directly with flags. For each I have

As

form, I consider

business

Generally

speaking, that antitrust

proaches solve the complements in question agreement without ment

its antitrust

below one might

two rather different imagine take to firms' efforts to coordinate

problem. One leads to more

is to ask whether

approach

than would

competition that agreement. This is the approach advocated Antitrust of Justice and Federal Trade Commission of Intellectual Property, which

the Licensing

concerns

antitrust

However,

competition

Another

among

quite

may

entities

in a relevant competitors izontal relationship").

arise

when

that would

ask whether

restrictive

that isworkable

alternative

the occur

in the Depart Guidelines for

state in ?3.1 that: a

licensing

arrangement

harms

of

the

license

(entities

in a "hor

be to ask whether

the agree Put dif agreement possible. a given is the least agreement

approach would is the most competitive

in question one could ferently,

ap to

have been actual or likely potential

in the absence

market

different

ment

mate

treatment.

can

in the sense of solving as unblocking patent

the legiti

faced, such positions. problem this latter standard, which does not reflect current antitrust en Clearly, to the Guidelines, would be far tougher on forcement policy according all forms of cooperation among patent and copyright holders. III. Cross

business

Cross

Licensing

Licenses

and Design

Freedom

are the preferred

means

clear by which large companies Based in part on work I themselves. amongst blocking patent positions have done on behalf of Intel, I can report that broad cross licenses are

Cross

licenses

the norm

in markets

sors.9 For

example,

for the design and manufacture into a number Intel has entered

of microproces of broad cross

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130

Shapiro

other major such as IBM, under industry participants, vast patent portfolio of each company's is licensed to the other. Furthermore, the companies agree to grant licenses to generally with

licenses

which

most

each other

that will be issued several years into the future, for patents for the lifetime of the cross licensing agreement. Often, these

typically cross licenses

involve

no running at the outset

royalties, although to reflect differences

they may involve in the strength of

balancing payments as reflected the two companies' in a patent pageant, patent portfolios and /or the vulnerability of each to an infringement action by the other. a cross For example, Hewlett-Packard and Xerox recently announced license

that settled

their outstanding patent disputes. the perspective of competition policy, cross licenses of this sort are concern with cross licenses among quite attractive. The traditional is will that used as a device to elevate be competitors running royalties From

prices and effect a cartel; see Katz and Shapiro 1985. Clearly, such con cerns do not apply to licenses that involve small or no running royal concern is that Another ties, but rather have fixed up-front payments. the granting of licenses to future patents will reduce each company's in centive to innovate because its rival will be able to imitate its improve correct in theory, it is clear, at least in the case of ments.10 While and no doubt more widely, that this concern is the firm each benefits when de enhanced by enjoys arising sign freedom by virtue of its access to the other firm's patent portfolio. There is little doubt that these broad cross licenses permit the more semiconductors

dwarfed

use of engineers the rate of (arguably the resource that governs in the semiconductor and faster industry), better products, In other IBM when and Intel words, product design cycles. sign a for cross license, each is enabled more to ward innovate looking quickly and more effectively without fear that the other will hold it up by as efficient

innovation

serting a patent that it has unintentionally infringed. And neither firm is really all that worried that the other will actually copy its products, the other has a license tomost of its patents. Of course, the just because rate of

impressive

of a web

presence for the view

innovation of such cross

that

these

cross

in the semiconductor licenses licenses

offers direct promote

industry

in the

support empirical rather than stifle

innovation.

Intel's Policy

of 'IP for IP"

attacked all of these benefits, the Federal Trade Commission Despite in 1998.11 One key episode behind Intel's cross licensing practices the

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Navigating the Patent Thicket

FTC's complaint involved a workstation Intergraph,

131

Intel's conduct when

a lawsuit by that Intel's micro

faced with

manufacturer, asserting on certain held processors patents infringed by Intergraph. Of course, are a necessary lawsuits like Intergraph's part of the threat point be

if one party is not happy with the has the option of initiating patent In to action against Intel, response litigation. Intergraph's infringement its own intellectual property Intel withdrew from Intergraph by suing

hind

any cross-licensing negotiation: terms offered by the other, it always

for infringement Intergraph of Intel trade secrets supply valued

highly

of Intel's patents and by withdrawing the to Intergraph, trade secrets that Intergraph of designing for the purposes systems built on Intel

chips. to Intel's conduct as unfair, the FTC attempted viewing Evidently fashion an antitrust case against Intel based on this conduct, along with a similar response by Intel to a lawsuit initiated by Digital Equipment The FTC action against Corporation.12 that the FTC and Intel had fundamentally

Intel sharply exposed the fact different views about the im

pact of the conduct at issue. The FTC saw Intel as using its existing mo to fortify its position its royalty costs per nopoly power by lowering and tech chip potentially offering superior products by incorporating as a in others. Intel itself viewed defen nologies engaging patented by a necessary aspect of cross licensing, namely for intellectual (IP for IP) and property property trading intellectual own intellectual its with a frontal faced when property withdrawing sive exercise

which

was

on its core action line in the form of an infringement product a juicy target it aware of what relief. Intel, well injunctive seeking it to from believed had itself and every right protect posed, holdup, assault

certainly no duty to give special treatment in the form of Intel trade se to hold crets and advance product to a company attempting samples it up. The problem for the FTC was that the conduct at issue, especially was to at a customer of Intel's, not a with respect directed Intergraph, and playing down aside concerns about holdup, competitor. Brushing the important role of cross licenses in the semiconductor industry, the FTC found no "business for Intel's and thus was conduct, justification" ac to presume that the conduct was anticompetitive without prepared on In Intel's the of conduct the impact competitors. tually studying true rivals in microprocessor and manufacturing design or as were either not subject to the (such IBM) AMD, Motorola, Sun, at all and thus not conduct at issue (since they were not Intel customers or cross at secrets had of the Intel trade issue), ongoing recipients fact,

