Mechanisms to Enable Follow-On Innovation: Liability Rules vs. Open Innovation Models (Munich Studies on Innovation and Competition, 15) 3030722562, 9783030722562

Table of contents :
Preface
Acknowledgements
Contents
About the Author
Abbreviations
List of Figures
Chapter 1: Introduction
1.1 Cumulative Innovation in Patent Law
1.2 Liability Rules Enabling Innovation
1.3 Open Approaches to Innovation
1.4 Legal Sources
1.5 Methodology
1.6 Structure
1.7 Limitations
Chapter 2: Theory
2.1 Underprotection
2.1.1 Market Failures
2.1.2 Incentive Theories
2.1.3 Prospect Theory
2.1.4 Disclosure Theory
2.1.5 Patents from the Perspective of Competition Law
2.1.5.1 The Economic Objectives of Competition Law
2.1.5.2 Competition Law and Follow-on Innovation
2.1.6 Towards a Dynamic Incentive Theory
2.1.7 Justifying Follow-on Innovation
2.2 A Typology of Subsequent Improvements
2.2.1 The Improvement Is Infringing and Not Patentable
2.2.2 The Improvement Is Infringing Yet Patentable
2.2.3 The Improvement Is Patentable and Does Not Infringe the Initial Patent
2.2.4 The Improvement Is a Follow-on Innovation Infringing the Initial Patent
2.3 Overprotection
2.3.1 The Increasingly Fragmented Patent Landscape
2.3.1.1 Patent Strategies
2.3.1.2 Patent Assertion Entities
2.3.1.3 Transitioning from Defensive to Offensive Strategies
2.3.1.4 Patent Quality
2.3.1.5 Interoperability Standards
2.3.1.6 Technological Changes
2.3.2 Market Failures Associated with Overprotection
2.3.2.1 The Tragedy of the Anticommons
2.3.2.2 Grounds for Categorization
2.3.2.3 Ex ante: Transaction Costs
2.3.2.4 Ex ante: Unjustified Refusals to License
2.3.2.5 Ex ante: Excessive Royalties
2.3.2.6 Ex ante: Royalty Stacking
2.3.2.7 Ex Post: Hold-up
2.3.2.8 Empirical Inconclusiveness
2.3.2.9 Market Failures and Their Potential Solutions
Chapter 3: Open Approaches to Innovation
3.1 Openness Through Private Ordering
3.1.1 The Market Correction Model
3.1.1.1 Theoretical Foundations
3.1.1.2 The Conditions for Openness
3.1.1.3 Adequacy in Resolving Overprotection Problems
3.1.2 Open Innovation
3.1.2.1 Definition
3.1.2.2 Incentives to License and Social Welfare Effects
3.1.2.3 The Normative Component
3.1.3 User and Open Collaborative Innovation
3.1.3.1 Theoretical Foundations
3.1.3.2 Innovation As a Public Good
3.1.3.3 Incentives to Innovate
3.1.3.4 UOCI and Patents
3.1.4 Interim Conclusions
3.2 The Continuum of Openness
3.2.1 The Various Dimensions of Openness
3.2.2 Exclusive Use
3.2.3 Restricted Use
3.2.4 Semi-Open
3.2.5 Open Licensing
3.2.6 Open Viral Licensing
3.2.7 Public Domain
3.2.8 Non-enforcement
3.2.9 A Dynamic View of Openness
3.3 Private Liability Rules
3.3.1 Patent Pledges
3.3.1.1 Incentives
3.3.1.2 Enforceability
3.3.2 Licenses of Right
3.3.2.1 A Switch to a Liability Rule
3.3.2.2 License of Right in Germany
3.3.2.3 License of Right for Unitary Patents
3.3.2.4 Incentives to Declare
3.3.3 Patent Pools
3.3.3.1 Governance and Objectives
3.3.3.2 Patent Pools and Competition Law
3.3.3.3 Incentives to Participate
3.3.4 Clearing Houses
3.3.4.1 Definition
3.3.4.2 Efficiency Gains
3.3.4.3 Future Perspectives for Clearing Houses
3.3.5 Open Viral Patent Licenses
3.3.5.1 Definition
3.3.5.2 The Challenge of Meeting Patentability Criteria
3.3.5.3 The Incentives to Create Sustainable Access
3.3.5.4 Protection Against Hold-ups
3.3.5.5 Normative Recommendations
3.4 Conclusions Regarding Open Approaches to Innovation
3.4.1 The Sufficiency of OAI to Resolve Overprotection Problems
3.4.2 The Suitability of OAI to Alleviate Overprotection Problems
Chapter 4: Economic Foundations of Compulsory Liability Rules
4.1 A Typology
4.2 A Context-Specific Instrument
4.3 Economic Considerations
4.3.1 Private vs. Compulsory Liability Rule
4.3.2 Effect on Incentives
4.3.3 Patent Evaluation Problems
4.3.4 Hold-Out Risks
4.3.5 Error Costs and Legal Uncertainty
4.3.6 Underuse
Chapter 5: Legal Foundations and Sources of Compulsory Liability Rules
5.1 Early History
5.2 Paris Convention
5.3 TRIPS Agreement
5.4 Compulsory Liability Rules in the EU Law
5.5 Unitary Patent System
5.6 Human, Fundamental and Basic Rights
5.6.1 Human Rights and IP
5.6.2 Patents in the Light of Human Rights
5.6.3 Follow-on Innovation and Human Rights
5.6.4 The Freedom to Enact Compulsory Liability Rules
Chapter 6: Compulsory Licenses in Patent Law
6.1 Property and Liability Rules Under TRIPS
6.2 Interrelationship of Art. 30 and Art. 31 TRIPS
6.3 General and Procedural Requirements
6.3.1 Prior Effort
6.3.1.1 The Objective of the Prior Effort Requirement
6.3.1.2 Interpretation of the Prior Effort Requirement
``Efforts´´
``Prior to Such Use´´
``Reasonable Commercial Terms´´
Reasonable Time
6.3.1.3 Prior Effort in the Context of Overprotection Problems
6.3.2 Adequate Remuneration
6.3.3 Scope and Assignability
6.3.4 Duration and Termination
6.3.5 Individual Merits
6.3.6 Decision by an Authority
6.3.7 Judicial Review
6.3.8 Conclusions on the General and Procedural Requirements
6.4 Grounds for Compulsory Licenses
6.4.1 Dependent Patents
6.4.1.1 The Objectives of Art. 31 (l) TRIPS
6.4.1.2 The Conditions of Art. 31 (l) TRIPS
6.4.1.3 Review
6.4.2 Abuse of Rights
6.4.3 Failure to Work
6.4.3.1 A Subtype of Abuse of Patent Rights
6.4.3.2 The Controversy Over Local Working Requirement
6.4.3.3 Applicability to Market Failures
6.4.4 A Remedy to Anti-competitive Practices
6.4.4.1 Substantial Criteria
6.4.4.2 Procedural Criteria
6.4.4.3 Multiple Options for Implementation
6.4.5 Dynamic Efficiency as a Public Interest
6.5 Interim Conclusions
Chapter 7: Denial of Injunctive Relief
7.1 Introduction
7.2 Limitations to Injunctive Relief Under TRIPS
7.3 eBay v. MercExchange
7.3.1 A Doctrine Based on Equity
7.3.2 Post-eBay Practice
7.3.2.1 Irreparable Harm and Inadequacy of Monetary Damages
7.3.2.2 Disproportionality of Hardships
7.3.2.3 Public Interest
7.3.3 Effect on Overprotection Problems
7.4 Patent Misuse Doctrine
7.4.1 An Equitable Defence
7.4.2 Applicability to Overprotection Problems
7.4.3 The Relevance of the Misuse Doctrine
7.5 Enforcement in Europe
7.5.1 Enforcement Directive
7.5.2 Implementation in Civil Law Countries
7.5.3 Equitable Discretion in the UK
7.5.4 Discretion Under the Unitary Patent System
7.5.5 Effect on Overprotection Problems
7.6 Interim Conclusions
Chapter 8: Compulsory Liability Rules in Competition Law
8.1 Introduction
8.2 Compulsory License As an Antitrust Remedy
8.2.1 Compulsory License As a Behavioural Remedy
8.2.2 Commitments to Grant Access
8.2.3 Compulsory License As a Defence in Patent Infringement Proceedings
8.3 Market Definition
8.3.1 General
8.3.2 Market Definition and Follow-on Innovation
8.3.3 Definition of the Market for Technology
8.3.4 Defining the Markets for Follow-on Innovation
8.4 The Finding of Dominance
8.4.1 Substantial Market Power
8.4.2 Market Position
8.4.3 Barriers to Entry and Expansion
8.4.4 Special Responsibility
8.5 Exclusionary Abuses
8.5.1 The Essential Facilities Doctrine
8.5.2 Indispensability
8.5.3 Exclusion of Any Effective Competition
8.5.4 New Product Requirement
8.5.4.1 IMS Health
8.5.4.2 Microsoft
8.5.5 Objective Justification
8.5.6 Standard-Spundfass
8.5.7 Antitrust Interventions in Refusals to License in the US
8.5.7.1 The Essential Facilities Doctrine
8.5.7.2 Unilateral Refusals to Deal
8.5.7.3 Trinko
8.6 Exploitative Abuse
8.6.1 Unfair Prices for Licenses As a Form of Exploitative Conduct
8.6.1.1 The Controversy Concerning Price Control
8.6.1.2 Applying United Brands to Patents
8.6.1.3 Excessive Royalties for FRAND-Encumbered SEPs
8.6.2 Patent Ambush
8.6.3 Transferability of FRAND Obligations
8.6.4 Enforcement of FRAND-Encumbered SEPs
8.6.4.1 Motorola and Samsung
8.6.4.2 The Orange Book Standard
8.6.4.3 Huawei
8.6.4.4 Interpretation of Huawei
8.6.4.5 Huawei and TRIPS
8.6.5 Conclusions on Huawei
8.6.6 Conclusions Concerning Hold-ups Involving de jure SEPs
8.7 Evaluation
8.7.1 Structure
8.7.2 Refusals to License
8.7.2.1 Non-SEP
8.7.2.2 De facto SEPs
8.7.2.3 De jure SEPs
8.7.3 Hold-ups
8.7.3.1 Non-SEPs
8.7.3.2 De facto SEPs
8.7.3.3 De jure SEPs
8.7.4 Excessive Royalties and Royalty Stacking
8.7.5 Other Anti-commons Problems
8.8 Interim Conclusions
8.8.1 The Weaknesses of the Compulsory Liability Rules in Competition Law
8.8.1.1 Narrow Scope of Application
8.8.1.2 The Length and Costs of the Proceedings
8.8.1.3 The Lack of Legal Certainty
8.8.1.4 The Paradox of the Effects-Based Approach
8.8.1.5 The Implications of the Huawei Decision
8.8.2 The Strengths of Compulsory Liability Rules in Competition Law
8.8.2.1 Flexibility in Addressing Follow-on Innovators´ Interests
8.8.2.2 The Wider Scope of the Compulsory Liability Rule
8.8.2.3 Market Failures That Do Not Originate from the Design of the Patent System
Chapter 9: Normative Recommendation
9.1 Conclusions Regarding Compulsory Liability Rules
9.1.1 Scope of Application
9.1.2 The Ineffectiveness of the Existing Instruments
9.1.3 The Preference for Patent Law Over Competition Law
9.2 A Compulsory Liability Rule That Fosters Open Innovation?
9.3 Private Ordering Revisited
9.3.1 A Government-Initiated Clearing House
9.3.2 The Reverse License of Right
9.3.3 The Combined Effects of the Voluntary Instruments
9.4 What Qualifies as a Market Failure That Is Remediable with a Compulsory License?
9.4.1 Interpretation of TRIPS in the Light of Dynamic Incentive Theory
9.4.2 Overprotection as a Ground for a Compulsory Liability Rule
9.4.3 Conditions for an Ex Post Liability Rule
9.4.3.1 Overcoming the Prior Effort Requirement
9.4.3.2 Article 44 TRIPS: Constrained by Fundamental Rights
9.4.3.3 Article 31 (k) TRIPS: A Reinterpretation of ``Anticompetitive Practice´´
9.5 A Compulsory License Against the Suppression of Follow-On Innovation
9.5.1 The Substantial Criteria
9.5.2 General and Procedural Considerations
Chapter 10: Conclusions
10.1 Follow-on Innovation May Be Threatened by Market Failures
10.2 Open Approaches to Innovation Do Not Resolve the Market Failures
10.3 The Existing Compulsory Liability Rules Do Not Resolve the Market Failures
10.4 A Compulsory License Against Abuse and in Favour of Voluntary Licensing
References
Case Law
EU
ECHR
WTO
Germany
The UK
The US
Articles, Books and Book Chapters
Briefs, Reports and Other Official Documents
Other Sources

Citation preview

Munich Studies on Innovation and Competition 15

Alina Wernick

Mechanisms to Enable Follow-On Innovation Liability Rules vs. Open Innovation Models

Munich Studies on Innovation and Competition Volume 15

Series Editors Josef Drexl, Munich, Germany Reto M. Hilty, Munich, Germany

The Munich Studies on Innovation and Competition present fundamental research on legal systems that have been created with the objective of promoting and safeguarding innovation and competition as the most important factors for economic growth and prosperity. Accordingly, this series will include monographic works in English in the different fields of intellectual property and competition law such as patent, trademark and copyright law, as well as unfair competition and antitrust law. Rather than describing what the law is, the series strives to contribute to the scholarship on how these legal systems should develop so as to promote innovation and competition. Therefore, its outlook is both international, by not focussing on any specific national legal system, and interdisciplinary. In particular, studies are encouraged that also incorporate the methods and findings of other disciplines such as economics, sociology and anthropology.

More information about this series at http://www.springer.com/series/13275

Alina Wernick

Mechanisms to Enable Follow-On Innovation Liability Rules vs. Open Innovation Models

Alina Wernick University of Helsinki Helsinki, Finland

ISSN 2199-7462 ISSN 2199-7470 (electronic) Munich Studies on Innovation and Competition ISBN 978-3-030-72256-2 ISBN 978-3-030-72257-9 (eBook) https://doi.org/10.1007/978-3-030-72257-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to my family: Elena, Seppo, Asia, and Yang.

Preface

The starting point of this work, a doctoral thesis, was an observation that despite its favourable effects on social welfare and follow-on innovation, patent holders refrain from licencing their patents more openly. At the same time, modern innovations are increasingly complex and more likely to incorporate and infringe pre-existing technology. On this basis, I have reviewed the extent to which the patent system is balanced concerning the interests of initial patent holders and follow-on innovators and whether this balance is should be achieved through liability rules or open innovation models. This research topic touches upon three paradoxes that are inherent to the patent system: 1. The balance of the interests of an initial and a follow-on innovator. 2. A patent holder’s right to both prohibit others from using a patent and to authorise them to do so (Art. 28 TRIPS). 3. The tension between private and public ordering, i.e. liability rules and open innovation models. Marianne Lewis’ research on the management of paradoxes (Marianne W Lewis, ‘Exploring Paradox: Toward a More Comprehensive Guide’ (2000) 25 AMR 760) offered me a helpful cognitive framework for the study of these seemingly opposing and sometimes polarised tensions present in the patent system. According to Lewis, the resolution of the problem underlying a paradox should be conditional on understanding the relevant paradoxical tensions in all their complexity. Such an approach promotes transcendence, i.e. a synthetic understanding of the complementarity of tensions that surpasses their polarisation. I have striven to be meticulous in understanding the interrelationships between a patent holder and a follow-on innovator and other paradoxes studied in this thesis to arrive at a normative recommendation that transcends the shortcomings of both liability rules and open innovation models. This thesis covers the state of the law as per 3 August 2019. Therefore, it does not address the latest case-law on the enforcement of FRAND-encumbered, standard essential patents. It also does not discuss the proposal for the amendment of the vii

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Preface

German Patent Act, which includes a proportionality test for the grant of injunctive relief—a change supported by industries producing complex products. Nevertheless, these recent developments stress the need for deeper understanding of the status of follow-on innovation in the patent system, and hopefully this work contributes to this goal. Helsinki, Finland

Alina Wernick

Acknowledgements

The thesis was written at the Max Planck Institute for Innovation and Competition, in the context of the International Max Planck School for Competition and Innovation (IMPRS-CI). The research was conducted with the generous scholarships from the Max Planck Institute for Innovation and Competition and the Finnish Cultural Foundation as well as grants from the Finnish Association for Lawyers and the IPR University Center, for which I am very grateful for. The opportunity to finalise this thesis during my employment at the Humboldt Institute for Internet and Society was also deeply appreciated. I am deeply indebted to my doctoral supervisor Prof. Dr. Dr. h.c. Reto M. Hilty for seeing potential in this research topic, his support as well as his invaluable feedback that elevated this research project towards basic research and for his patience. I want to express my gratitude to my second referee Prof. Dr. Annette Kur for her insightful and constructive feedback. I am also very thankful to Prof. Dr. Josef Drexl, LL.M. (UC Berkeley) for his support, feedback, and commentary. I would also like to thank Prof. Dietmar Harhoff Ph.D. whose advice helped me to navigate the literature on open innovation. Attending the IMPRS-CI was a privilege and a formative experience. The programs’ rigorous curriculum of intellectual property and competition law, economics, and business administration provided a solid foundation for interdisciplinary research. I am extremely grateful to Dr. Sylvie Nérisson, LL.M., both for her work as a coordinator of the IMPRS-CI and as my academic advisor for all her guidance throughout the research process. The feedback, advice, and support of the following IMPRS-CI alumni were very important for the research process. In particular, I am thankful to Prof. Dr. Sunimal Mendis, LL.M. for her dependability and encouragement as well as Prof. Dr. Martin Husovec, Michael Häfeli lic.iur., Dr. Agnieszka Kupzok, LL.M., Dr. Nikita Malevanny, LL.M., Dr. Owais Shaikh, LL.M., and Dr. Panagiotis Tsangaris, LL.M. The idea to pursue a doctoral degree abroad was prompted by Prof. Dr. Sirkka Jarvenpaa and I am deeply grateful to her for introducing me to the topic of open innovation and interdisciplinary research and for her relentless support. Prof. ix

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Dr. Geertrui Van Overwalle’s feedback and legal scholarship contributed significantly to the thesis, which I am grateful for. Prof. Dr. Rainer Oesch’s mentorship and support during the lengthy and eventful research process is deeply appreciated. I also thank Prof. Dr. Niklas Bruun; Prof. Nari Lee, Ph.D., LL.D.; Ilona Mooney; Dr. Yifat Nahmias, LL.M; Heikki Raappana, LL.M., LL.M.; Prof. Dr. Arul Scaria LL.M.; Prof. Dr. Andrea Wechsler, LL.M., LL.M., for their valuable support in the first steps towards doctoral studies. A dialogue with the scientific community has been essential both for refining research process and the socialisation to academia, and I thank my colleagues at Max Planck Institute for Innovation and Competition, Humboldt Institute for Internet and Society (HIIG), Ludwig Maximilian University, Aalto University, Helsinki University for the enlightening conversations. I am also very grateful for the insights and help that Dr. Mor Bakhoum, LL.M (Lausanne), LL.M (Chicago-Kent); Prof. Dr. Stefan Bechtold J.S.M.; Dr. Beatriz Conde Gallego, LL.M.; Prof. Dr. Séverine Dusollier; Dr. Natacha Estèves; Dr. Daniel Krauspehaar; Dr. Matthias Lamping; Dr. Dr. Mark-Oliver Mackenrodt, LL.M (NYU), Attorney (NY); Dr. Roberto Romandini, LL.M.; Dr. Claudia Tapia, LL.M.; and Dr. Axel Walz had provided at different stages of the research process. The encouraging feedback of Prof. Dr. Jeremy de Beer; Prof. Dr. Alfred Früh; Prof. Dr. Eric von Hippel; Prof. Michael Madison; and Prof. Riitta Smeds is also highly appreciated. I grateful for the help and patient advice that Dr. Eva Maria Bastian and Mrs. Ingrid Bolland from the Max Planck Institute for Innovation and Competition as well as Mrs. Doris Kohlmann from the Promotionsamt of the Faculty of Law of the LMU offered on the administrative side of the doctoral process. I would also like to thank Dr. Jörg Pohle and Irma Klünker from the HIIG for their support in the last miles of the thesis submission process. I value deeply Prof. Dr. Maria Alaranta, Heini Ahokas, Eva Fischer, Daria Kim, LL.M., Dr. Natalia Lukaszewicz, LL.M., Dr. Mina Kianfar, Yuzuki Nagakoshi, Ph.D., J.D., Mari Myllynen, Dr. Michael Neumann; Georgia Roussou, LL.M, and Klaus Wiedemann for their help, inspiration, loyalty, and friendship during this journey. I would not have reached the finishing line of this intellectual marathon without the unconditional support of my family. First and foremost, I thank my mother, Elena Wernick, for making choices that enabled me to take this path and always encouraging me to take up academic challenges and gain international experience and my father, Seppo Nuutinen, for unwavering moral support and sponsorship. It was a privilege to learn from my grandmother Asia’s experience in academia and I would not have finished this project without my late grandfathers Sergei’s example for resilience and courage. Finally, I thank my fiancée Yang Liu for his dependability and for motivating me to push forward even on days when finishing this manuscript seemed still to take innumerable late-night dinners at the Opera Canteen.

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Cumulative Innovation in Patent Law . . . . . . . . . . . . . . . . . . 1.2 Liability Rules Enabling Innovation . . . . . . . . . . . . . . . . . . . 1.3 Open Approaches to Innovation . . . . . . . . . . . . . . . . . . . . . . 1.4 Legal Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 1 3 6 7 8 11 12

2

Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Underprotection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 Incentive Theories . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 Prospect Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.4 Disclosure Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.5 Patents from the Perspective of Competition Law . . . . 2.1.6 Towards a Dynamic Incentive Theory . . . . . . . . . . . . 2.1.7 Justifying Follow-on Innovation . . . . . . . . . . . . . . . . 2.2 A Typology of Subsequent Improvements . . . . . . . . . . . . . . 2.2.1 The Improvement Is Infringing and Not Patentable . . . 2.2.2 The Improvement Is Infringing Yet Patentable . . . . . . 2.2.3 The Improvement Is Patentable and Does Not Infringe the Initial Patent . . . . . . . . . . . . . . . . . . . . . 2.2.4 The Improvement Is a Follow-on Innovation Infringing the Initial Patent . . . . . . . . . . . . . . . . . . . . 2.3 Overprotection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 The Increasingly Fragmented Patent Landscape . . . . . 2.3.2 Market Failures Associated with Overprotection . . . .

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Open Approaches to Innovation . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Openness Through Private Ordering . . . . . . . . . . . . . . . . . . . 3.1.1 The Market Correction Model . . . . . . . . . . . . . . . . . . 3.1.2 Open Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 User and Open Collaborative Innovation . . . . . . . . . . 3.1.4 Interim Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Continuum of Openness . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The Various Dimensions of Openness . . . . . . . . . . . . 3.2.2 Exclusive Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Restricted Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Semi-Open . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.5 Open Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.6 Open Viral Licensing . . . . . . . . . . . . . . . . . . . . . . . . 3.2.7 Public Domain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.8 Non-enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.9 A Dynamic View of Openness . . . . . . . . . . . . . . . . . 3.3 Private Liability Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Patent Pledges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Licenses of Right . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Patent Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Clearing Houses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5 Open Viral Patent Licenses . . . . . . . . . . . . . . . . . . . . 3.4 Conclusions Regarding Open Approaches to Innovation . . . . 3.4.1 The Sufficiency of OAI to Resolve Overprotection Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 The Suitability of OAI to Alleviate Overprotection Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Economic Foundations of Compulsory Liability Rules . . . . . . . . 4.1 A Typology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 A Context-Specific Instrument . . . . . . . . . . . . . . . . . . . . . . . 4.3 Economic Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Private vs. Compulsory Liability Rule . . . . . . . . . . . . 4.3.2 Effect on Incentives . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Patent Evaluation Problems . . . . . . . . . . . . . . . . . . . 4.3.4 Hold-Out Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.5 Error Costs and Legal Uncertainty . . . . . . . . . . . . . . 4.3.6 Underuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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171 171 174 176 176 176 179 181 183 184

5

Legal Foundations and Sources of Compulsory Liability Rules . . 5.1 Early History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Paris Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 TRIPS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Compulsory Liability Rules in the EU Law . . . . . . . . . . . . . 5.5 Unitary Patent System . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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187 187 188 191 194 194

3

Contents

5.6

6

7

xiii

Human, Fundamental and Basic Rights . . . . . . . . . . . . . . . . 5.6.1 Human Rights and IP . . . . . . . . . . . . . . . . . . . . . . . . 5.6.2 Patents in the Light of Human Rights . . . . . . . . . . . . 5.6.3 Follow-on Innovation and Human Rights . . . . . . . . . 5.6.4 The Freedom to Enact Compulsory Liability Rules . .

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195 195 196 199 201

Compulsory Licenses in Patent Law . . . . . . . . . . . . . . . . . . . . . . 6.1 Property and Liability Rules Under TRIPS . . . . . . . . . . . . . . 6.2 Interrelationship of Art. 30 and Art. 31 TRIPS . . . . . . . . . . . 6.3 General and Procedural Requirements . . . . . . . . . . . . . . . . . 6.3.1 Prior Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Adequate Remuneration . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Scope and Assignability . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Duration and Termination . . . . . . . . . . . . . . . . . . . . . 6.3.5 Individual Merits . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.6 Decision by an Authority . . . . . . . . . . . . . . . . . . . . . 6.3.7 Judicial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.8 Conclusions on the General and Procedural Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Grounds for Compulsory Licenses . . . . . . . . . . . . . . . . . . . . 6.4.1 Dependent Patents . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Abuse of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.3 Failure to Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.4 A Remedy to Anti-competitive Practices . . . . . . . . . . 6.4.5 Dynamic Efficiency as a Public Interest . . . . . . . . . . . 6.5 Interim Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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205 205 207 210 210 217 223 225 226 227 228

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229 230 230 238 240 244 248 253

Denial of Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Limitations to Injunctive Relief Under TRIPS . . . . . . . . . . . . 7.3 eBay v. MercExchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 A Doctrine Based on Equity . . . . . . . . . . . . . . . . . . . 7.3.2 Post-eBay Practice . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Effect on Overprotection Problems . . . . . . . . . . . . . . 7.4 Patent Misuse Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 An Equitable Defence . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Applicability to Overprotection Problems . . . . . . . . . 7.4.3 The Relevance of the Misuse Doctrine . . . . . . . . . . . 7.5 Enforcement in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.1 Enforcement Directive . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Implementation in Civil Law Countries . . . . . . . . . . . 7.5.3 Equitable Discretion in the UK . . . . . . . . . . . . . . . . . 7.5.4 Discretion Under the Unitary Patent System . . . . . . . 7.5.5 Effect on Overprotection Problems . . . . . . . . . . . . . . 7.6 Interim Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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257 257 258 261 261 263 268 271 271 275 277 278 278 281 282 283 284 285

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8

Contents

Compulsory Liability Rules in Competition Law . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Compulsory License As an Antitrust Remedy . . . . . . . . . . . . 8.2.1 Compulsory License As a Behavioural Remedy . . . . . 8.2.2 Commitments to Grant Access . . . . . . . . . . . . . . . . . 8.2.3 Compulsory License As a Defence in Patent Infringement Proceedings . . . . . . . . . . . . . . . . . . . . . 8.3 Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 Market Definition and Follow-on Innovation . . . . . . . 8.3.3 Definition of the Market for Technology . . . . . . . . . . 8.3.4 Defining the Markets for Follow-on Innovation . . . . . 8.4 The Finding of Dominance . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 Substantial Market Power . . . . . . . . . . . . . . . . . . . . . 8.4.2 Market Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.3 Barriers to Entry and Expansion . . . . . . . . . . . . . . . . 8.4.4 Special Responsibility . . . . . . . . . . . . . . . . . . . . . . . 8.5 Exclusionary Abuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.1 The Essential Facilities Doctrine . . . . . . . . . . . . . . . . 8.5.2 Indispensability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.3 Exclusion of Any Effective Competition . . . . . . . . . . 8.5.4 New Product Requirement . . . . . . . . . . . . . . . . . . . . 8.5.5 Objective Justification . . . . . . . . . . . . . . . . . . . . . . . 8.5.6 Standard-Spundfass . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.7 Antitrust Interventions in Refusals to License in the US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Exploitative Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.1 Unfair Prices for Licenses As a Form of Exploitative Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.2 Patent Ambush . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.3 Transferability of FRAND Obligations . . . . . . . . . . . 8.6.4 Enforcement of FRAND-Encumbered SEPs . . . . . . . . 8.6.5 Conclusions on Huawei . . . . . . . . . . . . . . . . . . . . . . 8.6.6 Conclusions Concerning Hold-ups Involving de jure SEPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7.1 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7.2 Refusals to License . . . . . . . . . . . . . . . . . . . . . . . . . 8.7.3 Hold-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7.4 Excessive Royalties and Royalty Stacking . . . . . . . . . 8.7.5 Other Anti-commons Problems . . . . . . . . . . . . . . . . . 8.8 Interim Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contents

xv

8.8.1 8.8.2 9

10

The Weaknesses of the Compulsory Liability Rules in Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . The Strengths of Compulsory Liability Rules in Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Normative Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Conclusions Regarding Compulsory Liability Rules . . . . . . . 9.1.1 Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . 9.1.2 The Ineffectiveness of the Existing Instruments . . . . . 9.1.3 The Preference for Patent Law Over Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 A Compulsory Liability Rule That Fosters Open Innovation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Private Ordering Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 A Government-Initiated Clearing House . . . . . . . . . . 9.3.2 The Reverse License of Right . . . . . . . . . . . . . . . . . . 9.3.3 The Combined Effects of the Voluntary Instruments . . 9.4 What Qualifies as a Market Failure That Is Remediable with a Compulsory License? . . . . . . . . . . . . . . . . . . . . . . . . 9.4.1 Interpretation of TRIPS in the Light of Dynamic Incentive Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.2 Overprotection as a Ground for a Compulsory Liability Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.3 Conditions for an Ex Post Liability Rule . . . . . . . . . . 9.5 A Compulsory License Against the Suppression of Follow-On Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.1 The Substantial Criteria . . . . . . . . . . . . . . . . . . . . . . 9.5.2 General and Procedural Considerations . . . . . . . . . . . Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Follow-on Innovation May Be Threatened by Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Open Approaches to Innovation Do Not Resolve the Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 The Existing Compulsory Liability Rules Do Not Resolve the Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 A Compulsory License Against Abuse and in Favour of Voluntary Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ECHR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Articles, Books and Book Chapters . . . . . . . . . . . . . . . . . . . . . . . . Briefs, Reports and Other Official Documents . . . . . . . . . . . . . . . . . Other Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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About the Author

Alina Wernick is a legal scholar specialised in intellectual property law and open innovation. Currently, she leads a project on smart city technologies’ long-term human rights risks with the Kone Foundation’s funding as a grant-funded researcher at University of Helsinki and an affiliated researcher of the university’s Legal Tech Lab. In addition, she is a research director for innovation of 89 Belgium think-do tank. Before that, she researched data-driven innovation, data governance, and e-Health at the HIIG. She wrote this doctoral thesis, which was awarded a grade summa cum laude, at the Ludwig-Maximilians-Universität. She conducted her doctoral research as a scholarship holder and visiting researcher at the Max Planck Institute for Innovation and Competition. She also completed the International Max Planck Research School for Competition and Innovation. She holds LL.M and LL.B. degrees from the University of Helsinki. During her legal studies, she worked at SimLab, an interdisciplinary laboratory at the Department of Industrial Engineering and Management of the Aalto University, where she assisted Prof. Dr. Sirkka Jarvenpaa and researched open innovation and trade secrets.

xvii

Abbreviations

Art. AG BeckRS BGB BGBl. BGH BPatG BverfG CJ CJEU CFI C.F.R. CFR/GRCh CPR DOJ DPMA DSB EC EC EEC ECHR/EMRK ECJ ECtHR EPC EPO EU ETSI FRAND FTC

Article The Advocate General Beck Rechtsprechung Das Bürgerliches Gesetzbuch (the civil code of Germany) Bundesgesetzblatt (German Federal Law Gazette) Der Bundesgerichtshof (The German Federal Court of Justice) Das Bundespatentsgericht (the German Federal Patent Court) Das Bundesverfassungsgericht (the German Federal Constitutional Court) The Court of Justice The Court of Justice of the European Union The Court of First Instance The Code of Federal Regulations The Charter of Fundamental Rights of the European Union Common pool resource The United States Department of Justice Das Deutsches Patent- und Markenamt (the German Patent and Trade Mark Office) Dispute Settlement Body The European Commission The Treaty Establishing the European Community The Treaty Establishing the European Economic Community The European Convention on Human Rights The European Court of Justice The European Court of Human Rights The European Patent Convention The European Patent Office The European Union The European Telecommunications Standards Institute Fair, reasonable, and non-discriminatory terms The Federal Trade Commission xix

xx

GATT GG GRUR GRUR-RR GRUR-RS GWB IIC ICCPR ICESC ICTSD InstGE IP IPR IoT ITC ITU LEC LG MCM NPE NZKart OAI OECD OI OLG OWD PAE PatG PC/PVÜ RG RGZ SEP SPatG SSO SSNIP TEU

Abbreviations

General Agreement on Tariffs and Trade Das Grundgesetz (The Basic Law of the Federal Republic of Germany) Gewerblicher Rechtsschutz und Uhreberrecht Gewerblicher Rechtsschutz und Urheberrecht RechtsprechungsReport Gewerblicher Rechtsschutz und Urheberrecht Rechtsprechung ssammlung Das Gesetz gegen Wettbewerbsbeschränkungen (The German Act Against Restraints of Competition) International Review of Intellectual Property and Competition Law The International Covenant on Civil and Political Rights The International Covenant on Economic, Social and Cultural Rights International Centre for Trade and Sustainable Development Entscheidungen der Instanzgerichte zum Recht des Geistigen Eigentums Intellectual property Intellectual property right The internet of things The International Trade Commission The International Telecommunications Union Local exchange carrier Das Landgericht (German District Court) The market correction model Non-practising entity Neue Zeitschrift für Kartellrecht Open approaches to innovation Organisation for Economic Cooperation and Development Open innovation Das Oberlandesgericht (German Higher Regional Court) The Orphan Works Directive Patent assertion entity Das Patentgesetz (The German Patent Act) The Paris Convention for the Protection of Industrial Property Das Reichsgericht (The German Imperial Court of Justice) Entscheidungen des Reichsgerichts in Zivilsachen Standard essential patent Das Bundesgesetz über die Erfindungspatente (the Swiss Federal Law on Patents for Inventions) Standard setting organization Small but significant and non-transitory increase in price Treaty on the European Union

Abbreviations

TFEU/AEUV TRIPS TTBER UDHR UK UN UNCTAD UOCI UPC UPCA UrhG UK US U.S.C. USPTO WIPO WTO WuW

xxi

Treaty on the Functioning of the European Union The Agreement on Trade-Related Aspects of Intellectual Property Rights Technology Transfer Block Exemption Regulation The Universal Declaration of Human Rights The United Kingdom The United Nations The United Nations Conference on Trade and Development User and open collaborative innovation The Unified Patent Court The Agreement on a Unified Patent Court Das Urheberrechtgesetz (The German Copyright Act) The United Kingdom The United States (of America) The United States Code The United States Patent and Trademark Office World Intellectual Property Organization The World Trade Organization Wirtschaft und Wettbewerb

List of Figures

Fig. 3.1

Fig. 3.2

Fig. 9.1

The closed innovation model. An adaptation of Chesbrough, “Open Innovation, A New Paradigm for Understanding Industrial Innovation” in Open Innovation: Researching a New Paradigm, ed. Chesbrough, Vanhaverbeke and West, (New York: Oxford University Press, 2006) 3, Figure 1.1. titled “The current paradigm: a Closed Innovation model”, © Oxford Publishing Limited and Henry Chesbrough. Reproduced with permission of the Licensor through PLSclear. Adapted with the Permission of the author . . . . . 81 The open innovation model. An adaptation of Chesbrough and Bogers, “Explicating Open Innovation: Clarifying an Emerging Paradigm for Understanding Innovation” In New Frontiers in Open Innovation, ed. Chesbrough, Vanhaverbeke and West (New York: Oxford University Press, 2014) 18, Figure 1.5 titled “The open innovation model”. © Oxford Publishing Limited / Henry Chesbrough and Marcel Bogers. Reproduced with permission of the Licensor through PLSclear. Adapted with permission of the authors . .. . . . .. . . .. . . . .. . . . .. . . . .. . . .. . . . .. . . . .. . . . .. . . . .. . . .. . . . .. . . . .. . . 83 Normative recommendation for three instruments . . . . . . . . . . . . . . . . . . . 380

xxiii

Chapter 1

Introduction

Innovation is inherently cumulative and complex technological products may be covered by thousands of patents. Nevertheless, follow-on innovations do not have a distinct legal status under the patent system, which is built under the “one-patentper-product” presumption and with an aim to prevent purely imitative use of inventions. The book relies on economic analysis of the law and doctrinal legal method to explore whether a patent holder’s exercise of the right to exclude can, in some situations, create market failures that hinder follow-on innovation. It also evaluates whether these problems can be solved with open innovation i.e. voluntary licensing, or with compulsory liability rules. Besides legal, economic, and management literature on open approaches to innovation, the scope of the study covers the compulsory licensing mechanisms present in international, European, German, and US law.

1.1

Cumulative Innovation in Patent Law

As Newton’s famous statement that “If I have seen further it is by standing on ye shoulders of Giants”1 suggests, all technological advances rely on pre-existing knowledge. Innovation is inherently cumulative. Patented inventions, being knowledge goods, represent both the output of R&D activity as well as input for further technical development. However, the inherently cumulative nature of innovation is not adequately addressed by the economic justifications behind patent law or the patent system itself.

1 Isaac Newton, “Letter to Robert Hooke (February 5, 1675),” Historical Society of Pennsylvania, last modified n.d., accessed 25 December 2015 http://digitallibrary.hsp.org/index.php/Detail/ Object/Show/object_id/9285.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_1

1

2

1 Introduction

The economic rationale that underlies patent protection and other IPRs is the protection of investments against free-riding. The imitative use of an invention without improving upon it is, by default, an infringement,2 which can be remedied by means of an injunctive relief.3 Patent protection seeks to foster innovation by encouraging substitution,4 which refers to the development of inventions that represent non-infringing alternatives and/or improvements to the initially patented invention.5 However, the justifications for patent protection struggle to address different forms of reuse, which refers to when a subsequent user adds something to a patented invention or changes it in some regard and the resulting follow-on innovation infringes upon the initial patent.6 Both the international and supranational instruments of patent law have focused on strengthening the enforceability of the rights conferred by a patent; however, they have failed to provide adequate balancing measures in favour of competitors or third parties’ “freedom to operate and compete on the merits”.7 As a result, with only a limited number of exceptions,8 a patent holder is entitled to seek a permanent injunction against the follow-on innovator engaging in reuse of the initial patent. Furthermore, both the economic justifications behind patent protection and the patent system itself rest upon the “one-patent-per-product” presumption.9 As a consequence, innovations that feature both patented technology developed previously and new technology developed by a follow-on innovator have no distinct legal status in the context of the patent system, despite the fact that contemporary technological products are becoming increasingly complex and involve ever larger

2 Reto M. Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” in Criminal Enforcement of Intellectual Property: A Handbook of Contemporary Research, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2012), 16, in which the author employs the term “identical use”, with the same meaning. In contrast, he qualifies “imitating use” as “a product [. . .] clearly inspired by the protected subject matter, but with some changes”. 3 Arts. 28 (1) and 44 of the General Agreement on Tariffs and Trade – Multilateral Trade Negotiations (The Uruguay Round): Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods, opened for signature 15 December 1993, 33 I.L.M 81 (entered into force 1 January 1995) [hereinafter TRIPS]; § 9 and § 139 (1) PatG. 4 Josef Drexl, “Intellectual Property in Competition : How to Promote Dynamic Competition as Goal,” in More Common Ground for International Competition Law, ed. Josef Drexl, et al. (Cheltenham: Edward Elgar Publishing, 2011), 210. 5 Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 16-17, referring to substituting use as a non-infringing form of “imitating use”. 6 Ibid, referring to reuse as infringing “imitating use”. 7 Matthias Lamping et al., “Declaration on Patent Protection - Regulatory Sovereignity under TRIPS,” IIC - International Review of Intellectual Property and Competition Law 45, no. 6 (2014): 679, 681, 683. 8 See, for example, Art. 31 (l) TRIPS. 9 Drexl, “Intellectual Property in Competition,” 211, who employs the concept of “one patent ¼ one product”; similar view is expressed by Mark A. Lemley and Carl Shapiro, “Patent Holdup and Royalty Stacking,” Texas Law Review 85 (2007): 1992.

1.2 Liability Rules Enabling Innovation

3

numbers of patents.10 Trends such as patent proliferation, defensive and offensive patent strategies, and the increasing relevance of interoperability standards that arise as a result of technological convergence with information and communication technology (ICT) further bring into question the one-patent-per-product presumption.11 The exercise of the exclusive right of a patent holder12 against a simple imitative product is deemed to be welfare enhancing. International legislative developments have long prioritized the objective of strengthening the enforceability of the rights that are conferred by a patent. In certain contexts, the effect of refusing a license or filing for an injunctive relief against an infringing complex follow-on innovation may have a disproportionate result, such as leading to a market failure or hindering the development of follow-on innovation. Whether such market failures caused by overprotection can be corrected by the market participants themselves (for example, by means of voluntarily licensing) or require legislative intervention remains unclear. The objective of this thesis is to investigate the manner in which the interests of a patent holder and a follow-on innovator could be balanced in the context of the patent system. Against the background described above, this work investigates the following research questions: (1) What is the role of follow-on innovation in the economic theories that justify patent protection and competition law interventions? (2) Are follow-on innovators exposed to market failures under the contemporary patent system, and, if so, which failures are they exposed to? (3) Are the market failures related to overprotection corrected, or are they correctable, through private ordering? (4) If not, can the market failures be resolved by public ordering, particularly on the basis of compulsory liability rules? (5) If not, what type of instrument would ensure a balance of interests between patent holders and follow-on innovators?

1.2

Liability Rules Enabling Innovation

In order to assess the conflicts of interest that may occur between patent holders and follow-on innovators, this thesis relies on Calabresi and Melamed’s framework for the efficient allocation of entitlements and the means of enforcing them in a society 10

On the discussion of the legal status of a follow-on innovator, see Sect. 2.2.4. See Sect. 2.3.1, discussing the fragmentation of patent landscape. 12 The term “patent holder” refers to the owner of a patent or an exclusive licensee. An exclusive licensee is entitled to seek a permanent injunction and, on the condition that the license is not personal, to grant non-exclusive licenses. Volker Ilzhöfer and Rainer Engels, Patent- Marken- und Urheberrecht : Leitfaden für Ausbildung und Praxis, 8th ed. (Munich: Verlag Franz Vahlen, 2010), at 1517. 11

4

1 Introduction

in which there are conflicting interests. The first question in this framework involves determining to which of the parties who have conflicting interests, such as those in polluted and unpolluted air, the law shall allocate an entitlement.13 In the context of patent law, an initial entitlement is given to an inventor whose invention satisfies the patentability criteria;14 in addition, a follow-on innovator is entitled to patent protection if his contribution satisfies the requirements of of patentability.15 However, a cumulative innovation that involves several patents is not subject to a specific entitlement under patent law.16 A follow-on innovation will infringe upon an initial patent if it overlaps with its claims or incorporates it or relies on it in other ways in its production process.17 The use of such follow-on innovation is therefore subject to access to the patent holder’s invention. The topic of access leads to the second question in Calabresi and Melamed’s framework, which is concerned with the enforcement of an entitlement. The authors identify three different means by which an entitlement can be protected:18 An entitlement that is protected by a property rule can be taken away from its owner only through voluntary sale at a price that the owner agrees to.19 In contrast, a liability rule allows an entitlement to be taken away or destroyed irrespective of the will of its owner; in return, she will be paid the objective value of the entitlement. Unlike cases in which the property rule is applied, the price of an entitlement that is protected by the liability rule is determined by the state. The third type of entitlement protection is the inalienability rule, which involves the state forbidding the sale of an entitlement or its destruction altogether but determines the remuneration paid for violation of the entitlement.20 Patents are primarily protected by the property rule, as it entitles owners to exclude others from using their inventions and to voluntarily license their patents

13 Guido Calabresi and A Douglas Melamed, “Property Rules, Liability Rules, and Inalienability : One View of the Cathedral,” Harvard Law Review 85, no. 6 (1972): 1090. The basis for such a decision may rest on considerations such as the economic efficiency of resource allocation, the distributional goals of a society, and/or other justice-based reasons. Ibid, 1093-1105. 14 Further analysis of the allocation of entitlement would entail asking “questions about patent duration, patent scope and what should be patentable”. Daniel Krauspenhaar, Liability Rules in Patent Law : A Legal and Economic Analysis (Heidelberg: Springer 2015), 20. 15 See Hanns Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 339. 16 Sect. 2.2.4. In contrast, collections of works are entitled to copyright protection. § 4 (1) Gesetz über Urheberrecht und verwandte Schutzrechte (Urheberrechtsgesetz) [UrhG] [Act on Copyright and Related Rights], 9 September 1965, Bundesgesetzblatt Teil I [BGBl I] 1273 as amended by Art. 1 Gesetz, 1 28. November 2018 BGBl I 2014, (Ger.), https://www.gesetze-im-internet.de/urhg/ BJNR012730965.html. 17 Sect. 2.2.4. 18 Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1090, 1092. 19 Ibid, 1092. 20 Ibid, 1092-1093. On the limited significance of the inalienability rule in the context of patent law, see Krauspenhaar, Liability Rules in Patent Law, 14 and fn 20.

1.2 Liability Rules Enabling Innovation

5

in exchange for royalty payments (§ 9 PatG); in addition, it allows patent infringement to be remedied by means of a permanent injunction (§ 139 (1) PatG).21 Hence, in the majority of situations, a subsequent innovator may gain access to a patent only if a patent holder agrees to sell his right and/or provide a license to it at a price that the innovator is able to pay. However, the contemporary patent landscape exposes follow-on innovators to numerous market failures, where the access to the initial patent is unjustifiably precluded or made so costly that dynamic competition is restricted.22 Generally speaking, the application of property rules can be assumed to result in an efficient allocation of resources, irrespective of to whom the entitlement was initially granted, when the transaction costs associated with establishing the price of the entitlement are low.23 However, Calabresi and Melamed argue that, in the presence of market failures, such as in situations in which it would prove excessively costly or impossible to determine the value of an entitlement due to transaction costs or sellers or buyers’ unwillingness to reveal their true valuations of goods, the use of a liability rule can lead to a more efficient allocation of resources than a property rule.24 Pursuant to this proposition, a solution to the overprotection problems would seem to lie in compulsory liability rules, such as compulsory licenses. However, this approach has been criticized by Merges, who argues that the application of the property rule would make it possible to resolve the market failures that stem from high transaction costs more efficiently than doing so through the application of liability rules. When faced with the challenge of repeated licensing in an environment that features transaction costs, the holders of IPRs have incentives to solve problems though contracting, without a state intervention.25 Given the conflicting views that exist with regard to the resolution of market failures, this thesis investigates whether the employment of liability rules, either through public ordering (as proposed by Calabresi and Melamed) or by private ordering (following Merges), can resolve overprotection problems. In the context of patents, a liability rule that encompasses both public and private ordering can be defined as a “legal instrument that protects the entitlement if the patented invention

21 Patentgesetz [PatG] [Patent Act], 16 December 1980, Bundesgesetzblatt Teil I [BGBl 1981 I] 1, as amended by Art. 4 Gesetz, 8 October 2017, BGBl I 3546, translation at https://www.gesetzeim-internet.de/englisch_patg/englisch_patg.html (Ger.); Krauspenhaar, Liability Rules in Patent Law, 20-21. 22 For a discussion on market failures of overprotection see Sect. 2.3.2. 23 R. H. Coase, “Problem of Social Cost,” Journal of Law & Economics 3 (1960) 2, 5-6, 8, 12, 15; Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1094-1095, 1106. 24 Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1106-1110. Beyond efficiency, distributional goals, which may be difficult to address under the property rule, could also justify the employment of the liability rule. Ibid, 1110. 25 Robert P. Merges, “Contracting into Liability Rules : Intellectual Property Rights and Collective Rights Organizations,” California Law Review 84, no. 5 (1996): 1296-1297, 1391-1393.

6

1 Introduction

can be used by any user (without the consent of the owner of the entitlement) as long as that user is willing to pay an objectively determined value for it”.26

1.3

Open Approaches to Innovation

In the context of patent law, liability rules established by private ordering can be referred to as private liability rules, under which entitlement is primarily protected by means of a property rule; however, the owner of an entitlement may change the mode of protection to a liability rule either with or without a contract. The application of a liability rule may thus occur completely independently of the judiciary on the private actor’s own initiative.27 When investigating the validity of Merges’ thesis on the adequacy of private liability rules in the resolution of market failures,28 the key is to determine in which situations patent holders have incentives to grant access to follow-on innovators. Several theories are relevant for reviewing the scope of patent holders’ incentives: Merges and Barnett’s theories, which together represent the market correction model,29 Chesbrough’s open innovation theory and the research into user and open collaborative innovation pioneered by von Hippel.30 In this work, these theories are together referred to as open approaches to innovation (OAI); they explain why the initial creator of knowledge that is protectable or protected by an IPR may allow others to access and use it, either in return for compensation, another obligation, or free of charge.31 The heterogeneous contractual instruments employed by OAI range from bilateral licenses to open-source licenses. Private liability rules represent the extreme end of OAI; under such rules, a patent holder contractually agrees to surrender her right to exclude any follow-on innovator.

26 Krauspenhaar, Liability Rules in Patent Law, 22. A liability rule is similarly defined by Merges as “a general rule of compensation applicable to all who take the right.” Merges, “Contracting into Liability Rules,” 1303. 27 Krauspenhaar, Liability Rules in Patent Law, 23-24. 28 See Merges, “Contracting into Liability Rules,” 1295, 1298, 1392-1393. 29 Ibid; Jonathan M. Barnett, “Property as Process : How Innovation Markets Select Innovation Regimes,” Yale Law Journal 119, no. 3 (2009); 431-433, 455-456. The umbrella term “market correction hypothesis” was employed by Mattioli to refer to this particular OAI. Michael Mattioli, “Communities of Innovation,” Northwestern University Law Review 106, no. 1 (2012): 108. For a discussion on market correction model, see Sect. 3.1.1. 30 For open innovation theory, see Henry Chesbrough, Open Innovation : The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press, 2003), 43-62; for user and open Collaborative Innovation, see generally Eric von Hippel, Democratizing Innovation (Cambridge, MA: MIT Press, 2005); Carliss Baldwin and Eric von Hippel, “Modeling a Paradigm Shift : From Producer Innovation to User and Open Collaborative Innovation,” Organization Science 22, no. 6 (2011). 31 See Chap. 3 for an analysis of the OAI.

1.4 Legal Sources

1.4

7

Legal Sources

The primary focus of the legal analysis is on the international IP law that determines the minimum standards for the enforcement of IPRs and the establishment of compulsory liability rules. The focus is on the provisions of the Paris Convention (PC)32 and the Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS) that determine the flexibilities to enact compulsory licenses or choice between property and liability rules in the enforcement of patents, most importantly Art. 5 (A) PC and Art. 31 TRIPS and part III of TRIPS. The extent to which human, fundamental, and basic rights constrain the enactment of compulsory liability rules is also addressed. German patent law, most importantly the German Patent Act (PatG) is discussed throughout this thesis as an example of the national patent law of a civil law jurisdiction. The enforcement of IPRs in the EU is harmonized by the Enforcement Directive 2004/48/EC,33 which is addressed in terms of the flexibility it offers to deny an injunctive relief. The EU law and the legal norms that govern European patents with unitary effect, most importantly the Agreement on a Unified Patent Court,34 are evaluated in terms of the extent to which they address private or compulsory liability rules. Furthermore, certain national instruments, such as the US doctrine of misuse and the denial of injunctive relief on the basis of equity,35 are analysed in order to provide a comprehensive overview of compulsory liability rules. The review of competition law focuses on the conditions under which the abuse of the dominant position by a patent holder may be remedied by the application of a compulsory liability rule. However, the constraints that competition law poses for the employment of private liability rules, such as patent pools, are briefly discussed, focusing on European competition law, most importantly Art. 101 TFEU and 102 TFEU36 and the Council Regulation (EC) No 1/2003.37 The relevant doctrines

32 Paris Convention for the Protection of Industrial Property of March 20, 1883, as revised at Brussels on December 14, 1900, at Washington on June 2 1911, at The Hague on November 6, 1925, at London on June 2, 1934 at Lisbon on October 31, 1958, and at Stockholm on July 14 1967, adopted 14 July 1967, 828 U.N.T.S. 305 (entry into force 26 April 1970), [hereinafter PC]. 33 Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 157) 45 [hereinafter Enforcement Directive]. 34 Agreement on a Unified Patent Court, 2013 O.J. (C 175) 1, [hereinafter UPCA]. 35 eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 126 S. Ct. 1837, 1839, 1841 (2006). 36 Consolidated version of the Treaty on the Functioning of the European Union. 2012 O.J. (C 326) 47, [hereinafter TFEU]. 37 Council Regulation (EC) No 1/2003 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, 2003 O.J. No. (L 1) 1 [hereinafter Regulation 1/2003]. Art. 101 TFEU was the former Art. 81 of the Treaty establishing the European Community [hereinafter EC] and the former Art. 85 of the Treaty Establishing the European Economic Community, signed 25 March 1957 294 U.N.T.S 3 (entry into force 1 January 1958) [hereinafter EEC], whereas Art. 102 TFEU was formerly known as Art. 82 EC and, before that, as Art. 86 EEC.

8

1 Introduction

under EU law are compared with those established under section 2 of the Sherman Act38 and the German Act Against Restraints of Competition (GWB).39

1.5

Methodology

The research themes of this thesis call for an economic analysis of the law.40 The work involves analysing and synthesizing findings from several fields of research, including patent and competition law, management, and economics. This interdisciplinary approach combines the methods employed in doctrinal legal research with the economic analysis of the law. In addition, a number of compulsory liability rules that are applied in the EU, the US and the UK are subject to a limited legal comparison. Economics, as a science, investigates the behaviour of the rational utility maximizers on markets.41 From this point of departure, the law and economics approach “studies the role of law as a means for charging prices attached to alternative legal actions”.42 Hence, the contemporary application of economics to law “extends the traditional economic models designed to analyse traditional markets and applies them to non-economic markets, such as the market of crimes, the market of conflict resolutions, the market of innovation etc. It also emphasizes the role of law and legal institutions within economic and non-economic markets.”43 An economic analysis of the law can be either positive, which attempts to explain the effects of legal norms,44 or normative, which strives to determine which legal rule or relevant institutional constellation is the most efficient.45 The normative standard of the research, which is established on the basis of the economic justifications for patent protection and competition law interventions, is Section 2 of the Sherman Antitrust Act (1890) is codified in 15 U.S.C. § 2 (2012). Gesetz gegen Wettbewerbsbeschränkungen [GWB] [Act against Restraints of Competition], 26 June 2013, Bundesgesetzblatt Teil I [BGBl. I] 1750, 3245, as amended by Art. 10 Gesetz, 12 July 2018, BGBl I 1151, (Ger.) https://www.gesetze-im-internet.de/gwb/BJNR252110998.html. 40 For a discussion on topics in IP law that are suitable for research with the method of economic analysis of the law, see Stefan Bechtold, “Zur rechtsökonomischen Analyse im Immaterialgüterrecht,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 57, no. 6 (2008): 485-488. 41 Richard A. Posner, Economic Analysis of Law, 8th ed. (New York: Aspen Publishers, 2011), 3-4. However, the presumption of rationality is called into question in behavioural economics and by game theory. See ibid, 22-27. 42 See Francesco Parisi, “Positive, Normative and Functional Schools in Law and Economics,” European Journal of Law and Economics 18, no. 3 (2004): 259, 262. 43 Eli M. Salzberger, Economic Analysis of the Law - the Dominant Methodology for Legal Research, Legal Studies Research Paper No. 1044382 (Haifa: University of Haifa - Faculty of Law, 2007), 14. 44 Ibid, 16; Posner, Economic Analysis of Law, 31. 45 Salzberger, Economic Analysis of the Law, 16. 38 39

1.5 Methodology

9

developed in Chap. 2. The theory employed for this purpose, the dynamic incentive theory, determines how the incentives of the patent holder and follow-on innovator should ideally be balanced with regard of the goal to foster dynamic efficiency.46 The market failures associated with overprotection, the adequacy of a patent holder’s incentives to engage in OAI, and the effectiveness of compulsory liability rules are evaluated against this standard. The normative economic analysis of compulsory liability rules, however, is preceded by a positive doctrinal analysis. The ultimate normative objective of the economic analysis conducted in this thesis is Kaldor-Hicks efficiency; this is due to the fact that this research focuses on market failures caused by overprotection that may potentially require legislative intervention, making the patent holder worse off,47 and because dynamic efficiency cannot yield a Pareto-optimal outcome.48 However, as the normative recommendations provided in this thesis encompass the introduction of a liability rule, the outcome of the suggested intervention would seek to approximate Pareto efficiency.49 European legal research, unlike its American counterpart, has been slow and hesitant to adopt the methodologies employed in law and economics.50 One reason for this is the epistemological differences that exist between economic analysis of the law and the doctrinal legal method.51 Without going further into the debate surrounding this topic, it is recognized in this thesis that law and economics represent perspectives that are external to doctrinal law.52 However, it has been noted that, in European private law, for example, the boundaries between the internal and external elements of the law have become less defined, with a consequence being that the doctrinal method has become more receptive to economic arguments.53 Similarly, patent and competition law can be viewed as being accommodating of the economic

46

For a description of the dynamic incentive theory, see Sects. 2.1.6–2.1.7. Klaus Mathis, Efficiency Instead of Justice? Searching for the Philosophical Foundations of the Economic Analysis of Law (New York: Springer, 2009), 38-39 with the accompanying references. 48 Roger J. Van den Bergh and Peter D. Camesasca, European Competition Law and Economics : A Comparative Perspective, 2nd ed. (London: Sweet & Maxwell, 2006), 31. 49 See Parisi, “Positive, Normative and Functional Schools in Law and Economics,” 267, fn 7. See also Sect. 4.3.2 on compulsory licenses’ effect on patent holders’ incentives. 50 See Anne van Aaken, Opportunities for and Limits to an Economic Analysis of International Economic Law, Law & Economics Working Paper No. 2010-09 (University of St. Gallen, 2011), 1-3; Rob van Gestel and Hans-Wolfgang Micklitz, Revitalizing Doctrinal Legal Research in Europe : What About Methodology? EUI Working Paper Law No. 2011/05 (European University Institute, 2011), 1-11; Jan M. Smits, “Redefining Normative Legal Science : Towards an Argumentative Discipline,” in Methods of Human Rights Research, ed. F. Coomans, F. Grünfeld, and M. Kamminga (Antwerp Intersentia, 2009), 46-48. 51 Parisi, “Positive, Normative and Functional Schools in Law and Economics,” 261; Martijn Hesselink, “European Legal Method? On European Private Law and Scientific Method,” European Law Journal 15, no. 1 (2009): 22-28, 30, 44; van Aaken, Economic Analysis of International Economic Law, 28-29. 52 See Hesselink, “European Legal Method?,” 20-25, 30. 53 Ibid, 15, 30-31, 45. 47

10

1 Introduction

viewpoint due to their economically driven functions. This is reflected in the normative goal expressed in the Patent Declaration: “As a framework regulation for innovation markets, the patent system needs to be tailored to the innovation process, which it is supposed to serve, and to the competitive environment within which it must operate.”54 Nevertheless, while this work acknowledges the external nature of the economic analysis, the findings thereof are subjected to normative doctrinal analysis by means of a review of the extent to which TRIPS may, through teleological interpretation, justifiably accommodate them.55 The second ground for the rejection of an economic analysis of the law is concerned with its normative premises. Irrespective of the standard employed, such as wealth or utility maximization, an economic analysis of the law does not take into account considerations of justice, most importantly with respect to inalienable human rights.56 A human rights review is undoubtedly necessary to ensure that propositions based on economic analyses of the law do not involve violations of, for example, human dignity (Art. 1 CFR) or the right to life (Art. 2 ECHR, Art. 2 CFR).57 However, the conflicts of interest that occur between patent holders and follow-on innovators involve, for the most part, clashes between the same human rights, as both the patent holder and the follow-on innovator enjoy the right to property and the right to conduct business.58 Hence, “[w]hile human rights considerations may be helpful in defining the objectives of IP policy, they do not in themselves inform policy makers about the best mixture policy measures to promote those objectives”.59 Peukert suggests instead that actual policy measures should be determined with reference to their empirical effectiveness.60 However, as discussed Lamping et al., “Declaration on Patent Protection,” 680. See van Aaken, Economic Analysis of International Economic Law, 20-31, who views teleological interpretation and the principle of proportionality as means by which economic arguments can be introduced into international economic law. For implementation of this approach, see Sect. 9.4.1. 56 See John Rawls, Theory of Justice. Revised Edition (Cambridge, MA: Belknap Press of Harvard University Press, 1999), 3; Mathis, Efficiency Instead of Justice?, 123; van Aaken, Economic Analysis of International Economic Law, 30. 57 Charter of Fundamental Rights of the European Union. 2012 O.J. (C326) 391 [hereinafter CFR]; Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signatures 4 November 1950, E.T.S. No. 5 (entry into force 3 September 1953) [The European Convention of Human Rights, hereinafter ECHR]. 58 Art. 17 (2) CFR and Art. 16 CFR. Furthermore, the human, fundamental, and basic rights that affect the protection of IPRs and their interpretation are not isolated from the overarching debates concerning the optimal scope of patent protection. For discussion on this topic see Sects. 5.6, 8.8.1.4 and 9.4.3.2. 59 Alexander Peukert, “Fundamental Right to (Intellectual) Property and the Discretion of Legislature,” in Research Handbook on Human Rights and Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2015), 172. Cf. Christophe Geiger, “‘Constitutionalising’ Intellectual Property Law? The Influence of Fundamental Rights on Intellectual Property in the European Union,” IIC - International Review of Intellectual Property and Competition Law 37, no. 4 (2006): 371, which he argues in favour of human rights as a means to alleviate overprotection problems in IP. 60 Peukert, “Fundamental Right to (Intellectual) Property,” 172. 54 55

1.6 Structure

11

later in this thesis, in questions concerning dynamic competition, empirical assessment is not always possible.61 Against such a background; economic analysis represents the second-best option.

1.6

Structure

Section 2.2 first reviews how the various economic justifications for patent protection and competition law interventions address the cumulative nature of innovation and determine the preferred manner of protecting the entitlement to a patent. On the basis of this analysis, the normative benchmark to be used for determining the optimal level of protection from the perspectives of both patent holders and follow-on innovators is defined. This work then proceeds to determine follow-on innovators’ status in patent law (Sect. 2.2); in addition, it investigates the factors that further undermine the one-patent-per-product presumption (Sect. 2.3.1) and increase follow-on innovators’ vulnerability to the market failures identified in Sect. 2.3.2. Chapter 3 considers whether the market failures caused by overprotection may be resolved through private ordering. It introduces three OAI theories in light of IP law and their presumptions regarding the incentives to provide access to patentable inventions (Sect. 3.1), discusses the various levels of openness (ranging from exclusive use to public domain) with regard to their effects on overprotection problems (Sect. 3.2), and proceeds to evaluate the different types of private liability rules and the incentives for employing them (Sect. 3.3). The hypothesis is that OAI may not solve all of the market failures associated with overprotection and that they are particularly weak when it comes to addressing the hold-up problems caused by patent assertion entities (PAE).62 Chapters 4 to 8 focus on evaluating the adequacy of the existing compulsory liability rules when it comes to resolving those overprotection problems that OAI cannot address. Chapter 5 identifies the legal sources in more detail. The following chapters focus on the use of compulsory licenses in patent law (Chap. 6), the limitations of injunctive relief (Chap. 7) and the use of compulsory liability rules under competition law (Chap. 8). The hypothesis is that the existing instruments do not adequately address overprotection problems because they rely on the one-patentper-product presumption, are incapable of addressing follow-on innovation, and are subject to excessively costly and lengthy application process. On the basis of the research findings, Chap. 9 provides a normative recommendation: It proposes a governmentally supported initiative intended to foster patent clearance and voluntary licensing and a new compulsory license that targets those

61 On limits of empirical assessment and the effects-based approach in competition law see Sect. 8.8. 1.4. 62 On PAEs, see Sect. 2.3.1.2.

12

1 Introduction

market failures that qualify as abusive practices under PC and TRIPS. The research findings are summarized in Chap. 10.

1.7

Limitations

Several topics relevant to understanding the role of cumulative innovation under patent law and the market failures associated with overprotection are excluded from the analysis. Due to its focus on liability rules, this work does not review the impact of exclusions from and exceptions to patent protection and the duration of patent term on follow-on innovation. In addition, given its interest in follow-on innovation, this thesis does not discuss those instruments intended to secure access for purely imitative use, such as compulsory licenses for public interest.63 Additional excluded themes include the impact of “TRIPS-plus” investment agreements on compulsory liability rules64 and the conditions for preliminary injunctions. While the assignment of patents and the incentives for patent owners to do so affect follow-on innovation, this thesis deals with only licensing as a vehicle of OAI. Furthermore, the analysis of patent licensing does not extend to the means used to calculate royalty rates and their relationship to the overprotection problems. The competition law analysis focuses on the exclusionary and exploitative abuses addressed under Art. 102 TFEU; however, the analysis does not extend to discriminatory abuses of market power. Furthermore, the review of the constraints posed by Art. 101 TFEU is not comprehensive. Finally, while this thesis addresses German patent law and competition law with regard to landmark cases, due to the language constraints of the author, it does not feature an in-depth analysis of German civil and contract law, case law, preparatory acts, or legal scholarship.

63 See, for example, WTO, Ministerial Conference, Fourth Session, Doha, 9-14 November 2001, Declaration on the TRIPS Agreement and Public Health, 20 November 2001, WT/MIN(01)/DEC/2 [hereinafter Doha Declaration]; WTO, General Council Decision, Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, 1 September 2003, WT/L/ 540 and Corr.1 [hereinafter Implementation of Paragraph 6 Doha Declaration]; Regulation (EC) No 816/2006 of the European Parliament and of the Council of 17 May 2006 on the Compulsory Licensing of Patents Relating to the Manufacture of Pharmaceutical Products for Export to Countries with Public Health Problems, 2006 O.J. (L 157) 1 [hereinafter Regulation 816/2006].; WTO, General Council Decision, Amendment of the TRIPS Agreement, 8 December 2005, WT/L/641. 64 See Carlos M. Correa, “Investment Protection in Bilateral and Free Trade Agreements : Implications for the Granting of Compulsory Licenses,” Michigan Journal of International Law 26, no. 1 (2004): 349-350.

Chapter 2

Theory

The economic justifications for patent protection are primarily concerned with the market failures that stem from imitation with little consideration of the cumulative nature of innovation. This chapter reviews the role of follow-on innovation under disclosure, prospect, and incentive theories as well as paradigms of competition law. The prospect theory is opposed to exceptions to the right to exclude, whereas incentive theories are accommodating towards the use of liability rules in patent protection. The dynamic incentive theory is selected as a normative benchmark for the subsequent analysis because it ties the justification for patent protection to considerations for dynamic competition. Following a typology of improvements to a patent, the book focuses on more complex follow-on innovations that improve upon the initial patent yet infringe it. The occurrence of such follow-on innovations is becoming more prevalent due to the changes in the patent landscape: the adoption of defensive and offensive patent strategies, the rise of patent assertion entities, and the increasing importance of interoperability. As a consequence, follow-on innovations may become subject to five different number of market failures, the most important being excessive transaction costs, refusals to license, and hold-up problems. The chapter also reviews the debate on the empirical occurrence of and solutions to market failures.

2.1 2.1.1

Underprotection Market Failures

The existence of the patent system is based on the assumption that, in the absence of patent protection, the level of inventive activity in society would be suboptimal due

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_2

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14

2 Theory

to the market failures associated with investments in innovation.1 Generally, the economic justifications for patent protection intend to address two market failures: the public good problem and the tragedy of the commons.2 The former serves as the foundation for the incentive theories, while the latter does so for the prospect theory.3 The economic theories that justify IP are primarily concerned with the market failures associated with imitation; the interests of users, including those of follow-on innovators, are discussed less frequently. Section 2.1 addresses how three main economic theories that underlie patent law, the various incentive theories, the prospect theory and the disclosure theory, address the role of follow-on innovation in the patent system.4 On the basis of an analysis, it defines a normative benchmark for identifying the market failures that hinder follow-on innovation and evaluating the adequacy of private and compulsory liability rules when it comes to resolving overprotection problems.

Market failures can be defined as failures “of a more or less idealized system of price-market institutions to sustain ‘desirable’ activities or to estop ‘undesirable’ activities. The desirability of an activity, in turn, is evaluated relative to the solution values of some explicit or implied maximumwelfare problem.” F. M. Bator, “Anatomy of Market Failure,” Quarterly Journal of Economics 72, no. 2 (1958): 351, [footnote omitted]. Market failures can be divided into several types: For example, the Chicago school of law and economics recognizes the market failures of imperfect competition and asymmetrical information, public goods, the problem of externalities, and the problem of positive transaction costs. Information goods may simultaneously be subject to several market failures. Niva Elkin-Koren and Eli M. Salzberger, Law and Economics of Intellectual Property in the Digital Age. The Limits of Analysis (New York: Routledge, 2013), 58-59. 2 The most important moral justifications for patents are provided by the natural rights theory and reward theory. The former is based on the assumption that an inventor has a “natural property right” to his creations, such as inventions, and that society has a moral duty to protect his inventions, as property rights, from the immoral theft of others. In contrast, the reward theory rests on the assumption that it is just to reward an inventor for his inventive activity by granting him a temporally limited exclusive patent right because his invention is useful to society. Fritz Machlup, Economic Review of the Patent System, Study of the Subcomittee on Patents, Trademarks, and Copyrights (Washington, DC: Government Publishing Office, 1958), 21. Similarly, Rudolf Kraßer and Christoph Ann, Patentrecht : Lehrbuch zum deutschen Patent- und Gebrauchmusterrecht, Europäischen und Internationalen Patentrecht, 7th revised ed. (Munich: C. H. Beck, 2009), at § 3 II 8-9. 3 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 57, 120, 126. 4 Two other economic patent justifications are acknowledged but not considered further in this thesis: The first is the signaling theory, which explains the role of patents in communicating information about their owners. Clarisa Long, “Patent Signals,” Chicago Law Review 69, no. 2 (2002): 625. For example, patents may be employed by start-ups to attract venture capital. Mark A. Lemley, “Reconceiving Patents in the Age of Venture Capital,” Journal of Small and Emerging Business Law 4 (2000):143-144. The second justification emphasizes the role played by patents in the facilitation of contractual know-how transfer. Ashish Arora, “Licensing Tacit Knowledge : Intellectual Property Rights and the Market for Know-How,” Economics of Innovation and New Technology 4, no. 1 (1995), 41. 1

2.1 Underprotection

2.1.2

15

Incentive Theories

The incentive theories strive to resolve the public good problem of information: inventions, being an information good, are both non-rival and non-excludable. As a consequence, it is assumed that they will become undersupplied without protection. Due to its non-excludability, after a costly production process, an information good may be copied and appropriated at marginal costs (which may approach zero), which attracts free riding on the investment of its initial creator.5 The producer of an information good is presumed to not have an incentive to invest in the production of the good because he is unlikely to recoup the fixed costs of its production on a competitive market. Under the incentive theories, the public good problem is resolved by means of public ordering. These theories regard the establishment of exclusive rights to IP as the best means of ensuring the adequacy of the incentives to invent and innovate.6 Exclusivity enables a patent holder to sell her innovation at a price that is above the marginal cost and recoup her investment in producing the invention.7 Depending on the activities that they are intended to encourage, incentive theories can be divided into three categories: incentives to invent, incentives to innovate, or incentives to commercialize. All of the incentive theories presuppose that, in the absence of patent protection, desirable levels of inventive and innovative activities will not be achieved in a society, which will restrict industrial progress.8 Incentive theories are sometimes referred to as the utilitarian approach to IPRs, which “claims that social institutions should be designed so as to maximize social welfare.”9 The legislative origin of incentive theories can be found in U. S. Const. Art. I, § 8, cl. 8, which establishes limited exclusive rights to “to promote the progress of science and useful arts”.10 The incentive-to-invent theory is often erroneously referred to as the reward theory in law and economics literature.11 While reward theory also features an

5

Jeffrey L. Harrison and Jules Theeuwes, Law and Economics (London: W. W. Norton & Company, 2008), 48–55, 147–151. 6 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 59–60, 87. 7 Harrison and Theeuwes, Law and Economics, 149. 8 Machlup, Economic Review of the Patent System, 21. 9 Guellec Dominique and Bruno van Pottelsberghe de la Potterie, Economics of the European Patent System : IP Policy for Innovation and Competition (New York: Oxford University Press, 2007), 49. 10 Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14. The argument underlying the incentive theory has also been attributed to Thomas Jefferson. See Thomas Jefferson, “To Isaac Mcpherson Monticello (August 13, 1813),” Temple University, last modified n.d., accessed 1 December 2015 http://www.temple.edu/lawschool/dpost/mcphersonletter.html, 48–49. 11 See, for example, David B. Conrad, “Mining the Patent Thicket : The Supreme Court’s Rejection of the Automatic Injuction Rule in eBay v. MercExchange,” Review of Litigation 26, no. 1 (2007): 133.

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economic rationale, its main justification for patent protection derives from justice:12 A just outcome is attained when inventive activity is rewarded with an exclusive right after it has occurred. The incentive-to-invent theory differs from the reward theory in the underlying assumption that the reward should be given only to the inventor, who, in the absence of the incentivizing effect of patent protection, would not have invested in the creation of his invention.13 The emphasis of the incentiveto-invent theory is hence on fostering future inventions.14 Obviously, the incentiveto-invent theory offers the narrowest justification for patent protection and, therefore, the widest room for subsequent innovators to operate. However, it does not place importance on the commercial success of an invention.15 In contrast, the incentive-to-innovate theory relies on the assumption that an actual invention may be extremely cheap to produce when compared to the expenses incurred in developing it into a final product.16 The incentive-to-innovate theory follows the Schumpeterian justification for a patent monopoly but extends the protection of inventions to innovations.17 The objective of patent protection is the incentivization of a “riskier, resource-devouring innovation period.”18 The incentive-to-commercialize theory would require an even stronger incentivization effect, as it assumes that patent protection should also provide incentives to bring the innovation to the market. The incentive theories are not explicit concerning the means that can foster cumulative innovation. However, the objective of incentivizing inventive and

12 Kraßer and Ann, Patentrecht, § 3 II 9, § 3 II 12; Machlup, Economic Review of the Patent System, 23–24; see also Sect. 2.1.1, note 66. 13 Samuel Oddi, “Un-Unified Economic Theories of Patents—the Not-Quite-Holy Grail,” Notre Dame Law Review 71, no. 2 (1999): 277, in which the author refers to the incentive-to-invent theory as patent-induced theory. In the absence of patent protection, a company may maintain incentives to invest in innovation due to the time that it takes for imitators to develop a profitable imitative product, the costs of imitation, the first-mover advantage, and the structure of a market. Frederick Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton Mifflin Company, 1990), 626-628. 14 Machlup, Economic Review of the Patent System, 21, 54-55. “[T]he beneficial effects of this incentive system must flow, not from existing patents, but from the hope for future profits from future patents; this hope may induce people to undertake certain risky investments and useful activities—to wit, financing and arranging industrial research—which they might not undertake otherwise.” Ibid, 55. Lemley refers to this as “ex ante justification” for IP. Mark A. Lemley, “Ex Ante Versus Ex Post Justifications for Intellectual Property,” University of Chicago Law Review 71 (2004): 129-130. Cf. Julie S. Turner, “Nonmanufacturing Patent Owner : Toward a Theory of Efficient Infringement,” California Law Review 86, no. 1 (1998): 188. 15 See Edmund W. Kitch, “Nature and Function of the Patent System,” Journal of Law & Economics 20, no. 2 (1977): 282-283. 16 Scherer and Ross, Industrial Market Structure, 618. 17 See Joseph A. Schumpeter, Capitalism, Socialism and Democracy, Taylor & Francis e-Library ed. (London: Routledge, [1942] 2010), 83-88; F.M. Scherer, Economic Effects of Compulsory Patent Licensing (New York: New York University Press, 1977), 7-8; Turner, “Nonmanufacturing Patent Owner,” 192; Scherer and Ross, Industrial Market Structure, 622-624. 18 Turner, “Nonmanufacturing Patent Owner,” 192.

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innovative activities is the maximization of social welfare, relying on the underlying presumption that balance exists between the initial inventor and users such as follow-on innovators.19 The establishment of an IPR creates a deadweight loss;20 the incentivising effect of patent protection should be proportional to the value of the patentee’s contribution.21 Incentive theories presuppose that the creation of knowledge goods creates positive externalities by benefiting subsequent users, the value of which creators cannot fully capture.22 Given that new information is developed based on existing knowledge, too little protection would have too small incentivizing effect, while excessively wide property rights would compromise the development of new knowledge. However, the most important shortcoming of the theory is the lack—and the potential unattainability—of empirical evidence concerning the optimal balance of incentives.23 Ultimately, the incentive theories assume that optimal solutions can be identified through a process of case-specific evaluation.24 While the incentive theories seek to resolve the public good problem by means of exclusivity, they are not opposed to the protection of an entitlement by means of a liability rule when doing so would yield a socially optimal result.25 In recent years, the increasingly accepted view of the complementarity of IP law and competition law, has influenced also the contemporary understanding of the incentive-to-innovate theory. The resulting dynamic incentive theory is discussed in Sect. 2.1.6.