Intel's

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132

Shapiro

licenses with

Intel under which

the litigation triggering these episodes in the first simply place. a compromise was reached and a settlement Fortunately, agreed to between the FTC and Intel.13 In essence, Intel agreed not to withdraw not occur

would

to build systems based by its customers Intel chips. (Presumably, this promise provides some benefit to Intel its customers that they will not be held by assuring once are on new Intel their for up they relying systems.) But Intel is not on products to to secrets continue trade farther out obligated provide information product on soon-to-be-released

needed

on their roadmap for a year that will not be introduced (i.e., products or two) to customers to provide suing Intel, and Intel was not obligated a a to secrets court trade Intel and any company suing injunc seeking tion to shut down

Intel's microprocessor business. The Intel situation also exposes the interplay between enforcement of the antitrust laws and private antitrust while

the FTC was

government actions. Even

a complaint Intel, bringing against in its Intel, Intergraph was engaged battle with Intel. Intergraph won a resound

investigating settling with

Intel, and ultimately own antitrust and patent in the first round ing victory

of that battle, in which the District Court issued anti-Intel opinion judge in Alabama ruling, among other things, that Intel's microprocessors and associated trade secrets a searing

were

"essential

facilities"

under

on Intel to sell its microprocessors secrets available to Intergraph,

a duty laws, thus imposing to Intergraph and to make its trade lawsuit against Intel not Intergraph's based on strands of antitrust law that antitrust

This opinion was withstanding. to deal with dominant companies require an ongoing dominant firm has established

their rivals, especially of dealing with

course

if the rivals

in the past.14 Intel was vindicated. The District Court judge however, Ultimately, was in not later ruled that Intel fact infringing on Intergraph's patents. the Court of Appeals for the Federal Circuit And, most significantly, vacated

the District

Court's

antitrust

facility opinion.15 In the appeals court ruled that itwas not di laws because

and essential

a

and sweeping opinion, strongly worded Intel's conduct did not violate the antitrust

at a competitor and indeed could have no adverse impact on was in to Intel the market where have competition alleged monopoly in which for microprocessors, the market power, namely Intergraph did not compete. The FTC's efforts to fashion an antitrust case out of rected

Intel's conduct quent

decision

look even more by the Court

dubious

now

in the light of this subse

of Appeals.

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the Patent Thicket

Navigating

The Intel episode ing the intersection

133

is closely related to another ongoing debate regard between intellectual property rights and anti

trust law: can a company violate the antitrust laws simply by refusing or by refusing to license its patents, to sell patented items, to its ri commentators vals? Most have said for some time that a refusal to li cense

an antitrust violation. cannot in and of itself constitute patents the has Court that unilateral refusals However, Supreme signaled to sell can indeed constitute if a com antitrust violations, especially an course of dealing with its rivals.16 pany has established ongoing a refusal to license a patent under which conditions precise an to antitrust constitute sell could violation (or items) patented stunned when the Ninth has remained unclear. Most observers were

The

Court

Circuit

of Appeals to sell patented

refusing service

organizations of servicing

business As

ruled

in 1997

that Kodak

for its machines

spare parts to compete against seeking and Kodak micrographics copiers

this was the acknowledged, a to sell item had been judged patented

the Court

refusal

first

was

liable

for

to independent in the Kodak

time

equipment. a unilateral

to be an antitrust

viola

for the Federal Circuit came tion.17 Just recently, the Court of Appeals a to a very different deci unilateral that conclusion, ruling company's never in could and sion not to license a patent (or sell a patented item) of

an antitrust violation.18 the Supreme Hopefully, the Circuit Courts and this significant split among refusals to license patents are immune from anti that unilateral

itself

Court will

constitute resolve

clarify trust challenge.

of and those of other firms who require grantbacks a license to in for patents, patents key enabling exchange or trade secrets, raises further interesting about questions copyrights, the role of self help in the digital economy.19 One view of such business Intel's practices,

relevant

cum legal regimes is that they are a welcome effort by lead strategies zone likely to favor inno a type of litigation-free to establish firms ing vation and get around some of the current difficulties with our patent system and the patent thicket it causes. A less favorable view is that firms to establish pri these arrangements represent efforts by powerful itmore difficult and make for vate legal regimes that favor themselves to challenge upstarts cross licensing policy

the dominance

of current market

leaders.

Is a

of IP for IP a beneficial

to cut through the way a a firm that enjoys or tactic by dominant strong-arm patent thicket, patent rights and seeks access to others' intellectual property powerful in exchange?

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134

IV.