2.1.3

Prospect Theory

The prospect theory, as articulated by Kitch, justifies the establishment of property rights to patents with reference to the prevention of inefficient duplicative investments and the reduction of the transaction costs incurred in the transfer of information.26 Unlike the incentive-to-invent theory, the prospect theory is concerned with

19

Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 124-126. Lemley, “Justifications for Intellectual Property,” 131. 21 Joseph Farrell et al., “Standard Setting, Patents, and Hold-Up,” Antitrust Law Journal 74, no. 3 (2007): 610. 22 Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 49. 23 Thomas F. Cotter, Comparative Patent Remedies : A Legal and Economic Analysis (New York: Oxford University Press, 2013), 30. Moreover, the theory leaves open the definition of society, as well as the time frame for the maximization of social welfare. Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 124-126. 24 Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 50. 25 See, for example, Ted Sichelman, “Purging Patent Law of ‘Private Law’ Remedies,” Texas Law Review 92 (2014): 517, 523, 536, 554, 557, 571, representing a more radical approach; Cotter, Comparative Patent Remedies, 47. For example, under the incentive-to-invent theory, a liability rule would be viable when the objectively defined remuneration for the use of an invention ensures that the patent holder maintains the incentives to continue investing in R&D. 26 Kitch, “Nature and Function of the Patent System,” 271, 290. 20

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the incentives that exist to make use of an invention after it has been created.27 Granting broad patent rights early (i.e. to the prospects offered by innovation, rather than to innovations in their final commercializable forms) is believed to encourage patent holders to more efficiently invest their scarce resources in innovation and to actively search for the best methods of developing their inventions further.28 The prospect theory aims to resolve the problem of the tragedy of commons;29 it addresses the cumulative nature of innovation an explicit manner. It assumes that, in the absence of patent protection, the further developments of an invention would be subject to overuse. As a consequence, the incentives that an inventor would have to invest in the further development of an invention would be lower than their social value.30 Following Demsetz’s theory concerning property rights, overuse represents 27 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 126-127. The prospect theory represents an ex post justification for patent protection, focusing on “encouraging efficient use of the existing works”. Lemley, “Justifications for Intellectual Property,” 132. 28 Kitch, “Nature and Function of the Patent System,” 270-273, 276. 29 The tragedy of the commons has been articulated by Hardin through the use of the open pasture metaphor: Each individual rational herdsman will aim to maximize his utility by increasing the number of cows in his herd. This behaviour leads to a tragedy, namely the overgrazing of the pasture, as the herdsmen do not sufficiently take into account the overuse of this resource in their decision-making. The establishment of property rights to such common resources is among the solutions to such a problem. Garrett Hardin, “Tragedy of the Commons,” Science 162, no. 3859 (1968): 1244-1245. 30 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 121; Mark A. Lemley, “Economics of Improvement in Intellectual Property Law,” Texas Law Review 75 (1997): 1046. An alternative perspective on the tragedy of the commons is adopted in economic theories on patent races (which have no connection to patent portfolio races). These theories view patented inventions as rival, common pools and subject to competition to invent and patent first. Excessive investments on the part of competitors in attempting to create an invention can, in total, exceed the social value of the invention in question and amount to the market failure equivalent of overexploiting a physical common resource, such as a fishery. Yoram Barzel, “Optimal Timing of Innovations,” Review of Economics and Statistics 50, no. 3 (1968): 348, 452; Robert P. Merges and Richard R. Nelson, “On the Complex Economics of the Patent Scope,” Columbia Law Review 90, no. 4 (1990): 870 and fn 133 with the references mentined there; Mark F. Grady and Jay I. Alexander, “Patent Law and Rent Dissipation,” Virginia Law Review 78, no. 1 (1992): 306-308; William M. Landes and Richard A. Posner, Economic Structure of Intellectual Property Law (London: Belknap Press of Harvard University Press, 2003), 300-301. Kitch’s Prospect theory has been viewed to acknowledge the relevance of the costs of the races to patent for the allocation of a property right, Merges and Nelson, “On the Complex Economics of the Patent Scope,” 871. However, the prospect theory has been criticized for disregarding the rent-dissipating effect of races to patent; for a discussion thereof, see John F. Duffy, “Rethinking the Prospect Theory of Patents,” University of Chicago Law Review 71, no. 2 (2004): 441-442. Duffy notes that the early granting of patent rights incentivises races to patent and pushes them to occur earlier, possibly inefficiently early, and involves duplicative investments before patenting, both of which incur private and social costs. However, in his view, competition to patent early diminishes the period of time during which a patent holder can exploit her innovation in a commercializable form. As a consequence, a patent which is granted at the early stage of an R&D effort has the social welfare-enhancing effect of bringing inventions to the public domain sooner. Ibid, 443-445, 474-475. Moreover, Landes and Posner suggest that patent races create positive externalities, as the information that is created as a side effect of such a race can be beneficial to firms that “lose” it. The authors also note that, in certain industries, there can be several

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an externality that a property right strives to internalize.31 Hence, the prospect theory advocates wide internalization of externalities, with broad entitlements to patents being protected by property rule.32 When compared to incentive theories, the prospect theory assumes a wider scope of the initial entitlement and opposes the protection of an entitlement by means of a liability rule. The prospect theory’s view of cumulative innovation rests on the assumption that efficient Coasean bargaining over property rights will occur in the absence of transaction costs.33 In such an environment, the property right to a patent will allow an owner to identify the relevant licensing party for the subsequent development of his patent.34 The prospect theory assumes that a property right will incentivise a patent holder to actively signal the existence of her invention to competitors and to seek licensees who may further develop the invention.35 The extent to which broad property rights and the strong coordinative control of a patent holder foster cumulative innovation has been widely debated.36 First, the

prizes for the participants involved in a race to win. Landes and Posner, Economic Structure of Intellectual Property Law, 301-302. The final argument, which questions the underlying assumption, is particularly convincing given that R&D efforts may result in the invention of substitutes. However, the theory of rent-dissipating races to invent relies on the assumption of a single patent protecting a single product; as such, it provides little in the way of explanation for innovation in complex industries in which R&D efforts may result in a number of patents. 31 See Harold Demsetz, “Toward a Theory of Property Rights,” American Economic Review 57, no. 2 (1967): 343, 348, 358-359. Demsetz considers overconsumption of a resource, such as overhunting, to be an externality problem. Externalities are positive or negative effects that impact interacting parties but are excessively costly to define and, consequently, to transact upon. Establishment of property right enables the internationalization of the costs and benefits of an externality and facilitates sustainable allocation of resources and their efficient use. For example, allocating ownership to one person, rather than to a community, incentivizes the owner to maximize the value of the land in the future. Ibid, 348-349, 351, 354-356. Demsetz implicitly refers to the tragedy of commons when discussing the problem of externalities. Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 118-119. 32 See Demsetz, “Toward a Theory of Property Rights,” 354, 359. Authors sometimes use the terms “property rights theory” Lemley, “Economics of Improvement in Intellectual Property Law,” 1044, and the “proprietary model of intellectual property” Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 115, to refer to the prospect theory. 33 Coase, “Problem of Social Cost,” 2, 5-6, 8, 12, 15; Lemley, “Economics of Improvement in Intellectual Property Law.”1044-1047; Demsetz, “Toward a Theory of Property Rights,” 349. 34 Kitch, “Nature and Function of the Patent System,” 276. See also Alberto Galasso and Mark Schankerman, “Patents and Cumulative Innovation : Causal Evidence from the Courts,” The Quarterly Journal of Economics 130, no. 1 (2015): 297. 35 Kitch, “Nature and Function of the Patent System,” 276; Lemley, “Economics of Improvement in Intellectual Property Law,” 1047. The active dissemination of information concerning patents by a patent holder differs from the disclosure theory, which assumes only passive publication of a patent. Kitch, “Nature and Function of the Patent System,” 278. 36 For additional overviews of more general criticisms of prospect theory, see, for example, Oddi, “Un-Unified Economic Theories of Patents,” 282; Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 127-128.

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theory assumes that the bargaining between a patent holder and a subsequent developer will occur in a Coasean world of “perfect information, perfect rationality and zero transactions costs”.37 However, in practice, licensing features the transaction costs of searching for a licensee, drafting a license agreement, and evaluating the agreement; in addition, it may involve strategic, or even irrational, behaviour.38 An inventor may also lack the expertise necessary to commercialize an invention, despite having control over the transfer of rights.39 Following Schumpeter, the prospect theory generally assumes monopolies, as opposed to competition, to be vehicles of innovation.40 Merges and Nelson criticized this starting point in their so called “race-to-invent theory”, arguing that broad patent rights are inefficient because they restrict the development of substitutes through rivalry and hence have an adverse effect on competition. In contrast, narrower property rights bring developments to the market more rapidly and accelerate the pace of innovation.41 The authors emphasize the risk of broad patents leading to the under-development of an invention by blocking innovation in terms of cumulative technologies and multicomponent products.42 Finally, the fundamental assumptions of the prospect theory have also been called into question. First, information, being non-rival, cannot be overused and thus cannot be subject to the tragedy of the commons.43 Second, the assumption that the full internalization of externalities results in the strongest incentives to innovate has been questioned:44 On the contrary, knowledge spillovers have been found to

37

Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 82. Lemley, “Economics of Improvement in Intellectual Property Law,” 1048-1062; Merges and Nelson, “On the Complex Economics of the Patent Scope,” 874, 876, 877, fn 160. 39 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 127, 131. 40 Kitch, “Nature and Function of the Patent System,” 286. 41 Merges and Nelson, “On the Complex Economics of the Patent Scope,” 843–844, 970, 972, 975. See also Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 129; Lemley, “Justifications for Intellectual Property,” 135. 42 Merges and Nelson, “On the Complex Economics of the Patent Scope,” 872-874, 908. The authors’ argument is derived from Arrow’s thesis on lowered innovation incentives for a monopolist and the superiority of competition in terms of fostering innovation. Kenneth Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in Rate and Direction of Inventive Activity: Economic and Social Factors, ed. Universities-National Bureau Committee for Economic Research and Committee on Economic Growth of the Social Science Research Council (Princeton, NJ: Princeton University Press, 1962), 620-621. 43 See Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 133; Lemley, “Justifications for Intellectual Property,” 143; Lemley, “Property, Intellectual Property and Free Riding,” Texas Law Review 83 (2005) 1050-1051; Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 52. See also Duffy, “Rethinking the Prospect Theory of Patents,” 491. 44 Full internalization of social value is not desirable, let alone possible, even with physical property, as it would require perfect price discrimination on the part of the producer and monopolistic pricing in order to capture maximum consumer surplus. Lemley, “Property, Intellectual Property and Free Riding,” 1046-1050. For a rejection of the full internalization of a patent’s social value in the 38

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foster innovation.45 The full internalization of the externalities of an innovation would have undesirable effect on social welfare because information serves as both an output of and an input for creative or innovative activity.46 An initial inventor may not be able to foresee the novel applications of her technology when investing in its development; therefore, capturing the full value of such subsequent use would have negative effects in terms of the “socially optimal development and use of a technology”.47 When compared to other theories, the prospect theory focuses more specifically on the role of follow-on innovation. However, the use of the tragedy of commons in IPRs is unconvincing, as the theory disregards the impact of competition on innovation and makes the utopian assumption that broad property rights and the centralized management of the development of an invention will lead to an efficient allocation of resources. This assumption is disconnected from the environments in which contemporary innovators operate.48 Furthermore, applying the prospect theory in positive or normative economic analyses of patent law would not be advisable due to the fact that this theory does not describe the actual state of patent law. Patent protection provides the negative right to exclude, not the positive right to appropriate. In addition, unlike the prospect theory, the patent system allows for the granting of entitlements to blocking patents.49

2.1.4

Disclosure Theory

As an economic justification for patent protection, the disclosure theory emphasizes the dissemination of technological information to society. Under the disclosure theory, which is sometimes referred to as the contract theory, inventors are given the exclusive rights to their secret inventions in return for revealing them to the rest of society.50 Without entitlement to their inventions, innovators are assumed to

assignment of damages for patent infringement, see Ted Sichelman, “Purging Patent Law of ‘Private Law’ Remedies,” 540-544. 45 Brett M. Frischmann and Mark A. Lemley, “Spillovers,” Columbia Law Review 107, no. 1 (2007): 259–261, 268–271. 46 Ibid, 273–274. 47 Ibid, 278. The fact that the subsequent developer of an invention may not necessarily capture all of the positive externalities of his contribution further undermines the argument in favour of full internalization of externalities. Ibid, 279-282. 48 See Sect. 2.3.1 on the increasingly fragmented patent landscape. 49 Duffy, “Rethinking the Prospect Theory of Patents,” 456-457. 50 Kraßer and Ann, Patentrecht § 3 II 11; Machlup, Economic Review of the Patent System, 21. The disclosure function rests on the assumption that the publication of an invention is more desirable from a social welfare perspective than protecting it as a trade secret. Kitch, “Nature and Function of the Patent System,” 275. Cf. Turner, “Nonmanufacturing Patent Owner,” 189, 191, who uses the “incentive to disclose” to describe this theory. She argues that that the commercialization of an

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invest disproportionately into the development of technologies that are protectable as a trade secret.51 The disclosure of secret inventions is considered to advance the technological progress of society towards a more socially beneficial level.52 In combination with a limited patent term, disclosure serves the objective of technology diffusion;53 when compared to incentive theories, it promotes public interest as a patent policy goal.54 From the legal perspective, disclosure serves the informational function of determining the scope of protection offered by an entitlement to a patent and distinguishes the patented invention from the state of the art.55 However, due to the complexity of technology, contemporary patent specifications rarely disclose all of the information required for the exploitation of a patent, which, in addition, requires the know-how of the patent holder.56 Nevertheless, patent disclosure serves three other functions: (1) to supply the general public with a complete and exact survey of the most recent state of technological development; (2) to provide the necessary information and stimulation for further development on the basis of the patented invention; (3) to point out to third parties interested in the industrial application of the invention the way to the patent owner who [. . .] possesses the necessary know-how required to carry out the invention.57 According to Conrad, the disclosure theory opposes the protection of an entitlement by means of liability rules.58 However, such a remedy contradicts the argument

invention, which requires significant efforts to educate a company’s employees, is a more efficient means of diffusing knowledge of an invention. 51 Machlup, Economic Review of the Patent System, 21. 52 Ibid, 21, 24. 53 Daniel Gervais, TRIPS Agreement : Drafting History and Analysis, 4th ed. (London: Sweet & Maxwell 2012), at 2.112-2.113; Susy Frankel and Jessica C. Lai, “Recognized and Appropriate Grounds for Compulsory Licenses : Reclaiming Patent Law’s Social Contract,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung: Liu (Heidelberg: Springer Verlag, 2015), 150. 54 Gervais, TRIPS Agreement, 2.113. 55 Friedrich-Karl Beier and Joseph Straus, “Patent System and Its Informational Function - Yesterday and Today,” IIC - International Review of Intellectual Property and Competition Law 8 (1977): 404. See also Friedrich-Karl Beier, “Future Problems of Patent Law,” IIC - International Review of Intellectual Property and Competition Law 3 (1972): 448. 56 Beier, “Future Problems of Patent Law,” 445-447. 57 Friedrich-Karl Beier and Joseph Straus, “Patent System and Its Informational Function - Yesterday and Today,” IIC - International Review of Intellectual Property and Competition Law 8 (1977): 404. Moreover, patents have been empirically found to foster efficient transfer of complementary know-how between patent holders and licensees; thus, they play a role in the development of markets for unpatented technology. Ashish Arora, Andrea Fosfuri, and Alfonso Gambardella, Markets of Technology : The Economics of Innovation and Corporate Strategy (Cambridge, MA: MIT Press 2001), 139-141. 58 Conrad, “Mining the Patent Thicket,” 137.

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that exclusivity incentivizes disclosure by protecting the inventor from the free riding of competitors.59 Nevertheless, disclosure is also favourable for competition, as it enables competitors to learn about new inventions and to design substitutes.60 Similarly, disclosure enables follow-on innovators to acquire the information necessary to make further improvements to patented inventions or to develop innovations that incorporate them. The disclosure theory is reflected in the disclosure requirement that is a universal precondition for the granting of a patent (Art. 29.1 TRIPS); such disclosure has the effect of facilitating follow-on innovations. Disclosure is considered to foster the diffusion of technical information and, as a by-product, to create patent databases.61 It serves the function of signalling, thus creating incentives for subsequent developers to identify pre-existing technology.62 It is intended to reduce the tracing costs of the patent holder of the subsequent innovator.63 However, the signalling effect generated by a patent office may prove weak.64 Hence, the actual effect of the diffusion of information concerning inventions and their holders depends on the transaction costs associated with searching for and diffusing information concerning them. Thus, it can be concluded that the disclosure theory, despite stressing the role of disclosure in indirect facilitation of follow-on innovation and competition, explains only one aspect of patent protection.65 It does not explain how the interrelationships between an initial inventor and subsequent innovators can be managed; thus, it fails to provide further ground for analyzing their conflict of interests.

2.1.5

Patents from the Perspective of Competition Law

2.1.5.1

The Economic Objectives of Competition Law

Competition law aims to protect competition between firms on the market “by controlling the exercise of market power, either by single firms or firms acting together, which leads to higher prices, less, choice, and lower quality and less innovation in products and services.”66 It can focus either on purely fostering various economic efficiencies or on other public policy interests, such as environmental

Turner, “Nonmanufacturing Patent Owner,” 189. See Posner, Economic Analysis of Law, 49. 61 Machlup, Economic Review of the Patent System, 76. 62 Conrad, “Mining the Patent Thicket,” 141. 63 Posner, Economic Analysis of Law, 53. 64 Conrad, “Mining the Patent Thicket,” 140-143, discussing USPTO. 65 For further arguments concerning the incompleteness of the disclosure theory, see Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 51. 66 Alison Jones and Brenda Sufrin, EU Competition Law : Text, Cases and Materials (Oxford: Oxford University Press, 2016), 2. 59 60

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protection, employment policy, and strengthening SMEs.67 The economic objective of competition law is maximizing welfare (either in terms of total or consumer welfare or a combination of thereof, depending on the jurisdiction).68 Both US and EU competition law seek to maximize consumer welfare.69 Under perfect competition, the marginal prices associated with producing products will equal their marginal costs.70 This will result in allocative efficiency, which means that goods and services are transferred to those on the market who have the highest willingness to pay for them.71 A company that has market power (in the extreme case, a monopolist) is in a position to raise prices above marginal costs, causing deadweight loss.72 However, “the prospect of some amount of market power” is crucial for incentivizing investments in R&D.73 Under perfect competition, firms are expected to organize the production of good or services in the manner that best minimizes costs, leading to productive efficiency.74 In the absence of competitive pressure, a monopolist firm is expected to have fewer incentives to invest in efficient technology; the Darwinian mechanism of competition, which drives inefficient firms off the market, is also absent in the presence of a monopoly.75 Dynamic efficiency “is a measure of whether firms have the ability and the incentives to increase productivity and innovate, developing new products or reducing production costs which can yield greater benefits to consumers”.76 The diffusion

67 Giorgio Monti, EC Competition Law (Cambridge: Cambridge University Press, 2007), 4. For a discussion of the different policy objectives of competition law, see Massimo Motta, Competition Policy : Theory and Practice (New York: Cambridge University Press, 2004), 20-30. In the neoclassical economic approaches to competition, the focus is on “the effects of the behaviour of firms on economic welfare”. In this approach, it is only market failures that require governmental interventions. Monti, EC Competition Law, 22-24. 68 Motta, Competition Policy, 18-20; Jones and Sufrin, EU Competition Law 2016, 86-87. The two standards may also conflict with each other, as a policy focused on consumer welfare involves a value judgement concerning the redistribution of the surplus. Ibid, 11. 69 See FTC, To Promote Innovation : The Proper Balance of Competition and Patent Law and Policy (Washington, DC: Federal Trade Commission, 2003), 4; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty. 2009 O.J. (C 45) 2, paras 1 and 5-6. 70 Jones and Sufrin, EU Competition Law 2016, 7. 71 Monti, EC Competition Law, 45. 72 Motta, Competition Policy, 40-43. 73 Ibid, 89. 74 See Monti, EC Competition Law, 45; Jones and Sufrin, EU Competition Law 2016, 7. 75 Motta, Competition Policy, 45-52. See also Communication from the Commission — Notice — Guidelines on the Application of Article 81(3) of the Treaty 2004 O.J. (C 101) 97, para 92. A firm may become “X-inefficient”, as there may be insufficient motivation for managers to reduce the costs of production and innovate new means of production and new products. Harvey Leibenstein, “Allocative Efficiency vs. ‘X-Efficiency’,” American Economic Review 56, no. 3 (1966): 401, 406, 408. 76 Monti, EC Competition Law, 45.

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of new innovations to society is also an aspect of dynamic efficiency.77 However, a rent-seeking monopolist may also block the market entries of innovative competitors.78 Dynamic efficiency is not Pareto optimal, as it may destroy former incumbents by causing them to lose competition to innovative newcomers.79 Unlike the allocative and productive efficiencies, which are concerned with static situations, dynamic efficiency is inter-temporal. Supporting different types of efficiencies involves trade-offs that a policymaker must resolve.80 Intellectual property promotes dynamic efficiency through its incentivizing effect.81 While patents restrict competition by imitation and limit allocative efficiency, they foster competition by substitution, where existing products are replaced with more innovative ones.82 From the perspective of competition law, the market power that stems from the exercise of an IPR is an empirical question.83 The efficiency of the exercise of the patents can be assessed with reference to three different types of markets: In the context of cumulative innovation, patented technology is typically sold on the upstream market for technology, and it is then used as an input on the downstream product market.84 In addition, the exercise of IPRs, for example through technology transfer, may affect competition in innovation: Competitive innovation efforts that

77 Van den Bergh and Camesasca, European Competition Law and Economics, 30. Hence, X-inefficiency (see note 75) is argued to be detrimental to dynamic efficiency. Motta, Competition Policy, 48. 78 Monti, EC Competition Law, 56; Guidelines on the Application of Article 81(3) of the Treaty, para 105. 79 Van den Bergh and Camesasca, European Competition Law and Economics, 31. 80 Jones and Sufrin, EU Competition Law 2016, 7-9, 11-12. 81 Communication from the Commission — Guidelines on the Application of Article 101 of the Treaty on the Functioning of the European Union to Technology Transfer Agreements. 2014 O.J. (C 89) 3 [hereinafter Technology Transfer Guideline (2014)], paras 7-8. Schumpeter views patents as a form of armour for companies that allows them to make long-term investments in contexts that are characterized by unstable competitive circumstances and to participate in competition. Patents, in his view, are one of the instruments that enable the introduction of new technologies, products, and processes. Schumpeter, Capitalism, Socialism and Democracy, 87-88. 82 Drexl, “Intellectual Property in Competition,” 210. 83 Steven Anderman and Hedvig Schmidt, “EC Competition Law and IPRS,” in Intellectual Property Rights and Competition Policy, ed. Steven Anderman (Cambridge: Cambridge University Press, 2007), 38. Historically, IPRs have been associated with monopolies. Ibid, 37. In modern competition law, the legal monopoly of holding an exclusive IPR is not considered to constitute an economic monopoly that amounts to a dominant position on the market. See for example Joined cases C-241/91 and C 242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission [Magill], 1995 E.C.R. I-743, para 46. It is generally accepted that very few patents confer the degree of market power that could subject them to the scrutiny of competition law, and even fewer constitute a monopoly in the economic sense. 84 TTBER Guidelines (2014), paras 20-23. See also Communication from the Commission. Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-Operation Agreements, 2011 O.J. (C 11) 1, para 116.

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focus on the creation of new technology and improved or completely new products that may function as “a source of potential competition”.85 The concept of dynamic efficiency is closely related to Schumpeter’s theory of dynamic competition.86 Under Schumpeterian dynamic competition, risk-taking firms compete by introducing new products to the market. A new innovation may endogenously disrupt an entire existing market or even an industry that has settled into a state of price competition. Following such “creative destruction”, the first firms to apply the innovation have the opportunity to earn supranormal profits. However, the market will eventually catch up by imitating the new innovation until such time that it settles into a new equilibrium.87 Such creative destruction is considered to improve the performance and productivity of a society.88

2.1.5.2

Competition Law and Follow-on Innovation

The theories, paradigms, and doctrines intended to explain the interrelationships that exist between patent and competition law are polarized in a manner similar to that found among the economic justifications for patent protection, wherein the incentive theories and the prospect theory represent opposite viewpoints on the optimal scope of patent protection and patent holders’ control. A long-term and on-going debate, both theoretical and empirical, exists concerning whether monopolist firms are the biggest drivers of innovation, as in the Schumpeterian model, or whether a competitive market represents a more incentivising context for innovation, as in Arrow’s model.89 The Schumpeterian theory of monopolists as sources of innovation aligns with the prospect theory’s justification of patent protection.90 In contrast, the more recent understanding of dynamic efficiency adapts elements of Schumpeterian dynamic competition, such as creative destruction, but acknowledges that a monopolist may also suppress 85 TTBER Guidelines (2014), para 26. The Commission previously used the term “innovation market” to refer to competition in innovation; see Guidelines on the Application of Article 81 (3) of the Treaty, para 25. See also DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (Washington, DC: DOJ and Federal Trade Commission, 1995), 10-13. A technology transfer agreement may delay competition in innovation, TTBER Guidelines (2014), para 26. Ultimately, this could prevent the replacement of existing products with new ones and forestall the creation of new markets with completely new demands. Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 119, 121. 86 For an overview of the Schumpeterian, evolutionary, Austrian, path-dependent, and resourcebased theories of dynamic competition, see Jerry Ellig and Daniel Lin, “Taxonomy of Dynamic Competition Theories,” in Dynamic Competition and Public Policy: Technology, Innovation and Antitrust, ed. Jerry Ellig (Cambridge: Cambridge University Press, 2001). 87 Ibid, 19-21, with references to Schumpeter, Capitalism, Socialism and Democracy, 83. 88 Schumpeter, Capitalism, Socialism and Democracy, 83. 89 Ibid; Arrow, “Economic Welfare,” 619; Van den Bergh and Camesasca, European Competition Law and Economics, 30-31.; see also FTC, To Promote Innovation, ch 12, 12-15. 90 See Kitch, “Nature and Function of the Patent System,” 286.

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27

innovation.91 Unfortunately, scholars tend to use the terms dynamic efficiency and dynamic competition interchangeably; therefore, in this thesis, the term Schumpeterian dynamic competition is used to refer to the presumption that creative destruction is driven by monopolies. Whether the theory of Arrow or that of Schumpeter is given primacy is reflected in the paradigms underlying competition policy. The earlier Chicago School presumes that, over time, market distortions may self-correct without government intervention; it thus adopts a minimalist approach to the enforcement of competition law.92 Embracing the Schumpeterian view on monopolists as sources of innovation, the Chicago School opposes the imposition of a liability rule in favour of the interests of downstream innovators;93 thus, it uses the prospect theory as a justification for patent protection. Competition law systems vary in their treatment of IPRs and subject their exercise to diverse levels of immunity.94 Traditionally, IPRs have been seen as lex specialis with respect to competition law. In the so-called separation doctrine, an appropriate balance between competition and protection of IP was seen to have stricken upon enacting exclusive rights, and, consequently, their use could not violate competition law.95 When taken together with the Chicago School view of competition law, the exercise of IPRs cannot be subject to antitrust interventions such compulsory licenses in favour of competing follow-on innovators. In contrast, the post-Chicago paradigm focuses on the strategic means that companies use to acquire and exercise market power and employs the empirical methods in identifying anti-competitive behaviour.96 This paradigm shift was reflected in the understanding of the interrelationships that exist between competition and IP law. The legalistic separation doctrine evolved into the contemporary, economics-based complementarity theory, which strives to balance the objectives of the two fields of law.97

91 See Monti, EC Competition Law, 56. Guidelines on the Application of Article 81(3) of the Treaty, para 105. 92 Monti, EC Competition Law, 4-5, 73. For a historical analysis of the influence of Chicago school on US antitrust law; see ibid, 63-68. 93 See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP [Trinko], 540 U.S. 398, 407 (2004); Josef Drexl, “Intellectual Property and Antitrust Law - IMS Health and Trinko Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases,” IIC International Review of Intellectual Property and Competition Law 35, no. 7 (2004): 796-797, 803. 94 Anderman and Schmidt, “EC Competition Law and IPRS,” 38, 107. 95 Over time, the separation doctrine has varied in scale, ranging from absolute immunity of IP law to antitrust interventions to doctrines in which some practices were deemed inherent or part of the specific subject matter of an IP right, thus justifying greater immunity from competition law. See Thorsten Käseberg, Intellectual Property, Antirust and Cumulative Innovation in the EU and the US (Oxford: Hart Publishing, 2012), 24-34. 96 Monti, EC Competition Law, 68-70. See also Jones and Sufrin, EU Competition Law 2016, 20. 97 Käseberg, Intellectual Property, 24-34.

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This view is prevalent in both US and EU competition law.98 Under the theory of complementarity, patent and competition law share the goal of fostering dynamic competition.99 Intellectual property rights are deemed to support this goal by creating incentives to invent, while competition enhances innovation through competitive pressure.100 Both are necessary for promoting innovation and ensuring its competitive exploitation101 and thus the promotion of consumer welfare.102 In addition to dynamic efficiency, both patent and competition law aim at the efficient allocation of resources.103 Competition law allows for “competition on the merits” which advances consumer welfare even by a patent holder who holds a dominant position.104 Facilitated by the incentivizing effect of IPRs, new competitors can enter a market or create new ones. The licensing of IP further strengthens this effect, as it enhances the diffusion of technology in favour of both competition and innovation.105 Hence, IP fosters

98

However, in Europe, the doctrine of complementarity is argued to have less normative weight than in the US, as EU competition law accommodates objectives other than consumer welfare. Ibid, 35, 40, 45. 99 This complementarity was expressed in the EC’s guidelines for technology transfer agreements as follows: “Indeed, both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources. Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition by putting pressure on undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.” TTBER Guidelines (2014), para 7. Similar views are expressed in DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 1.0; DOJ and FTC, Antitrust Enforcement and Intellectual Property Rights. Promoting Innovation and Competition (Washington, DC: DOJ and FTC, 2007), 1. 100 TTBER Guidelines (2014), para 7. 101 Ibid. 102 DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 1.0; Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); FTC, Antitrust Enforcement, 1. 103 TTBER Guidelines (2014), para 7. 104 Case C-457/10 P, AstraZeneca AB & AstraZeneca plc v. Commission, 4 C.M.L.R. 7 (2013), para 129; Steven Anderman, “Competition Law Perspective II : The Relationship between Patents and Competition Rules,” in Unitary EU Patent System, ed. Justine Pila and Christopher Wadlow (Oxford: Hart Publishing, 2014), 136-137. 105 Commission Notice — Guidelines on the Application of the Article 81 of the EC Treaty to Technology Transfer Agreements. 2004 O.J. (C 101) 2, para 9; TTBER Guidelines (2014), para 9; Anderman and Schmidt, “EC Competition Law and IPRS,” 38. Licensing may also foster integration of complementary technology, in addition to further R&D on blocking technologies. DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 5. Beyond promoting dynamic efficiency, technology transfer agreements are usually deemed pro-competitive. Commission Regulation (EU) No 316/2014 on the Application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Technology Transfer Agreements, 2014 O.J. (L 93) 17 [hereinafter TTBER], rec 4.

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dynamic efficiency by precluding competition by imitation that is based on freeriding and enabling competition by substitution.106 While the economic concept that underlines complementarity can be traced back to Schumpeter’s model of dynamic competition,107 similarly to the modern concept of dynamic efficiency, it does not adopt Schumpeter’s presumption that monopolists act as drivers of innovation. The underlying justification of patent protection under the theory of complementarity is the incentive-to-innovate theory.108 Indeed, the scope of protection that an individual competitor enjoys under competition law, in its broad meaning, should be determined on the basis on its effect on dynamic competition: While the investments of a market participant need to be protected from free riding, this protection should not reach a threshold that precludes other market participants from entering the market with a view to engage in dynamic competition.109 Under the theory of complementarity, the exercise of IPRs is not immune to interventions,110 which can also be made in favour of follow-on innovators:111 “[A compulsory] licence would be justified whenever it would enable substitution by a different, potentially more innovative product. In such situation, only the duty to license can guarantee that the expected advantage of dynamic competition is attained.”112 Drexl, “Antitrust Placebo,” 807. A substitute may also be unprotectable with IPRs. Ibid. Drexl “Intellectual Property in Competition,” 210. 108 See TTBER Guidelines (2014), para 8; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 75. 109 Reto M. Hilty, “Law against Unfair Competition and Its Interfaces,” in Law against Unfair Competition: Towards a New Paradigm in Europe?, ed. Reto M Hilty and Frauke HenningBodewig (Heidelberg: Springer Verlag, 2007), 4-5, 19, 47-49. 110 TTBER Guidelines (2014), para 7. The exercise of IPRs may become subject to antitrust scrutiny when horizontal and vertical practices involve IPs, such as licensing agreements between undertakings that have anticompetitive effects, see Art. 101 TFEU; Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 111-149, 263-299, TTBER Guidelines (2014), paras 5-18; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995) 7-22; when they confer market power and are used in an abusive manner, see Art. 102 TFEU; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty; and upon merger regulation, see Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings. 2004 O.J. (C 31) 5; Guidelines on the Assessment of Non-Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings, 2008 O.J. (C 265) 6. See also Commission Notice on Remedies Acceptable under Council Regulation (Ec) No 139/2004 and under Commission Regulation (Ec) No 802/2004, 2008 O.J. (C 267) 1, paras 62 and 65. 111 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 87; Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743; Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2004 E.C.R. I-5039; Case T-201/04, Microsoft Corp. v. Commission, 2007 E.C.R. II-3601. 112 Hanns Ullrich, “Protecting Technology - Property or Policy,” in Economics, Law and Intellectual Property - Seeking Strategies for Research and Teaching in a Developing Field, ed. Ove Granstand (Alphen aan den Rijn: Kluwer Law International, 2003), 448-449; Josef Drexl et al., “Comments of the Max Planck Institute for Intellectual Property, Competition and Tax Law on the Directorate-General Competition Discussion Paper of December 2005 on the Application of Art 106 107

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2.1.6

2 Theory

Towards a Dynamic Incentive Theory

The paradigm shift that occurred in competition law towards the post-Chicago approach and the doctrine of complementarity has influenced the contemporary understanding of the incentive-to-innovate theory.113 Due to its emphasis on dynamic efficiency, the modern economic justification for protection is henceforth referred to as the dynamic incentive theory. It stresses that patents alone do not create incentives for innovation; incentives derive not from the patents themselves but from the market opportunities that the right to exclude allows a patent holder to capture.114 Consequently, more weight is placed on the distributional goal of competitiondriven dynamic efficiency when allocating the initial entitlement to patent.115 Given the assumption that competition itself fosters innovation though competitive pressure, patent protection should be granted only to resolve market failures: more specifically, it should be granted only in situations in which lead time alone is not sufficient to recoup the investments made in innovation on the relevant market for the invention in question.116 Generally, “[p]atent protection must not interfere with dynamic competition as a decentralised discovery procedure for innovation opportunities, and price setting mechanism for innovation rewards.”117 Patent protection should not exceed the level that is sufficient for encouraging investments in R&D,118 because both underprotection and overprotection may cause “a distortion of competition that prevents an efficient allocation of market revenues according to the competitive performance of market actors.”119

82 of the EC Treaty to Exclusionary Abuses,” IIC - International Review of Intellectual Property and Competition Law 37 (2006): 568-569. The royalty rate should mitigate the effect of the intervention on the incentives of a patent holder. Ibid, 569. 113 The effect of the economically and empirically driven post-Chicago approach is also reflected in the Patent Declaration, Matthias Lamping et al., “Declaration on Patent Protection - Regulatory Sovereignity under TRIPS,” IIC - International Review of Intellectual Property and Competition Law 45, no. 6 (2014): 679-680. 114 Ibid, 682; similarly Reto M. Hilty and Peter R. Slowinski, “Patenting Coffee - IP Protection and Its Impact on Innovation in the Coffee-Capsule Market,” in Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz, ed. Kai Purnhagen and Peter Rott (Heidelberg: Springer Verlag, 2014), 494-495. 115 See Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1098-1099. 116 Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14, 16; Hilty and Slowinski, “Patenting Coffee–IP Protection,” 495. Similarly, see Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 52, 58. Cf. Sidak, who argues that patent protection should compensate a patent holder for the opportunity costs of providing second comers with the real option value of a technology on the market, which requires the patent holder to make a risky sunk investment. Gregory J. Sidak, “Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement : Reply to Lemley and Shapiro,” Minnesota Law Review 92, no. 3 (2008): 717, 736, 738. 117 Lamping et al., “Declaration on Patent Protection,” 682. 118 Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 15. 119 Lamping et al., “Declaration on Patent Protection,” 683.

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The optimal scope of patent protection under the dynamic incentive theory is wider than when following the incentive-to-invent theory but narrower than that of the incentive-to-innovate theory. With respect to the manner in which an entitlement is protected, the dynamic incentive is open towards liability rules; an entitlement will be protected by the property rule only if the goal of fostering innovation cannot be achieved as efficiently through other means, including the imposition of a liability rule.120

2.1.7

Justifying Follow-on Innovation

The objective of this thesis is to explore the conflicts of interest that can occur between an initial patent holder and a follow-on innovator. Section 2.1.7 examines how the economic justifications for patents and competition law address the cumulative nature of innovation and the conflicts between the abovementioned interests and what importance the relevant theories place on the manner in which an entitlement is protected, i.e. via a property or liability rule. The author concurs with the views that the public good problem represents the central market failure and that the need to recoup the investments sunk into inventive activity is the most convincing economic justification for patent protection.121 While less explicit about the means by which follow-on innovation can be fostered, incentive theories essentially allow for the weighing of conflicting interests and are flexible when it comes to selecting between property and liability rules as modes of protecting patents. In contrast, the further theories justifying patent protection veer from incentivizing disclosure and inventive activity towards commercialization, the less leeway they offer when it comes to introducing the liability rule as a means of patent protection.122 Under the prospect theory, access to an invention would be completely dependent on the patent owner’s choice. This thesis relies on the dynamic incentive-to-innovate theory as the basis for the identification of overprotection problems and in the assessment of the conflict of interests that occur between initial inventors and subsequent innovators. When compared to others, this theory assumes a rather narrow scope of protection; however, it also addresses the need for dynamic competition, which is a critical factor for follow-on innovation.123 A patent holder is deemed to be overrewarded 120

Annette Kur and Jens Schovsbo, Expropriation or Fair Game for All? Gradual Dismantling of the IP Exclusivity Paradigm, Research Paper No. 09-14 (Munich: Max Planck Institute for Intellectual Property, Competition & Tax Law, 2009), 2. 121 See Frischmann and Lemley, “Spillovers,” 258, 276, 272, 282; Lemley, “Property, Intellectual Property and Free Riding,”; 1032; Elkin-Koren and Salzberger, Law and Economics of Intellectual Property; Lamping et al., “Declaration on Patent Protection,” 57-64, 134. 122 See also Conrad, “Mining the Patent Thicket,” 137. 123 See Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14, 16; Hilty and Slowinski, “Patenting Coffee–IP Protection,” 495.

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when follow-on innovators’ “freedom to operate and compete on the merits” is undermined.124 This approach ensures protection only for those innovations that, in the absence of exclusive rights, would lack sufficient incentives to attract investments. This approach is also in accordance with empirical findings demonstrating that, in the majority of industries, patents are considered to be less effective in recouping investments made in inventive activity and innovation than other means of doing so, such as secrecy, lead time, and learning curve advantages.125 Only in the chemical and pharmaceutical industries were patents rated as one of the important means of appropriating returns from the investments made in R&D.126 The patent system protects inventions, not innovations, and allows for the development of innovations that consist of a number of patents. The weakness of all theories in terms of justifying patent protection is the underlying one-patent-perproduct presumption.127 For this reason, the following Sects. 2.2 and 2.3 focus on the market failures associated with overprotection that may hinder the development of more complex follow-on innovations. First, the legal status of different types of follow-on innovators is identified in Sect. 2.2; the sources of the overprotection problems are discussed in Sect. 2.3.1; thereafter, market failures are defined from the economic perspective in Sect. 2.3.2.

2.2

A Typology of Subsequent Improvements

In law and economic literature, follow-on innovation has predominately been addressed from the one-patent-per-product perspective. This presumption has shaped both the patent system128 and how patent law treats the conflicts of interest between an initial inventor and subsequent improver. The legal standing of a followon innovator depends on the nature of her subsequent contribution to the patented invention.129 Building upon Lemley’s seminar article on the Economics of

Lamping et al., “Declaration on Patent Protection,” 683. Richard C. Levin et al., “Appropriating the Returns from Industrial Research and Development,” Brookings Papers on Economic Activity 1987, no. 3 (1987): 793-796. 126 Ibid, 796. 127 This holds true even in the case of Schumpeterian competition. Drexl, “Intellectual Property in Competition,” 211-213. On the inapplicability of the prospect theory to multicomponent products, see James E. Bessen, Patent Thickets : Strategic Patenting of Complex Technologies (Boston: Technology & Policy Research Initiative - Boston University School of Law, 2003), 4. Cf. Kitch, “Nature and Function of the Patent System,” 286, who views the fragmentation of rights to reflect the problems associated with innovation though competition, as opposed to concentrating innovation efforts to a monopolist. 128 Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1992. 129 Mark A. Lemley, “Economics of Improvement in Intellectual Property Law,” 1004, Figure 1, 1005-1014, 1073, 1083, 1084. 124 125

2.2 A Typology of Subsequent Improvements

33

Improvement in Intellectual Property Law,130 Sect. 2.2 describes how patent law treats various subsequent improvements depending on their legal nature.131

2.2.1

The Improvement Is Infringing and Not Patentable

The first situation arises when a subsequent improvement to a patent either corresponds to or is equivalent to the claims of the initial invention.132 Such an improvement is not patentable, as it does not fulfil the requirement of inventive step (Art. 56 EPC, § 4 PatG) in respect to the initial invention.133 Producing, offering, putting on the market, or using an improvement will infringe the initial patent, unless the patent holder provides the improver to use his invention via license.134 A license should be sought prior to the production or use of the infringing improvement. The social value of such forms of improvement is deemed to be too minor to justify the establishment of an entitlement to it in the form of a patent.135 In the absence of a license, the patent holder may seek an injunctive relief against the subsequent improvement (§ 139 PatG) and thus protect herself from free riding. The property rule ensures that a patent holder’s incentives to continue investing in R&D are not compromised by the insignificant improvements made by a follow-on innovator that essentially qualify as imitative use.136

130

Ibid, 1000-1013. Cf. Lemley 1007-1013, who distinguishes follow-on innovations according to the social value of an improvement to minor, significant, and radical improvers. 132 Art. 69 (1) EPC, § 14 PatG. Under German patent law, the scope of patent protection extends from the literal wording of patent claims to the equivalent solutions that may be discoverable to a person skilled in the art. This doctrine of equivalents seeks to balance the objective of rewarding the inventor with the objective of maintaining legal certainty. The existence of equivalency is determined on the basis of the claims as interpreted by a person skilled in the art. Formstein, BGH, 29 April 1986, GRUR 1986, 803. The conditions–the equivalent solutions, the objectively identical effect, retrievability to a person skilled in the art, and equivalence in value– were confirmed in 2002 by five BGH decisions; Custodiol I, BGH 12 March 2002, GRUR, 2002, 523; Custodiol II, BGH, 12 March 2002, GRUR 2002, 527; Kunststoffrohrteil, BGH, 12 March 2002, GRUR 2002, 511; Schneidmesser I, BGH, 12 March 2002, GRUR 2002, 515; Schneidmesser II, BGH, 12 March 2002, GRUR 2002, 519; Uwe Scharen, “PatG14 §,” in Patentgesetz, ed. Georg Benkard, 11th ed. (Munich: C. H. Beck, 2015), 101; Henrik Timmann, “Extension of the Scope of Protection to Equivalents,” in Patent Law: A Handbook on European and German Patent Law, ed. Maximilian W. Haedicke and Henrik Timmann (Munich: Nomos Verlagsgesellschaft mbH & Co KG, 2014), 647-648. For further analysis, see ibid. 133 See also Lemley, “Economics of Improvement in Intellectual Property Law,” 1007-1008. 134 § 9 PatG. 135 Lemley, “Economics of Improvement in Intellectual Property Law,” 990, 1007-1008. 136 From another perspective, minor improvers are not protected against free-riding on their contribution to the patented invention. Ibid, 1008. 131

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2.2.2

2 Theory

The Improvement Is Infringing Yet Patentable

When an improvement fulfils the requirement of non-obviousness in relation to the initial patent, it can be patentable in itself, even if it coincides with to the claims of the initial patent,137 or is equivalent to them.138 Such situation may arise, for example, when a patent protects a basic innovation that is succeeded by a range of more specific applications.139 The initial and subsequent patents block each other, and neither of the patent holders can use the improvement without infringing each other’s patents. The patentability of the improvement resolves the problem of Arrow’s paradox in the transfer of valuable information concerning unpatentable improvements. However, the conclusion of a licensing agreement between parties may prove inefficient or even impossible due to transaction costs, imperfect information, externalities, and strategic—or even irrational—behaviour.140 Given these inefficiencies, international patent law provides a framework for resolving the problem associated with blocking patents with the use of the liability rule. Art. 31 (l) TRIPS defines the criteria for the compulsory licensing of dependent patents.141 The liability rule balances the interests of the initial and subsequent patentees; nevertheless, this compulsory liability rule rests on the one-patent-perproduct presumption.142 United States patent law does not feature a compulsory license for blocking patents. However, an improvement that differs substantially from the initial patent while overlapping its claims can potentially still be deemed non-infringing on the basis of the reverse doctrine of equivalents.143 However, such a defence for infringement is rarely applied in practice;144 instead, the initial patent may become subject to a liability rule in favour of the follow-on innovator, on the basis of equity.145

Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339. Michael Nieder, Die Patentverletzung (Munich: C. H. Beck, 2004), 31-33. For a review of the interrelationship of equivalency and dependency of patents see ibid, 31-33, 296-299; Eberhard Körner, “Äquivalenz und abhängige Erfindung,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 58, no. 2 (2009), 97-102. 139 Suzanne Scotchmer, Innovation and Incentives (Cambridge, MA: MIT Press, 2004), 132. 140 Lemley, “Economics of Improvement in Intellectual Property Law,” 1052-1062; Robert P. Merges, “Intellectual Property Rights and Bargaining Breakdown : Case of Blocking Patents,” Tennessee Law Review 62 (1994): 84-91. On Arrow’s information paradox, see Arrow, “Economic Welfare,” 615. 141 For a detailed analysis of Art. 31 (l) TRIPS, see Sect. 6.4.1. 142 Sect. 6.4.1.3. 143 Lemley, “Economics of Improvement in Intellectual Property Law,” 1010-1012, 1023. See also Merges, “Case of Blocking Patents,” 91-99. 144 See Samuel F. Ernst, “Lost Precedent of the Reverse Doctrine of Equivalents,” Vanderbilt Journal of Entertainment & Technology Law 18, no. 3 (2016): 467, 472-473. 145 See eBay, 126 S. Ct. 1837, 1839, 1841. For a detailed analysis of the eBay decision as an liability rule, see Sect. 7.3. 137 138

2.2 A Typology of Subsequent Improvements

2.2.3

35

The Improvement Is Patentable and Does Not Infringe the Initial Patent

Finally, a subsequent improvement may not only cross the threshold of patentability but also be sufficiently advanced to not overlap with the claims of the initial patent;146 Such an improvement can be exercised freely, without the interference of the initial patent holder. In the context of products that are covered by only one patent, patent law can be described as having the objective of incentivizing more radical improvements that have higher social value.147 The freedom of a follow-on innovator to exploit an improved patented product increases in proportion to the degree of departure of the improvement from the initial invention. When determining whether or not discrete follow-on innovations represent infringement, German patent law presumes that the entire follow-on innovation, as a product, (a) is imitative and therefore infringing, (b) subject to a compulsory liability rule on the basis of dependency or (c) of being non-infringing.

2.2.4

The Improvement Is a Follow-on Innovation Infringing the Initial Patent

When relying on the one-patent-per-product presumption, patent law’s treatment of subsequent inventors appears balanced from the perspective of incentive theories.148 The configuration is appropriate for discrete industries, such as pharmaceuticals and chemicals, in which an individual innovation is covered by only a limited number of patents.149 However, it is difficult to apply similar logic to the balance of incentives in patent law with regard to follow-on innovations that depend upon pre-existing patents, even when the follow-on innovator has developed patentable technology of his own. Beyond blocking patent scenarios in which patent claims overlap, a follow-on innovation may rely on existing technology in four other ways: In the first, the “research tools” scenario, the “second-generation product requires the input of many

146

Careful drafting of claims can contribute to the independence of a subsequent invention from an initial patent. 147 Lemley, “Economics of Improvement in Intellectual Property Law,” 1007-1013. 148 Cf. Scotchmer, who, implicitly relying on the prospect theory, found that there is no socially optimal solution for balancing the incentives of an initial patent holder and the inventor of a dependent patent. Suzanne Scotchmer, “Standing on the Shoulders of Giants : Cumulative Research and the Patent Law,” Journal of Economic Perspectives 5, no. 1 (1991): 34-35. 149 See Wesley M. Cohen, Richerd R. Nelson, and John P. Walsh, Protecting Their Intellectual Assets : Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not), Working Paper No. 7552 (Cambridge, MA: National Bureau of Economic Research, 2000), 18-19.

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different first-generation products [. . .] Some of these [research] tools may end up being embodied in the product, and some not.”150 Innovations in the biotechnological field and in diagnostic testing often depend on upstream patents on research tools, such as genes.151 The research tool scenario may also arise in relation to few, possibly pioneering, unsubstitutable upstream patents upon which the R&D efforts of an entire field depend. Scotchmer also identifies a “basic innovation” scenario, where a number of subsequent downstream applications rely on an individual, pioneering upstream innovation.152 When the use or production of such subsequent innovation depends on the appropriation of the patented basic innovation and the subsequent application is not patented in a manner that it overlaps with the patent claims of the basic innovation and qualifies for a compulsory license on the basis of dependency, such downstream application infringes upon the basic innovation. In the third scenario, cumulative innovation, the follow-on innovation is a complex product that incorporates several complementary patents.153 Examples of fields featuring cumulative innovation are computers, telecommunications, and semiconductors, as well as fields where very small components are patentable, as is the case with gene fragments in biotechnology.154 The cumulative innovator creates patentable technology of her own, but either the production or the use of the new innovative technology infringes upon a pre-existing complementary patent.155 In theory, all of the patents incorporated into a cumulative innovation could be developed by the same innovator.156 However, in the complex technology fields, it is likely that a follow-on innovator would need to integrate externally developed complementary technology into a product, as inventing around every single patent would be economically unfeasible and socially wasteful. The fourth scenario, sequential innovation, is characterized by “sequence of products that keep getting better”. This arises in the context of competition, wherein each of the improvers is likely to later to become a licensee of the technology to yet

150

Scotchmer, Innovation and Incentives, 132. For examples of such follow-on innovations, see National Research Council. Intellectual Property Rights and Research Tools in Molecular Biology. Summary of the Workshop Held at the National Academy of Science, February 15-16, 1996. Washington, DC: National Academies Press, 1997, 14-16, 40-55. 152 Scotchmer, Innovation and Incentives, 132. 153 Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 19. 154 Ibid, 19, 21. 155 On complementarity in innovation, see Scotchmer, Innovation and Incentives, 144-146. Cf. Michael Mattioli, “The Data Pooling Problem,” Berkeley Technology Law Journal 32, no. 1 (2017), 191, who employs a term “recombinant innovation” to refer to a reassembly of existing components “in a useful and complementary way”, without innovating individual components of one’s own. 156 Alternatively, in accordance with the prospect theory, all follow-on development of a technology could be executed by one company. Kitch, “Nature and Function of the Patent System.,” 276 285, 288-289; FTC, To Promote Innovation, ch 2, 18-19. 151

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37

another follow-on innovator.157 Patent law, relying on the one-patent-per-product assumption, determines the balance of incentives between the initial patent holder and the follow-on innovator with reference to the follow-on innovator’s contribution. However, a sequential innovator may have developed an improvement to a technology that is complex in itself and covered by multiple patents. Nevertheless, the use of sequential innovation requires licenses for the earlier versions of the technology. To conclude, in several scenarios, the production and commercialization of a follow-on innovation is dependent on the use of external technology.158 Different scenarios may also play out simultaneously in respect to a particular follow-on innovation.159 Given that a follow-on innovator needs to have licenses for the patents ex ante, the transaction may be affected by the typical inefficiencies associated with licensing, such as the costs involved in locating the licensee, patent valuation problems, and strategic behaviour on the part of the patent holder.160 If the license is refused, the follow-on innovator can either seek access to substitute technology (if it exists) or attempt to design around the existing patent. Compulsory licensing based on dependency does not apply to the described follow-on innovations above, because the newly developed technology does not improve upon any particular patent. However, in such a scenario, the total social welfare effect of a follow-on innovation could be comparable to or higher than that of the subsequent patentee in the blocking patents scenario. In comparison to dependent patents,161 patent law does not assign a special standing to follow-on innovation and subjects it to the same rules as unpatentable, infringing imitative products. Hence, if the follow-on innovator fails to secure licenses to external technology before investing in innovation, he is infringing the externally developed patent. The initial patent is protected by a property rule, yet the effect of the injunctive relief concerns the entire follow-on innovation, even if the patent represents only a small component thereof. Consequently, if the license to the initial patent is refused or the patent holder succeeds in receiving a preliminary or permanent injunction, the follow-on innovator’s entire product, irrespective of its

157

Scotchmer, Innovation and Incentives, 146. There may be also situations in which a follow-on innovation has considerable economic and social value yet does not meet the patentability criteria not because of its obviousness but rather due to the fact that it was published during the process of its development. Such innovation is likely to be treated as infringing, subpatentable improvement. They may emerge, for example, following the practice of free revealing in UOCI, See Sects. 3.1.3.2 and 3.3.5.2. 159 For example, drawing the line between the research tool and cumulative innovation scenarios with respect to a biotechnological innovation may prove difficult. Similarly, depending on their products, follow-on innovators in the field of telecommunications may encounter both cumulative innovation and sequential innovation scenarios. 160 For an analysis of transaction costs associated with licensing, see Lemley, “Economics of Improvement in Intellectual Property Law,” 1048-1064, and Sect. 2.3.2.3. 161 See Alexandra Abello, La License, Instrument de Régulation des Droits de Propriété Intellectuelle (Paris: LGDJ, 2008), 217-218. 158

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social value, will be taken off the market. The objective of patent law is to incentivise investments in innovation and foster dynamic efficiency; however, in the context of follow-on innovation, the reward offered to the initial patent holder is in danger of becoming excessively imbalanced in respect to the patentee’s contribution to the social value of the follow-on innovation.

2.3

Overprotection

2.3.1

The Increasingly Fragmented Patent Landscape

2.3.1.1

Patent Strategies

In the last decades, a number of changes to the patent landscape have undermined the one-patent-per-product presumption and have led to an increase in both the fragmentation of patent ownership and the complexity of innovations. Together, the trends described in Sect. 2.3.1 contribute to the imbalance of the patent system in respect to follow-on innovators. Over the last two decades, patenting activity has increased significantly globally.162 Patent proliferation is attributed to a number of factors: First, the emergence of new technology sectors, such as progress in ICT technology and biotechnology, has contributed to more active patent filing in those sectors. Second, changes have occurred in competitive environments as a result of the decentralization of innovation processes, which have evolved towards more networked and collaborative 162

World Intellectual Property Organization., World Intellectual Property Indicators (Geneva: WIPO, 2014), 3, 13. Bronwyn H. Hall, Exploring the Patent Explosion, Working Paper No. 10605 (Cambridge, MA: National Bureau of Economic Research, 2004): 4-5 and 17, Figure 2. The number of patent applications filed to patent offices globally rose from 1 to 2.5 million between 1995 to 2013, while grants rose from 0.4 to 1.17 million during the same period. World Intellectual Property Organization., World Intellectual Property Indicators, 9, 18, 23. See also OECD, Patents and Innovation : Trends and Policy Challenges (Paris: OECD Publishing, 2004), 5. In the US, the trend towards a rapid increase in the number of patent applications can be traced to the mid-1980s. Between 1967 to 1984, the number of patent applications in the US grew from 94,629 to 111,284; between 1985 and 2014, the number rose from 117,006 to 578,802. U.S. Patent and Trademark Office and Patent Technology Monitoring Team (PTMT), “Number of Utility Patent Applictions Filed in the United States, by Country of Origin, Calendar Years 1965 to Present (1),” U.S. Patent and Trademark Office, last modified 2015, accessed 25 November 2015 http://www.uspto.gov/ web/offices/ac/ido/oeip/taf/appl_yr.htm. A similar acceleration in the number of patent applications filed with the EPO has occurred since the mid-1990s. Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 9. In the last decade, many of the Asian countries, particularly China and Korea, have demonstrated rapid growth in terms of the number of patents filed, while patent filings in Japan have been declining; the EPO, however, has not kept pace with the US. World Intellectual Property Organization, World Intellectual Property Indicators, 13-15. Similarly, a decline had been observed also in Sweden. Ove Granstand and Marcus Holgersson, “Anatomy of Rise and Fall of Patenting and Propensity to Patent : Case of Sweden,” International Journal of Intellectual Property Management 5, no. 2 (2012) 169.

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models, advancements in the specializations of firms, and the rise of technology markets. Third, the changes that have occurred to patent law as a result of the expansion of patentable subject matter and more intense enforcement of patents have contributed to the increase in patenting activity. The trend of strengthening patent protection originated in the US and expanded to the global level through the TRIPS Agreement. Fourth, the application processes became more efficient across the world .163 What is relevant from the perspective of follow-on innovation is that a great deal of this increased patenting activity and subsequent exercise of patents reflects patent strategies that are not aligned with the dynamic incentive theory that justifies patent protection. These strategies are particularly prevalent in complex technology fields that deal with cumulative innovations. A characteristic of complex technology is that it encompasses a number of complementary patents, the values of which are higher when concentrated in one portfolio than when fragmented in many. In contrast, discrete technologies do not incorporate entire patent portfolios.164 In their often-cited empirical study, Cohen et al. found that, beyond the objective of preventing copying, the other prevailing reasons why US manufacturing companies patent were blocking rivals from patenting related innovations, prevention of patent litigation, and the use of patents in license negotiations. The preferred strategies differed between discrete and complex industries.165 In complex industries with cumulative innovation, patenting frequency was found to be rising constantly, despite the finding that patents were not regarded as the predominant means of appropriating returns from investments into R&D.166 Given that constant innovation is a prerequisite for competing in these industries, companies that operate in these fields are not considered to have responded to the incentive function of patents.167 Recently, discrete industries have also been found to have adapted patenting strategies that are not motivated by protecting the inventions from free-riding.168

163

OECD, Patents and Innovation, 5, 13, 16-18. Dietmar Harhoff et al., Strategic Use of Patents and Its Implications for Enterprise and Competition Policies, Report Entr/05/82 (Brussels: European Commission), 7. 165 Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 17-19, 21-25. See also Levin et al., “Appropriating the Returns from Industrial Research and Development,” 795-796, 798, 810. 166 Bronwyn H. Hall and Rosemarie Ham Ziedonis, “Patent Paradox Revisited : An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995,” RAND Journal of Economics 32, no. 1 (2001): 101. 167 Conrad, “Mining the Patent Thicket,” 144. Conrad views the cross-licensing of large patent portfolios as indicating that patents do not function as incentives in complex industries. Ibid, 144-145. 168 In an empirical study conducted in Germany, Knut et al. did not discover differences in patenting motives between discreet and complex industries; they thus argue that technological complexity is prevalent in every modern industry. For example, the chemical and biotech fields have adopted certain aspects of complex industries and also patent with the intention of cross-licensing. Knut Blind et al., “Motives to Patent : Empirical Evidence from Germany,” Research Policy 35, no. 5 (2006): 664-665, 671. 164

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From the perspective of follow-on innovation, two strategies are of particular importance: defensive and offensive patent strategies. These strategies often do not concern individual patents but rather companies’ entire patent portfolios.169 Because these strategies do not foster innovation, they clash with both the incentive and prospect theories’ justifications for patent protection.170 They increase the likelihood that follow-on innovations will contain externally developed technologies and the probability of overprotection problems occurring.171 In addition, they may have anticompetitive effects.172 There is no established definition for the strategies. Based on the legal and economic literatures, they are described in the following paragraphs. When following a defensive patent strategy, a company accumulates patents with the motive of securing freedom of operation.173 The strategy represents companies’ understanding of patents as business tools.174 In addition to deliberately applying for patents for defensive purposes, a company may also decide to use the patents resulting from its unsuccessful R&D projects in a defensive manner.175 A defensive patent portfolio serves two purposes: First, it is intended to alleviate the risk of patent litigation, and, second, it allows for the use of patents as bargaining chips in crosslicensing negotiations with rivals. Cross-licensing arrangements may be either initiated upon threat of litigation or be motivated by an interest in accessing a licensee’s technology.176 These strategies are may be adopted by large companies, which choose not to sue each other; hence, the outcome of this behaviour is so-called “mutual non-aggression”.177 The patent flooding that can derive from defensive 169

Bessen, Patent Thickets, 2. Turner, “Nonmanufacturing Patent Owner,” 195-196. 171 Most importantly hold-ups, discussed Sect. 2.3.2.7. 172 Cf. Harhoff et al., Strategic Use of Patents, 6, who employ a narrow definition of the strategic use of the patent system which covers only behaviour that has anticompetitive effects. 173 Defensive patenting strategies initially emerged in response to two events that occurred in the 1980s. The first was the Polaroid v. Kodak patent dispute, which amounted to an injunction against Kodak, together with 1 billion dollars in damages and a prohibition from participating in the market for instant-cameras. Following this case, the perception of the risk of being subject to permanent injunction in patent disputes on the part of incumbent manufacturing companies changed. The second event was the new business strategy employed by Texas Instruments at the turn of the 1980s, which saw the company begin to actively enforce its patents and consequently charge higher licensing fees. Hall and Ziedonis, “Patent Paradox Revisited,” 108-110. 174 Futoshi Yasuda, “Issues and Possible Solutions in Japan : Patent Filing Activities of Japanese Companies, Resulting Backlog Problem and Possible Solutions,” in Future of the Patent System, ed. Ryo Shimanami (Cheltenham: Edward Elgar Publiching, 2012), 179, 217. 175 In such a case, the initial patenting activity would be aligned with the incentive theory. 176 See Colleen Chien, “From Arms Race to Marketplace : The New Complex Patent Ecosystem and Its Implications for the Patent System,” Hastings Law Journal 62 (2010): 307-309, 321-322. Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 19, 22, 25, 27; Hall, Exploring the Patent Explosion; Rosemarie Ham Ziedonis, “Don’t Fence Me In : Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms,” Management Science 50, no. 6 (2004); 804; FTC, To Promote Innovation, 33. 177 Bessen, Patent Thickets, 1, 3. In addition, Cohen et al. hypothesized that, in complex product industries, patent portfolio races are the consequences of non-cooperative game interactions 170

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patenting can be seen as showcasing companies’ attempts to mitigate the risks associated with the commercial failures of individual patents.178 However, they also end up contributing to the creation of anticommons179 and reduce rivals’ possibilities to enter the industry. In contrast, an offensive patent strategy is characterized by the intention of blocking other companies’ product development by patenting or acquiring patents in their technology areas and litigating the patents.180 The targets of such litigation can either be competitors or operate on other markets.181 A patent holder may use this strategy with the intention of interfering with the market position or entry of the alleged infringer. This form of behaviour is referred to as offensive–anticompetitive. Such strategies may hinder both subsequent improvements of the initial patent as well as competition by substitution.182 Generally, the incentives to engage in offensive–anticompetitive behaviour appear to be specific to practicing entities.183

between companies. They are socially wasteful because companies apply for patents predominantly for reasons other than protecting inventions. Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 27-29. Cf. Chien, reporting on selectively aggressive litigation behaviour from holders of defensive patent portfolios. Colleen Chien, “Of Trolls, Davids, Goliaths, and Kings : Narratives and Evidence in the Litigation of High-Tech Patents,” North Carolina Law Review 87, no. 8 (2009), 1572, 1592, 1606. 178 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 98. 179 For a discussion on the tragedy of anticommons, see Sect. 2.3.2.2. 180 Strategic patenting is not a new phenomenon: Offensive patent strategy was already described in the 1906 US Supreme Court case Continental Paper Bag Co. v. Eastern Paper Bag, in which a plaintiff sued a rival for infringing a patent which the patent owner itself had never put to use. According to the circuit court of appeals’ statement cited in the case, “The record also shows that the complainant, so to speak, locked up its patent. It has never attempted to make any practical use of it, either itself or through licenses, and apparently its proposed policy has been to avoid this. In this respect, it has not the common excuse of a lack of means, as it is unquestioned that the complainant is a powerful and wealthy corporation. We have no doubt that the complainant stands in the common class of manufacturers who accumulate patents merely for the purpose of protecting their general industries and shutting out competitors.” Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 427-28 (1908). 181 Firms that operate in complex industries have also been reported as facing increasing amounts of litigation from non-rival practicing companies. In her sample of large high-tech companies, Chien found that almost 40 percent of patent litigation concerned companies with whom large portfolio holders had overlaps, yet almost a third of suits were raised against completely non-rival companies. Chien suggested that these results indicate that companies adopt more offensive patenting strategies in order to exploit asymmetries in the patent portfolios of non-rival companies. Chien, “From Arms Race to Marketplace,” 335-336. Furthermore, the likelihood of companies from the semiconductor industry being subject to the patent assertion of non-rivals from outside the industry has been reported to have risen significantly. The risk is not attributed to PAEs but instead predominantly to companies competing in markets connected to the semi-conductor industry. In addition, many of the rival firms that had filed suits were found to be in the process of exiting the industry. Hall and Ziedonis, Empirical Analysis, 15-18. 182 Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 28. 183 Mark A. Lemley and A. Douglas Melamed, “Missing the Forest for the Trolls,” Columbia Law Review 113, no. 8 (2013).

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Alternatively, the offensive patent strategy may be driven by a business model that emphasizes aggressive patent licensing, in which case the threat of injunction may be used to pressure an alleged infringer into settling for higher royalty fees. The offensive–exploitative patent strategy has been associated with patent assertion entities. Patent assertion entities (hereinafter, PAEs) “use patents primarily to get licencing fees than to support the development or transfer of technology.”184 They are “businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.”185 By employing such a strategy, PAEs attempt to benefit from hold-up situations.186 When a patent holder following an offensive strategy does not operate in the same field of technology as the party it sues for an infringement, it is immune to defensive strategies such as countersuits.187

2.3.1.2

Patent Assertion Entities

Patent assertion entities belong to a group of non-practicing entities (hereinafter NPEs), along with research and development entities, such as universities, defensive patent trusts, and start-ups, that had not yet manufactured any products.188 In comparison to other NPEs, PAEs, also referred to as “patent trolls”, have been viewed as taking advantage of the patent system, thus undermining its objective of incentivizing innovation. This opportunistic behaviour may occur as a result of the adoption of several different business models aimed at allowing PAEs to collect “money from others that allegedly infringe their patents”.189 From the perspective of dynamic efficiency, PAEs play a controversial role, because they seek licenses ex post, after the alleged infringer has invested in his product.190 They have been reported to wilfully engage in strategic behaviours intended to create hold-up situations. For example, PAEs may consciously strive to conceal their identities, making it more difficult for innovators to identify the

Chien, “From Arms Race to Marketplace,” 300. FTC, Patent Assertion Entity Activity (Washington, DC: FTC, 2016), 1. 186 The hold-up problems are discussed Sect. 2.3.2.7. 187 Chien, “From Arms Race to Marketplace,” 318-320. 188 See ibid, 325-332. 189 Lemley and Melamed, “Missing the Forest for the Trolls,” 2118. A study conducted by the FTC identified two types of PAEs: The “Portfolio PAEs”, which specialize in acquiring and licensing large patent portfolios, rarely litigate and typically produce large revenues. This type of PAE is typically backed by investors. In contrast, “Litigation PAEs” are small companies with little capital that actively litigate a limited number of patents against large numbers of alleged infringers and obtain smaller royalties per patent than portfolio PAEs. FTC, Patent Assertion Entity Activity, 42-50. For other categorisations of PAEs, see, for example, Lemley and Melamed, “Missing the Forest for the Trolls,” 2126-2127; Chien, “From Arms Race to Marketplace.”; “Of Trolls, Davids, Goliaths, and Kings,” 1577-1590. 190 FTC, Evolving IP Marketplace : Aligning Patent Notice and Remedies with Competition (Washington, DC: FTC, 2011), 8-9. 184 185

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43

patents that they own;191 this, in turn, makes it more difficult to contact them before investing in an innovation. Hence, instead of signalling their ownership of patents, PAEs may consciously aspire to create hold-up situations.192 However, the patents that a PAE exercises may have initially served the purpose of incentivizing innovation in another company before being sold to a PAE.193 On some occasions, PAEs can be favourable to innovation, as they enable individual inventors to find buyers for patented technology and, when necessary, litigate against infringers.194 From this perspective, PAEs also serve the role of market intermediaries for inventors who do not have the resources required to assert their patents and hence lack the negotiating power necessary to successfully license them.195 However, few of the profits obtained through the activities of PAEs flow back to small inventors, which indicates that the majority of the costs imposed by PAEs on defendants in patent litigation are socially wasteful.196 In addition, PAEs do not facilitate innovation by inducing technology transfer, as the majority of their licensing demands target independently developed technologies used in licensees’ existing operations.197

2.3.1.3

Transitioning from Defensive to Offensive Strategies

In practice, the strategy according to which a patent is exercised may vary over its lifetime. As Chien observed, patents have “longer shelf-lives than the products, strategies, and even companies they are initially obtained to support.”198 A company that patents defensively in order to protect its R&D efforts may later adopt a more

Chien, “From Arms Race to Marketplace,” 319. Practicing entities may be inhibited from adopting such strategy due to their interest in maintaining their own reputations. See Lemley and Melamed, “Missing the Forest for the Trolls,” 2165; Fiona M. Scott Morton and Carl Shapiro, Patent Assertions : Are We Any Closer to Aligning Reward to Contribution?, Working Paper No. 21678 (Cambridge, MA: National Bureau of Economic Research, 2015), 1-2. 192 Chien, “From Arms Race to Marketplace,” 319. This behaviour bears similarities to the patent ambush strategy encountered in standard settings, in which an ambusher conceals its ownership of a SEP in the standard-setting process with the purpose of holding up implementers of the standard; see Case COMP/38.636 Rambus, Summary of Commission Decision of 9 December 2009, 2010 O.J. (C 30) 17. For a discussion on patent ambushes in the context of competition law, see Sect. 8. 6.2. 193 Lemley and Melamed, “Missing the Forest for the Trolls,” 2168. 194 Fiona M. Scott Morton and Carl Shapiro, “Strategic Patent Acquisitions,” Antitrust Law Journal 79 (2014): 478, 480. 195 James F. McDonough, “Myth of the Patent Troll : An Alternative View of the Function of Patent Dealers in an Idea Economy,” Emory Law Journal 56 (2006): 211. 196 James E. Bessen and Michael J. Meurer, “Direct Costs from NPE Disputes,” Cornell Law Review 99, no. 2 (2014): 422. 197 Robert Feldman and Mark A. Lemley, “Do Patent Licensing Demands Mean Innovation,” Iowa Law Review 101 (2015): 137, 173. 198 Chien, “From Arms Race to Marketplace,” 313. 191

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offensive strategy and a litigious business model while reducing its investments in R&D.199 Companies or business units that exit the manufacturing business are often reported to adopt offensive strategies, either as a strategic choice or due to bankruptcy.200 The strategy under which an individual patent is exercised also may change upon assignment.201 As such, profiting from the sales of patents is aligned with the justifications of patent protection202 and allows companies to specialize in R&D. However, buyers, which can be either practising entities or NPEs, may both employ offensive strategies; such strategies may overreward patent holders from the perspective of dynamic incentive theory. On occasion, patents are deliberately sold to such entities. Companies with large patent portfolios that are unwilling to engage in patent litigation are incentivized to monetize their patents through sales in order to realize the opportunity cost of keeping the patents on the shelf and unenforced.203 In the long run, defensive strategies may have a facilitating effect on patent litigation if defensively built patent portfolios are eventually sold to PAEs.204 Paradoxically, defensive patent portfolios, which are aimed at preventing hold-up situations, may, over time, become a weapon of socially wasteful offensive patent strategies.205 The presence of PAE’s on technology markets may also incentivize patenting,206 which is not supported by the dynamic incentive theory. Consequently, patents may be exercised offensively at any point during their lifetimes. An offensive strategy can be employed both by practicing entities and NPEs. Those actors that adopt offensive strategies take advantage of the design flaws of the patent system and highlight its systemic problems.207 The market failures that result from the adoption of offensive strategies are discussed in Sect. 2.3.2, in particular in Sect. 2.3.2.7 addressing hold-up problems.

Ibid, 328; Lemley and Melamed, “Missing the Forest for the Trolls,” 2136-2137. See ibid, 21352136, for a list of examples of companies that have changed their patent assertion strategies. Rambus, for example, appears to have adopted an offensive strategy upon becoming an NPE. Chien, “Of Trolls, Davids, Goliaths, and Kings,” 1607. 200 Conrad, “Mining the Patent Thicket,” 146. 201 Chien, “From Arms Race to Marketplace,” 312. 202 See Lemley and Melamed, “Missing the Forest for the Trolls,” 2150, 2152, 2161. 203 Lemley and Melamed, “Missing the Forest for the Trolls,” 2137-2139. 204 Chien, “From Arms Race to Marketplace,” 313. Indeed, both portfolio and litigation PAEs appear to acquire and license patents from owners who wish to “outsource” their patent assertion activity. See FTC, Patent Assertion Entity Activity, 47-49. 205 Chien, “From Arms Race to Marketplace,” 300, 342. 206 Lemley and Melamed, “Missing the Forest for the Trolls,” 2120-2121, 2150, 2152, 2161. 207 Ibid, 2120-2121. 199

2.3 Overprotection

2.3.1.4

45

Patent Quality

A large proportion of patents fail to withstand a validity challenge.208 The licensing fees paid for an invalid patent are socially wasteful, as the follow-on innovator could use the licensing fees in a more efficient manner. Furthermore, holding a portfolio of weak patents creates an unjustified competitive advantage.209 However, the invalidation of weak patents also requires resources, and SMEs may prefer to pay licensing fees rather than become involved in litigation. Invalid patents appear to negatively affect follow-on innovation in a more indirect manner. A recent empirical study indicated that the invalidation of patents that were perceived to be strong in a given industry led to a 50 percent increase in patent citations by follow-on innovators.210 Specifically, the patents were found to block follow-on innovation in complex technology industries in which fragmented patent ownership is common: electronics, computers and communications, and medical instruments, including biotechnology. The increase in subsequent innovation manifested exclusively in small downstream innovators’ citations of patents held by large companies, which rose by 520 percent. This effect manifested two years after the invalidations.211 The invalidation proceedings and unblocking effect were attributed to bargaining breakdowns in licensing negotiations, specifically those between large and small companies in fields characterized by fragmented patent

In the US, the invalidation rate in lawsuits filed between 2008–2009 was 43 percent. John R. Allison, Mark A. Lemley, and David L. Schwarz, “Understanding the Realities of Modern Patent Litigation,” Texas Law Review 92 (2014): 1770, 1773, 1801. In the UK, 42 percent of litigated patents were revoked or partially revoked. Christian Helmers and Luke McDonagh, “Patent Litigation in the UK : An Empirical Survey 2000-2008,” Journal of Intellectual Property Law & Practice 8, no. 11 (2013), Table 12. Between 2010–2013, the invalidation rate of the German Federal Patent Court (BPatG) was 79 percent, of which 36.5 percent represented partial invalidations. The invalidation rate for software and telecommunications patents was higher, at 88 percent, of which 30 percent were partially invalid. These high rates were attributed to patent examiners’ errors, the emergence of new prior art, and differences in the examinations standards of the German Patent Office, the EPO, and the BPatG. Peter K. Hess, Tilman Stoy-Müller, and Martin Wintermeier, “Are Patents Merely ‘Paper Tigers’?,” Bardehle Padenberg, last modified November 2014. accessed 9 January 2018 https://www.bardehle.com/de/ip-news-wissen/publikation/ publikationen/ipnews/info/are-patents-merely-paper-tigers.html, 4, 6–7, 27–30. More generally in Europe, on average, 31 percent of challenged patents are found invalid during the period of 2000–2010. Stuart J. H. Graham and Nicolas van Zeebroek, “Comparing Patent Litigation across Europe,” Stanford Technology Law Review 17 (2014): 695, Table 10. The study covered Germany, France, Spain, the UK, and the Netherlands. 209 See Case AT.39985, Motorola - Enforcement of GPRS Standard Essential Patents, Commission decision of 29 April 2014, C(2014) 2892 final, http://ec.europa.eu/competition/antitrust/cases/dec_ docs/39985/39985_928_16.pdf, para 383. 210 Galasso and Schankerman, “Patents and Cumulative Innovation,” 317, 321. The sample covered only patents invalidated by the Federal Circuit, ibid, 321. 211 Ibid, 320-322, 354. 208

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ownership and the cumulative development of technology.212 However, the study also implied that incumbent patent holders prevent the market entries of innovative SMEs. Given that, in complex industries, many patents are also valid, this study emphasizes their potential blocking effect on follow-on innovation and the need to alleviate the bargaining breakdowns that hinder it.213

2.3.1.5

Interoperability Standards

Standardisation may concern either the quality and safety of products and services or the technical specifications that guarantee the interoperability of complementary products.214 The rise of networked industries has increased the importance of the latter type of standard setting. These industries are characterized by strong network effects, meaning that the value of a network will increase with each additional user of a product compatible with it, such as a fax machine or mobile telephone. Consequently, networks are prone to tipping, which refers to when a winning network attracts the majority of consumers and becomes a de facto standard. Network effects can be also indirect, such as when the increased demand for one product, such as mobile telephones, increases the demand of a complementary product, such as mobile applications.215 After a networked product has become market dominant, consumers are typically locked-in to it and will encounter high switching costs. The product that wins the competition between two incompatible networks is not necessarily the most technologically advanced.216 In order to compete on a market impacted by network effects, a follow-on innovator’s products must be interoperable with the technology that governs access to the relevant network or with complementary products. A privately owned IP-protected technology that guarantees interoperability may also rise to the status of a de facto standard.217 Alternatively, a technical interoperability standard for a network can be set as a de jure standard under the coordination of a standard-setting organization (SSO).218 De jure standards seek to ensure technical interoperability and compatibility between the technologies produced by several undertakings, with

212

Ibid, 356. The study did not investigate whether there was an initial attempt to acquire a license and whether the initiator of the invalidation proceedings was a licensee. 213 See ibid, 366. 214 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 257. 215 See Michael L. Katz and Carl Shapiro, “Systems Competition and Network Effects,” Journal of Economic Perspectives 8, no. 2 (1994): 96-98, 105-106. 216 Ibid, 108, 108. 217 See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 661-662. 218 Standard-setting organizations may feature very heterogeneous organizational and contractual structures, and the initiative for standard setting may arise both from a private organization or the government. See Mark A. Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” California Law Review 6, no. 3 (2002): 1898-1901, 1903-1908.

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the effect of fostering competition on merits instead of lock-in to a de facto standard the access to which may be in the hands of one undertaking.219 De jure standards are intended to be openly accessible for any company willing to implement them, irrespective of its position on the market.220 De jure standard setting is favourable in terms of allocative efficiency, as it is capable of reducing transaction costs on the technology market.221 It also fosters dynamic competition through the creation of a technology platform for subsequent innovative activity and reduces the time required to introduce innovations to the market.222 It must be noted, a de facto standard is market dominant by definition, whereas a de jure standard is subject to competition from other technologies, and becomes market dominant only when the market tips in its favour. Both de facto and de jure standards may feature standard essential patents (hereinafter, SEPs). If a follow-on innovator wishes to develop a standard-compliant product and avoid patent infringement, it must obtain licenses for all of the SEPs incorporated into the relevant standard. This task involves high, and sometimes insurmountable, transaction costs, as standards may encompass hundreds of patents declared as SEPs, some of which are not essential or even valid. Furthermore, hightechnology products such as mobile telephones must typically comply with a number of standards.223 In the presence of a de facto standard, access to the network and the price of access are dependent on the goodwill of the dominant undertaking(s) holding the de facto SEPs, which makes willing standard implementers vulnerable to refusals to license that prevent market entry and hold-ups. Consequently, de jure standards are viewed as being more pro-competitive than de facto standards. Under de jure

219

See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 308. 220 FTC, Antitrust Enforcement, 34. De jure standard setting, when executed in compliance with the guidelines for horizontal co-operation agreements, is generally deemed to be pro-competitive. See, TTBER Guidelines (2014), paras 280, 309, 315-319; Carl Shapiro, “Navigating the Patent Thicket : Cross Licenses, Patent Pools, and Standard Setting,” in Innovation Policy and the Economy, Volume 1, ed. Adam B. Jaffe, Josh Lerner, and Scott Stern (Cambridge, MA: MIT Press, 2001), 138. 221 See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 308. 222 See ibid. Pro-competitive effects are deemed most likely to occur when a de jure standard establishes “compatibility on a horizontal level between different technology platforms”. Ibid, para 264. 223 On problems related to SEPs, see also European Commission, Patents and Standards. A Modern Framework for IPR-Based Standardisation, Ecsip Consortium (Brussels: European Commission, 2014), 109-131; Knut Blind et al., Study on the Interplay between Standards and Intellectual Property Rights (IPRs) Tender No. Entr/09/015 (Luxembourg: Publications Office of the European Union, 2011): 23-24, 27, 61-66, 81, 85 115, IPLytics for the European Commission, “Landscaping Study on Standard Essential Patents (SEPs),” European Commission, last modified December 12, 2016, accessed April 6, 2018 https://ec.europa.eu/growth/content/landscaping-study-standardessential-patents-europe-0_de, 56.