Shapiro

Patent

Pools a

a new entity or one of the single entity (either that licenses the patents of two or more compa original patent holders) as a a patent nies to third parties In many respects, package. pool a to like is the the complements (much license) purest solution package in the appendix. above and analyzed Indeed, licens problem described

A patent

pool

ees may

well

involves

a pool, both for the convenience of a the subset of be one-stop shopping required patents may of little or no value by themselves. Thus, from the licensee's perspec the entire package is simpler and avoids the danger of tive, licensing welcome

such

and because

for some patent

paying

complementary Essential

Patents

The Department

rights

that turn out to be useless

without

other

rights. vs. Rival of Justice

Patents (DOJ) has

ward

clearly articulated in a trio of business

to its policy review letters

patent pools/package licensing an MPEG patent pool and two DVD patent pools. The es regarding sence of this the economic princi approach, which precisely mirrors is articulated of that inclusion above, ples truly complementary patents in a patent pool is desirable and procompetitive, but assembly of substi tute or rival patents in a pool can eliminate and lead to ele competition

in forming a fees. But differently, the key distinction or that is essential between which patent pool patents, blocking properly belong in the pool, and substitute or rival patents, which may need to re vated

main

license

separate.

the creation of a pool case,20 the Department approved to meet to of patents enable manufacturers the MPEG-2 necessary video compression This pool, encompassing from patents technology. General Matsushita, Mitsubishi, Instrument, Lucent, Fujitsu, Philips, Scientific-Atlanta, one-stop permits Sony, and Columbia University, In the MPEG

digital video disks and players, and as well as cable, satellite, and broad equipment cast television their formation of a patent pool, services. To support an extensive these nine patent holders conducted search to identify all for makers shopping telecommunications

of televisions,

to the MPEG-2 standard and include them in the pool. patents essential The licensing agent for the pool, MPEG LA, will employ an independ a patent in the pool is in fact ent patent expert to determine whether

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135

Navigating the Patent Thicket

other patents as well are essential and thus suit essential, and whether in the pool. As stated by the Department, able for inclusion "the use of the independent-expert will help ensure that the portfolio mechanism will

contain

dard, weeding

that are truly essential only patents out patents that are competitive

to the MPEG-2 alternatives

stan to each

other."

In the first Digital Versatile Disk (DVD) case,21 the Department ap a proposal to and Pioneer license pat jointly by Philips, Sony, proved ents necessary to make discs and players that comply with the and DVD-ROM

DVD-Video

standards. Again, only essential patents in the joint licensing program. As with the earlier CD of Sony and Philips, licenses will be offered by licensing program on behalf of all three firms. Again, an independent case in this Philips, to ensure that the license only conveys patent expert will be employed are to be included

to essential

the rights will would

ensure

help otherwise

"the expert patents. As stated by the Department, that the patent pool does not combine patents that be competing with each other." The Department sub

a second to the scheme joint licensing relating approved one this and DVD-ROM standards,22 patents including held by Toshiba (the licensing entity), Hitachi, Matsushita, Mitsubishi, and Victor Company that the effect of Time Warner, of Japan. Note

sequently DVD-Video

these

shopping,

to be to reduce but not eliminate appears since there remain two separate pools, not itwould appear.

Created

to Resolve

two patent

complements one: two-stop A Patent

Pool

pools

problem,

Claims

of Blocking

the just

Patents

to the Department of Justice's approval of these three patent a pat inMarch 1998 challenged Trade Commission pools, Inc. and VisX, Inc., two firms ent pool formed by Summit Technology, lasers to perform a new, and increasingly that manufacture and market In contrast

the Federal

vision

eye surgery, photorefractive correcting keratectomy.23 to the FTC: "Instead of competing with each other, the firms According in a patent pool and share the proceeds patents placed their competing each and every time a Summit or VISX laser is used." The FTC was os popular,

the same principles employed by the Justice Depart tensibly following or essential to the of ment, namely complementary permit assembly to the FTC, but not rival patents, into a pool. According patents, not to the two companies license their patents independently. agreed

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136

Shapiro

in this case argued vigorously the companies that they did However, indeed have mutually their pool, Pillar Point blocking patents, making In August 1998 the two companies settled Partners, procompetitive. the FTC and agreed to lift any restrictions of their patents; licensing ultimately, dissolved.24

with the

and VisX

The Summit

case raises a number

of very

interesting

and

in regarding patent pools joint licensing programs two if believed that their patents general. First, companies reasonably blocked each other at the time they formed the pool, was that sufficient to justify the formation of a pool? How hard are they required to look to pool their into the validity of each other's claims before agreeing tricky

issues

on each other regarding patent pool was

their

and

it could, at considerable expense, patents? Second, if each firm believed two invent and the should the firms around other's risk, patents, delay, be prohibited from forming a pool and rather forced to attempt to in patents, under the view that consumers might of direct competition the product thereby enjoy (although or never in of be the absence the pool)? introduced, might delayed, some is in rival pat there competitive harm Third, placing potentially vent around

each other's

the benefits

that each party in fact controls valid block assuming some Fourth, can the type of pool procompetitive? ing patents, making on on antitrust the be attacked based that a less argument pool grounds ents into the pool,

restrictive

legitimate so, does itmatter license pool will license licensing V.

a cross namely and created purposes

alternative,

same

would

in this assessment

the have achieved license, would ex post competition? If additional if the two companies that the agree

to third parties, something that a cross their patents not permit, it contained rather unusual sub unless

rights?