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standards, a patent becomes essential upon its inclusion within a standard.224 To ensure the accessibility of a de jure standard, it is critical that the patents relevant for that standard are disclosed and that the holders of SEPs commit to licensing them on FRAND terms.225 The patents included in a technology standard become much more valuable when they gain market power as a result of wider implementation of the standard, while the values of excluded technologies will decline.226 The FRAND commitments aim to prevent SEP holders from leveraging the lock-in of a particular industry to a particular standard by means of a patent hold-up, discriminatory licensing practices, or the exclusion of certain companies from access to the standard.227 However, de jure standards are vulnerable to hold-ups resulting from a failure to disclose SEPs upon agreement over the technology standard, a situation also known as a patent ambush.228 Furthermore, even when an SEP is subject to a FRAND commitment, SEP holders may seek to enforce their patents against standard implementers, with the effect of creating a hold-up situation.229

2.3.1.6

Technological Changes

The one-patent-per-product presumption is also undermined by the general trend of technological development towards increased complexity and convergence. By their natures, certain technological fields are characterized by fragmentation: For example, in the fields of nanotechnology and biotechnology, patents typically cover small components. In certain areas of technology, such as genetics, inventing around patented components may prove close to impossible.230 One predictor of increased technological complexity is Moore’s law, according to which the number of components on an integrated circuit is expected to double every

Shapiro, “Navigating the Patent Thicket,” 136. See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 286. 226 Farrell et al., “Standard Setting, Patents, and Hold-Up,” 607-608. 227 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 269, 286, 311. 228 Shapiro, “Navigating the Patent Thicket,” 136, 141; Farrell et al., “Standard Setting, Patents, and Hold-Up,” 605. See also Case COMP/38.636 Rambus, Summary 2010 O.J. (C 30) 17; Communication from the Commission. Intellectual Property Rights and Standardisation. COM (92) 445 final (27 October 1992), para 4.4.1. 229 See Case AT.39985, Motorola (29 April 2014); Case AT.39939, Samsung - Enforcement of UMTS Standard Essential Patents, Commission Decision of 29 April 2014, C(2014) 2891 final. http://ec.europa.eu/competition/antitrust/cases/dec_docs/39939/39939_1501_5.pdf.; Case C-170/ 13, Huawei Technologies Co. Ltd v. ZTE Corp. and ZTE Deutschland GmbH, 5 C.M.L.R. 14 (2015). 230 Geertrui Van Overwalle, “Exclusive Ownership Versus Open Commons : The Case of Gene Patents,” WIPO Journal 4, no. 2 (2013): 140. 224 225

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two years.231 Similarly, the trend of technology convergence suggests that future innovations will be increasingly complex and feature technologies developed by a number of patentees. Technology convergence can be defined as the “blurring of boundaries between at least two hitherto disjoint areas of [. . .]technology[. . .] marked by an increase of interchangeability and connectedness between the respective areas, as can be seen in collaboration, licensing, patenting, or publishing behavior”.232 For example, ICT is becoming increasingly integrated with fields it had traditionally no association with it, such as the automotive and electricity supply industries.233 The convergence of new fields with ICT indicates the importance of interoperability and standardisation in converging industries. However, convergence is encountered also in fields unrelated to ICT, such as in the chemical and pharmaceutical industry.234 These trends are likely to accelerate with the advent of the Internet of Things (IoT), which is a “global infrastructure for the information society, enabling advanced services by interconnecting (physical and virtual) things based on existing and evolving interoperable information and communication technologies.”235 Innovation in the IoT sector is characterized by convergence:236 The existing and emerging applications IoT applications are likely to come to cover a broad range of sectors, such as transportation, healthcare, housing and hospitality, logistics, retail and wholesale, agriculture, and public administration.237 The IoT facilitates the rise of Industry 4.0, the “organisation of production processes based on technology and devices autonomously communicating with each other along the value chain”,238 which is anticipated to create an enormous economic surplus.239

Gordon E. Moore, “Cramming More Components onto Integrated Circuits,” Electronics 38, no. 8 (1965): 115. 232 Clive-Steven Curran and Jens Leker, “Patent Indicators for Monitoring Convergence - Examples from NFF and ICT,” Technological Forecasting and Social Change 78, no. 2 (2011): 258. Curran and Leker distinguish between two terms referring to “the blurring of boundaries between two or more industries”: “convergence”, in which a new field is created in response to a new demand, and “fusion”, in which industries merge in response to existing demands. Ibid. 233 Directorate-General for Enterprise and Industry, Patents and Standards, 84-88, 93-94, 108. 234 See Curran and Leker, “Patent Indicators for Monitoring Convergence,” 261-262. 235 ITU, Overview of the Internet of Things, Series Y: Global Information Infrastructure, Internet Protocol Aspects and Next-Generation Networks (Geneva: International Telecommunication Union, 2012); 1. 236 A. T. Kearney, Internet of Things : A New Path to European Prosperity (Chicago: A. T. Kearney, 2016), 3. 237 Ibid, 4. 238 Jan Smit et al., Industry 4.0 (Brussels: European Parliament - Policy Department A: Economic and Scientific Policy, 2016), 20. 239 By 2025, IoT applications are predicted to produce an annual economic surplus of 3.9–11.1 trillion per year. James Manyika et al., Internet of Things : Mapping the Value Beyond the Hype (New York: McKinsey Global Institute, 2015), 2. The predicted market of IoT applications in Europe is 80 billion, and it is predicted to generate a surplus of one trillion. A. T. Kearney, Internet of Things : A New Path to European Prosperity, 1. 231

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Of the potential value of IoT applications, 40 percent is estimated to stem from interoperability.240 The standardisation of IoT-related ICT, such as technology enabling machine-to-machine communication, is critical for its success. In addition, interoperability and standardisation of IoT components facilitate the achievement of economies of scale downstream.241 Currently, IoT technologies are subject to numerous competing de jure standard-setting initiatives, while many companies are also developing competing proprietary standards.242 The field of IoT features competition on multiple markets for various IoT sub-technologies. Many applications of IoT’s enable much narrower interoperability than 3G technology, therefore the markets for IoT are predicted to be less prone to tipping than those for smart phone sector.243 As a consequence, the IoT markets are likely to be less vulnerable to hold-ups involving SEPs, than the markets for mobile telecommunications. Nevertheless, the implementers of IoT standards may encounter hold-up problems upon clearing SEPs ex post standard implementation.244 The IoT is likely to provide many opportunities for innovation, market entry, and even the creation of new markets. However, due to increased convergence and the importance of standardisation in the context of the IoT, innovators will likely come to operate in an increasingly complex, fragmented, and cumulative patent landscape.245 This will place pressure on them when it comes to efficient licensing negotiations, and it also increases the risk of follow-on innovators engaging in involuntary patent infringement.

240

Manyika et al., Internet of Things, 4. A. T. Kearney, Internet of Things : A New Path to European Prosperity, 17. For an overview of standardisation initiatives in the context of IoT, see, for example, Patrick Guillemin et al., “Internet of Things Global Standardisation - State of Play,” in Internet of Things – from Research and Innovation to Market Deployment, ed. Peter Friess and Ovidiu Vermesan (Gistrup: River Publishers, 2014); OECD, Internet of Things : Seizing the Benefits and Addressing the Challenges, Background Report for Ministerial Panel 2.2 (Paris: OECD Publishing, 2016); Patrick Guillemin et al., eds., Internet of Things - Position Paper on Standardization for IoT Technologies (Brussels: European Research Cluster on the Internet of Things, 2015), 29-31. 242 See A. T. Kearney, Internet of Things : A New Path to European Prosperity, 23. 243 A consensual prediction on the basis of discussions at the IoT Connectivity Standards Workshop, the Max Planck Institute for Innovation and Competition, Munich 04.07.2017. 244 Beatriz Conde Gallego and Josef Drexl: “IoT Connectivity Standards: How Adaptive is the Current SEP Regulatory Framework,” IIC - International Review of Intellectual Property and Competition Law 50 no. 1 (2019): 144-145, 153-155. 245 On fragmented ownership of IoT-related patents, see LexInnova, “Internet of Things : Patent Landscape Analysis,” World Intellectual Property Organization, last modified 2016, accessed 31 December 2018 https://www.wipo.int/edocs/plrdocs/en/internet_of_things.pdf. 241

2.3 Overprotection

2.3.2

Market Failures Associated with Overprotection

2.3.2.1

The Tragedy of the Anticommons

51

In the future, the one-patent-per-product assumption will likely be applicable to ever fewer innovations. It can be assumed that innovations across industries will continue to grow increasingly complex, convergent, interoperable, and cumulative and will rely on large numbers of patents held by different patent holders. With the rise of the IoT, many previously discrete products will, in the future, need to comply with standards that may possibly feature hundreds of SEPs. Simultaneously, the trends of patent proliferation and strategic patent behaviour are likely to persist. Many follow-on innovators are likely to innovate in fragmented patent environments characterized by patent thickets. A patent thicket can be defined as “multitude of essential patents, which are held by a multitude of patent holders”.246 When a follow-on innovation, as a resource, is overlapped by several unbundled, competing rights, it may become subject to the anticommons problem:247 The fragmentation of patent rights may lead to a situation in which a follow-on innovator would need to negotiate licenses with a number of patent holders in order to create a new product.248 A cumulative innovator may fail to clear all of the patents due to their sheer number and the use of offensive patent strategies, which can be employed during the lifetime of any patent. Innovating in such environment is vulnerable to transaction costs problems, hold-ups, and the accumulation of licensing fees.249 The consequence is a tragedy of the anticommons, in which “multiple owners are each endowed with the right to exclude others from a scarce resource, and no one has an effective privilege of use.”250 However, the tragedy of the anticommons as a concept is too general to be used in assessing the market failures of overprotection that may harm the follow-on innovator, which are identified and analysed in greater detail in the following Sects. 2.3.2.2–2.3.2.9.

Geertrui Van Overwalle, “Patent Pools and Clearinghouses in the Life Sciences : Back to the Future,” in Research Handbook on Intellectual Property and the Life Sciences, ed. Duncan Matthews and Herbert Zech (Cheltenham: Edward Elgar Publishing, 2017), 309. Alternatively, a thicket can be defined as an “overlapping set of patent rights requiring those seeking to commercialize new technology to obtain licenses from multiple patentees.” Shapiro, “Navigating the Patent Thicket,” 119. 247 Michael A Heller, “Tragedy of the Anticommons : Property in the Transition from Marx to Markets,” Harvard Law Review 111 (1998): 670. 248 Michael A. Heller and Rebecca S. Eisenberg, “Can Patents Deter Innovation? The Anticommons in Biomedical Research,” Science 280, no. 5364 (1998): 698-700. 249 Ibid, 673-674. The authors employ the term “hold-out”. 250 Heller, “Tragedy of the Anticommons,” 624. The tragedy of the anticommons mirrors the tragedy of the commons. 246

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Grounds for Categorization

Two categorizations are important when determining which overprotection problems hinder follow-on innovation. The first relates to the point of time at which the market failure occurs: ex ante refers to those that occur before a follow-on innovator invests in the new innovation, while ex post refers to those that occur after a followon innovator has made an investment. Excessive transaction costs, excessive royalties, royalty-stacking problems, and unjustifiable refusals to license represent the ex ante market failures, while hold-ups and multiparty hold-ups are the ex post market failures. The second delineation is between market failures faced by a follow-on innovator that involve an individual patent holder, such as a hold-up and the market failures that result from the behaviour of multiple patent holders, such as royalty stacking problems and multiparty hold-ups. In addition, the market failures associated with excessive transaction costs often stem from the presence of multiple patent holders.

2.3.2.3

Ex ante: Transaction Costs

As a general rule, in order to avoid patent infringement, a follow-on innovator must obtain licenses to all of the patents that his product incorporates or uses ex ante before he begins to produce his innovation.251 Such ex ante clearance of pre-existing patents is expected to succeed in a Coasean world of perfect information and zero transaction costs;252 however, in a fragmented patent landscape, fulfilling this requirement typically involves substantial transaction costs, which may stifle follow-on innovation. Patent law assumes that the follow-on innovator takes upon herself the transaction costs involved in locating a patent holder and initiating the licensing negotiations (Art. 31 (b) TRIPS). In practice, a follow-on innovator would face costs associated with (a) identifying all of the technologies that his innovation would incorporate, (b) evaluating the scope and quality of the patents, (c) searching for the owners of the technologies needed, (d) negotiating the licenses, and (e) valuating the externally developed technologies. Excessive transaction costs may have three unfavourable consequences: passivity on the part of a follow-on innovator in terms of even attempting to obtain a licence; bargaining breakdowns; and failure to clear all of the patents ex ante, despite the innovator’s efforts. When a follow-on innovation covers hundreds or even thousands of patents, the costs of identifying all of the technologies involved ex ante can be excessive,

§ 9 PatG, Arts. 28 and 31 (b) TRIPS. See Coase, “Problem of Social Cost,” 2, 5-6, 8, 12, 15; Anastasia P. Winslow, “Rapping on a Revolving Door : An Economic Analysis of Parody and Cambell v. Akuff-Rose Music, Inc.,” Southern California Law Review 69, no. 3 (1996): 780; Lemley, “Economics of Improvement in Intellectual Property Law,” 1046-1047.

251 252

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particularly for SMEs.253 In the early stages of follow-on innovation, it may also be difficult to determine ex ante which patents the innovation would infringe upon.254 In the anti-commons context, the transaction costs associated with negotiating licenses into workable bundles may stifle innovative activity. Pre-existing patents are prone to underuse in the case of low-value follow-on innovations and when investments made in follow-on innovation are risky.255 In such situations, a followon innovation may not be created at all, and the follow-on innovators will likely not even engage in license negotiations. Negotiations for patent licensing are lengthy, as the process of agreeing on the value of a technology is complicated and involves the risk that negotiations may break down.256 Negotiations for bundling rights may break down due to a right holder’s heterogeneous interests257 and transaction cost budgets, as well as asymmetrical willingness to cross-license.258 Furthermore, the costs associated with strategic bargaining accumulate when ownership of patents to technology is fragmented.259 In fields that feature complex technologies and high patenting frequency, such as the semiconductor and telecommunication industries, the transaction costs involved in clearing all rights beforehand may prove economically unfeasible, which aggravates the risk of hold-up.260 In addition to being possibly excessively costly, clearing all patents ex ante may also prove irrational for the follow-on innovator from the perspective of maintaining incentives to innovate. Patent claims can be drafted very

See Lamping et al., “Declaration on Patent Protection,” 680. Ziedonis argues that the distribution of the holders of patents that cover an innovation may have an effect on the willingness of a new innovator to engage in ex ante licencing negotiations, as fragmentation raises the transaction costs involved in locating the right holder(s) and evaluating the validity of patents and increases the likelihood of patent assertion. Ziedonis, “Don’t Fence Me In,” 807-808. 254 Correa reports that the developers for downstream products related to SARS faced additional costs due to ex ante uncertainty concerning how many upstream patents the final cure would cover and the associated transaction costs of negotiating licenses for them. Carmen Correa, “The SARS Case,” in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press, 2009), 45. 255 Heller and Eisenberg, “Can Patents Deter Innovation?,” 698-700; see also Heller, “Tragedy of the Anticommons,” 673-674. 256 Merges, “Case of Blocking Patents.” 84-91; Arti K. Rai, “Fostering Cumulative Innovation in the Biopharmaceutical Industry : Role of Patents and Antitrust,” Berkeley Technology Law Journal 16, no. 2 (2001): 831. See also Rebecca S. Eisenberg, “Patents and the Progress of Science : Exclusive Rights and Experimental Use,” University of Chicago Law Review 56 (1989): 1073. 257 A bargaining breakdown that results from the disagreement over price is referred to as a market failure of excessive royalties, discussed Sect. 2.3.2.5. 258 Heller and Eisenberg, “Can Patents Deter Innovation?,” 700-701. Heller and Eisenberg discuss these issues in detail in connection with regard to the biomedical sector. Cf. Rai, who suggests that the heterogeneity of the biomedical industry could be a temporary phase that precedes deeper vertical integration. Rai, “Role of Patents and Antitrust,” 847. 259 Merges, “Contracting into Liability Rules,” 1317. 260 Shapiro, “Navigating the Patent Thicket,” 119-120, 122. 253

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ambiguously, and many of patents are invalid.261 Patent backlog and the stockpiles of unused patents aggravate the problem,262 while independent inventive activity also contributes to it.263 Furthermore, in the fast-paced field of technology, clearing all patents ex ante would cause companies to fall behind their competitors. Slavish obedience to the requirement of ex ante negotiations would also retard the adoption of standards, which can feature hundreds of SEPs. In industries with patent thickets, companies and universities have been observed to consciously ignore existing patents when moving forward with their R&D, thus taking the risk of becoming subject to patent litigation.264 A company may also proceed with investing in followon innovation due to the perception that the patent holder would not pursue aggressive litigation.265 Foregoing obtaining a license to a presumably weak, yet unsubstitutable, patent ex ante involves a risk of patent hold-up in the event that it is later litigated and found valid.266

2.3.2.4

Ex ante: Unjustified Refusals to License

A patent holder has a right to conclude licensing contracts (Art. 28 (2) TRIPS) and enjoys the contractual freedom to choose her licensees and to determine the level of royalties. From the perspective of follow-on innovation, a patent holder would, ideally, refuse a license only in order to prevent free-riding that compromises his incentives to invest in R&D in the future. A refusal to license will be unjustified and create a market failure only in situations wherein the exercise of the patent would conflict with the economic rationale that underlies the patent system or represent an abuse of market power. As a general rule, a refusal is rarely unjustified when the patent is used by its owner and the follow-on innovator is its competitor, as exclusivity enables a patent holder to maintain her innovation incentives when her competitive advantage derives from the patented invention. The follow-on is innovator then assumed, in the absence of substitutes, to design around the patent. This reflects the objective of

Mark A. Lemley and Carl Shapiro, “Probabilistic Patents,” Journal of Economic Perspectives 19, no. 2 (2005); Chien, “From Arms Race to Marketplace,” 338-339. 262 “From Arms Race to Marketplace,” 339-341. 263 Cotter, Comparative Patent Remedies, 60. “Patents on trivial or already existing inventions are particularly hard to monitor, since the engineer intending to use them may not perceive them as patentable at all and hence may not find a patent search worthwhile.” Markus Reitzig, Joachim Henkel, and Christopher Heath, “On Sharks, Trolls, and Their Patent Prey—Unrealistic Damage Awards and Firms’ Strategies of “Being Infringed”,” Research Policy 36, no. 1 (2007): 147. 264 Mark A. Lemley, “Ignoring Patents,” in Future of the Patent System, ed. Ryo Shimanami (Cheltenham: Edward Elgar Publishing, 2012), 79-81. In this manner, a company also avoids being charged for wilful infringement. Ibid, 80. 265 Reitzig, Henkel, and Heath, “On Sharks, Trolls, and Their Patent Prey,” 147. 266 Farrell et al., “Standard Setting, Patents, and Hold-Up,” 618-619. 261

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the protection of IPRs to foster dynamic efficiency though the development of substitutes to patented inventions.267 The rights to determine a price for access and to exclude generally do not constitute an economic monopoly, which presupposes the possibility of controlling prices on the market. Many inventions on the market have competing substitutes;268 hence, when a holder of substitutable patent refuses to license, the follow-on innovator may seek access to a substitute technology.269 However, some patents may also be near to impossible to substitute. For example, a patent subject to refusal may be a very valuable pioneer invention and the followon innovation a mere downstream application of a research tool.270 While refusal to license in respect to an individual follow-on innovation does not alone have a dramatic effect in terms of dynamic competition, systematic refusals to license an unsubstitutable patent to downstream innovators may also suppress the technological development of a particular sector and harm downstream competition. If a patent also confers market power, it may constitute an essential facility for operating on the downstream market in which an innovator intends to introduce his product. A patent may be essential to a de facto standard or a market dominant de jure standard, access to which would represent a precondition for operating in the market.271 Such situations, in which competition by substitution cannot occur, represent an overprotection problem in patent law.272 Thus, a refusal would be unjustifiable when it precludes “substitution by a different, potentially more innovative product”.273 In the same vein, a refusal is also unjustified when a patent is acquired in order to follow an offensive–anticompetitive strategy, and it is not for the purposes of maintaining incentives to innovate. A refusal may be also difficult to justify from the perspective of incentive theories when a follow-on innovator is neither using the patent in question nor competing, or planning to compete, with the patent holder, especially when the patent covers only an individual component of a follow-on innovation. Generally, unless it features as a key element of a follow-on innovation, a refusal to license an individual patent produces a negligible entry barrier from the

Drexl, “Antitrust Placebo,” 807. Harrison and Theeuwes, Law and Economics, 149; Ilkka Rahnasto, “How to Leverage Intellectual Property Rights” (Doctoral Dissertation, University of Helsinki, 2001), 32. 269 By refusals to license, I refer to situations in which a rightful holder is not willing to give a license at all. Situations in which a follow-on innovator cannot afford to agree to the requested royalty rate are discussed in relation to the market failure of excessive royalties. 270 I owe this argument to Dr. Marius Fischer. 271 The applicability of the essential facilities doctrine to standard essential patents, is discussed Chap. 8 on compulsory liability rules in competition law. 272 Alfred Früh, Immaterialgüterrechte und der relevante Markt : Eine wettbewerbsrechtliche und schutzrechtliche Würdigung technologischer Innovation, Schriftenreihe zum Gewerblichen Rechtsschutz. Band 181. (Cologne: Carl Haymanns Vorlag, 2012), 462-463. 273 Drexl et al., “Comments of the MPI on the Application of Art 82 EC,” 568-569. 267 268

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perspective of competition law.274 However, the necessity of inventing around unsubstitutable patents when faced with a refusal to license may, in some situations, also have undesirable effects with regard to social welfare and compromise dynamic efficiency: First, it may demand wasteful duplicative investments in substituting an existing technology, with possibly inferior results. Second, the process of designing around necessarily involves the costs associated with the later introduction of the follow-on innovation to society. Third, the costs of inventing around may be too high to bear for the follow-on innovator, who will then be unable to bring the innovation to the market at all. While it may still be economically viable for an innovator to invent around individual patents, the net costs of inventing around a number of patents or replacing an entire patent portfolio with her own substitutes may prohibitive for a follow-on innovator. When a license is refused for the purposes of blocking R&D efforts of other companies, a developer of a complex cumulative innovation may need to invent around his own patents, in order to develop an alternative, non-infringing technological solution. Furthermore, in the anti-commons context, a follow-on innovator may face multiple refusals to license from a number of patent holders in respect to several patents or even entire patent portfolios, possibly with the motivation of precluding the market entry of that follow-on innovator. If a follow-on innovation is significantly more valuable than the patent (s) that it depends upon, a refusal will have a negative effect on dynamic efficiency.

2.3.2.5

Ex ante: Excessive Royalties

One of the economic objectives of patent protection is to enable the patent holder to raise the price of the patented invention above the marginal costs of its production. While this creates a deadweight loss for those who would still be willing to pay a lower price (yet one that is still higher than the marginal costs of production), it is justified for the purpose of recouping the fixed costs associated with creating an invention. Consequently, it can be presumed that the number of situations in which a patent holder’s exercise of his contractual freedom to determine his licensing fees ex ante would constitute a market failure are few. Ex ante license negotiations are considered to yield more socially optimal results than ex post licensing, as they allow a follow-on innovator to avoid hold-up situations.275 Nevertheless, bargaining may break down due to asymmetric access

Rahnasto, “How to Leverage Intellectual Property Rights,” 28. See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1992-1993. When investigating sequential innovation, Green and Scotchmer found that ex ante negotiations enable more socially optimal divisions of profits between initial and subsequent innovators, because, in ex post negotiation, profits would be eroded by competition. Jerry R. Green and Suzanne Scotchmer, “On the Division of Profit in Sequential Innovation,” RAND Journal of Economics 26, no. 1 (1995): 28. However, this study does not take into account the effect of injunctive relief on subsequent licensing negotiation and different ways of calculating damages for patent infringement in courts.

274 275

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to information276 and the difficulties involved in assessing the economic values of patents and a follow-on innovation that arise due to uncertainty.277 An excessively high price may be a result of not only rational profit maximization but also cognitive bias, which may lead to an overestimation of the value of the patent.278 Generally, a market failure caused by excessive pricing does not arise in relation to patents that are valid and have substitutes, as competition drives royalty rates down.279 Obviously, licensing rates for invalid patents are always overcompensating a patent holder.280 The holder of an unsubstitutable patent may rise to a monopolistic position, from which he may raise prices above the competitive level in order to maximise his profits, thus creating a deadweight loss, with a consequence being that technology has a lower rate of dissemination.281 When observing the relationship between an individual patent holder and a follow-on innovator, identifying when the price exceeds that which is necessary to secure the patent holder’s incentives to innovate is very difficult. Market power can be viewed as justifiable when it results from the excellence of a particular technology;282 however, market power may also derive from other causes, such as industry lock-in to a standard and network effects aggravating it. Therefore, in the context of standardisation, the most obvious issues associated with excessive pricing arise when a holder of an SEP demands royalties above the FRAND level. However, in general, an excessive royalty rate in respect to

James E. Bessen and Eric Maskin, “Sequential Innovation, Patents, and Imitation,” 40, no. 4 (2009): 613. 277 Arrow, “Economic Welfare,” 224; Eisenberg, “Patents and the Progress of Science,” 1073-1074; Merges, “Case of Blocking Patents,” 89-90. 278 Heller and Eisenberg, “Can Patents Deter Innovation?,” 701; Merges, “Case of Blocking Patents,” 90-91. On the endowment effect, see Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6 (1990): 1339-1342. 279 See Guiseppe Dari-Mattiacci and Francesco Parisi, “Substituting Complements,” Journal of Competition Law & Economics 2, no. 3 (2006): 338, 345; the authors presume that patent holders compete by price. 280 Lemley and Shapiro found that prices negotiated ex ante do not reflect the likelihood of a patent being invalid and that they therefore lead to overcompensation in a manner similar to that found in hold-up situations. Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2003-2005. In ex ante negotiations, a follow-on innovator’s alternative to licensing is designing around the patent, which assumes that the patent in question is valid. Carl Shapiro, “Injunctions, Hold-up, and Patent Royalties,” American Law and Economics Review 12, no. 2 (2010): 298-300. Follow-on innovators are likely to be insufficiently incentivized to invalidate weak patents because successful revocation can create positive externalities that benefit competitors. Lemley and Shapiro, “Probabilistic Patents,” 88-89. However, the game theoretic model disregards companies’ freedom to evaluate the strength of patents or entire portfolios and to address this issue upon setting the royalty rates or determining the scope of cross-licensing agreements. In addition, specialized services that evaluate the validity of patents are available; see, for example, “Patent Validity Search,” IP.com, last modified n.d., accessed 10 March 2017 http://ip.com/solutions/professional-services/patentvalidity/. 281 Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 88. 282 Farrell et al., “Standard Setting, Patents, and Hold-Up,” 615. 276

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an individual valid patent rarely poses a significant threat of market failure, unless it has an effect of a factual, unjustified refusal to license.

2.3.2.6

Ex ante: Royalty Stacking

In the context of the cumulative innovation of multicomponent products, the aggregated effect of high royalties may lead to a market failure, which will hinder followon innovation even if the pricing of individual patents is not remarkably excessive. A follow-on innovation may become subject to the market failure of royalty stacking, “in which a single product potentially infringes on many patents, and thus may bear multiple royalty burdens. The term ‘royalty stacking’ reflects the fact that, from the perspective of the firm manufacturing the product in question, all of the different claims for royalties must be added or ‘stacked’ together to determine the total royalty burden borne by the product if the firm is to sell it free of patent litigation.”283 The problem of royalty stacking differs from the problem of increased transaction costs caused by fragmentation.284 In the context of follow-on innovation,285 royalty stacking stems from Cournot’s problem of complements:286 When determining royalty rates, individual patent owners do not take into consideration the impact of the aggregate royalties on the price and profits derived from a multicomponent product. Consequently, the total royalty rate in an anti-commons environment is higher than in situations in which complementary patents are owned by a single entity, resulting in higher costs for users, higher product prices, and deadweight loss.287 Eventually, the aggregation of royalties may become so high that it diminishes follow-on innovators’ incentives to invest in the development of their own product, either as a whole or with regard to making a certain improvement to it, even if the result is not desired by individual patent holders.288 In an experimental study, the deadweight losses from the market failure were found to correlate positively with the complementarity and fragmentation of rights.289 However, the existence of two

Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993. See Lemley and Melamed, “Missing the Forest for the Trolls,” 2172-2173, 2178. 285 A market failure that is closely related to Cournot’s problem of complements is the double marginalization problem, which “arises when input suppliers with market power (here, the patentees) sell to a downstream firm that also has some power over price”. Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2014. This market failure also translates into higher consumer prices and a larger deadweight loss. However, it primarily harms consumers, not follow-on innovators. 286 Ben Depoorter, “Putting the Humpty Dumpty Back Together : Experimental Evidence of Anticommons Tragedies,” Journal of Law, Economics & Policy 3, no. 1 (2007): 1. 287 Lemley and Melamed, “Missing the Forest for the Trolls,” 2157-2158. 288 Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2015-2016. 289 Depoorter, “Putting the Humpty Dumpty Back Together,” 21. 283 284

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substitutes per component releases the market from the deadweight losses that stem from Cournot’s problem of complements with respect to a particular component.290 Royalty-stacking problems are presumed to result from the fragmentation of the ownership of patents relevant for a multicomponent product.291 The theory behind these market failures presupposes that an innovator does not have her own patent portfolio to cross-license.292 These problems are also associated with jure standard setting, wherein the implementation of a standard would require licenses for hundreds of SEPs.293 While this topic is not further explored in this thesis, the manner in which royalties are calculated may contribute to royalty stacking.294

2.3.2.7

Ex Post: Hold-up

A follow-on innovator risks being subject to a hold-up market failure when he fails to clear prior patent rights before investing in and manufacturing his innovation. When a follow-on innovation infringes a patent, the patent holder enjoys stronger negotiating power, allowing her to demand royalties that may exceed the actual value of the technology during ex post licensing negotiations. This negotiation power derives from the investments that the innovator has sunk into the new product,

Dari-Mattiacci and Parisi, “Substituting Complements,” 338, 345. See Lemley and Melamed, “Missing the Forest for the Trolls,” 2157-2158; Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2014-2015; On patent fragmentation dynamics in semiconductor industry, see generally Ziedonis, “Don’t Fence Me In.” 292 Damien Geradin and Miguel Rato, “Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-up, Royalty Stacking and the Meaning of FRAND,” European Competition Journal 3, no. 1 (2007): 127. 293 See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1991-1993. See also Damien Geradin, Anne Layne-Farrar, and A. Jorge Padilla, “Complements Problem within Standard Setting : Assessing the Evidence on Royalty Stacking,” Boston University journal of science & technology law 14, no. 2 (2008), 145-148. However, Geradin et al question the relevance of the royaltystacking problem. See Ibid. 150-15, 154 163, 176. In standard implementation, SEPs are rarely cleared ex ante. Typically, however, the owners of SEPs have given FRAND declarations for patents that they own that have been incorporated into a de jure standard; these declarations are intended to ensure that licenses granted ex post implementation will reflect the value of the patent prior to its incorporation into the standard and the standard’s possible subsequent market dominance. See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 269, 285, 287. 294 For example, reach-through royalties, where the royalty fee is calculated on the basis of sales of products incorporating the technology or resulting from the use of the technology, may, on some occasions, overreward the initial right holder. Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law, vol. X (New York: Wolters Kluwer Law and Business, 2011), at 1782g. Reach-through royalties are characteristic for patents on research tools. Daryl Lim, Patent Misuse and Antitrust Law : Empirical, Doctrinal and Policy Perspectives. (Cheltenham: Edward Elgar Publishing, 2013), 124. Therefore, they pose a risk of royalty-stacking and raising transaction costs of licensing for downstream companies. 290 291

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which the patent holder’s right to seek injunctive relief puts at risk.295 Generally speaking, the licensing fee in a hold-up will be clearly higher than what the licensee would have agreed upon ex ante. Consequently, the price agreed upon creates a deadweight loss because is not proportionate to the economic contribution of the patent holder’s technology296 and the need to maintain the incentives to innovate. Instead, the deadweight loss resembles a tax on the innovator’s product, with the effect of diminishing dynamic efficiency.297 The excess of the royalties in a hold-up is the highest for weak patents that cover minor components of a complex product.298 If the held-up technology has substitutes, the alternative to the failed ex post licensing negotiations is redesigning the product to include the rival technology, which poses opportunity costs as a result of delay.299 In the case of unsubstitutable technology, hold-ups further exacerbate the problem of underusing resources in the anti-commons setting.300 Hold-ups in which a patent holder makes an excessive offer under the threat of injunctive relief can be referred to as exploitative hold-ups. They are characteristic of offensive–exploitative patent strategies, but they may also be a result of coincidental ex post license negotiation in which the patent holder is opportunistically incentivised to demand excessive royalties. However, a hold-up may also result from the employment of offensive–anticompetitive patent strategies when the objective of patent holder is not to obtain high royalties but rather to interfere with the follow-on innovator’s market position with the use of an injunctive relief. In the worst case, the subsequent innovator may lose his entire investment in the complex innovation and his own technology. Such an excluding hold-up represents abusive enforcement that is unjustifiable from the perspective of the dynamic incentive theory.301 A hold-up that results from a deceptive concealment of a SEP in de jure

Farrell et al., “Standard Setting, Patents, and Hold-Up,” 610-613, provide an economic model of a hold-up in the light of incentive theory. The market power to demand excessive royalties in a holdup situation is distinct from the justified market power that stems from the superiority of a particular technology. Ibid, 615-616. For a model of how the threat of injunction impacts licensing negotiations between a single patent holder and the innovator of a complex product ex post and ex ante, see Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1994-2005; Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 1994-2005; see also Mark A. Lemley and Carl Shapiro, “Reply : Patent Holdup and Royalty Stacking,” Texas Law Review 85 (2007), 2163-2170. 296 Cotter, Comparative Patent Remedies, 59. 297 Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993. 298 Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 23. 299 Farrell et al., “Standard Setting, Patents, and Hold-Up,” 614. 300 See Heller and Eisenberg, “Can Patents Deter Innovation?,” 698-700. Furthermore, due to the risk of hold-ups, some innovators may decide not to produce their innovations, particularly when economies of scale are present. Shapiro, “Navigating the Patent Thicket,” 126. 301 Excluding hold-ups resemble unjustified refusals to license, with the difference being that inventing around a held-up patent is more costly due to the follow-on innovator’s sunk investments. 295

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standard setting is also referred to as a patent ambush.302 When a licensee, as opposed to the patent holder, has a disproportionate advantage during negotiations, the patent holder may be subject to a reverse hold-up, or a hold-out, in which the licensee can dictate the licensing rate and terms.303 Hold-out situations are harmful to patent holders when they prevent them from recouping investments made in R&D to a sufficient extent. The literature is not always clear regarding whether exploitative hold-ups represent a problem that is distinct from royalty stacking.304 However, while the excessiveness of royalties in Cournot’s problem of complements derives from the market power of the individual patent holders, in exploitative hold-ups the negotiation power of the patent holder stems from the patent-specific sunk investments of the patent holder.305 Therefore, the problems associated with excessive royalties become more serious ex post, because the royalty rate that can be demanded and consequently agreed or settled upon for individual patent may be higher than what can be demanded ex ante. In principle, a follow-on innovator may, either simultaneously or over time become subject to a number of hold-ups. To distinguish this situation from royalty stacking problems, it is henceforth referred to as a multiparty hold-up.306 In the worst case scenario, an entire complex product may be taken off the market, either because the accumulated royalty rate becomes unsustainable to pay in terms of maintaining incentives to invest in the follow-on innovation or because one of the hold-ups that the innovator is faced with eventually leads to the granting of a permanent injunction.307 While all of the market failures pose the risk of delaying the introduction of a product to the market and increasing its costs, consequently creating a deadweight loss, the most dramatic is the hold-up. The risk of a hold-up mirrors the transaction cost problems encountered in the anti-commons setting. The likelihood that a follow-on innovator will be subject to hold-up grows due to increasing costs and decreasing rationale to clear all of the pre-existing rights prior to investing into a follow-on innovation. 302

Communication from the Commission. Intellectual Property Rights and Standardisation. COM (92) 445 final (27 October 1992), para 4.4.1. On patent ambushes from the perspective of competition law see Sect. 8.6.2. 303 For further discussion on hold-outs, see Sect. 4.3.4. 304 See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993; Alexander Galetovic and Stephen Haber, “Fallacies of Patent-Holdup Theory,” Journal of Competition Law & Economics 13, no. 1 (2017): 1, 28-33 for critiques of this conceptual ambiguity. 305 Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 17, 32. 306 Cf. ibid, 12, in which the authors argue that a hold-up can occur only once. However, the authors presume that all “firm’s quasi rents (the difference between its revenues and its short run costs) can only be extracted once” in an individual hold-up. In contrast, in this thesis, a hold-up is considered to encompass a royalty rate that is excessive from the perspective of the ex ante value of a patent, even if the royalty rate does not exhaust all of the quasi rents of the follow-on innovator. 307 A permanent injunction may be granted either because a patent holder refuses to pay an excessive royalty fee (i.e. an exploitative hold-up) or because the patent holder did not intend to license a patent on the basis of an offensive–anticompetitive strategy (i.e. an exclusionary hold-up).

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Empirical Inconclusiveness

The market failures described in Sect. 2.3.2 pose the risk of hindering follow-on innovation; however, their relevance and actual rates of occurrence have been subject to debate. Lemley and Shapiro’s model of the hold-up problem has been criticized from the theoretical perspective.308 According to Sidak, Lemley and Shapiro’s reasonable royalty rate is too low because it fails to take into account the value of the information concerning the benefits that a patented technology offers to companies that do not bear the commercial risks of the patent holder.309 However, this argument implicitly presumes that the patent infringer would seek to compete with the patent holder and pursue a second-comer strategy. Lemley and Shapiro’s model has also been criticized for presuming that the patent holder holds all of the bargaining power310 and failing “to develop and normatively justified baseline against which excessiveness of patent rewards can be measured.”311 Furthermore, the patent hold-up model and its underlying presumption that hold-ups require legislative interventions has been criticized by Galetovic and Haber for not aligning with the theory of transaction-cost hold-ups,312 which requires that “[t]here must be (1) a sunk investment in a relationship specific asset; (2) an incomplete contract; and (3) opportunistic surprise”.313 Indeed, the existing theories concerning hold-ups in patent law do not align with the criteria for transaction cost hold-ups.314 However, from the perspective of the law and economics of patent protection, Galetovic and Haber appear to have attacked a strawman: The description of patent hold-up theories in their article is incomplete and completely ignores the economic theories behind patent protection and competition law, which have a strong influence over the determination of what constitutes a market failure in relation to patents.315 Their article does not discuss the market failure of excluding hold-ups. Galetovic and Haber take the view that there is no hold-up problem but rather a long-run equilibrium. Companies that participate in de jure standardisation must be aware of how their choices regarding standard essential technology will influence the negotiating positions of patent holders, as this will allow them to make the adjustments necessary to counteract the hold-up risks.316 However, this argument against hold-up problems is weak, as not all of the implementers of a de jure standard participate in

See generally Sidak, “Reply to Lemley and Shapiro.”; John M. Golden, “‘Patent Trolls’ and Patent Remedies,” Texas Law Review 85 (2007). Cf. Mark A. Lemley and Carl Shapiro, “Reply : Patent Holdup and Royalty Stacking.” 309 Sidak, “Reply to Lemley and Shapiro,” 741-743. 310 Ibid, 746. 311 Golden, “‘Patent Trolls’ and Patent Remedies,” 2161. 312 Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 43-44. 313 Ibid, 20. 314 Ibid, 22-27. 315 See, for example, Farrell et al., “Standard Setting, Patents, and Hold-Up,” 610-621. 316 Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 262-227, 234-235. 308

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standard setting. They also argue that companies exposed to non-SEP hold-ups make financial accommodations for the risk involved;317 however, should this occur in practice, the resources reserved or the prices increased to accommodate unjustifiably high royalties are nevertheless undesirable from the social welfare perspective. While the hold-up model proves that the patent holder may become overcompensated, it does not prove whether this occurs incidentally or systematically in practice.318 On the one hand, the evidence concerning the business models of PAEs and offensive patent strategies supports the view that patent systems are subject to systematic market failures that hinder follow-on innovation.319 Litigation in the mobile telephone sector, also referred to as “patent wars”320 or “standard wars”, can be seen to reflect the occurrence of overprotection problems in patent law.321 Recently, in an international patent dispute, both the Fuzhou Intermediate People’s Court in China and the Regional Court of Munich awarded Qualcomm with injunctive relief against Apple.322 In Germany, Apple was prohibited from selling a number of its phone models that contained a chip that infringed upon Qualcomm’s patents in its own stores. The Qualcomm’s total commitments in the German cases

317

Ibid, 26-28. Golden, “‘Patent Trolls’ and Patent Remedies,” 2161. 319 For a discussion on patent strategies and PAEs, see Sects. 2.3.1.1–2.3.1.3. One of the famous patent war resolutions is a 612,5 million dollar settlement between NTP Inc., a PAE, and Research in Motion Ltd., the producer of Blackberry mobile phones. Kelley, Rob. “BlackBerry maker, NTP ink $612 million settlement.” CNN Money. Last modified 3 March 2006. Accessed 23 July 2019. https://money.cnn.com/2006/03/03/technology/rimm_ntp/. The settlement has been viewed to have been influenced by the earlier injunction granted against Research in Motion Ltd. Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 281. For the procedural history of the dispute, see Jennifer Lane, “NTP, Inc. v. Research in Motion, Ltd. : Inventions Are Global, but Politics Are Still Local— an Examination of the Blackberry Case,” Berkeley Technology Law Journal 21, no. 1 (2006) 64-66. 320 The patent wars have also concerned design patents and utility models; see Jessie Yang, “Use and Abuse of Patents in the Smartphone Wars : A Need for Change,” Case Western Reserve Journal of Law, Technology and the Internet 5 (2014): 241, 276. On competition law cases arising from standard wars in telecommunications sector see Sect. 8.6.4. 321 See Michael A. Carrier, “Roadmap to the Smartphone Patent Wars and FRAND Licensing,” CPI Antitrust Chronicle 2, no. April (2012) 2; Alison Jones, “Standard-Essential Patents : FRAND Commitments, Injunctions and the Smartphone Wars,” European Competition Journal 10, no. 1 (2014): 9-16. 322 Don Clark and Nicas Jack, “Chinese Court Says Apple Infringed on Qualcomms Patents,” The New York Times, last modified 2018, accessed 28 March 2019, https://www.nytimes.com/2018/12/ 10/technology/apple-qualcomm-patents-ruling.html; David Faber, “China Court Grants Qualcomm Injunction against Apple, Banning Sale of Some Iphones,” CNBC, last modified 2018, accessed 27 March 2019, https://www.cnbc.com/2018/12/10/china-court-grants-qualcomm-injunctionagainst-apple.html; Si Ma and Yin Cao, “Fuzchou Court Sides with Qualcomm over Apple,” ChinaDaily.com.cn, last modified 2018, accessed 28 March 2019, http://www.chinadaily.com.cn/a/ 201812/12/WS5c1043f3a310eff3032906d6.html; Jim McGregor, “Apple Banned from China as a Result of Battle with Qualcomm,” Forbes, last modified 2018, accessed 27 March 2019, https:// www.forbes.com/sites/tiriasresearch/2018/12/10/apple-banned-from-china-as-a-result-of-battlewith-qualcomm/#10b473897ca1; LG München, 20 December 2018, 7 O 10495/17, BeckRS 2018, 33489. 318

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exceeded 1.3 billion euros in order to cover Apple’s damages if the finding of patent infringement will be reversed upon appeal.323 In China, the preliminary injunction concerned all Apple’s mobile phones.324 In both cases, the dispute displays symptoms of a hold-up problem. Albeit such high-profile disputes may be infrequent, the amount of Qualcomm’s commitments illustrates the financial interests that can be at stake. On the other hand, the mere grant of an injunction against a follow-on innovator does not immediately reflect a presence of a hold-up problem. On the contrary, patent may be enforced to remedy a hold-out situation.325 Lemley and Shapiro found evidence for royalty stacking in case studies of, inter alia, 3G Cellular Technology and Wi-Fi Technology.326 Furthermore, the dramatic effect that patent invalidation has on follow-on innovation by SMEs indicates the presence of market failures in technology transfer.327 The existence of patent thickets with overlapping claims has been found to discourage the entries of new patentees in their respective technological areas.328 On the other hand, the empirical evidence concerning royalty stacking in the field of semiconductors, software, biotechnology and mobile telephony was found to be inconclusive.329 Furthermore, no strong evidence for the existence of anticommons problems in the biomedical sector has been found.330 While fragmentation of rights

BeckRS 2018, 33489; Mathieu Klos, “Qualcomm Hit Apple Hard,” Juve Patent, last modified 2018, accessed 31 March 2019, https://www.juve-patent.com/news-and-stories/cases/another-bigwin-for-qualcomm-against-apple/. 324 McGregor, “Apple Banned from China”. 325 See LG Düsseldorf, 9 November 2018, 4a O 17/17, [Beck Rechtsprechung] [BeckRS]2018, 35570; LG Düsseldorf, 12 December 2018, 4b O 5/17, BeckRS 2018, 38605; Konstanze Richter, “MPEG LA Scores Another Victory in SEP Dispute,” Juve Patent, last modified 2018, accessed 28 March 2019, https://www.juve-patent.com/news-and-stories/cases/mpeg-la-scores-anothervictory-in-sep-dispute/; “Verdicts Agaist Huawei and ZTE Enforced in Germany,” Business Wire, last modified 2018, accessed 28 March 2018, https://www.businesswire.com/news/home/ 20181227005324/en/Verdicts-Huawei-ZTE-Enforced-Germany. 326 Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2025-2029. Cf. Geradin, LayneFarrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 159-162, questioning the strenght of Lemley and Shapiro’s empirical fidnings. 327 Galasso and Schankerman, “Patents and Cumulative Innovation,” 320-322, 354, 366. 328 Bronwyn H. Hall et al., Study of Patent Thickets, Final Report Prepared for the UK Intellectual Property Office (London: National Institute of Economic and Social Research, 2012), 50-52. 329 Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 145-162. 330 See Charles R. McManis and Brian Yagi, “Bayh-Dole Act and Anticommons Hypothesis : Round Three,” George Mason Law Review 21, no. 4 (2014): 1090; Jonathan M. Barnett, “AntiCommons Revisited,” Harvard Journal of Law & Technology 29, no. 1 (2015): 144-147. For example, Walsh et al. found no evidence of bargaining breakdowns and failures to obtain access to patented research tools, as “firms and universities have been able to develop ‘working solutions’ that allow their research to proceed. These working solutions combine taking licenses, inventing around patents, infringement (often informally invoking a research exemption), developing and using public tools, and challenging patents in court.” John P. Walsh, Ashish Arora, and Wesley M. Cohen, “Effects Research Tool Patenting and Licensing and Biomedical Innovation,” in Patents in Knowledge-Based Economy, ed. Wesley M. Cohen and Stephen A. Merrill (Washington, DC: 323

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was found to be a reality in the context of genetic inventions, the expected market failures were deemed anecdotal and not systemic.331 In the same vein, the ICT sector, which has been associated with patent proliferation, has experienced constant growth, active innovation efforts, and decrease in prices during the last decades.332 In addition, the relevance of hold-ups and royalty-stacking problems in the context of de jure standards has been subject to criticism.333 Geradin et al., for example, do not find Lemley and Shapiro’s empirical findings concerning royalty stacking convincing and sufficient to establish policy changes involving a liability rule.334 Furthermore, in these sectors, no empirical evidence was found of royaltystacking problems systematically hindering downstream innovation or having an effect on consumer prices; rather, when compared to other industries, the prices of products from these sectors have been falling rapidly. In comparison, in non-SEPreliant industries, such as electricity, the price decrease has been more gradual.335 The limited empirical evidence concerning market failures associated with the overprotection of patents, especially in the anticommons setting, has been explained with reference to patent holders’ active efforts to cooperate and employ private ordering mechanisms, such as cross-licenses and patent pools, to mitigate them.336 In the majority of situations, cooperation is rational because patent holders seek to maximize profits. By refusing to license, a patent holder would incur the opportunity cost of losing licensing fees during the period in which the patent is valid.337 The inconclusiveness of empirical findings concerning the existence of royalty-stacking problems could demonstrate “that self-interest is enough to push firms toward market mechanisms for solving any complements problem on their own, without

National Academies Press, 2003), 286. However, the study focused on anticommons problems in research, and the results may differ in the context of product development. Van Overwalle, “Exclusive Ownership Versus Open Commons,” 141 fn 14. 331 OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, Evidence and Policies (Paris: OECD Publishing, 2002), 77. 332 See Barnett, “Anti-Commons Revisited,” 142-144. 333 For a broad overview, see Gregory J. Sidak, “Antitrust Division’s Devaluation of StandardEssential Patents,” Georgetown Law Journal 104 (2015): 60-62 and fn 49, with the following references. 334 Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 159-163, 174-176. 335 Alexander Galetovic, Stephen Haber, and Ross Levine, “Empirical Examination of Patent Holdup,” Journal of Competition Law & Economics 11, no. 3 (2015) 549, 554. See also Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 149. Industries that are reliant on SEPs have also displayed an accelerated pace of innovation. Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 8-9. 336 OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, 60; Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 165-168; Walsh, Arora, and Cohen, “Effects Research Tool Patenting and Licensing and Biomedical Innovation,” 286; Galetovic, Haber, and Levine, “Empirical Examination of Patent Holdup,” 572-573. 337 Richard A. Epstein and Bruce N. Kuhlik, “Is There a Biomedical Anticommons?,” Regulation 27, no. 2 (2004): 55-56.

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intervention.”338 Geradin and Rato argue that SEP holders are horizontally price constrained due to the complementarity of SEPs: Even a dominant holder of an SEP would, in setting her royalty rate, take into account the cumulative license rate that an implementer can pay given the royalty rates of other SEP holders.339 In the context of de jure standard setting, excessive royalties are less likely to be demanded by practicing entities with an interest in cooperation than by PAEs.340

2.3.2.9

Market Failures and Their Potential Solutions

Assuming that market failures related to overprotection do occur, their respective solutions can be divided into three different approaches: The first stream aims at limiting the fragmentation of patents and the number of weak patents ex ante. The most radical of the proposed solutions to anti-commons problems would be Heller’s suggestion to give the entitlement to an individual owner in a bundle of rights, which would facilitate efficient use of the resource in question.341 In the context of legal research on patents, the normative suggestions for resolving overprotection problems are more moderate. The proposals include recalibrating or strengthening patentability criteria,342 modifying the breadth of patent claims that are protected,343 increasing the quality of patent examinations, and increasing the attractiveness of opposition procedures.344 Furthermore, the scope of rights could be narrowed through exceptions to patent protection (Art. 30 TRIPS). Essentially, these solutions aim to respond to the first question in Calabresi and Melamed’s framework, namely to whom should the entitlement be granted?345

Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 162-163. Geradin and Rato, “Can Standard-Setting Lead to Exploitative Abuse?,” 147-148. Galetovic and Huber stress that “the profit-maximizing royalty rate falls with the number of patent holders.” Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 32. Some commentators have even claimed that companies’ incentives to hold up in anti-commons contexts are lower because many other patent-holders have the same power to create a hold-up. Douglas Gary Lichtman, Patent Holdouts and the Standard Setting Process, John M. Olin Program in Law and Economics: Working Paper No. 292 (Chicago: Chicago Working Paper Series, 2006), 8. This argument, however, implicitly presupposes that a patent holder has an interest in utilizing a technology that is subject to an anti-commons problem. 340 Scott Morton and Shapiro, “Strategic Patent Acquisitions,” 477. 341 Heller, “Tragedy of the Anticommons,” 688. Similar views have been expressed in connection to prospect theory, see Kitch, “Nature and Function of the Patent System,” 270-273, 276. 342 Heller and Eisenberg, “Can Patents Deter Innovation?,” 701. 343 Merges and Nelson, “On the Complex Economics of the Patent Scope,” 916. 344 Carl Shapiro, “Patent Reform : Aligning Reward and Contribution,” Innovation Policy and the Economy 8 (2008): 135-137. 345 Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1090. Exceptions to patent protection narrow down the scope of the initial entitlement and do not determine the means of its enforcement. Krauspenhaar, Liability Rules in Patent Law, 18-19. 338 339

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The second approach to resolving market failures concentrates on the second question in Calabresi and Melamed’s framework: Should the entitlement to a patent be protected through a property or liability rule?346 Calabresi and Melamed assumed that liability rules may be more efficient than property rules in the presence of market failures.347 The normative recommendations that are based on the second approach strive to define the conditions in which the employment of a compulsory liability rule would yield more efficient results than that of a property rule. In other words, they seek to answer the question as to when a market failure could be resolved by limiting the enforceability of patents with a permanent injunction.348 The third approach relies on the assumption of Coasean bargaining and suggests that, beyond the grant of the initial entitlement being protected by a property rule, at least some of the market failures caused by overprotection do not necessarily require any legislative intervention. The proponents of this approach consider technology markets to be self-correcting and concerns over market failures caused by overprotection excessive.349 This viewpoint has been expressed in the literature on OAI that stresses that patent holders have incentives to prevent market failures though private ordering and therefore act in ways that does not compromise follow-on innovation.350 The author considers the normative suggestions presented in the first stream insufficient when it comes to resolving the overprotection problems because, as observed in Sect. 2.3.1.3, a patent may over its lifetime be exercised both in accordance with and against the dynamic incentive theory. However, the mere act of screening for weak patents cannot resolve the problems of overprotection,351 as improved patent quality does not prevent the emergence of patent thickets.352 In addition, hold-up problems cannot be solely attributed to the problems associated with the allocation of entitlement but are also influenced by rules on patent enforcement and remedies.353 In contrast, compulsory liability rules enable a flexible balance between the interests of a follow-on innovator and those of the patent holder over the course of a patent’s validity.354 While this instrument limits the right to

Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1092. See ibid, 1106-1110. 348 See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2036-2037, 2044-2045; Lemley and Shapiro, “Reply,” 2163, asupporting stays to permanent injunctions in infringement proceedings. 349 See Merges, “Contracting into liability rules,” 1295, 1298, 1392-1393; Barnett, “Property as Process,” 411, 431-433, 455-456. 350 On OAI theories, see generally Sect. 3.1. 351 Improved patent quality could also have the indirect effect of reducing defensive and offensive motivations to apply for patents. 352 Van Overwalle, “Exclusive Ownership Versus Open Commons,” 146. 353 Rosa Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, European Studies in Law and Economics (Rotterdam: Intersentia, 2010), 24. 354 Lamping et al., “Declaration on Patent Protection,” 688. 346 347

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exclude, it makes it possible to maintain the incentives to invest in R&D via the patent holder’s entitlement to royalties and damages for the use of an invention. However, the mere identification of the possible market failures that can be caused by overprotection does not clarify when there would be a need for legislative intervention in the form of compulsory liability rules. The empirical literature on the prevalence and frequency of the problems is contradictory: Some authors are opposed to the imposition of policy changes intended to resolve market failures, which have not been proven to occur regularly.355 However, direct measurement of the actual rate of occurrence of market failures associated with overprotection and their impact across different industries is very difficult or even impossible in the absence of counterfactual legal doctrines to show a causal link between the occurrence of market failures and the scope and means of protecting the legal entitlement to a patent.356 Similarly, it may be impossible to verify what proportion of follow-on innovations never reach the market due to the overprotection problems of the patent system. Obviously, the assessment of the occurrence of overprotection problems is beyond the scope of this research and its methods. From the perspective of purely doctrinal legal research, the fact that patent law, as a system, allows for an unjustifiable outcome to occur, even in theory, suffices for the confirmation of the existence of imbalance. However, even when relying on an economic analysis of the law, the problems associated with PAEs and the evidence for defensive and offensive patenting allow one to draw the conclusion that overprotection problems are relevant beyond mere theoretical consideration.357 A recent study confirms this presumption: the NPE-driven litigation in the EU has increased by 19 percent between 2007 and 2017. The trend had become more pronounced in 2014, 2015 and 2017. Germany was perceived as preferred jurisdiction to litigate, where 19.5 percent of infringement actions were initiated by NPEs.358 Nevertheless, it cannot be ignored that, pursuant to empirical findings, market failures can, in many cases, be avoided by the means of private ordering. Therefore, before proposing policy measures intended to resolve overprotection problems, it is necessary to review to what extent patent holders and follow-on innovators have

Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 175-176. However, the eBay decision represents an exogenous shock. Kirti Gupta and Jay P. Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases, Research Paper No. 17-03 (Champaign, IL: University of Illinois - College of Law, 2016) 4. Therefore it allows for more comprehensive studies on the impact of ex-post liability rules on market failures of overprotection. 357 See Sects. 2.3.1.1–2.3.1.2. 358 Darts-ip, NPE Litigation in the European Union. Facts and Figures (Brussels: IP2Innovate, 2018), 6, 11. The report defined NPEs as “independent organizations (legal entities) which own or benefit from patent rights but do not sell or manufacture goods or services associated with them (i.e., non-operating companies) and which have an active (offensive) assertion or litigation role as plaintiffs towards the enforcement of their patent rights.” The definition covers also NPEs that may engage in R&D activities but excludes universities and sole inventors. Ibid, 19. 355 356

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adapted to the increasingly fragmented patent landscape.359 For this reason, Chap. 3 reviews, relying on theories concerning OAI, whether and to what extent patent holders and other market actors are incentivized to resolve overprotection problems on their own initiative. Systematically studying the rationales of patent holders who allow follow-on innovators to access their patents makes it possible to identify in which contexts the market failures caused by overprotection do not materialize or are actively transcended through private ordering and in which areas concern regarding their impact on follow-on innovation is well-founded.

359

OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, 77-78.

Chapter 3

Open Approaches to Innovation

This Chapter distinguishes three open approaches to innovation: The Market Correction Model, the Open Innovation Theory, and User and Open Collaborative Innovation and reviews how they explain the motivations behind giving voluntary access to intellectual property. What qualifies as “openness” differs dramatically between the three theories. On this basis, the open models and the licensing practices they represent are placed on a continuum that ranges from restricted to indiscriminate access. The impact on innovation and competition of each level of openness is analysed. Mechanisms that are based on indiscriminate licensing, such as patent pledges, patent pools, and open viral patenting, are evaluated in more detail concerning their legal foundations, legal bindingness, and incentives to employ them. The chapter identifies the scope of incentives to engage in open licensing and arrives at the conclusion of them being insufficient to resolve all the market failures that hinder follow-on innovation.

3.1

Openness Through Private Ordering

Section 3.1 reviews the three OAI theories, each of which offers a distinct explanation for why patent holders may allow follow-on innovators to access and use their patents. The first of these, the market correction model, presupposes that patent holders or even entire markets have incentives to alleviate the market failures caused by overprotection through private ordering. The market correction model covers two theories introduced in law and economics research on IP law.1 Open innovation and user and open collaborative innovation stem from the field of management and

1 See Merges, "Contracting into liability rules," 1295, 1298, 1392-1393; Barnett, "Property as Process," 431-433, 455-456.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_3

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represent competing OAI theories.2 The starting points of both theories of innovation are similar: “[s]haring knowledge in our view does not deteriorate the value of knowledge, but rather, promotes knowledge creation.”3 In addition, in both theories, openness and closedness of innovation are perceived as resting on a continuum.4 However, these theories fall on opposite ends of the spectrum with regard to defining how accessible an innovation process and its outcomes should be to different stakeholders5 and whether or not access to IP and knowledge should be subject to compensation.6 Section 3.1 reviews these OAI theories’ stances with regard to IP, especially concerning the incentives to allow follow-on innovators to use IP-protected or protectable information. The study seeks to identify the adequacy of OAI approaches in terms of resolving the overprotection problems found in patent law as well as to determine the normative propositions of each OAI theory on how to address the remaining the market failures that hinder follow-on innovation. In order to ensure conceptual clarity when analysing openness in patent law, Sect. 3.2 defines the various levels of patent accessibility. The explanations offered by the three OAI concerning why, when, and how patent holders grant access to follow-on innovators are placed on a continuum that ranges from offensive proprietary uses to the most permissive forms of licensing. The typology is also complimented with

2 For OI theory, see Chesbrough, Open Innovation, 43-62; for UOCI theory, see genrally von Hippel, Democratizing Innovation; Baldwin and von Hippel, "Modeling a Paradigm Shift." The concept of open innovation has already been subject to considerable debate in the originating research community; see, for example, Linus Dahlander and David M. Gann, "How Open Is Innovation?," Research Policy 39, no. 6 (2010): 699-700; Aard J. Groen and Jonathan D. Linton, "Is Open Innovation a Field of Study or a Communication Barrier to Theory Development?," Technovation 30, no. 11 (2010) 2-9; Georg von Krogh, "Is Open Innovation a Field of Study or a Communication Barrier to Theory Development? Commentary," Technovation 31, no. 7 (2011) 286; Eric von Hippel, "Comment on ‘Is Open Innovation a Field of Study or a Communication Barrier to Theory Development?’," Technovation 30, no. 11 (2010): 555; Harold A. Linstone, Technovation 30, no. 11 (2010) 556; Anthony di Benedetto, "Comment on 'Is Open Innovation a Field of Study or a Communication Barrier to Theory Development?'," Technovation 30, no. 11-12 (2010): 557; Henry Chesbrough and Marcel Bogers, "Explicating Open Innovation : Clarifying an Emerging Paradigm for Understanding Innovation," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), 24. 3 Ikujiro Nonaka, "Foreword : Open Innovation and Knowledge Creation," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), i. 4 Dahlander and Gann, "How Open Is Innovation?," 703. 5 Eelko K. R. E. Huizingh, "Open Innovation : State of the Art and Future Perspectives," Technovation 31, no. 1 (2011): 3-4; Georg von Krogh, "Is Open Innovation a Field of Study or a Communication Barrier to Theory Development? Commentary," Technovation 31, no. 7 (2011): 286; Eric von Hippel, "Comment on ‘Is Open Innovation a Field of Study or a Communication Barrier to Theory Development?’," Technovation 30, no. 11 (2010): 555. 6 Dahlander and Gann, "How Open Is Innovation?," 702.

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non-IP based alternatives for providing access to innovations. The role of private liability rules in the typology of openness is identified. Section 3.3 reviews in greater detail a patent holder’s incentives to employ different private liability rules and their effectiveness in terms of resolving overprotection problems. The focus is on license of right, patent pledges, patent pools, clearing houses, and open viral licenses for patents. Section 3.4 provides a synthesis of the extent of patent holders’ incentives to grant access to follow-on innovators and observations about the adequacy of private ordering, and private liability rules in particular, when it comes to resolving overprotection problems in patent law. Chapter 3 concludes with an identification of situations in which incentives to allow reuse are not sufficient and where denial of access is not justified from the perspective of patent law.

3.1.1

The Market Correction Model

3.1.1.1

Theoretical Foundations

The first OAI, the market correction model (MCM), features two theories, Merges’ contracting to liability rules and Barnett’s property as process theory. Both of the MCMs assume that, under specific conditions and within a certain time period, patent holders themselves, without governmental intervention, have incentives to resolve market failures that impede the innovation of complex products.7 The solutions to the anticommons problems proposed by the MCM build upon Coase’s acknowledgement of the transaction costs incurred in the efficient allocation of initial entitlements through bargaining8 and the findings of the new institutional economics, most importantly the work of on collective action following Mancur Olson and the research on governing the commons conducted by Elinor Ostrom.9 7

Mattioli, "Communities of Innovation," 108, 116, 118; Merges, "Contracting into Liability Rules," 1295, 1298, 1392-1393; Barnett, "Property as Process," 431-433, 455-456. 8 Coase, "Problem of Social Cost," 12, 15; Merges, "Contracting into Liability Rules," 1318-1323; Barnett, "Property as Process," 411. 9 See Mancur Olson, Logic of Collective Action (Cambridge, MA: Harvard University Press, 1971); Elinor Ostrom, Governing the Commons : The Evolution of Institutions for Collective Action (New York: Cambridge University Press, 2008). Olson argues that individual actors can unite into a group in order to pursue a goal that promotes their collective self-interest, but such a collective action would be subject to inefficiencies due to free-riding on the contributions of others. Olson, Logic of Collective Action, 1-3. Collective action is thus subject to the prisoners’ dilemma: Actors may not unite to produce a public good because they expect that others will free-ride on it. Russell Hardin, Collective Action (Baltimore: John Hopkins University Press, 1982), 17, 30. Collective action has a greater chance of succeeding when a group is relatively small or when additional incentives to those offered by achieving the group’s goal are offered to individual actors. Olson, Logic of Collective Action, 1-3. However, Ostrom argues that, with regard to common pool resources (CPRs), the free-rider problems associated with the tragedy of the commons—namely the prisoner’s dilemma of collective action—can be resolved, and the use of a resource can be

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Merges’ theory of contracting to liability rules represents the narrow MCM. He views the market failures related to follow-on innovation as occurring in the context of dynamic interaction, rather than as a one-shot negotiation of outcome between licensor and licensee.10 Elaborating upon Calabresi and Melamed’s framework for protecting entitlements either by means of property or liability rules,11 he argues that private bargaining, which is based on strong property rules, yields more efficient solutions to anti-commons problems than the establishment of statutory licenses with license rates being predetermined by the government.12 His view is that, in those industries that are plagued by patent thickets, right holders who make repeated transactions involving IP will have incentives to contract into liability rules collectively by establishing institutions such as collective right organizations or patent pools, or enter into cross-licensing agreements. By collectively valuating IP rights, these private institutions enable parties to avoid the high transaction costs associated with recurring licensing negotiations as well as the high costs of enforcing rights individually. Right holders join such private institutions as long as their administration costs do not exceed the gains offered by lowering the transaction costs of IP.13 In addition, right holders may voluntarily reveal their IP-protected assets and license them indiscriminately in order to prevent an important innovation input from becoming subject to anti-commons problems in the future.14 Barnett’s theory of property as process reflects the broad MCM. Similarly to Merges, Barnett believes that market participants are able to recognize problems associated with overprotection of IP and take corrective actions, which, over time, lead to configurations of exclusivity and openness that are more favourable for follow-on innovation.15 However, in comparison to Merges, who focused on the incentives that collectives of right holders have to resolve anti-commons problems,

sustainable. Common pool resources are qualified as being rival and non-excludable. They may be scarce renewable resources that are produced by nature, such as fishing grounds, or be man-made, such as irrigation canals. When subject to repeated interactions, individual actors who are interested in consuming a CPR may come to cooperate with the aim of developing rules and institutions that enable sustainable management of the resource in question. These rules that govern such collective action will be based on local information concerning resources, and adherence to such rules will monitored by the members of the group in question. Such arrangements represent institutional alternatives to private companies or public governments. Ostrom, Governing the Commons, 2-7, 30-32, 39-40. See also Yochai Benkler, "Between Spanish Huertas and the Open Road : A Tale of Two Commons," in Governing Knowledge Commons, ed. Brett M. Frischmann, Michael J. Madison, and Katherine J. Strandburg (New York: Oxford University Press, 2014), 91. 10 Merges, "Contracting into Liability Rules," 1318-1323. 11 Calabresi and Melamed, "Property Rules, Liability Rules, and Inalienability," 1092-1093; Merges, "Contracting into Liability Rules," 1318-1323. 12 Merges, "Contracting into Liability Rules," 1307. 13 Ibid, 1293-1295, 1302-1303, 1319, 1323-1327, 1392. 14 Merges, "New Dynamism in the Public Domain," University of Chicago Law Review 71, no. 1 (2004): 188, 192-193. 15 Barnett, "Property as Process," 384, 387-389, 410. Note that Barnett is agnostic with respect to overprotection problems’ factual hindering effect on cumulative innovation.

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Barnett explores the extent to which entire technology markets are self-correcting.16 In this respect, Barnett views the scope of property entitlements and the manner of their protection to be determined by private investments, which are driven by innovating market participants’ choices with regard to the balance between (1) exploiting innovations through heightened IP protection and (2) reducing transaction costs and enabling follow-on innovation by relaxing property entitlements. Ultimately, private investments determine the choice of “innovation regime”, which may range from a strong emphasis on exclusivity and property rule towards sharing regimes with various levels of openness. The balance between the two poles is expected to ebb and flow over time.17 Private investments may take very heterogeneous forms, which can occur in complex combinations across an industry, including lobbying, enforcement, cross-licensing, patent pools, patent pledges, public-private collaborations, establishment of databases, non-enforcement, freely revealing IP-protectable assets to the public domain, and sharing facilitated by profitdriven third-party intermediaries.18 Barnett assumes that even competing innovators may choose to invest in constraining the extent of the property rule in order to lower the transaction costs associated with IP transfer and to foster follow-on innovation in an anti-commons setting.19

3.1.1.2

The Conditions for Openness

Both the narrow and wide MCM stress the importance of repeated interaction as the impetus for resolving market failures of overprotection that threaten cumulative innovation. Patent-based arrangements, such as cross-licenses and patent pools, in addition to de jure standard setting, can resolve royalty-stacking problems and holdup situations under the condition that only complementary patents are licensed within them. The inclusion of substitute patents within such arrangements would reduce competition between technologies.20 Repeated interaction between members of the institution further alleviates the risk of hold-ups.21 Barnett presumes that corrective initiatives originate from vertically integrated follow-on innovators, because as producers they operate both as sellers and buyers at the upstream market for inputs for complex innovations.22 Consequently, they have incentives to reduce the transaction costs resulting from overprotection problems in order to “maximize the cumulative stream of initial plus subsequent innovation

16

Ibid, 387. Ibid, 384, 388-389, 446, 453. 18 Ibid, 384, 430-432, 434-437, 439-442, 453. 19 Ibid, 431-432; Barnett, "Anti-Commons Revisited," 130. 20 Shapiro, "Navigating the Patent Thicket," 122, 126, 134. 21 Merges, "Contracting into Liability Rules," 1321 and fn 76. 22 Barnett, "Property as Process," 390, 413, 433. 17

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gains, net of transaction costs”.23 However, corrective measures are contingent upon low coordination costs, such as situations in which a limited number of companies together dominate the same market, the participants being able to appropriate sufficient gains from investing in collective action,24 and patent portfolios being of comparative value.25 Consequently, large companies engaged in follow-on innovation may, over time, gain incentives to invest in measures against overprotection problems.26 Finally, Barnett proposes that incumbent companies that are often blamed for lobbying in favour of the overprotection of IPRs may, over longer periods of time, take action intended to balance the configuration of protection.27 He also argues that, historically, active and costly patent litigation, which can be perceived as a market failure, often precedes the formation of a patent pool or other self-correcting mechanisms intended to alleviate transaction costs.28 Hence, a market failure that concerns large numbers of potential transacting parties may be resolved through a collective rights organization, a collective trade organization, or a large patent pool.29 In addition, right holders may be incentivized to share their innovations more openly when they have complementary sources of profit.30 Furthermore, market failures that follow-on innovators have insufficient incentives to resolve by themselves may be corrected by virtue of the actions of third-party intermediaries who seek to profit from reducing the transactions costs incurred on the market for IPRs.31

3.1.1.3

Adequacy in Resolving Overprotection Problems

Following the MCM, private incentives to mitigate anticommons problems fall short in the presence of high transaction costs.32 Merges does not expect contracting to liability rules to resolve all market failures of overprotection;33 private incentives are also insufficient to resolve market failures that involve non-repeat players. For example, a PAE will not make investments to correct market failures when the

23

Ibid, 432 [italics removed]. Ibid, 390, 413. 25 Barnett, "Anti-Commons Revisited," 130. 26 Barnett, "Property as Process," 411-412. 27 Ibid, 390-391, 433. 28 Barnett, "Anti-Commons Revisited," 150-151. 29 Merges, "Contracting into Liability Rules," 1295-1296; Barnett, "Property as Process," 422–423. 30 Barnett, "Property as Process," 402-405. See also Barnett, "Illusion of the Commons," Berkeley Technology Law Journal 25, no. 5 (2010), 1811, 1805; Merges, "New Dynamism in the Public Domain," 186, 192. The relevance of a complementary source of revenue as an incentive is also in the context of UOCI, see Sect. 3.1.3.3. 31 Barnett, "Anti-Commons Revisited," 130, 141. 32 Barnett, "Property as Process," 414. 33 Merges, "Contracting into Liability Rules," 1391. 24

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existing regime remains more profitable to them.34 Consequently, it is impossible for private ordering to resolve all hold-up problems.35 Barnett predicts anticommons problems to persist with respect to cumulative innovations featuring unsubstitutable technology in markets characterized by numerous patent holders with heterogeneous assets and entry barriers for third-party intermediaries.36 Finally, arrangements such as patent pools are not likely to form in response to an individual follow-on innovator who introduces disruptive technology that also relies on existing patents; such an innovator may still be prevented from creating a new market due to overprotection problems. It is not clear how far the MCM would hold in the fragmented modern patent landscape described in Sect. 2.3.1. Generally, Barnett assumes that corrective measures will require a very long time horizon to achieve an efficient result. However, market participants’ foresight with regard to follow-on innovations that may arise far in the future is limited.37 Even if the market would correct itself over time, the waiting period involved would yield excessive social welfare losses in situations where overprotection problems retard innovation activity across entire fields of technology. Considering that incumbent firms, for example, fund research on patent and antitrust law, the relevance of the lobbying efforts of incumbents should not be understated.38 Furthermore, incumbent innovators may lobby for legislative changes, such as attempts to reduce PAEs’ rights to injunctive relief.39 However, it is doubtful that lobbying will take place in favour of long-term dynamic competition to a sufficient extent. For example, unless they are organized into a trade union, innovative SMEs are unlikely to have access to the resources required to invest in lobbying intended to overcome the market failures that they face. Furthermore, it is unlikely that user innovators operating under the UOCI model would engage in lobbying on a level that would make the patent system able to accommodate this type of OAI.40

34

Barnett, "Property as Process," 417–418. Shapiro, "Navigating the Patent Thicket," 126. 36 Barnett, "Anti-Commons Revisited," 139–140. 37 Mattioli, "Communities of Innovation," 150. 38 See Olivia Solon, "Google Spends Millions on Acedemic Research to Influence Opinion, Says Watchdog," The Guardian, last modified 7 July 2017, accessed 31 December 2018 https://www. theguardian.com/technology/2017/jul/13/google-millions-academic-research-influence-opinion; "Google Academics Inc.," Google Transparency Project, last modified 11 July 2017, accessed 10 October 2017 http://googletransparencyproject.org/articles/google-academics-inc. 39 Barnett, "Property as Process," 391, 411, 431, 434–437, 441–442, 456. 40 See Katherine J. Strandburg, "Evolving Innovation Paradigms and the Global Intellectual Property Regime," Connecticut Law Review 41, no. 3 (2009), 912-920, proposing WIPO to take a more active role of accommodating UOCI type of innovation under the TRIPS system. 35

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In support of his theory, Barnett highlights the inconclusiveness of empirical evidence concerning systematic hold-up problems and royalty stacking;41 in addition, he reviews historical examples of patentee- or intermediary-driven resolutions to anti-commons problems in several technological sectors.42 However, Barnett’s historical examples of patent litigation and subsequent pooling in the early aircraft and radio and technology sectors fail to support his thesis with respect to resolving hold-up problems, as, in both cases, the critical upstream patents were subject to compulsory liability rules for long periods of time, and the patent-pooling efforts were prompted by the government43 In the same vein, in his ethnographical study of collective licensing arrangements, Mattioli identified a number of examples where MCM did not hold. First, several arrangements that prima facie appeared to represent private ordering intended to alleviate anti-commons problems were in fact either directly or indirectly influenced by the government. Hence, the social welfareenhancing effects of collective patent licensing may, in certain situations, require initiatives or even incentives provided by the government.44 This is consistent with Merges’ support for the formation of governmental institutions that may alleviate transaction costs, such as clearing houses.45 Second, some of the arrangements were motivated by defensive strategies aiming at protecting existing products from patent litigation, rather than releasing future follow-on innovation from anti-commons

41 See Barnett, "Anti-Commons Revisited," 142-147. See also Barnett, "Has the Academy Led Patent Law Astray?," Berkeley Technology Law Journal 5, no. 4 (2017): 8-28, 41. For the discussion on the empirical inconclusiveness of overprotection problems, see Sect. 2.3.2.8. 42 See Barnett "Anti-Commons Revisited," 147-182. 43 First, the patent litigation in respect of critical upstream patents in those industries, namely the Wright patent in aviation and the Fleming patent in radio, did not yield to the issuance of an effective injunctive reliefs, which meant that follow-on innovators could continue to develop these technologies further. Second, even when the injunction was granted, its effect was weakened by World War I and a compulsory liability rule in favour of the government and its contractors. Finally, the government was involved in the formation of the patent pools after the war. However, the manner in which the government was involved can also be considered to represent a hold-out situation. Ibid, 172-182. For a critical account on the government’s position in the aviation industry patent litigation and pooling, see Ron D. Katznelson and John Howells, "Myth of the Early Aviation Patent Hold-up—How a US Government Monopsony Commandeered Pioneer Airplane Patents," Industrial & Corporate Change 24, no. 1 (2015) 1, 64; See also John Howells and Ron D. Katznelson, "Coordination of Independently-Owned Vacuum Tube Patents in the Early Radio Alleged Patent 'Thicket'," SSRN, 25. Cf. Merges, "Case of Blocking Patents," 84-87, in which the author addresses the Fleming patent as a blocking patent scenario that was resolved by the government. Barnett presents two other examples of cross-licensing efforts, namely the Selten patent in the early automotive industry and “cracking” patents in petroleum refining. The litigation in the former did not result in the imposition of injunctive relief during the proceedings. However, in both industries, litigation was followed by patent pooling or cross-licensing efforts. See Barnett, "Anti-Commons Revisited," 151-160. 44 Mattioli, "Communities of Innovation," 120-133, 151, addressing the Medicines Patent Pool, the Pool for Open Innovation Against Neglected Tropical Diseases, the SNP Consortium, and the Manufacturer’s Aircraft Association. 45 Merges, "Contracting into Liability Rules," 1391.

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problems.46 Third, some of the pooling arrangements were not motivated by private benefit but were instead the product of some companies’ more charitable goals. However, such initiatives did not consider the complementarity of patents and are likely to have a limited effect when it comes to clearing patent thickets.47 Consequently, the broad MCM may hold, in a very case-specific manner, in situations where an innovation, and hence the relevant complementary technology, is easily identifiable in the near time horizon.48 However, in other situations, overcoming anti-commons problems would require compulsory licensing, or, alternatively, less intrusive activities and the development of incentives intended to initiate collective patent licensing on the part of the government.49 Consequently, Barnett’s theory has more explanatory power when it coincides with Merges’ explanations as to why and when competing patent holders would engage in Coasean bargaining in order to rearrange property entitlements in more mutually beneficial way.50

3.1.2

Open Innovation

3.1.2.1

Definition

The concept of open innovation (OI) was established and popularized by Henry Chesbrough, who defined it as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets of external use of

46 Mattioli, "Communities of Innovation," 133-141, 148-149, in which the author discusses the Open Invention Network, the Bessemer Association, and the historical case of the Mines of Cornwall. The Open Invention Network represents a defensive patent pool for open-source software against software patent litigation. 47 Ibid, 142-147, 148-150, discussing the Eco-Patent Commons and the Green Exchange. 48 Ibid, 151-155. 49 Ibid, 151-154. Both Merges and Barnett speak in favour of strong property rights as enablers of self-correcting initiatives and oppose compulsory licensing; see Merges, "Contracting into Liability Rules." 1299, 1322, 1392-1393; Jonathan M. Barnett, "Intellectual Property as a Law of Organization," California Law Review 84, (2011): 832; Barnett "Has the Academy Led Patent Law Astray?," 4. Yet, unlike Barnett and similarly to Mattioli, Merges presumes that, due to the problems encountered in collective action, the employment of private-ordering mechanisms, such as patent pools, would require government facilitation. Merges, "Contracting into Liability Rules," 1356, 1391. However, it should be noted that Merges compares the benefits of contracting into liability rules to those of statutory licenses. However, statutory licenses represent a much wider intervention in the property rule than compulsory licenses to patents under Art. 31 TRIPS. Furthermore, following the broad MCM, private lobbying may lead to the establishment of a compulsory liability rule. 50 Barnett, "Property as Process," 411, 431; See Coase, "Problem of Social Cost," 2, 5-6, 8, 12, 15.; Merges, "Contracting into Liability Rules," 1392.

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innovation, respectively.”51 The concept of OI represents a synthesis of several streams of management literature, as well as industry practices with decades of history.52 Essentially, research on OI focuses on the management of knowledge spillovers.53 Open innovation claims to be a new innovation model that offers an alternative to the former closed innovation model (Fig. 3.1). Closed innovation assumes that innovation occurs within the boundaries of a vertically integrated firm; new product ideas derive solely from a company’s internal science and technology base, because little relevant knowledge is produced outside of the company’s boundaries. The centralized R&D process of a firm identifies the ideas that are relevant to it and develops them into products.54 Intellectual property is exercised in a defensive manner that protects the core business from the imitation of competitors55 and maintains its “freedom to operate.”56 Patents that are not commercialized are passively retained in the company’s patent portfolio.57 While the assumptions that underlie the closed innovation paradigm have been criticized as “exaggerated at best and plain false in general”58 over the last decades,

51

Henry Chesbrough, "Open Innovation : A New Paradigm for Understanding Industrial Innovation," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 1. Chesbrough was certainly not the first to address the use of external knowledge for the benefit of a firm or the interest in sharing internally developed knowledge with competitors, as such innovative practices had already been documented to have occurred in the 19th century; see Robert C. Allen, "Collective Invention," Journal of Economic Behavior & Organization 4, no. 1 (1983): 2; Alessandro Nuvolari, "Collective Invention During the British Industrial Revolution : The Case of the Cornish Pumping Engine," Cambridge Journal of Economics 28, no. 3 (2004) 351-359; Andrew Hargadon, "Retooling R&D : Technology Brokering and the Pursuit of Innovation," Ivey Business Journal 68, no. 2 (2003). 52 Huizingh, "Open Innovation," 3. For a review of management research predating the concept of open innovation, see Paul Trott and Dap Hartmann, "Why 'Open Innovation' Is Old Wine in New Bottles," International Journal of Innovation Management 13, no. 4 (2009): 715-727; who criticizes Chesbrough for repackaging well-known ideas and Dahlander and Gann, "How Open Is Innovation?," 700-701 and the literature referenced therein. For a response to Trott and Hartmann, see Chesbrough and Bogers, "Explicating Open Innovation," 22-23. Nevertheless, the integration of inbound and outbound innovation processes, Huizingh, "Open Innovation," 3, and the emphasis on the latter as an opportunity for commercialization were considered novel in management research. Julien Pénin, Caroline Hussler, and Thierry Burger-Helmchen, "New Shapes and New Stakes : A Portrait of Open Innovation as a Promising Phenomenon," Journal of Innovation Economics & Management 2011, no. 7 (2011): 14. 53 Chesbrough and Bogers, "Explicating Open Innovation," 17. 54 Open Innovation, 29-30; "Open Innovation," 2, 5. 55 Open Innovation, 155, 159. 56 Henry Chesbrough and Roya Ghafele, "Open Innovation and Intellectual Property : A Two-Sided Market Perspective," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), 195. 57 Chesbrough, Open Innovation, 34, 57. 58 Trott and Hartmann, "Why 'Open Innovation' Is Old Wine in New Bottles," 728. For a further detailed critique, see ibid, 717-729. For a response, see Chesbrough and Bogers, "Explicating Open Innovation," 22-23. Only certain industries, such as nuclear and military, appear to closely resemble the closed innovation model. Oliver Gassmann, "Opening up the Innovation Process : Towards an

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Fig. 3.1 The closed innovation model. An adaptation of Chesbrough, “Open Innovation, A New Paradigm for Understanding Industrial Innovation” in Open Innovation: Researching a New Paradigm, ed. Chesbrough, Vanhaverbeke and West, (New York: Oxford University Press, 2006) 3, Figure 1.1. titled “The current paradigm: a Closed Innovation model”, © Oxford Publishing Limited and Henry Chesbrough. Reproduced with permission of the Licensor through PLSclear. Adapted with the Permission of the author

several changes in the innovation context have made it difficult to successfully innovate strictly within the boundaries of a firm. The quality and the number of educated and mobile personnel, the availability of venture capital, and the expertise of supplier companies have increased, while the product life-cycles have shortened.59 Part of this change can be attributed to the rise of technology markets and the division of labour in knowledge production.60 Globalization has accelerated the process of specialization61 and increased the complexity of technology.62 For example, firms operating in the chemical, biotechnology, software, and semiconductor sectors have come to specialize in R&D, selling their inputs on technology markets to downstream firms that focus on product development and

Agenda," R&D Management 36, no. 3(2006): 224. The critiques of the closed innovation paradigm are also valid from the perspective of the core principles of patent law, which include the objective to disseminate technological innovations. A firm that operates following the closed innovation paradigm would only use patents to protect itself from imitation. In addition, closed innovation would assume the existence of a far scarcer knowledge landscape than either the incentive or prospect theory. 59 Chesbrough, Open Innovation, 34-40. Talented professionals are also becoming decreasingly committed to single companies throughout the courses of their entire careers. Dahlander and Gann, "How Open Is Innovation?," 699. 60 Arora, Fosfuri, and Gambardella, Markets of Technology, 6-10, 17-89. 61 Dahlander and Gann, "How Open Is Innovation?," 699. 62 Pénin, Hussler, and Burger-Helmchen, "New Shapes and New Stakes," 12; Gassmann, "Opening up the Innovation Process," 224, using the term “Technology intensity”.