Cooperative

Standard

Setting

are common in the context of standard set Blocking patents especially once a standard is picked, any patents to (or copyrights) necessary ting: If the standard be with that become essential. standard comply truly comes each such patent can confer significant market popular, on its owner, and the standard itself is subject to holdup if these to holders are not somehow license their patents on obligated able terms. As noted above, for precisely this reason, standard to license any essential patents on bodies require participants able terms as a quid pro quo before

adopting

power patent reason setting reason

any standards.25

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Navigating the Patent Thicket

137

a great many co antitrust concerns have not prevented Fortunately, standard setting efforts from proceeding forward. Some par operative so as to far that the innovation much of go say ticipants taking place now

areas is stan in the telecommunications, Internet, and computer even dards based. the fiercest enemies often team up in the Indeed, new to in 1997, Microsoft software Back standards. promote industry hardly known as cozy partners, agreed of Virtual Reality Modeling Language in their browsers. This agreement was (developed by Silicon Graphics) to make to view 3D images on the it far easier for consumers expected Web. Earlier, Microsoft to the support agreed Open Profiling Standard, which to control what personal computers permits users of personal two companies and Netscape, to include compatible versions

information

to a particular

is disclosed

been

advanced

ously and Verisign

by Netscape,

web

site, and which had previ with Inc. Firefly Network, along

Inc.

But neither scrutiny. partment lishment

is cooperative from antitrust standard setting immune In the consumer the Justice De electronics area, for example, and others regarding the estab investigated Sony, Philips, in the 1980s. Cooperative of the CD standard efforts to set

in private antitrust optical disc standards have also been challenged to adhere to a standard are an un cases, on the theory that agreements restraint of trade: reasonable [defendants ...

by

have agreed, combined,

agreeing

not

to compete

common

Does

format

and

of

and by instead agreeing

compact disc players,

design

..

to eliminate

and conspired

in the design

formats

competition

for compact

discs

and

to establish, and establishing,

a

.26

lead to efficient standardization, increased compe cooperation consumer and additional benefits? Or is cooperative standard

tition, for firms collectively setting a means ment and firms not of consumers

to the detri to stifle competition, in the standard setting the limits that and evaluating

included

these questions Answering on cooperative be placed standard setting efforts require an in comparison effects of such cooperation analysis of the competitive an antitrust with some reasonable but-for world. Inevitably, analysis of an assessment involves of the market standard how setting cooperative group? should

would

likely

evolve

without

incompatible multiple, the cooperation. Another ally

tip to a single

the cooperation. products would prevail

One

possibility in the market, is that the market would

possibility even without product,

cooperation.

Even

is that if not for eventu in this

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138

Shapiro

latter

an

case,

initial

and welfare

have

significant (1) cooperation emerge from com

for three reasons:

consequences,

efficiency lock in a different

may

can

standard

industrywide

product design may eliminate

than would a standards

war waged (2) cooperation prior to to to is firms enable (3) likely multiple supply cooperation tipping; a standards war may lead to a the industry standard product, whereas petition;

and

proprietary

single,

The Costs

and Benefits

These

successful

protecting

of network

Likewise,

and

standardization

and standard.

compatibility

can

impose

very

real

consumers:

constraints

on variety

and innovation,

loss of ex ante competition control

proprietary Legal Treatment

of Cooperative

agree to license terms. criminatory typically

are sometimes

Firms

the market,

and

standard.

Standard

Setting

at the intellectual

closely in the context

specifically

to win

over a closed

look more

I now

until

compatibility.

or network,

an open

within

achieving

effects,

from stranding,

competition

enabling

on

of a bandwagon

launching

buyers

with

associated

benefits

realization

greater

and Standards

of Compatibility

are significant include:

There

costs

product.

of standard their patents

property setting, where

issues

that arise

the participants on fair, reasonable, and nondis

intellectual of hiding property rights in a formal has been embedded technology

accused

after

the proprietary as one of contract law. Standard I view this issue primarily in their charters compelling have groups provisions typically

standard. setting

participants to commit

either

to reveal

all relevant

or property rights in the rights embedded

intellectual

to licensing any intellectual property on reasonable these rules help control the terms.27 Clearly, im some the precise requirements In cases, however, holdup problem. a In be unclear. circum these standard setting group may posed by if the standard affects nonparticipants, consumers, stances, including standard

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139

Navigating the Patent Thicket

on partici is a public interest in clarifying the duties imposed a in stifles rather than fashion that promotes pants competition. or even encour The question of whether firms should be allowed, there

is part of the broader issue of col aged, to set standards cooperatively a storied area within antitrust law. Most laboration among competitors, of the case law deals with quality and performance standards rather than compatibility standards.28 on the standard setting process erative standard setting.

Existing cases also have tended to focus of coop itself, rather than the outcomes

in a standard set liability has been found for participants to that exclude from the who abuse process competitors ting process market. One leading case is Allied Tube & Conduit Corp. v. Indian Head, Antitrust

the Supreme Court affirmed a jury Inc., 486 U.S. 492 (1988), in which verdict against a group of manufacturers of steel conduit for electrical to of the cable. These manufacturers block an amendment conspired National conduit. tional

Electric

Code

They achieved Fire Protection

adopted American

by

state

and

the use of plastic permitted the annual meeting this by packing of the Na is widely code whose model Association, other The local governments. leading case is that would

have

v. Hydrolevel Corp., 456 U.S. 556 Society ofMechanical Engineers an antitrust in which the Supreme Court affirmed judgment

(1982), In this case, the chairman of an association against a trade association. subcommittee offered an unofficial product ruling that the plaintiff's was unsafe, and this ruling was used by the plaintiff's rival (who en on the subcommittee) to discourage customers joyed representation

from buying the plaintiff's product. a rival from the market ap Antitrust risks associated with excluding a an to be less for of open standard, but could arise if pear problem from adhering the standard block others the companies promoting re or seek royalties The DOJ business from outsiders. stan the MPEG-2, DVD-Video, and DVD-ROM letters regarding can dards are excellent illustrations of how the enforcement agencies to the standard

view

successfully

handle

intellectual

property

in

the

standard

setting

context.