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commercialization.63 Furthermore, technology convergence requires a more interdisciplinary approach to product development.64 Novel technologies, such as the ICT in particular, enable collaboration that transcends geographical boundaries.65 As a consequence of these changes, the body of externally developed knowledge that is relevant to a company’s innovation process is increasingly abundant and available outside the boundaries of the firm in question.66 Simultaneously, these changes lead to a heightened risk of a company’s as yet uncommercialized ideas spilling over to the market, thus slipping out of its control and possibly benefitting its competitors.67 In order to thrive in the new knowledge landscape, firms need to adapt the OI model (see Fig. 3.2).68 The OI model assumes that an abundance of relevant external ideas exists69 and that openness requires permeability of firm boundaries.70 Companies can no longer expect to find all of the expertise and the technology relevant to their products within the confines of their firms.71 Instead, companies should purposefully manage spillovers of their own R&D and employ mechanisms intended to benefit from them. Firms should also strive to benefit from the spillovers of others.72 The relevant “flows of knowledge may involve knowledge inflows to the focal organization (leveraging external resources through internal processes), knowledge outflows from the focal organization (leveraging internal knowledge through external commercialization processes) or both (coupling external knowledge sources and commercialization activities)”.73 In the OI model, monetary incentives are viewed as central to innovative activity.74 Initially, the model was very firm-centric:75 The business model of the firm is

63 Arora, Fosfuri, and Gambardella, Markets of Technology, 7-9. For a review of the development of markets for technology in the complex technological fields of chemical processing, software, biotechnology, and semiconductors, see ibid, 45-89. In addition, for examples of specialization from life sciences and consumer products, see Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 196. 64 Gassmann, "Opening up the Innovation Process," 224, using the term “Technology fusion”. 65 Dahlander and Gann, "How Open Is Innovation?," 699; Gassmann, "Opening up the Innovation Process," 223; Pénin, Hussler, and Burger-Helmchen, "New Shapes and New Stakes," 16. 66 Chesbrough, Open Innovation, 40-41, 43-51. 67 Ibid, 34-40. 68 Ibid, 51 69 Chesbrough, Open Innovation, 155. 70 Chesbrough and Bogers, "Explicating Open Innovation," 17. 71 Chesbrough, "Open Innovation," 1. 72 Chesbrough and Bogers, "Explicating Open Innovation," 16–17. 73 Ibid, 17. 74 Frank Piller and Joel West, "Firms, Users, and Innovation : An Interactive Model of Coupled Open Innovation," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), 31. 75 “Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas and internal and external paths to market as they look to advance their technology” [emphasis added], Chesbrough, "Open Innovation," 1.

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Fig. 3.2 The open innovation model. An adaptation of Chesbrough and Bogers, “Explicating Open Innovation: Clarifying an Emerging Paradigm for Understanding Innovation” In New Frontiers in Open Innovation, ed. Chesbrough, Vanhaverbeke and West (New York: Oxford University Press, 2014) 18, Figure 1.5 titled “The open innovation model”. © Oxford Publishing Limited / Henry Chesbrough and Marcel Bogers. Reproduced with permission of the Licensor through PLSclear. Adapted with permission of the authors

seen as the driver of the value creation from the externally and internally developed ideas.76 However, since the introduction of the concept in 2003, the focus of open innovation research has expanded to co-creation across organizational boundaries in the ecosystems of “firms, customers, academia, and government.”77 Hence, it is now viewed to cover innovations based on interaction and collaboration between organizations, such as cooperative R&D, that are facilitated by heterogeneous contractual instruments.78 The more recent management literature on OI is concentrated on co-creation between multiple heterogeneous stakeholders to create new markets.79

76

Open Innovation, 63-91; "Open Innovation," 1-2. Nonaka, "Foreword," ii. The departure from the firm-centric view is also reflected in the recent definition of open innovation as a “distributed innovation process, based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model” [emphasis added], Henry Chesbrough and Marcel Bogers, "Explicating Open Innovation : Clarifying an Emerging Paradigm for Understanding Innovation," 17. 78 See Hanns Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," in Droit, Économie et Valeurs: Hommage à Bernard Remiche, ed. Alexia Autenne, Vincent Cassiers, and Alain Strowel (Brussels: Éditions Larcier, 2015), 203. 79 Martin Curley and Bror Salmelin, Open Innovation 2.0 : The New Mode of Digital Innovation for Prosperity and Sustainability (Cham: Springer, 2018), 48. 77

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However, the coupled processes of OI,80 in which an IP is co-created over the course of an agreement, are not discussed further due to the thesis’ focus on a patent holder’s incentives to license to a follow-on innovator.81 Intellectual property, and patents in particular, is one of the central mechanisms in the purposive management of knowledge flows in OI. Open innovation assumes active participation in the technology markets,82 while IP is viewed as “a new class of assets that can deliver additional revenues to the current business model, and also point the way towards entry of new businesses and new business concepts.”83 Hence, in in the open innovation model, openness is based on pecuniary licensing and sales of IP, with licensors engaging in “outbound innovation” and licensees in “inbound innovation”, respectively.84 Furthermore, the formation of patent pools, cross-licensing, and the development of spin-offs, as well as acquisitions or sales of companies (including their patent portfolios), represent means by which a firm can engage in OI.85

3.1.2.2

Incentives to License and Social Welfare Effects

The narrative of the increasing relevance of OI closely parallels the narrative of the increased complexity of innovations and fragmentation of technology. The strength of Chesbourgh’s open innovation model lies in its description of successful

Gassman and Enkel define the coupled process as “coupling the outside-in and inside-out processes by working in alliances with complementary partners in which give and take is crucial for success”. Gassmann, "Opening up the Innovation Process," 6. Inter-organizational collaboration in the coupled process represents a new focus of interest in research on Chesbrough’s concept of open innovation. See Piller and West, "Firms, Users, and Innovation," 36-49. 81 On the IP law questions that arise from coupled open innovation, see generally Arina Gorbatyuk, Geertrui Van Overwalle, and Esther van Zimmeren, "Intellectual Property Ownership in Coupled Open Innovation Processes," IIC - International Review of Intellectual Property and Competition Law 47, no. 3 (2016); Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy,"; Alina Wernick, "Defining Trade Secrets in Multilateral Research Collaboration," in Sopimaton menettely elinkeinotoiminnassa verkkotalouden aikana, ed. Rainer; Oesch and Hannes Kankaanpää (Helsinki: Lakimiesliiton Kustannus, 2012). On policy perspectives concerning coupled open innovation, see generally European Commission, Open Innovation, Open Science, Open to the World - a Vision for Europe (Luxembourg: Publications Office of the European Union, 2016); Koenraad Debackere et al. Boosting Open Innovation and Knowledge Transfer in the European Union, Independent Expert Group Report on Open Innovation and Knowledge Transfer - Study (Luxembourg: Publication Office of the European Union, 2014). 82 Chesbrough, Open Innovation, 155. 83 Chesbrough "Open Innovation," 4. 84 Dahlander and Gann, "How Open Is Innovation?," 704–705. Gassmann and Enkel use the definitions “outside-in process” and “inside-out process”. Their terminology refers to knowledge flows in open innovation in general, not limited to IP, see Gassmann, "Opening up the Innovation Process," 6. Cf. Fig. 3.2. 85 Pénin, Hussler, and Burger-Helmchen, "New Shapes and New Stakes," 18–19. 80

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innovation management in the context of fragmented ownership of inputs for innovation and the incentives for licensing in such environment. Under the OI model, patent holders are expected to license for profit. Traditionally, firms are assumed to license when a licensee is expected to be more efficient in exploiting the technology than its developer. For SMEs that engage in R&D activity that lack manufacturing or marketing capacities, licensing may be the only means to profit from innovation.86 The incentive to create a de facto standard is another reason to license, especially in the presence of network externalities.87 In addition, licensing in the context of a de jure standard represents a form of OI.88 Companies may also have an interest in licensing technologies that are not relevant for their own products or do not fit their strategies.89 Assuming that there is a demand for such technologies outside of a firm, licensing creates another source of revenue.90 Furthermore, in complex industries incentives for cross-licensing are present due to the need to access complementary technology.91 Large incumbent companies are generally not expected to license the technologies that are responsible for the competitive advantages of their products.92 Indeed, when an incumbent manufacturing company does not face competition for its technology, it is unlikely to be willing to license to a rival in its product market. The revenue such a company could obtain from licensing royalties (“the revenue effect”) would be lower “the rent dissipation effect [. . .] the erosion of profits due to another firm (licensee) competing in the product market” However, when there are two or more manufacturing companies present on the product market with substitutable technology, the rent dissipation effect on profits is shared. The incumbent company may also be willing to license its technology if, as a consequence of competition, the expected revenue effect becomes stronger than the rent dissipation effect.93 Hence, the presence of non-manufacturing R&D companies induces licensing by incumbents, while the development of substitute technologies puts pressure on a company to appropriate technologies that were regarded as “crown jewels” on the technology market.94 Consequently “licensing is more likely chosen in a distant market (where it is costly for the licensor to produce), when market share of the licensor is small (e.g. ‘orphan’ technologies) and when downstream market is highly

86

Arora, Fosfuri, and Gambardella, Markets of Technology, 170-171. Ibid, 170-176, 117 and fns 3, 178. 88 Timothy S. Simcoe, "Open Standards and Intellectual Property Rights," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 165. 89 Arora, Fosfuri, and Gambardella, Markets of Technology, 175. 90 Turner, "Nonmanufacturing Patent Owner," 183. 91 Arora, Fosfuri, and Gambardella, Markets of Technology, 178. 92 Ibid, 170. 93 Ibid, 178-179. 94 Ibid, 192-193, 195. 87

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competitive”.95 On the other hand, high levels of product differentiation reduce the incentives to license downstream.96 Open innovation can provide insight as to why the business models that are based on specialization in R&D are adopted and the emergence of other intermediaries in markets of technology and innovation:97 “Opening up to external sources of knowledge may accelerate time to market, fill technical gaps in internal R&D or reduce the total cost of innovation for a firm.”98 Simultaneously, patent holders are assumed to have incentives to license their patents for profit as a result of the threat that the ideas underlying their technologies may soon be appropriated by others inventing around them.99 Technology transfer via licensing agreements is generally assumed to “improve economic efficiency and be pro-competitive as they can reduce duplication of research and development, strengthen the incentive for the initial research and development, spur incremental innovation, facilitate diffusion and generate product market competition.”100 In addition, “[a]t an industry level, markets of technology lower entry barriers, increase competition and compress product life cycles”.101 Hence, overall, OI promotes dynamic efficiency and social welfare.

3.1.2.3

The Normative Component

The theory of open innovation paints a picture wherein patents are licensed in the context of complex cumulative innovation sans market failures and hence the need for a legislative intervention to address them. However, this impression is superficial and stems from the fact that the research on open innovation has been developing in a manner that is largely disconnected from both from the doctrinal legal and the law and economics research on patents.102 While IP and, in particular, the licensing thereof, are recognized as being central to OI, the main object of inquiry of the research stream is the successful management of IP assets, most importantly patents, on technology markets.103 Given this focus, the views that OI literature presents

95

Ibid, 251. Ibid, 195. 97 Chesbrough, "Open Innovation," 10. 98 Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 194; Chesbrough, Open Innovation, 53. in which a company’s own technology is assumed to fill in the gaps of an external technology, suggesting the use of external technology in larger proportion. 99 Chesbrough, Open Innovation, 41, 53, 57. A hallmark example of a business model that leverages licensing IP is the active licensing scheme that IBM uses for its hardware. Ibid, 92-112. 100 Rec. 4 TTBER. 101 Arora, Fosfuri, and Gambardella, Markets of Technology, 251. 102 Moreover, the findings of legal research on IP have been considered unhelpful for this research objective; see Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 191-193. 103 Ibid, 191. 96

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concerning the patent system often appear incomprehensive from the perspective of legal research.104 Open innovation views IP to be necessary for the incentivization of innovation. Intellectual property is shared with a follow-on innovator when it is profitable for the patent holder to do so. Moreover, the outcome of innovation process is not open for anyone to use;105 rather, it is implicitly assumed to be protected by IPR. However, there is nothing new in licensing for profit and operating in technology markets from the perspective of legal and economic research on patent and competition law.106 The most articulated normative view with regard to IPR in OI was presented by an MCM scholar. Barnett views IP as serving “as an instrument for organizing intellectual production, not inducing it. Intellectual property typically regulates innovation incentives solely to the extent that it regulates the choices of organizational forms by which to implement innovation.”107 He expects specialization and vertical disintegration to be contingent on strong patent protection reducing the expropriation risks involved in knowledge transactions and consequently lowering the entry barriers to R&D-intensive NPEs and other companies across the supply chain, such as suppliers and the intermediaries that facilitate transactions.108 Barnett views the weakening of patent protection as nudging companies back towards vertical integration.109 Nevertheless, the normative views presented, whether directly or indirectly, in the OI literature with regard to follow-on innovation appear to correspond to those of dynamic incentive theory. A narrow focus on the appropriation of IP would be misaligned with OI if “information search or cumulative innovation”,110 and the emergence of technology markets as a result of the appearance of substitutes111

104

For example, while discussing the relevance of stronger IP rights for OI, West is unclear as to whether the strength lies in the wider scope of entitlement or the manner in which the entitlement is enforced. Joel West, "Policy Challenges of Open, Cumulative, and User Innovation," Washington University Journal of Law & Policy 30, no. 1 (2009): 25-29. Cf. West, "Does Appropriability Enable or Retard Open Innovation?," 117-118, discussing the effect of enforceability of IP on viability of IP-based business models. 105 Huizingh, "Open Innovation," 3-4. 106 See generally Sect. 2.1, discussing the economic justifications behind patent protection. 107 Barnett, "Intellectual Property as a Law of Organization," 856. 108 Ibid, 789, 792-794, 811, 813, 819-821, 856-857. see also David J. Teece, "Profiting from Technological Innovation : Implications for Integration, Collaboration, Licensing and Public Policy," Research Policy 15, no. 6 (1986): 301, 304; Jonathan M. Barnett, "Why Is Everyone Afraid of IP Licensing," Harvard Journal of Law & Technology 30 (2017): 137. 109 Barnett, "Intellectual Property as a Law of Organization," 818-819, 832, 856. 110 Joel West, "Does Appropriability Enable or Retard Open Innovation?," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 130. Similarly, "Policy Challenges of Open, Cumulative, and User Innovation." Washington University Journal of Law & Policy 30, no. 1 (2009): 40, in which the author acknowledges the trade-off between incentivizing both initial and cumulative innovation. 111 See Arora, Fosfuri, and Gambardella, Markets of Technology, 192-193, 195

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would be compromised. Against this background, the public policy is viewed to play a critical role in balancing the incentives to innovate against the goal of fostering technological dissemination though multiple paths to market.112 The OI paradigm implicitly assumes that licensing negotiations will take place ex ante, during the process of developing new products.113 It considers it necessary that innovators be aware of relevant IP developed elsewhere in order to obtain immediate access to it and to integrate it with their own technology.114 However, such optimism concerning a company’s willingness to license technology to competitors has been questioned.115 While OI literature acknowledges some of the problems associated with overprotection,116 imperfect information concerning the technology available and its value and the excessive transaction costs incurred in ex ante licensing have been identified as representing the greatest challenges to the success of OI.117 Nevertheless, the public policy reports on open innovation address the need to interfere with “predatory IP strategies” and stress the importance of users’ rights to access IP as a means to counterbalance the effects of such IP enforcement.118 Echoing MCM, OI literature proposes resolving these problems by further development of more creative licensing solutions, most importantly by the formation of patent pools and intermediary organizations that specialize in connecting technology

112

Henry Chesbrough and Wim Vanhaverbeke, Open Innovation and Public Policy in Europe (Brussels: Science|Business Publishing, 2011), 14. 113 See Fig. 3.2. In more recent research, Chesbrough and Ghafele address the issue of companies that only consider licensing a technology when its holder threatens them with an infringement action; the authors consider this practice of unlicensed use to be detrimental to the emergence of technology markets. Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 206. 114 Chesbrough, Open Innovation, 53. 115 Trott and Hartmann, "Why 'Open Innovation' Is Old Wine in New Bottles," 727-728. 116 Observations have been made concerning the limiting impact of software patents on access to and reuse of open-source software. Stuart J. H. Graham and David C. Mowery, "Use of Intellectual Property in Software : Implications for Open Innovation," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 197. Patent ambushes and other offensive practices in the context of de jure standard setting have also been addressed: Timothy S. Simcoe, "Open Standards and Intellectual Property Rights," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 177; Joel West, "Does Appropriability Enable or Retard Open Innovation?," in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2006), 122. See also Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 199, who refer to Rambus’ patent ambush. However, the “aggressive patenting” strategies of SMEs, even when exercised in accordance with incentive theories, have also been viewed as being potentially detrimental to successful standard-setting processes and the implementation of such standards. Simcoe, "Open Standards and Intellectual Property Rights," 180. As is the case with monetary incentives to license, excessive royalties are not considered to be a problem under open innovation; however, the avoidance of royalty stacking has been mentioned as one of the benefits of a patent pool; see Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 203. 117 Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 197-201. 118 Debackere, et al., Boosting Open Innovation and Knowledge Transfer, 28.

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sellers with buyers and other services that support the innovation process.119 However, unlike the broad MCM, OI is not strictly opposed to governmental interventions; however, the identification of market failures and propositions for legislative solutions intended to resolve them are not objects of inquiry of innovation management research and hence are rarely addressed by OI literature. Under the OI theory, failures are assumed to partially derive from the limited mind-sets of managers who have not learned to manage IP in a more open manner.120 This suggests that some of the problems that are assumed to have been caused by overprotection may in fact stem from either a patent holder’s or prospective licensee’s limited dynamic capabilities,121 and other managerial capabilities,122 or qualities of the organizational culture unfavourable to open innovation,123 rather than failures in the design of the patent system.

3.1.3

User and Open Collaborative Innovation

3.1.3.1

Theoretical Foundations

The third OAI theory concentrates on innovation that is typically undertaken by users who may form open collaborative communities. This paradigm of innovation has been studied in several fields, including management, information systems, economics and law, and has been approached via a number of overlapping research topics, including user innovation, free innovation, and free and open-source software, as well as various forms of open collaborative innovation and common

119

Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 201-204; Wim Vanhaverbeke and Myriam Cloodt, "Theories of the Firm and Open Innovation," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), 263-264; Nadine Roijakkers, Andy Zynga, and Caroline Bishop, "Getting Help from Innomediaries : What Can Innovators Do to Increase Value in External Knowledge Searches?," in New Frontiers in Open Innovation, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (New York: Oxford University Press, 2014), 242-254, discussing innomediaries that offer wide variety of services beseides technology transfer. 120 Chesbrough and Ghafele, "Open Innovation and Intellectual Property" 204-206. See also Vanhaverbeke and Cloodt, "Theories of the Firm and Open Innovation," 276. 121 David J. Teece, Gary Pisano, and Amy Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal 18, no. 7 (1997): 509; André Spithoven, Bart Clarysse, and Mirjam Knockaert, "Building Absorptive Capacity to Organise Inbound Open Innovation in Traditional Industries," Technovation 30, no. 2 (2010) 131; Nari Lee, "Exclusion and Coordination in Collaborative Innovation and Patent Law," International Journal of Intellectual Property Management 3, no. 1 (2009) 90. 122 Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 206. 123 Fiona Murray and Siobhán O'Mahony, "Exploring the Foundations of Cumulative Innovation : Implications for Organization Science," Organization Science 18, no. 6 (2007):1017; Philipp Herzog, Open and Closed Innovation : Different Cultures for Different Strategies (Wiesbaden: Gabler, 2011).

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property regimes.124 As a consequence, this type of OAI lacks a consistent, unitary definition.125 Here, Baldwin and von Hippel’s term user and open collaborative innovation (UOCI) is used to describe this form of OAI.126 User and open collaborative innovation “refer[s] to an innovation model that emphasizes low-cost or free production of public, non-rivalrous, non-excludable goods.”127 A UOCI project “involves contributors who share the work of generating a design and also reveal the outputs from their individual and collective design efforts openly for anyone to use. The defining properties of this model are twofold: (1) the participants are not rivals with respect to the innovative design (otherwise they would not collaborate) and (2) they do not individually or collectively plan to sell products or services incorporating the innovation or intellectual property rights related to it. Many, but not all, open source software projects have these characteristics.”128 On the individual level of UOCI, innovations are produced by user innovators. Users are incentivized to innovate by the immediate benefit of using their innovation.

124

See generally Baldwin and von Hippel, "Modeling a Paradigm Shift,"; Yochai Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," Yale Law Journal 112, no. 3 (2002); Dietmar Harhoff, Joachim Henkel, and Eric von Hippel, "Profiting from Voluntary Information Spillovers : How Users Benefit by Freely Revealing Their Innovations," Research Policy 32, no. 10 (2003); von Hippel, Democratizing Innovation; von Hippel, "Comment."; Eric von Hippel, Free Innovation (Cambridge, MA: MIT Press, 2016); von Hippel and von Krogh, "Free Revealing."; Piller and West, "Firms, Users, and Innovation." 125 Concepts used in the relevant literature involve “user innovation communities” von Hippel, Democratizing Innovation, 7. “open source innovation communities” ibid, 11. “innovation communities”, ibid.; “free innovation”, Free Innovation, 1; “private-collective innovation model” von Hippel and von Krogh, "Free Revealing" 302-303; "Open Source Software and the “PrivateCollective” Innovation Model : Issues for Organization Science," Organization Science 14, no. 2 (2003): 213; “open design”, Christina Raasch, Cornelius Herstatt, and Kerstin Balka, "On the Open Design of Tangible Goods," R&D Management 39, no. 4 (2009), 29; “peer production”, Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 403; “open source innovation”, James Boyle, "Open Source Innovation : Patent Injunctions, and the Public Interest," Duke Law & Technology Review 11 (2012): 32; “open innovation communities”, Clark D. Asay, "Enabling Patentless Innovation," Maryland Law Review 74, no. 3 (2015): 435; “open source software” and “open patenting” Mariateresa Maggiolino and Maria Lillà Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," IIC - International Review of Intellectual Property and Competition Law 42, no. 7 (2011) 804; “user-centered and communitycentered Open Innovation”, Geertrui Van Overwalle, "Inventing Inclusive Patents : From Old to New Open Innovation," in Kritika: Essays on Intellectual Property, ed. Peter Drahos, Gustavo Ghidini, and Hanns Ullrich (Cheltenham: Edward Elgar Publishing, 2015), 219; “the maker movement”, Dale Dougherty, "The maker movement." Innovations: Technology, Governance, Globalization 7, no. 3 (2012): 11; Natalia Lukaszewicz, "Patent Use Exception for User-Generated Inventions : The Maker Movement Meets Patent Law" (Doctoral Dissertation, LudwigMaximilians-Universität, 2015), 10. 126 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1402. 127 Chesbrough and Bogers, "Explicating Open Innovation," 21. 128 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1403.

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Such users may be either individual consumers or companies.129 Typically, user innovators are experts in their field with highly specific needs.130 They may modify existing products to fit their niche demands that are not served by the mass market.131 A related category of actors in UOCI consists of free innovators, who innovate at their own expense in their free time and are not motivated by pecuniary rewards.132 Typically, UOCI is widely distributed and networked.133 The development of ICT technology and the Internet has greatly facilitated the proliferation of UOCI by providing user innovators with improved and more accessible ICT tools and information that support innovation.134 These technologies also allow users to communicate and collaborate, transcending geographical boundaries, and to reveal and disseminate innovations at low cost.135 User and open collaborative innovation is further characterized by the modularisation of tasks, which enables large numbers of participants to contribute smaller parts to a more complex innovation.136 The individual contributions of innovators are typically incremental; therefore, the innovation resulting from the collaborative process is by default cumulative.137 Finally, users may organize themselves into a community, which can be defined as “a voluntary association of actors, typically lacking in a priori common organizational affiliation (i.e. not working for the same firm) but united by a shared instrumental goal – in this case, creating, adapting adopting or disseminating innovations.”138 User and open collaborative innovation communities are typically open to anyone to participate in, and the innovation activity that occurs within them is transparent.139 Both firms and individuals may belong to a community, and communication between participants can take place both offline and online.140 A

129

von Hippel, Democratizing Innovation, 2; Baldwin and von Hippel, "Modeling a Paradigm Shift," 1400, 1402-1403. 130 von Hippel, Democratizing Innovation, 31, 74-75. 131 Ibid, 4-7, 32-60. 132 Free Innovation, 1, 38, 144. 133 Democratizing Innovation, 93; Boyle, "Open Source Innovation," 32, 52; Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 383. 134 von Hippel, Democratizing Innovation, 13; Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 383. 135 von Hippel, Democratizing Innovation, 10. 136 Ibid, 11. 137 Boyle, "Open Source Innovation," 32; Asay, "Enabling Patentless Innovation," 436, 462-466; Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 378-379. 138 Joel West and Karim R. Lakhani, "Getting Clear About Communities in Open Innovation," Industry & Innovation 15, no. 2 (2008): 224. 139 Boyle, "Open Source Innovation," 52, 64. Transparency enables better allocation of creative human capital, as interested participants may self-select to participate in a community. Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 405-406, 412-415, 422. 140 von Hippel, Democratizing Innovation, 96.

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community may form around a single innovation project or feature a number of projects. Users join a project when the benefit gained from access to the work of other participants is higher that the communication costs of participating in the project.141 However, both user and free innovators may nevertheless innovate independently, even when conditions for joining a community are not met.142 Free and open source software (FOSS) is perhaps the most famous and widely researched example of UOCI.143 However, UOCI-type innovation practices have already been recorded as taking place in the nineteenth century.144 Furthermore, open collaborative innovation is not limited to Internet-based innovation, as the model is also applicable to innovation of physical artefacts.145

141

Baldwin and von Hippel, "Modeling a Paradigm Shift," 1407. See ibid, 1404-1405; von Hippel, Free Innovation, 40-41. 143 See generally von Hippel and von Krogh, "Open Source Software and the “Private-Collective” Innovation Model."; Eric von Hippel, "Innovation by User Communities : Learning from OpenSource Software," MIT Sloan Management Review, last modified 15 July 2001, accessed 31 December 2018 https://sloanreview.mit.edu/article/innovation-by-user-communities-learningfrom-opensource-software/. 144 Allen has reported on the practice of the free revealing of information concerning furnace design improvements between competitors in the iron industry in mid-19th-century England. Allen, "Collective Invention," 1. Similar findings exist regarding the free revealing of steam engine innovations and improvements in 19th-century England; see Nuvolari, "Collective Invention During the British Industrial Revolution." These findings can also be considered to showcase the tradition of engaging in OI by utilizing externally developed knowledge. Huizingh, "Open Innovation," 2; Van Overwalle, "Inventing Inclusive Patents," 221. 145 User innovation (which does not always involve users who are organized into a community) has occurred, inter alia, in the context of scientific instruments, see Eric von Hippel, "Dominant Role of Users in the Scientific Instrument Innovation Process," Research Policy 5, no. 3 (1976).; semiconductors, see "Dominant Role of the User in Semiconductor and Electronic Subassembly Process Innovation," IEEE Transactions on Engineering Management EM-24, no. 2 (1977); skateboarding, snowboarding and windsurfing equipment, see Sonali Shah, Sources and Patterns of Innovation in a Consumer Products Field : Innovations in Sporting Equipment, Sloan Working Paper No. 4105 (Cambridge, MA: Sloan School of Management, 2000): 2; kitesurfing, see Robert Tietz et al., "Process of User-Innovation : A Case Study on User Innovation in a Consumer Goods Setting," International Journal of Product Development 2, no. 4 (2005): 1741; sailboats, see Christina Raasch, Cornelius Herstatt, and Phillip Lock, "Dynamics of User Innovation : Drivers and Impediments of Innovation Activities," International Journal of Innovation Management 12, no. 3 (2008), 377; and free space optics, see Johan Söderberg, "Free Space Optics in the Czech Wireless Community : Shedding Some Light on the Role of Normativity for User-Initiated Innovations," Science, Technology, & Human Values 36, no. 4 (2010). The possibilities of UOCI in terms of further expanding to physical products depend on the development and diffusion of technologies for mass customization. von Hippel, Free Innovation, 47-48. 142

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3.1.3.2

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Innovation As a Public Good

User and open collaborative innovation is a more radical OAI than OI146 or MCM. User and open collaborative innovation represents an alternative innovation model to producer innovation147 that is characterized by a) b) c) d) e)

the Schumpeterian presumption of firms as a locus of innovation; the necessity of IPRs to protect innovators from free riding;148 the need to control spillovers from an innovation;149 the indispensability of transaction costs,150 and the need to exchange inputs and outputs on the market.151

The patent system is built on the basis of the producer innovation paradigm.152 In contrast, UOCI questions the incentivizing effect of exclusive rights to IP on innovation and the assumption that innovations are produced only due to the motivation of profiting from their sale on the market.153 Consequently, all forms of OI represent closed innovation under the UOCI paradigm.154 In UOCI, “all information related to the innovation is a public good non-rivalrous and non-excludable”.155 No-one is denied access to the output. This is reflected by the engagement of innovators in the act of free revealing.156 Innovation management and information systems literature use this term to refer to (a) the disclosure of secret information that is unprotectable by IP rights, (b) the release of

146

See, for example, Piller and West, "Firms, Users, and Innovation," 31, table 2.1. Baldwin and von Hippel, "Modeling a Paradigm Shift." 1403, 1410-1412. It has also been referred to as the “private investment model” by Eric von Hippel and Georg von Krogh, "Open Source Software and the “Private-Collective” Innovation Model," 212. 148 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1413. 149 von Hippel and von Krogh, " Open Source Software and the “Private-Collective” Innovation Model," 212-213. 150 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1409; von Hippel, Free Innovation, 11. 151 Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 381, 402-403. 152 Katherine J. Strandburg, "Users as Innovators : Implications for Patent Doctrine," University of Colorado Law Review 79, no. 46 (2008), 467, 539. 153 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1399-1401; Asay, "Enabling Patentless Innovation," 443. User and open collaborative innovation is not aligned with any of the economic justifications for patent protection; see ibid, 439-446. Furthermore, UOCI questions Olson’s collective action model, which presumes that collective innovation efforts that are intended to produce a public good are dependent on the incentivizing effect of governmental subsidies. von Hippel and von Krogh, "Open Source Software and the “Private-Collective” Innovation Model," 213, 215. See also Olson, Logic of Collective Action, 1-3. 154 Van Overwalle, "Inventing Inclusive Patents," 224; von Hippel, Free Innovation, 144. 155 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1400. 156 Free revealing requires that “all existing and potential intellectual property rights to that information are voluntarily given up by that innovator and all interested parties are given access to it - the information becomes a public good.” Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1753. 147

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information that is protectable as IP into the public domain, and (c) sharing IP-protected information, such as copyright-protected source code, via indiscriminate licenses in UOCI communities.157 Irrespective of the lack of nuance with regard to IP, in all forms of free revealing, access to an innovation and its individual modules is provided to anyone.158 Hereinafter, the term free revealing only refers to disclosures of information that is protectable as IP to the public domain.159 The practice of free revealing strives toward the creation of commons based on open access, which are qualified by the absence of property.160 In this thesis, the term open licensing is used to describe an act of openness by which indiscriminate access is established on the basis of an IP right.161 When the output of UOCI is protected with IP, the right to exclude is exercised in a reverse manner, though private ordering, to allow others to use the innovation in question.162 The IP right enables the right holder to stipulate that anyone who uses her innovation and develops it further must licence the subsequent innovation under the same terms. In this manner, the license underlying the IP right gains a “viral” or “copyleft” character, as it imposes restrictions on the exercise of subsequent innovators’ exclusive rights.163 One of the most famous examples of a viral license is the GPL license for software.164 In this thesis, the term open viral licensing165 is used to refer to this type of openness. 157

See Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1753; von Hippel, Democratizing Innovation, 9. However, cf. ibid, 80. 158 Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1754. 159 This type of openness is further discussed Sect. 3.2.7. 160 Carol M. Rose, "Comedy of the Commons : Commerce, Custom and Inherently Public Property," University of Chicago Law Review 53, no. 3 (1986): 721 using the term “unlimited commons”; Charlotte Hess and Elinor Ostrom, "Ideas, Artifacts, and Facilities : Information as a Common Pool Resource," Law and Contemporary Problems 66 (2003): 121-122. 161 See Sect. 3.2.5. 162 Séverine Dusollier, "Sharing Access to Intellectual Property through Private Ordering," Chicago-Kent Law Review 82, no. 3 (2007): 1407-1410. 163 Ibid, 1409. 164 See "GNU General Public License. Version 3," FSF, last modified 18 November 2016, accessed 22 March 2017 https://www.gnu.org/licenses/gpl-3.0.html; Richard M. Stallman, Free Software, Free Society : Selected Essays of Richard M. Stallman, 2nd ed. (Boston: Free Software Foundation, 2010), 22-23, 93-95. 165 I consider the term “open viral” more suitable than “open source” or “copyleft”. Open-source software licenses do not need to feature a viral clause. Séverine Dusollier, "Commons as a Reverse Intellectual Propery - from Exclusivity to Inclusivity," in Concepts of Property in Intellectual Property Law, ed. Helena R. Howe and Jonathan Griffiths (New York: Cambridge University Press, 2013), 238; Janet Hope, "Open Source Genetics : Conceptual Framework," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press, 2009), 178. The term copyleft is in turn a concept that is closely related to copyright and bears an ideological connotation; See Free Software Foundation, "What Is Copyleft?," FSF, last modified 15 December 2018, accessed 31 December 2018 https://www.gnu.org/licenses/copyleft. en.html. This type of access is further discussed Sect. 3.2.6.

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All free-revealing practices prevent duplicative innovative effort by individual user innovators.166 Initially, free revealing was also qualified by the lack of a direct payment that benefited the innovator.167 The practices involved in free revealing have been viewed as enhancing welfare by accelerating the diffusion of technology.168 Maintaining freedom to operate is central to, and often ideological, in UOCI.169 Hence, UOCI is perceived to be ideologically opposed to the protection of IPRs, because they restrict access to inputs for innovative activity.170 Nevertheless, despite this normative stance, the practice of treating innovations as public goods in UOCI is motivated by a wide spectrum of incentives, few of which reflect an ideology.

3.1.3.3

Incentives to Innovate

Under the UOCI model, a public good can be produced by private investments, because free revealing creates private benefits for the innovators, and these benefits exceed those enjoyed by free riders.171 The incentives to engage in UOCI can be

166

von Hippel, Democratizing Innovation, 7, 9, 77. Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1754. However, in practice, some UOCI products, such as free software, are not precluded from being sold, as long as the buyer remains free to copy and modify the software. Stallman, Free Software, Free Society, 5. 168 Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1758. 169 Benkler, "Between Spanish Huertas and the Open Road," 73. von Hippel’s seminal work on user innovation is titled Democratizing Innovation. For example, the free software movement, as initiated by Richard Stallmann, emerged as a counter-reaction to the exclusive copyright regime that protects software, which hindered the UOCI practices of the developer community. Hence, it also strived to re-establish the culture of free revealing that was prevalent among software developers before software became subject to copyright protection or constrained access on the basis of secrecy. Stallman, Free Software, Free Society, 9-12. “‘Free software’ means software that respects users’ freedom and community. Roughly, it means that the users have the freedom to run, copy, distribute, study, change and improve the software. Thus, ‘free software’ is a matter of liberty, not price. To understand the concept, you should think of ‘free’ as in ‘free speech,’ not as in ‘free beer’.” Free Software Foundation, "What Is Free Software? - the Free Software Definition," FSF, last modified 15 December 2018, accessed 25 December 2018 http://www.gnu.org/ philosophy/free-sw.html. As an another example, the ethos of open-source movement is characterized by Maggiolino and Montagnani as follows: “Based on the idea that the more a culture embraces knowledge, the more democratic, just and fair it is, nowadays Open Source can be deemed as a spontaneous and compounded cultural movement that uses the internet to promote the aggregation and sharing of contents in order to allow people, not only take advantage of knowledge, but also to modify it in order to create new, diverse and improved contents to be aggregated and shared in turn”, Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 808. 170 Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 445-446. See also ch 5 “Why Software Should Not Have Owners” in Stallman, Free Software, Free Society, 37-41. 171 von Hippel and von Krogh, "Open Source Software and the “Private-Collective” Innovation Model," 215-216; "Free Revealing," 303-304. A similar observation has also been made in the 167

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divided into four different categories: (a) cost reduction, (b) utility, (c) intrinsic interests, (d) extrinsic interests.172 The diverse incentives for engaging in OCI can involve complex combinations:173 For example, extrinsic motivations do not cancel intrinsic motivations,174 as both types of motivation may drive an individual innovator simultaneously. A company may decide to engage in free revealing because it would be unprofitable to protect an innovation as a secret175 or to patent and seek to license it176 when compared to the benefits that would arise from releasing it into the public domain.177 User innovators are motivated by the utility they gain from their innovations, 178 such as providing a solution to a personal need.179 In addition, the incentives to innovate under the UOCI model may be intrinsic, such as the enjoyment of the process of innovation,180 creativity,181 altruism,182 and identifications with a community and obedience to its norms.183

context of the MCM; See Merges, "New Dynamism in the Public Domain," 186; Barnett, "Property as Process," 402-404; Barnett, "Illusion of the Commons," 1756-1757, 1814. 172 In contrast, the MCM presumes that free revealing and open viral licensing are motivated by an interest in precluding anti-commons problems with regard to future follow-on innovations. Merges, "New Dynamism in the Public Domain," 192, 200, 201. 173 Alexander Hars and Shaosong Ou, "Working for Free? Motivations for Participating in OpenSource Projects," International Journal of Electronic Commerce 6, no. 3 (2002): 34-35; Jeffrey A. Roberts, Il-Horn Hann, and Sandra A. Slaughter, "Understanding the Motivations, Participation, and Performance of Open Source Software Developers : A Longitudinal Study of the Apache Projects," Management Science 52, no. 7 (2006): 984, 996-997. 174 Karim R. Lakhani and Robert G. Wolf, "Why Hackers Do What They Do : Understanding Motivation and Effort in Free/Open Source Software Projects," in Perspectives on Free and Open Source Software, ed. Joseph Feller, et al. (Cambridge, MA: MIT Press, 2005), 18; Roberts, Hann, and Slaughter, "Longitudinal Study of the Apache Projects," 995. 175 Allen, "Collective Invention," 17. 176 Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1755; von Hippel and von Krogh, "Free Revealing," 299-300. 177 von Hippel and von Krogh, "Open Source Software and the “Private-Collective” Innovation Model," 297-298. 178 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1400, 1402; von Hippel, Democratizing Innovation, 2. 179 Eric Raymond, "Cathedral and the Bazaar," Knowledge, Technology & Policy 12, no. 3 (1999): 29, 38; Hars and Ou, "Working for Free?," 29. 180 von Hippel, Democratizing Innovation, 7, 60-61. 181 Lakhani and Wolf, "Why Hackers Do What They Do," 18. 182 Hars and Ou, "Working for Free?," 28. 183 Lakhani and Wolf, "Why Hackers Do What They Do," 5-6, 18; Hars and Ou, "Working for Free?," 28. For companies, engaging in the practice of free revealing may stem from the obligations imposed by open viral licenses. Joachim Henkel, "Selective Revealing in Open Innovation Processes : The Case of Embedded Linux," Research Policy 35, no. 7 (2006): 962.