on a product standard the Supreme Court has noted, "Agreement or an not to manufacture, distribute, is, after all, implicitly agreement certain types of products."29 To date, this type of reasoning purchase has not been used to impose per se liability on software standard set As

ting activities. to cooperation I am aware

I know of no successful antitrust Indeed, challenges to set compatibility standards. The closest case of which is Addamax

Corporation

v. Open

Software Foundation,

Inc.,

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140

Shapiro

888 F. Supp. grant an

274

summary

industry dent version

(1995).

judgment consortium

In Addamax, to the District Court refused on behalf of the Open Software Foundation, a to develop formed platform-indepen

the UNIX operating a ding to select supplier of security antitrust lected, Addamax brought of

and Digital Packard, had chosen the winner

Equipment not based

a bid system. OSF conducted software. After failing to be se claims against OSF, Hewlett

Corporation, on the merits

that OSF asserting but to favor specific

case looks problematic, and technologies. The Addamax as the primary purpose its members of OSF was to permit to team up to offer stronger the competition against leading UNIX Sun Microsystems and AT&T, and there was no evidence vendors, companies inasmuch

suggesting members

that OSF's desire

failure

to control

was based to pick Addamax the market in which Addamax

on

its

itself

operated. the antitrust risks faced by companies that are trying to Ultimately, set compatibility standards appear to be relatively minor as long as the scope of the agreement truly is limited to standard setting and steers the law has typi clear of distribution, and pricing. While marketing, in or looked and collaborators for among risk-sharing cally integration as a venture and der to classify escape per se joint cooperation screens for standard setting these are not very helpful condemnation, activities. The essence of cooperative standard setting is not the sharing or the integration of oper specific investments, intellectual prop of complementary ations, but rather the contribution to and the of unified support erty rights ignite positive expression feedback for a new technology.

of risks associated

with

stan imposed by public policy in the area of compatibility dards remain unclear. The most specific statement by the antitrust en can be found in a recent FTC Staff Report.30 The forcement agencies The

limits

Staff Report

recognized

a need

for clarification

in this area:

the time has come for a significant effort to rationalize, simplify, and articulate in one document the antitrust standards that federal enforcers will apply in as sessing collaborations among competitors. This effort should be directed at "competitor collaboration guidelines" that would drafting and promulgating be applicable to a wide variety of industry settings and flexible enough to ap ply

sensibly

Since Hearings,

that

as

industries

call and

continue

rapidly

to innovate

and

evolve.31

the FTC has conducted action, Joint Venture Division issued in the Commission and the Antitrust for

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2000 new

April

"Antitrust

Patents

A number

for Collaborations web

in Standard

and Holdup

Among

Com

site).

Setting

of disputes have surfaced recently that illustrate the thorny associated with hidden patent rights that were later exerted

problems

established

against

Guidelines

at either Agency's

(available

petitors" Hidden

141

the Patent Thicket

Navigating

standards.32

Dell Computer and the VESA VL-Bus Standard The leading U.S. exam antitrust action is the FTC's consent agreement with ple of this type of Dell Computer Corporation, the case involved computer community undisclosed

announced

hardware, The assertion was

as well.

in November 1995. Although it is important for the software to exercise that Dell threatened

the patent adopting rights against computer companies a mechanism to transfer data instructions between standard, such as the hard disk drive or the computer's CPU and its peripherals

VL-bus

screen. The VL-bus was used the display been supplanted by the PCI bus. According

in 486 chips, but to the FTC.

it has now

During the standard-setting process, VESA [Video Electronics Standard Asso to certify whether ciation] asked its members they had any patents, trade marks, or copyrights that conflicted with the proposed VL-bus standard; Dell certified that it had no such intellectual property rights. After VESA adopted in part, on Dell's certification?Dell the standard?based sought to enforce its to firms follow the standard.33 patent against planning are two controversial

There

this consent decree: surrounding market power, and indeed acquired and (b) the FTC did not assert that that VESA. suggests analysis My issues

(a) the FTC did not assert that Dell the VL-bus never was successful; misled intentionally is unlikely harm anticompetitive

Dell

market

power intentions.

Dell's Motorola how

and

and the ITU V.34 Modem

competition

impose ambiguous the V.34 modem standard standard

Standard

in the absence effects

of significant are not dependent on

Another

good

example

of

can be affected when duties

cations

to arise

that the competitive

standard setting organizations on participants and is the case of Motorola Telecommuni International the adopted by

to the essential agreed to license its patents case to all comers on "fair, reasonable, and nondiscriminatory

Union.

Motorola

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142

Shapiro

the standard

terms."34 Once

was

that some

in place, Motorola then made offers as not did this obliga regard meeting in part over and Motorola, Rockwell

industry participants tion. Litigation ensued between of whether the question reasonable

terms

should mean:

(a) the terms in could have obtained with other competition or (b) the in that could have been the standard; technology placed terms that Motorola could extract ex post, given that the standard is set to that standard. and Motorola's patents are essential ex ante,

that Motorola

are best dealt with

by the standard setting bodies, or more either setting participants, by making explicit the duties on ex or ante competition imposed participants, by encouraging holders of intellectual among different property rights to get their into the standard. Unfortunately, antitrust concerns have led property These

issues

standard

at least some of these bodies to steer clear of such ex ante competition, on the to set technical standards, not to that their job ismerely grounds in prices, including the terms on which intellectual prop get involved to will made be ironic result has available other The erty participants. some companies to seek substantial been to embolden royalties after participating VI.

in formal

Settlements

standard

setting

activities.

of Patent Disputes

to settle intellectual prop and patent pools can be ways For VisX the and Summit erty disputes. patent pool discussed example, a was Pillar Point settlement of a patent Partners, above, essentially Summit and VisX. dispute between

Cross

licenses

concerns antitrust have legitimate authorities Generally speaking, in ways that parties will settle their intellectual property disputes that a no reason to matter of economic stifle competition. As theory, there is interests in settlement, and especially expect the two parties' collective in the form of any settlement to with coincide the public in they adopt, consumer interests. while law which the includes terest, So, surely wel comes the settlement and does not seek to force of disputes generally, can be anticompetitive. parties to litigate to the death, some settlements General for Antitrust Based on this general view, Assistant Attorney the 1997) that parties notify (see Klein Joel Klein recently suggested as enter of settlements that certain much into, Justice Department they parties are required to notify the Justice Department vance of their intention to merge.

and the FTC in ad

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the Patent Thicket

Navigating

143

are quite creative in crafting settlements of intellectual prop no means restrict to cross licenses and their attention erty disputes, by and patent pools. For example, one tried and true method of settling a Firms

the simply to merge. However, can themselves that such mergers and they will view such mergers with skepti chance that the two parties will in fact be capable

is for the companies dispute are well antitrust authorities eliminate cism

competition, if there is a good

involved

aware

of competing against each other, their patent claims notwithstanding. A good example of such a merger in response to FTC that was modified concerns was the of Boston Scientific and CVIS in the proposed merger area of imaging catheters.35 An interesting twist in such cases is that the in court, where to assert they each have an incentive on the other's patents, direct am infringing provides munition to the FTC or DOJ to assert that the two companies could in not deed compete if for the merger. independently can use to settle a patent A second method that companies is dispute parties' posturing that they are not

to simply pay the other company to drop its claims for one company and exit the market. raise obvious antitrust concerns, Such agreements to pay handsomely to elimi because an incumbent firm may be willing nate a potential and avoid the risk of having its patent chal competitor if no equally effective challenger lenged, especially the scene any time soon. The losers in such deals quent would-be ers (who would or not infringed).

and thus there is a le to other firms or to consumers, to role of the Courts and the antitrust enforcement agencies such settlements.

ternalities, gitimate oversee One

is likely to arrive on can easily be subse entrants (if the patent were struck down) or consum that the patent at issue is invalid benefit from a finding a settlement can generate negative ex Put differently,

either

on their face is that in that are suspicious of branded between incumbent manufacturers

class of settlements

agreements volving rivals who seek to offer generic compe and would-be pharmaceuticals tition by challenging the validity of the patents underlying the branded It has been reported that the dominant recently product's position. FTC is considering an interesting

have

several such settlements.36 These cases challenging from the fact that certain generic twist resulting

can gain preferential before rights to enter the market to do so. As a result, the branded manufacturer others are permitted into a suitable agree may be able to stall competition by entering manufacturers

ment

with

the uniquely-placed

generic

manufacturer,

knowing

that

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144

Shapiro

will

rivals

subsequent

any anticompetitive prevent asked that the FDA require settlements

and make

some

face

that

delay.

In order

to

and identify the FTC has

of this nature, to notify the FDA of any such to the FTC for its available

agreements companies information

review.

VII.

Conclusions

Our

current patent system fields, including and e-commerce, software, in several

a potentially situation dangerous semiconductors, computer biotechnology, a would-be or inno in which entrepreneur

is causing

vator may face a barrage of infringement to bring its product or service tomarket.

actions

that itmust

overcome

In other words, we are in dan to com costs for those seeking

transaction ger of creating significant new mercialize based on multiple patents, technology overlapping and it is fair to Under these circumstances, rights, holdup problems. too far in the direction ask whether the pendulum has swung of strong patent rights, ranging from the standards used at the Patent and to the secrecy for approving Trademark Office patent applications, to the presumption of such applications, afforded by the courts to pat ent validity, to the right of patent holders to seek injunctive relief by in cease of the offending that infringing firms sisting production products. Under

we can ill afford to further raise transac these circumstances, tion costs by making it difficult for patentees complemen possessing to to in cross and coordinate engage tary potentially blocking patents or to Yet antitrust law form patent pools. licensing, package licensing,

can

potentially play titrust jurisprudence

horizontal

such a counterproductive since an role, especially starts with a hostility toward cooperation among

rivals.

a keen understanding So far, the Department of Justice has displayed in of the need for those holding complementary rights to coordinate the licensing of those rights, but the Federal Trade Commission has ex itmore difficult for firms and arguably ismaking or to form to offer licenses, licenses, package of these issues are likely to be ex patent pools. Many procompetitive near in the rise of stan the future, tremely important especially with hibited

less restraint, in cross

to engage

dard

setting

technologies

as

an

essential

part

of

the process

by which

new

are commercialized.

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the Patent Thicket

Navigating

145

Notes at "Innovation for presentation and the Economy," National Bureau Policy Adam and Scott Stern, organizers, Research, Jaffe, Joshua Lerner, April are welcomed; DC. Comments direct any comments Washington please

of

Prepared Economic 2000,

11, to

[email protected]. 1. For in 1995 Joseph Stiglitz, of the Council then Chairman of Economic Advi example, on stated at the opening of the Federal Trade Commission's hearings Competition in the New High-Tech, Global Marketplace, that "some people to the con Policy jump... clusion that the broader the patent and that isn't rights are, the better it is for innovation, one innovation in which builds on correct, because we have an innovation system always sors,

If you

another.

at the bottom, get monopoly you may rights down ... the breadth on so and and utilization later patents

uses

those

used

not only to stifle competition, but also have See FTC Staff Report, p. 6.

adverse

effects

that stifle competition can be of patent rights in the long run on inno

vation." 2. See

http://www.amazon.com/exec/obidos/subst/misc/patents.html/103-4266077

5496631. 3. Nearly

5,000

were

patents

4. See,

for example,

5. For

a brief

of Cournot's

description

see

6. Cournot

assumed

in a recent more

semiconductors

and Lerner

Kortum

extensions,

in the U.S.

granted to mention

not

alone,

microprocessors

1998, Cohen

on

year,

1998,

to

relating

broadly.

et al. 2000, work

original

single

and Hall

complements,

and Ham

1999.

and modern

1989, p. 339.

Shapiro

in certain fixed inputs, copper and zinc, were required of brass. If one input can be substituted for the other, they as well as case in which between complements, competition

that the two

for the production proportions have properties of substitutes

can go far to the problem this pa input owners solving posed here. Throughout am in question I the company each of sev that per, assuming requires rights to practice eral patents, and that one patent to the ex license cannot substitute for another. Clearly, the two

can on or tent that a manufacturer, for example, rely multiple designs production the patent covered by separate patents with thicket is far less owners, processes separate can still be But even in this relatively extra difficulties of a problem. setting, friendly discussed raised by the holdup below. problem, 7. For a thoughtful see 1999. Merges 8. See Klein

discussion

of possible

at the Patent

reforms

and Trademark

Office,

1997 for a further

form a pool

of this pool and how it operated. In this case, description on of the Franklin D. to to had lean the Roosevelt, Navy, industry Secretary and help enable wartime of aircraft. production

9. See Hall

and Ham

the Assistant

ing practices 10. This under

concern

which

about

an existing ther discussion In the matter

and Teece

1997

for additional

studies

of licens

industry.

innovation also arises with to grantbacks, respect to license in exchange its future patents for rights to agrees See Gilbert and Shapiro 1997 for a fur company. by another

discouraging

one

use

11.

1999 and Grindley

in the semiconductor

company patent held of grantbacks.

of Intel Corporation,

Docket

No.

9288, Complaint

filed

June 8,1998.

The

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146

Shapiro

I was

is available at http://www.ftc.gov/os/1998/9806/intelfin.cmp.htm. Complaint on this matter. retained by Intel to work 12. For one well-informed

articulation

of the theory

the FTC's

underlying

position,

see

1999.

Baker 13. For

more

on

information

the

settlement

FTC

the

between

and

Intel,

see

http://www.ftc.gov/os/1999/9903/d09288intelagreement.htm. 14. The key recent Supreme case here is Aspen Court the essential Skiing Corp., 472 U.S. 585 (1985), although case of U.S. v. Terminal Railroad Association of St. Louis,

Skiing Company facilities doctrine 224 U.S.

383

v. Intel Corporation, United States Court 15. Intergraph Corporation eral Circuit, November 98-1308, Decided 5,1999, Judge Newman the Court.

v.

Aspen Highlands goes back to the

(1912). for the Fed

of Appeals

the opinion

writing

for

cites are Otter Tail Power Co. v. U.S., 410 U.S. 366 (1973) (duty to sell whole v. to a retail competitor) and Aspen Skiing Company power Aspen Highlands to offer a joint lift ticket with a rival ski Skiing Corp., 472 U.S. 585 (1985), (duty to continue 16. The

sale

classic

electric

slope). a to refuse to set up a tortured decision standard under which company's that the its patent was "presumptively valid," but could be overcome by evidence intent was Of course, intellectual asserting property rights anticompetitive. company's a a would-be in the sense of trying to eliminate rival is typically against anticompetitive 17. The Court license

which add to the competitor's from the competitor, (or at least earn royalties competitor be the Court said that Kodak would costs), so this test is not in fact workable. Amazingly, was to earn a return on its R&D in to sell patented parts if its intent to those parts, but not if its intent was to design and manufacture on those very on behalf of Ko who eliminate competitors parts. I testified rely patented dak in this case.

justified vestment

in refusing required

In Re Independent 18. United States Court of Appeals for the Federal 99-1323, Circuit, v. Xerox Febru Service Organizations Antitrust Corporation, Decided Litigation, CSU, et. al. the 17,2000, ary opinion. Judge Mayer writing 19. For a discussion 20.

See

the

June

of self help 1997

26,

focusing release

press

on

copyright

see Dam

holders,

1998.

at http://www.usdoj/gov/atr/public/press_

releases/1997/1173.htm. 21.

See

the December

17,

1998

at http://www.usdoj.gov/atr/public/

release

press

press_releases/1998/2120.htm. 22.

See

the June

10, 1999 business

review

letter

at http://www.usdoj.gov/atr/public/

press_releases/1999/2484.htm. 23.

See

the March

1998

24,

at http://www.ftc.gov/opa/1998/9803/

release

press

eye.htm. 24.

For

a

description

of

the

settlement,

see

21, 1998 press this settlement,

the August

Despite a key patent acquiring Office. Patent and Trademark

http://www.ftc.gov/opa/1998/9808/sumvisx.htm. to pursue VisX for allegedly continued

on the U.S. fraud by omission trative law judge subsequently dismissed lease at http://www.ftc.gov/opa/1999/9906/visx.htm.

and

this complaint;

see

release the

at FTC

conduct by inequitable an adminis However, the June 4,1999 press re

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the Patent Thicket

Navigating

147

to assert incentive rules can create the perverse for patent holders are not in fact essential, of their patents but perhaps merely extremely a can in in complying with the standard. By this device, patent holder helpful, principle once the standard es its patent to others either refuse to license has become (especially 25. Note

that

these

that at least some

or seek and perhaps for a patent that issued after the standard is established) more than and Of whether the terms fair fair and reasonable course, royalties. something are evaluated on an ex ante or ex post basis is not the reasonable clear, although precisely on an ex post basis. terms would have little force if applied only tablished,

26.

"Second

Disctronics Texas, Inc., et al. v. Pioneer Complaint," of Texas, Case No. 4:95 CV 229, filed August 2,1996

Amended

et al. Eastern

District

Electronic

Corp.

at 12.

in the standard that a company might setting profit from refusing to participate in the hope that the resulting standard will nonetheless inadvertently) (perhaps on the to license not be obligated the company would patent. Then infringe company's at least create the its blocking terms, if at all. This would patent on fair and reasonable

27. Note process,

in question that the company established.

possibility etary once 28.

See Anton

and Yao

formance

standards.

29. Allied

Tube & Conduit

30.

Trade

Federal

Policy dards." 31.

could

control

the standard

and make

it propri

it became

1995 for a more

Corp.

Commission.

in the New

High-Tech

ibid, Chapter

v. Indian Head, 1996, Global

Inc., 486 U.S. "Anticipating

Marketplace,"

492,500

treatment

of per

(1988).

the 21st Century: Competition and Stan 9, "Networks

Chapter

at 17.

10, "Joint Ventures,"

are many

June.

of the legal

discussion

complete

hidden of disputes patent involving rights and stan examples vs. and Microsoft Mitsubishi; setting, Cascading Wang Style Sheets; and including: ETSI and Third-Generation Mobile Telephones. 32. There

more

dard

33.

See http://www.ftc.gov/opa/9606/dell2.htm.

34.

I served

necessarily 35.

as an expert in this matter retained by Rockwell; those of any party to the case.

See

boscvis.htm.

release 3, 1995 press of Gemstar recent merger issues. that raises antitrust

the May The

merger/settlement 36. One episode Pharmaceuticals volves

Aventis

under

investigation and the popular (the new company

unit,

Abbott Deal

stated

here do not

asserts

that

at and

http://www.ftc.gov/opa/1995/9505/ TV Guide is another example

of

a

Geneva Novartis's Abbott Laboratories, in Another episode hypertension drug, Hytrin. and from formed the merger of Hoechst

involves

to CD. Abbott the heart drug Cardizem agreed reportedly to delay version of Hytrin. the launch of a generic per month with all laws." See the is "in accordance with Geneva its agreement

Rhone-Poulenc), Andrx, $4.5 million pay Geneva Wall

the views

reflect

and

Street Journal, February 7, 2000, "FTC Panel Backs Suit Against Abbott, for updates. for Hypertension p. B20. See the FTC website Drug,"

Novartis

on

References Anton,

James,

High-Technology

and

Dennis

Industries."

Yao.

1995.

Antitrust

"Standard-Setting Law Journal 64:247-65.

Consortia,

Antitrust,

and

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Baker, Rule."

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David.

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Dam, Kenneth. nomics Working

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283-336. and David

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to Promote

Analysis

and John Walsh. Their 2000, February. "Protecting and Conditions U.S. Pat Firms Why Manufacturing Appropriability NBER Working Paper No. W7552.

(or Not)."

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and Exclusivity: Antitrust Law Review 7:523-76.

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and Carl Katz, Michael, Journal of Economics. Katz,

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Technical

Appendix that prices can be well above monopoly levels ifmultiple read on a single product. More critical patents, all of which ifN firms each control a patent that is essential for the pro

I show

Here

firms have

precisely, set their duction of a given product, and if these N firms independently on N the is that times the mo licensing fees, resulting markup product markup. that N firms, i = 1,..., N, each own a patent that is essential Suppose to the production let us think of there of a given product. For simplicity, a that produces this product, buying and being competitive industry nopoly

from each of these N firms. For the necessary components we can think of firm i either as setting a license fee for the it will sell its essential of its patent, or as setting a price at which

assembling this purpose use

to the competitive component cal either way. The cost to firm for licensing

assembly

industry;

the theory

i per unit

is identi

and selling its component (for making to assemblers) is denoted by cf. The price

its patent i (or the license

or of

fee charged by firm i) is denoted by p,. The component to paying royal is of the itself denoted by p. In addition product price an firms incur the ties (or buying assembly assembly components), cost per unit equal to a. Competition = a + thatp ?.=ipI. in question Demand for the product

at the "assembly" is denoted e=

level ensures

by D(p). The absolute In gen -D'(p)p/D(p)'

is given by of the elasticity of demand eral, ewill vary with p. I assume that the N firms set their component prices, equivalently In other words, their license fees, independently and noncooperatively. in the prices plr..., I look for the Nash Equilibrium pN. The profits for

value

firm

i are given

by

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150

ttz

Shapiro

=

-

The first-order ?l-die,

=

ct).

D(p)(pi

?

x

condition n?

for firm

w

D{p) + D\p){Vi

v

i is given

by

^

= 0.

-0

dp,

all zgives

up across

Adding

= 0.

D(p)N + D'(p)?(p?-cI) which

can be rewritten Dip)

"(p,-c,-)_

h

V

as

N

pD'ip)

of the definition Using = a + we have p ^T p,,

p-