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Furthermore, under the UOCI model, innovators may be extrinsically driven by monetary rewards,184 reputational gains in the innovation community in question,185 the improvement of skills,186 and the possibility of signalling such talents to potential employers.187 The customizability of an innovation may incentivize engagement in UOCI.188 Furthermore, the benefit of low-cost or free further improvement and correction of an innovation, often by talented, self-selected professionals, incentivizes engagement in UOCI.189 Collectively, free revealing accelerates the rate of innovation.190 It is ill-founded to characterize UOCI innovators as not being motivated by profit.191 A company can be predicted as likely to engage in UOCI when “the increase in profit in the proprietary complementary segment offsets any profit that would have been made in the primary segment, had it not been converted to open source.”192 Firms may finance UOCI activities when doing so allows them to market complementary products and services,193 such as customization and support services or sale of hardware in connection with providing open source software. Engagement 184

von Hippel, Democratizing Innovation, 7, 60-61. Allen, "Collective Invention," 17; Raymond, "Cathedral and the Bazaar," 40; Josh Lerner and Jean Tirole, "Some Simple Economics of Open Source," Journal of Industrial Economics 50, no. 2 (2002): 213; Henkel, "Selective Revealing in Open Innovation Processes," 962. 186 Hars and Ou, "Working for Free?," 29, 32. 187 Raymond, "Cathedral and the Bazaar," 40; Lerner and Tirole, "Some Simple Economics of Open Source," 21-214; Hars and Ou, "Working for Free?," 29. 188 Lerner and Tirole, "Some Simple Economics of Open Source," 215-216. 189 Raymond, "Cathedral and the Bazaar," 29-30, 40-41, 44. Support for development was confirmed to be one of the main motivations for companies to engage in UOCI. Henkel, "Selective Revealing in Open Innovation Processes." 962. Open-source development is characterized by Linus’ law: “Given enough eyeballs, all bugs are shallow”. Raymond, "Cathedral and the Bazaar," 29. However, the reputation of the superiority of open-source software development in terms of identifying bugs was damaged by the Heartbleed scandal, in which an undiscovered bug in a piece of open-source software left thousands of web-servers exposed to attacks for two years. Steven J. Vaughan-Nichols, "Heartbleed : Open Source's Worst Hour," ZDNet, last modified 14 April 2014, accessed 6 September 2017 http://www.zdnet.com/article/heartbleed-open-sources-worsthour/; Alex Hern, "Heartbleed : Developer Who Introduced the Error Regrets 'Oversight'," The Guardian, last modified 11 April 2014, accessed 31 December 2018 https://www.theguardian.com/ technology/2014/apr/11/heartbleed-developer-error-regrets-oversight. The incident spurred discussion of the underfinancing of open-source software development. Christina Warren, "Heartbleed Exposes a Problem with Open Source, but It's Not What You Think," Mashable, last modified 15 April 2014, accessed 31 December 2018 http://mashable.com/2014/04/14/heartbleed-opensource/#qWz_PitJ1iqm. 190 Allen, "Collective Invention," 21; Nuvolari, "Collective Invention During the British Industrial Revolution," 361. 191 Van Overwalle, "Inventing Inclusive Patents," 222. 192 Josh Lerner and Jean Tirole, "Economics of Technology Sharing : Open Source and Beyond," Journal of Economic Perspectives 19, no. 2 (2005): 106. 193 Lerner and Tirole, "Some Simple Economics of Open Source," 224-225; Hars and Ou, "Working for Free?," 29. The best known examples of this are firms that specialize in the development of FOSS, such as IBM and RedHat. Lerner and Tirole, "Some Simple Economics of Open Source," 198; Benkler, "Coase's Penguin, or, Linux and 'the Nature of the Firm'," 425-426. 185

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in UOCI may also be motivated by an interest in competing against a rival technology, such as a proprietary standard.194 Employing the UOCI model may lead to an innovation being more rapidly introduced to the market.195 Diffusing innovation though free revealing or open licensing may also create positive network effects, potentially culminating in the rise of the innovation as a de facto standard.196 The interrelationships between UOCI and competition are multifold: On the one hand, the emergence of a de facto standard may suppress competition;197 on the other hand, the UOCI model may be employed to increase competition, either on the market for a UOCI-developed innovation or on the markets for complementary products.198 However, the presence of competition may reduce incentives to engage in UOCI in the first place,199 unless the innovator finds a successful means by which to manage the closed and open mode of innovation through “selective revealing”.200

3.1.3.4

UOCI and Patents

Patents, especially in the context of software, have been viewed as misaligned with the values of UOCI.201 As with any follow-on innovation, UOCI innovations run the risk of breaching an externally developed IP and operating in the context of patent thickets.202 User and open collaborative innovation risks infringing an external IP, the ex ante clearance of which may involve uncertainties and excessive transaction costs:203 For example, open-source software may become subject to hold-ups by

194

Merges, "New Dynamism in the Public Domain," 193. Matthias Stuermer, Sebastian Spaeth, and Georg von Krogh, "Extending Private-Collective Innovation : A Case Study," R&D Management 39, no. 2 (2009): 181-182. 196 Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1757; von Hippel, Democratizing Innovation, 86; von Hippel and von Krogh, "Free Revealing," 301. 197 von Hippel and von Krogh, "Free Revealing," 301. 198 See Lerner and Tirole, "Some Simple Economics of Open Source," 225-226. 199 Nikolaus Franke and Sonali Shah, "How Communities Support Innovative Activities : Exploration of Assistance and Sharing among End-Users," Research Policy 32 (2003): 170-171; Baldwin and von Hippel, "Modeling a Paradigm Shift."; Shah, Sources and Patterns of Innovation in a Consumer Products Field, 1401, 1403. 200 Henkel, "Selective Revealing in Open Innovation Processes," 953. Companies may also reveal a part of their proprietary, IP-protected assets when faced with a demand to do so from customers. In such situations, free revealing or open licensing may create a competitive advantage. Joachim Henkel, Simone Schöberl and Oliver Alexy. "The Emergence of Openness: How and Why Firms adopt Slective Revealing in Open Innovation” Research Policy 43 no. 5 (2014): 888. 201 Jason Schultz and Jennifer Urban, M., "Protecting Open Innovation : The Defensive Patent License as a New Approach to Patent Threats, Transaction Costs, and Tactical Disarmament," Harvard Journal of Law & Technology 26, no. 1 (2012): 3-4, 10-14. 202 Asay, "Enabling Patentless Innovation," 434, 461. 203 See Baldwin and von Hippel, "Modeling a Paradigm Shift," 1414. 195

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software patents.204 Some authors have raised concerns that patents holders’ litigation against individual users risks freezing innovation in communities.205 However, this appears to be an excessive concern, as patent holders’ interest in litigation is likely to correlate with the degree of commercialization of UOCI-produced products such as software.206 Hence, the problems of commercial UOCI innovators in the context of software appear to coincide with those of manufacturing cumulative innovators face in complex industries.207 User and open collaborative innovation rarely relies on patent protection, because the patent system is not appropriate for such a distributed approach to innovation. The decentralized UOCI communities, let alone individual user innovators, often lack the monetary resources to apply for patents.208 However, the growth of UOCI efforts may lead to the adoption of control measures against misappropriation of an innovation,209 including defensive uses of patents.210 However, UOCI innovators are often at a disadvantage when applying for a patent because incremental innovations that are improved cumulatively and shared within a networked community are less likely to fulfil the requirements of novelty and non-obviousness.211 Nevertheless, the UOCI model and the practice of providing open viral licenses to patents has caught the attention of scholars due their potential to resolve overprotection

204

Lerner and Tirole, "Economics of Technology Sharing," 113; Schultz and Urban, "Protecting Open Innovation, " 3, 7, 53, 57-58. 205 Boyle, "Open Source Innovation," 32, 54. 206 Asay, "Enabling Patentless Innovation," 438, 457, 467. 207 PAEs are reported to prefer litigating against the few downstream multicomponent-producing companies because doing so involves fewer transaction costs than targeting component manufacturers. Furthermore, litigation against multicomponent producers offers advantages when it comes to the calculation of damages on the basis of an expensive end-product. Moreover, foregoing licensing to the producers of components maintains the possibility of suing a multicomponent producer, as the exhaustion principle does not apply. Lemley and Melamed, "Missing the Forest for the Trolls," 2131 and fn 62, 2164 and fn 197,. However, so-called “bottom-feeder trolls” prefer to sue smaller companies, who may agree to pay royalties as a result of the fear of litigation. Ibid, 2164, 2176. 208 Schultz and Urban, "Protecting Open Innovation," 8-9. 209 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1409. 210 See Schultz and Urban, "Protecting Open Innovation," 26-37. 211 Asay, "Enabling Patentless Innovation," 436, 462-466.

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problems.212 For example, Hope has highlighted the benefits of adapting UOCI models of innovation and open viral licensing to the field of genetics.213 Empirical studies have confirmed that, in accordance with the UOCI literature, patent holders may assign or license patents for free, for example to academic institutions, for the purposes of cutting costs. Such sharing could be motivated by a patent holder’s the desire to profit indirectly from the creation of a de facto standard or an interest to benefit from the efforts of the UOCI community, which receives a royalty-free license to his patent.214 Patent holders have also been found to offer access to patents for reasons not immediately identified by the UOCI theory. Donations or royalty-free licenses can be motivated by an interest in fostering innovation by universities or non-profit organizations, without direct benefit to the firm in question. Furthermore, the royalty-free licensing of patents can also be motivated by the promotion of the public interest through providing access to certain types of patents, such as pharmaceuticals in developing countries, and the good-will resulting from such actions.215 However, generally speaking, the adoption of the UOCI model among patentintensive industries is dependent on the possibility of the profits generated by complementary products exceeding the costs of innovating, manufacturing, and commercializing the UOCI-type of innovation. Furthermore, some scholars are sceptical about replicability of the UOCI innovation model in fields where innovation process cannot be broken down into small modules for individual innovators to work on or those that require high investments.216 Unless they have access to mass customization technology, users have limited opportunities to produce tangible technologies.217 Individual user innovators are not motivated to incur the costs of patenting their innovations, because doing so would

212

See Sara Boettinger and Dan L. Burk, "Open Source Patenting," Journal of International Biotechnology Law 1 (2004), 221, 261; Reto M. Hilty, "Individual, Multiple and Collective Ownership : What Impact on Competition?," in Individualism and Collectiveness in Intellectual Property Law, ed. Jan Rosén (Cheltenham: Edward Elgar Publishing, 2012), 28-30, 42; Hope, "Open Source Genetics," 179; "Open Source Genomics. Symposium on Bioinformatics and Intellectual Property Law," Boston University Journal of Science & Technology Law 8, no. 1 (2002): 249-262 (comments by Dan Burk); Van Overwalle, "Inventing Inclusive Patents," 219-225. Cf. "Open Source Genomics. Symposium on Bioinformatics and Intellectual Property Law," Boston University Journal of Science & Technology Law 8, no. 1 (2002): 265 (comments by Josh Lerner). 213 Hope, "Open Source Genetics," 185-189; Dianne Nicol and Janet Hope, "Cooperative Strategies for Facilitating Use of Patented Inventions in Biotechnology," Law in Context 24, no. 1 (2006) 102-105, in which the authors mention, inter alia, developmental support and testing, the freedom to customize, reputational gains, enhancement of competition by substitution, the development of complementary products, and price reductions due to increased competition. 214 Nicole Ziegler, Oliver Gassmann, and Sascha Friesike, "Why Do Firms Give Away Their Patents for Free?," World Patent Information 37 (2014): 21-22. 215 Ibid, 21-23. 216 Lerner and Tirole, "Some Simple Economics of Open Source," 231. 217 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1408-1409.

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reduce the overall resources that are available to their innovation efforts and the value of the resulting innovation.218 Given the manufacturing capacities and economies of scale of firms,219 it may prove advantageous for user innovators to reveal their designs to manufacturers in order to have them produced.220 However, more recently, UOCI research has highlighted that the mere revealing of an innovation’s design to the public does not in itself lead to diffusion of the technology unless the innovator working under the UOCI model is ready to assume the costs of communicating the innovation to a larger public.221 Individual user innovators do not have sufficient incentives to do so, because they do not internalize the benefits the diffusion of the innovation creates to others. The underdiffusion of such innovation represents a market failure.222

3.1.4

Interim Conclusions

All three OAI theories deal with enabling innovation and provide explanations of patent holders’ incentives for allowing follow-on innovators to reuse their patents or patentable inventions. In OAIs, this accessibility is based on private ordering, but the theories take very different perspectives on openness. The first, MCM seeks to resolve the market failures stemming from excessive transaction costs directly, through the lens of law and economics. In contrast, OI and UOCI, which originate from management research, address the problems of overprotection indirectly by highlighting situations in which allowing reuse of IP would prove beneficial to its holder. While both OI and UOCI claim to articulate new innovation paradigms, only the latter questions the prevailing firm-centred innovation model, which the economic justifications for patent protection also presuppose. Hence, while MCM and OI align with the incentive theories, UOCI does not consider IP as necessary for the incentivization of innovation. The presumptions regarding the desirable level of openness vary across theories: From the perspective of OI, bilateral licensing suffices, while MCM and UOCI also address constellations in which a right holder voluntarily limits his right to exclude. However, whereas UOCI advocates contracting into private liability rules223 that are accessible to any follow-on

218

Ibid, 1403, 1409. Ibid, 1408. 220 Harhoff, Henkel, and von Hippel, "Profiting from Voluntary Information Spillovers," 1756. 221 von Hippel, Free Innovation, 41, 45. 222 Jeroen P. J. de Jong et al., "Market Failure in the Diffusion of Consumer-Developed Innovations : Patterns in Finland," Research Policy 44, no. 10 (2015): 1863; von Hippel, Eric, et al., "Market Failure in the Peer-to-Peer Diffusion of User Innovations: The Case of Off-Label Drug Discoveries, " Science and Public Policy 44, no. 1 (2017): 121, 124. 223 See Krauspenhaar, Liability Rules in Patent Law, 23, 26-31. 219

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innovator, the under the MCM it is, in most cases, sufficient to give access to a more limited group of innovators.224 Open approaches to innovation theories adopt diverse stances with regard to the relevance of the overprotection problems of the patent system and their preferred solutions for overcoming them. The broad MCM, influenced by the Chicago School, is the most optimistic regarding the capacity of patent holders to resolve market failures through private ordering. However, the narrow MCM acknowledges the insufficiency of private incentives when it comes to precluding the occurrence of hold-up problems. The OI theory has been developed in isolation from the law and economics discourse on the market failures of the patent system and therefore offers little guidance for resolving them. Generally, it aligns with Epstein and Kuhlik’s argument that overprotection problems in an anti-commons setting are ameliorated by patent holders’ interest in not foregoing an opportunity to obtain licensing fees.225 While OI research holds that the enforceability of patents relevant for technology transfer, fostering vertical disintegration, and the emergence of the technology markets, it acknowledges certain overprotection problems. However, it also suggests that some of them may derive not from imbalances in the design of the patent system but rather failures in the management of IP assets. The UOCI paradigm focuses on non-IP-dependent innovation, and, despite the relevance of copyright protection to enabling open viral licensing, it is generally critical of IP protection and its foreclosing effect on follow-on innovation. However, the relevance of IP in enabling the large-scale production and dissemination of innovations has recently drawn more attention in UOCI research.226 The legal scholarship on such private ordering mechanisms has suffered from the lack of acknowledgement of the differences between the three OAI theories.227 In addition, the conceptual imprecision of OI and UOCI research with regard to IP law has heightened the threshold to addressing their research findings in the context of legal research. On the other hand, legal research on OAI often focuses on specific means of private ordering and has a tendency to overstate the possibilities for applying the instrument, disregarding the incentives and other relevant factors at play behind the OAI initiative. Research on MCM generally leans towards the

224

The different preferences of the MCM and UOCI with regard to sufficient levels of openness can be traced to their theoretical backgrounds. The MCM relies on Olson’s theory of collective action and Elinor Ostrom’s research on governing common property resources, which, being rival, can be sustainably managed by a group of a limited size. See Merges, "Contracting into Liability Rules," 1295-1296; Barnett, "Property as Process," 422–423; Benkler, "Between Spanish Huertas and the Open Road," 91-92. The UOCI, in turn, draws from Carol Rose’s theory on open-access commons, in which a resource is presumed to be non-excludable in general. Rose, "Comedy of the Commons,” 721. 225 See Epstein and Kuhlik, "Is There a Biomedical Anticommons?," 55-56. 226 See Sect. 3.1.3.4. 227 For an exception, see Van Overwalle, "Inventing Inclusive Patents," 209-224, discussing OI and UOCI.

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Chicago School’s resistance towards governmental interventions. In contrast, legal research on UOCI tends to adapt the ideological stance of UOCI. In the context of legal research, the emerging tendency to establish access to IP by means of private ordering has been viewed as reflecting a normative shift in the use of IPR in favour of pro-access ideology.228 Representing this view, Van Overwalle has recently outlined a new normative benchmark for legal research on OAI. This approach, defined as a “new approach to open innovation”, strives to foster UOCI in its community-driven form in the context of technological innovation.229 It is undisputable, that the current patent system is not tailored to foster UOCI. Indeed, many UOCI initiatives feature the objective of influencing lawmakers to accommodate new modes of innovation in the IP system.230 Furthermore, UOCI and other OAI theories require “translating” into the context of patents. However, in the author’s opinion, legal research would benefit from a different perspective on OAI theories: First, legal researchers should avoid contributing to the terminological confusion surrounding the OAI theories. Second, adopting a strong normative stance towards OAI theories or certain private ordering mechanisms inhibits the legal research community from learning from the empirical and theoretical findings of the constantly evolving management and economic research into OAI. The understanding of the existence, and the limits, of incentives to participate in OAI initiatives is advancing. In order to provide well-informed normative recommendations, legal research must remain open to reassessing its presumptions concerning OAI; new OAI findings should continue to be integrated into the economic analysis of patent law and should ultimately inform the normative framework that justifies patent protection alongside other theoretical and empirical research into patents and their effects. From the perspective of the dynamic incentive theory, the three OAI approaches offer new insights into the role of IP in fostering innovation and illustrate those contexts where market failures associated with overprotection are unlikely to occur. Ultimately, the normative objective of this approach is the maintenance of neutrality231 and, as far as possible, objectivity, with regard to the benefits of different modes and sources of innovation.

228

Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1394. Van Overwalle, "Inventing Inclusive Patents," 225-229. “New open innovation is characterized by universal openness, pointing to a regime where technology and inventions are open for use for all, where everyone is free to use and improve the invention without prior permission, and where access to and use of technical improvements is fostered and warranted for all.” Ibid, 228. 230 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1411-1412. 231 Hilty has emphasized the importance of neutrality of of the law regard to the patent holder’s choices to engage in more exclusive or inclusive exercise of her rights conferred by a patent. Hilty, "Open Approaches," in Kommunikation: Festschrift für Rolf H. Weber zum 60. Geburtstag, ed. Rolf Sethe and Rolf Weber (Bern: Stämpfli, 2011), 108; Hilty, "Individual, Multiple and Collective Ownership," 44. 229

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The Continuum of Openness The Various Dimensions of Openness

All three OAI theories offer different perspectives regarding the expected and desired level of accessibility in respect to follow-on innovation. To fully understand the relevance that OAIs have in terms of resolving overprotection problems, it is necessary to place the theories and respective practices for providing access to patents or patentable inventions on a continuum. At the closed end of continuum is exclusive use. The levels of openness, in expanding order, are restricted, semiopen, open, open viral, and public domain.232 In addition, access to a patent can be based on non-enforcement. In this part, the different types of openness are analysed with regard to their relevance to solving overprotection problems. All levels of openness depend on individual ownership of a patent,233 with the only exception being revealing it to the public domain.234 Hence, openness, even in its most inclusive entitlement-based forms, such as open viral licenses, relies on the existence and assertion of an IPR.235 Furthermore, with the exception of the release of patentable inventions to the public domain and non-enforcement, openness is achieved through private ordering. These “[p]rivate ordering mechanisms rely upon contractual or technical means to enforce owners’ rights[. . .]to counteract IP expansion instead of intensifying it”.236 Hence, in OAI, the scope of openness is not a matter of patent law but instead the contractual designs that depend on the interests of the contracting parties and the boundaries set by competition law.237 However, it

The categories of “restricted use” and “semi-open use”, as well as the logic of categorization, rely on the framework advanced by Van Overwalle. Similarly, the qualifications of “sustainable”, “universal”, and “conditional” access, which are further discussed in greater detail, are attributed to her. Geertrui Van Overwalle, "Individualism, Collectivism and Openness in Patent Law : From Exclusion to Inclusion through Licensing," in Individualism and Collectiveness in Intellectual Property Law, ed. Jan Rosén (Cheltenham: Edward Elgar Publishing, 2012), 105-108. See also Van Overwalle; "Inventing Inclusive Patents," 226-229. 233 See Hilty, "Individual, Multiple and Collective Ownership," 42. For a debate on the categorisation of individual, multiple, and collective ownership of IP, see generally ibid; Alexander Peukert, "Individual, Multiple and Collective Ownership of Intellectual Property Rights - Which Impact on Exclusivity?," in Structure of Intellectual Property: Can One Size Fit All?, ed. Annette Kur and Vytautas Mizaras (Cheltenham: Edward Elgar Publishing, 2011); Geertrui Van Overwalle, "Individualism, Collectivism and Openness in Patent Law : From Exclusion to Inclusion through Licensing." 234 Van Overwalle, "Exclusive Ownership Versus Open Commons," 144. 235 See Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1407-1408. 236 Ibid, 1393-1394. Private ordering may also be used to expand the scope of IPRs to material that belongs to the public domain or is subject to exceptions and limitations. Ibid.; Reto M. Hilty, IP and Private Ordering, Research Paper No. 16-15 (Munich: Max Planck Institute for Innovation & Competition, 2016), 7-8. 237 Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 296, 299, 307. 232

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is the individual ownership of a patent that allows its owners to stipulate its use in an inclusive manner that is enforceable against foreclosure attempts.238 Open innovation predominantly covers open-restricted types of openness but may also explain certain unilateral forms of semi-open uses. In theory, it may also accommodate open and open viral licensing in circumstances under which such initiatives may offer revenues to the patent holder. The MCM entails openness from open-restricted forms to open use and acknowledges open viral licensing. Finally, UOCI covers levels of access ranging from open to open viral, as well as revealing to the public domain and non-enforcement. The heterogeneous open private ordering mechanisms support the exercise of patents in accordance with the dynamic incentive theory. The innovation incentives do not derive from exclusive rights conferred by IP as such but rather the possibilities they provide for value capture on a dynamic market. This effect depends on the availability of alternative, competing models of engaging in OAIs by means of contractual arrangements that can be tailored to serve the strategic goals of a specific innovation project.239 However, some forms of openness, such as restricted use, benefit the parties that employ the private ordering mechanism but may also foreclose follow-on innovators or have anticompetitive effects. Furthermore, the scope of access provided by the private ordering mechanisms and their effect on the overprotection problems of the patent system may change over time. Several further qualifications are essential when assessing the openness of patented inventions in relation to follow-on innovators. The first is the universality of access. Universal access means that anyone can access or use a patent or a patentable knowledge resource.240 Constellations based on private liability rules, i.e. open and open viral uses, as well as free revealing to public domain, are universally accessible. The second is the sustainability of openness, which “means that the openness is passed on from one inventor/improver to another, and that a chain of openness can be endorsed among follow-on improvers.”241 Only the open viral constellations have a sustainable quality. The third is the enforceability of the access, which refers to whether the patent holder can oblige others to conform to the practice of sharing.242 Essentially, the sustainability of open viral access depends on the enforceability of the underlying viral license.243 The fourth is the longevity of access, which refers to how long a period of time follow-on innovators may be able to use an invention.244 Generally, longevity of access depends on the terms of the contract. When revealing

238

Hilty, "Individual, Multiple and Collective Ownership," 42. Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 307. 240 Van Overwalle, "Inventing Inclusive Patents," 224, 227. 241 Ibid, 229. 242 Hilty, "Individual, Multiple and Collective Ownership," 42. 243 See ibid, 33, 42. 244 Schultz and Urban, "Protecting Open Innovation," 25, to whom the term “longevity” is also to be attributed. Cf. Van Overwalle, "Inventing Inclusive Patents," 229 labelling longevity as subcategory of sustainability. 239

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to the public domain and in the case of non-enforcement, there is no contract that determines the time period during which the resource will be accessible. The longevity of access may be compromised by a change in the patent holder’s strategy or upon transfer of the IPR to new owner. The fifth is the conditionality of access, referring to whether a follow-on innovator must pay or contribute something else, such as a cross-license, in return for gaining access to the patented or patentable invention.245 In addition, an obligation to behave in a certain manner, such as committing to sharing behaviour in return for a license, represents a form of conditional access.246 Consequently, only royalty-free licenses, granting access to the public domain, and non-enforcement that does not entail reciprocal practices of non-enforcement represent unconditional access. However, based on the dynamic incentive theory, access to a patent does not need to be unconditional in order for it to be efficient with regard to follow-on innovators and yield positive effects in terms of social welfare. On the contrary, on many occasions, an expectation of licensing fees may be the core motivation for a patent holder to continue to invest in R&D in the future. Hence, in this thesis, the author does not express a normative preference for unconditional access in qualifying the openness of a patented invention. Nevertheless, it is acknowledged that royalty-free licensing prevents the market failure of royalty-stacking, which may retard downstream innovation,247 or singular demands for excessive royalties. Finally, while the theories on commons are connected to both the MCM and the UOCI,248 this work does not rely on them directly to qualify levels of openness or private ordering instruments. Due to their focus on the governance of knowledge resources, these theories are too imprecise to define the legal conditions for and implications of access for the purposes of this research.249

3.2.2

Exclusive Use

A patent is used exclusively when a patent owner or an exclusive licensee of a patent does not license it to others. Upon the discovery of an infringement, the right holder seeks a permanent injunction, without an interest in creating an exploitative hold-up

245

Van Overwalle, "Inventing Inclusive Patents," 228. However, the author considers the viral effect to be a subcategory of sustainability. 246 Van Overwalle, "Exclusive Ownership Versus Open Commons," 151. 247 Hope, "Open Source Genetics," 181. 248 For a detailed discussion see Sect. 3.1.4 note 648. 249 For research on the commons in the context of IPRs as well as other knowledge resources, see, for example, Dusollier, "Commons as a Reverse Intellectual Property."; Van Overwalle, "Exclusive Ownership Versus Open Commons."; Brett M. Frischmann, Michael J. Madison, and Katherine J. Strandburg, Governing Knowledge Commons (New York: Oxford University Press, 2014).

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situation.250 As described in Sects. 2.3.2.4 and 2.3.2.7, from the perspective of the dynamic incentive theory, the exclusive use of a patent is justified when it is necessary to maintain its owners’ incentives to invest in innovation in the given competitive environment. The exercise of a patent is unjustified when it reflects an offensive–anticompetitive exercise of patents through refusal to license or an exclusionary hold-up.251 Patents that are not used, licensed, or enforced, the so-called “sleeping patents” represent a wide grey area of exclusive use between these two extremes. Such patents may be obtained for defensive purposes or simply represent alternative, potentially abandoned, R&D paths adopted by their owners.252 From the perspective of the dynamic incentive theory, sleeping patents are exercised unjustifiably only when their holder refuses to license them or enforces them. However, from the perspective of follow-on innovation, this mass of patents may create hold-up risks, particularly if they are not identified and cleared prior to investing in an innovation. The OI theory, which considers unused patents as representing closed innovation, urges patent holders to actively seek ways to license out the sleeping patents in order to create a stream of revenue253 whith a consequence of preventing duplicative innovation.254 However, due to the transaction costs involved and the interest of some holders in employing offensive practices, this ex ante licensing ideal is unrealistic. Furthermore, sleeping patents may be valuable to their holder in that they secure an opportunity to take an another direction in R&D.255 Distinguishing such motives from the offensive blocking of a competitor may prove difficult. Finally, there may be a lack of demand for sleeping patents due to their technological inferiority; as such, they may have no effect on follow-on innovation and only represent deadweight losses to the patent holder.

250

A patent holder who seeks to create an exploitative hold-up situation is actually willing to license a patent, but only under conditions that overreward him. 251 It must be noted that, due to patent law’s disclosure requirement, even offensively exercised patents are more open to follow-on innovators than inventions that are kept secret. Hilty, "Individual, Multiple and Collective Ownership," 27-28. The effect of mandatory disclosure may foster follow-on innovations that improve upon an original patent. However, protecting an initial invention as a trade secret is more favourable to cumulative innovators who independently develop the same solution. 252 Of the companies’ patents, almost 40 percent are neither used internally nor licensed, of which 26 percent serve the objective of blocking competitors, while 13 percent are regarded as “sleeping patents” that are merely sitting on the shelf. Salvatore Torrisi et al., "Used, Blocking and Sleeping Patents : Empirical Evidence from a Large-Scale Inventor Survey," Research Policy 45, no. 7 (2016): 1381. The study does not distinguish defensive patents from patents acquired in pursuit of an offensive-anticompetitive strategy. It also does not measure the proportion of unused patents that are subject for litigation. 253 Chesbrough, Open Innovation, 34, 41, 53, 57. 254 Rec. 4 TTBER. 255 Paola Giuri et al., "Inventors and Invention Processes in Europe : Results from the PatValEUSurvey," Research Policy 36, no. 8 (2007): 1118.

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Restricted Use

Situations in which a patent is licensed to a limited group of “well-identified” licensees represent a restricted form of openness.256 This category of openness covers many heterogeneous licencing constellations: Bilateral licenses, bilateral and multi-lateral cross-licensing agreements, patent pools that do not license to non-members, and R&D agreements represent restricted use.257 In addition, issuing multiple bilateral licenses for one patent to a limited number of licensees also falls in the category of restricted openness.258 Due to this discriminate quality, restricted openness is not in accordance with UOCI.259 In the simplest form, a patent holder licenses a patent bilaterally to one licensee against a payment.260 This already qualifies as openness under the OI theory. It also represents the prospect theory’s ideal form of licensing to a subsequent innovator. In the absence of transaction costs and the availability of perfect information and the presence of rationality, a patent holder would license her patent to the most capable subsequent innovator.261 Conditional patent licensing in return for a licensing fee is one of the most commonplace means of exploiting a patent, but it is vulnerable to transaction cost problems262 Furthermore, a patent holder may still seek to create an exploitative hold-up situation aimed at a follow-on innovator who is not party to the licensing agreement. Cross-licensing arrangements are a form of openness propagated by MCM; they are driven by the motivation of reducing the number of overprotection problems, in particular transactions costs and royalty stacking. Two companies enter crosslicensing agreements when both of them hold complementary patents to each other’s technology. The license can be royalty-free or conditional to royalty payments.263 This may present an efficient solution to the problem of blocking patents.264 The welfare-enhancing effects of cross-licensing are twofold: First, if the cross-licensee’s patent portfolio is not as strong as that of the cross-licensor, it incentivizes innovation by providing the licensor with returns for the investments sunk in R&D. Second, it allows companies to focus their R&D efforts on their areas of expertise and the development of complements, instead of wasting resources on duplicative

256

Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 75. Cf. Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 298-299. 258 Van Overwalle, "Exclusive Ownership Versus Open Commons," 141. 259 Similarly, Van Overwalle, "Inventing Inclusive Patents," 218. 260 Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 75. 261 On prospect theory see Sect. 2.1.3. 262 On transaction cost problems see Sect. 2.3.2.3. 263 Shapiro, "Navigating the Patent Thicket," 127, which also describes different forms of crosslicensing agreements. In addition, cross-licensing may used as means to settle patent disputes. Ibid, 128, 130, 142. 264 Ibid, 123. 257

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innovation.265 Arguably, it is more the strength and the relevance of the IP than the size of the company that determines its negotiation position in cross-licensing negotiation.266 However, incentives to enter into cross-licensing agreement instead of litigating are reduced when the interests of companies are not symmetrical, as in the case when the other is an NPE.267 Furthermore, the quality of the patent portfolios may not be equal, which may complicate the process of arriving at a licensing agreement. Nevertheless, bilateral licensing and cross-licensing agreements are deemed generally favourable in terms of follow-on innovation and competition.268 Technology transfer agreements for the purposes of the production of products are therefore exempt by TTBER from the prohibition of Art. 101 (1) TFEU provided that the agreement does not include any other hardcore restrictions and the parties do not cross the market share thresholds.269 Coupled-OI generally presupposes the existence of R&D agreements, which are also subject to block exemption regulation.270 The MCM envisions restrictedly open constellations, including multilateral crosslicensing agreements and patent pools, as reducing transactions costs, the risks of bargaining breakdown, royalty stacking, and hold-up problems under the condition that the arrangements include only complementary patents.271 However, these overprotection problems are mitigated only in relation to the cross-licensees or members of the pool. These constellations may restrict competition both upstream and downstream, as well as inter- and intra-technological competition. While pooling grants the participating firms the freedom to operate without the risk of infringement, it may fortify the patent holders’ market position in comparison to entrants who do not hold patents that would enable them to enter into cross-licensing arrangements.272 Both cross-licensing agreements and patent pools that do not license to third parties pose the risk of developing into a de facto standard, which, in the absence of access to the technology, may preclude competition on the market 265

Peter C. Grindley and David J. Teece, "Managing Intellectual Capital : Licensing and CrossLicensing in Semiconductors and Electronics," California Management Review 39, no. 2 (1997): 9-10, 32. 266 Ibid, 32. An SME with a relevant complementary patent to a widely distributed product or an entrant with relevant technology may have a strong position in cross-licensing negotiations against a large company. Ibid. 267 Lemley, "Intellectual Property Rights and Standard-Setting Organizations," 1950. 268 See rec. 4 TTBER. 269 Ibid, Art. 2, Art. 4; TTBER Guidelines (2014), para 40. The precondition of this exception is that a licensing agreement allows for exploitation of a patent; an agreement to block the development of competing technology is not covered by the block exception, see ibid, para 59. 270 See Commission Regulation (EU) No 1217/2010 of December 2010 on the Application of Article 101 (3) of the Treaty on the Functioning of the European Union to Certain Categories of Research and Development Agreements, 2010 O.J. (L355); Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 111-149. 271 For detailed discussion on the MCM see Sect. 3.1.1.2. 272 Shapiro, "Navigating the Patent Thicket," 130, 133; Cf. Merges, "Contracting into Liability Rules," 1354.

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in question.273 Technology transfer agreements which involve more than two parties are not subject to TTBER, but the assessment of their pro-competitiveness is subject to the same principles, with the exception of patent pools.274

3.2.4

Semi-Open

Semi-open uses represent private ordering solutions where access is granted only to certain type of users, but, within that group, access is indiscriminate.275 In comparison to the restricted form of openness, in semi-open constellations, the licensees are not clearly identifiable ex ante.276 An example of such approach would be a patent pool that targets only certain types of follow-on innovators. The semi-open initiatives may also be based on mutual pledges to either license openly or not to assert patents against other patent holders who have made the same pledge.277 In this form of openness, the patent holder takes advantage of the right to grant non-exclusive licenses to as many licensees as he wishes. In practice, semi-open constellations often predefine not only eligible users but also the purposes for which patents can be used. The motivations behind the semi-open initiatives fall into three categories: public interest, constellations in favour of follow-on innovation, and defensive interest.278 Semi-open constellations motivated by public interest include, for example, initiatives aimed at developing countries and strive at closing down the research gap with respect to tropical and neglected diseases, as well as those that seek to improve access to affordable generic medicines in low-income countries.279 Often, such initiatives seek to foster imitative use, rather than follow-on innovation.280 273

TTBER Guidelines (2014), para 196. Ibid, paras 54, 57. 275 See Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 105. Similarly: Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1410. An example from the field of copyright would be Creative Commons licenses that distinguish between commercial and non-commercial uses. Ibid. 276 Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 75. 277 Mariateresa Maggiolino and Maria Lillà Montagnani, Pledges and Covenants : The Keys to Unlock Patents, Legal Studies Research Paper No. 2615061 (Milan: Bocconi University, 2015), 1. 278 The interests in fostering follow-on innovation and public interest are also recognized by Ziegler et al. See Ziegler, Gassmann, and Friesike, "Why Do Firms Give Away Their Patents for Free?," 22-23. 279 See Amy Kapczynski et al., "Addressing Global Health Inequities : An Open Licensing Approach for University Innovations," Berkeley Technology Law Journal 20, no. 2 (2005): 10461052. 280 For example, under the Medicines Patent Pool, those pharmaceutical companies and research organizations that hold patents for HIV, hepatitis, and tuberculosis medicines grant licenses to generic companies who commit to making such medicines available in low and middle-income countries. Medicines Patent Pool, "What We Do," Medicines Patent Pool, last modified n.d., 274

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However, some initiatives combine public interest with the motivation of also supporting subsequent R&D.281 Semi-open initiatives intended to promote the public interest represent a method of price discrimination in favour of certain licensees or countries. Companies who engage in such initiatives maintain an opportunity to exercise the patent on desirable markets while contributing to a commons in favour of developing countries.282 Semi-open initiatives that are aimed at the public interest can be best qualified as a form of selectively exercised UOCI.283 Generally, such constellations are welfare enhancing. Examples of semi-open initiatives that are more directly motivated by follow-on innovation are Patent Commons and GreenXchange. Patent Commons is a clearing house supported by the Linux Foundation that documents the patent commitments, pledges, and policies made by companies that hold software patents in favour of FOSS software development.284 The objective of the Patent Commons is to support innovation in FOSS by reducing the risk of patent infringement while also avoiding the transaction costs associated with technology transfer across developers’ networks.285 The GreenXchange was a clearing house initiative that sought to allow

accessed 31 December 2018 https://medicinespatentpool.org/what-we-do/. Despite its name, the Medicines Patent Pool is structured as a clearing house. Van Overwalle, "Exclusive Ownership Versus Open Commons," 149. 281 For example, Merck’s patent policy supports follow-on innovation more directly, as it allows for royalty-free licensing of its patents for R&D and manufacturing activities for the purpose of addressing “public health needs for [neglected tropical diseases] in the least developed countries”, in addition to their commercialization in such countries. "Public Policy Statement : Social Licensing Approach for Research Development Parnershios for Neglected Tropical Diseases (Ntds)," Merck, last modified January 2014, accessed 22 March 2017 https://www.merck.com/about/views-andpositions/Public-Policy-Statement-Social-Licensing-Approach-for%20Research-Develop.pdf. In the same vein, Kapczynski has proposed a license for neglected diseases that would allow researchers to continue R&D concerning such diseases, even if the university that owns a relevant patent licenses it exclusively to a company. See Kapczynski et al., "Addressing Global Health Inequities," 1119-1112. 282 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1410. 283 However, they may also be viewed as a special type of pro-bono OI for markets in which the patent holder has no interest in operating. Finally, they may also represent government-induced MCMs. For example, the Medicines Patent Pool does not represent a pure MCM initiative, as it is supported by the United Nations. Medicines Patent Pool, "What We Do". 284 Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 821-822. As an example, Nokia committed to not enforcing its patents against the Linux Kernel. Patent Commons Project, "Nokia's Legally Binding Commitment Not to Assert Nokia Patents against the Linux Kernel," Linux Foundation, last modified 2005, accessed 29 March 2017 http://www.patentcommons.org/commons/pledgesearch.php?displaypledge¼27& titlecopy¼&contributor_id¼&searchSubmit¼Find. Red Hat also undertook not to enforce its patent against FOSS that may read on claims of any patents it owns. "Red Hat's Statement of Position and Promise," Linux Foundation, last modified 2002, accessed 29 March 2017 http://www. patentcommons.org/commons/pledgesearch.php?displaypledge¼29&titlecopy¼&contributor_ id¼&searchSubmit¼Find. 285 "Commons : Protecting and Supporting Innovation," Linux Foundation, last modified accessed 29 March 2017 http://www.patentcommons.org/about/the_commons.php.

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patent holders to license their defensive and sleeping patents to other sectors and for non-competing uses.286 The initiative targeted sustainable innovation287 with the objective of fostering OI.288 However, the GreenXchange failed due to the problems of two-sided markets surrounding a small clearing house, which translated into limited incentives to license through it, the demand for know-how and collaboration rather than mere access to patents, and insufficient resources of the administration of the initiative.289 These examples illustrate the ambivalence involved in incentives to establish a semi-open initiative for the promotion of follow-on innovation. On the one hand, the presence of indirect benefits from sharing, such as enhanced reputation of the patent holders, the lowered transaction costs of licensing, and the direct benefits of increasing the defensive network of non-enforcement may foster the sharing of patents in a semi-open manner. On the other hand, the transaction costs of licensing-based semi-open initiatives may be too high for them to operate effectively. In addition, the initiative may prove to be unattractive to licensors in the absence of strong network effects. Google’s Patent Starter Program and Microsoft’s Azure IP Advantage are examples of defensive semi-open use. Through its Patent Starter Program, Google offered patents to 50 start-ups of a certain size on a first-come-first-served basis.290 The patents were selected by Google and transferred to the companies without remuneration, while Google maintained non-exclusive licenses for them.291 The transfer was conditional on joining the License-on-Transfer (LOT)-Network, an “industry-led, networked, royalty-free patent cross licensing arrangement for transferred patents launched by industry participants”.292 The objective of the LOT-Network is to defend its members from litigation by PAEs.293 Its founding members are, inter

286

Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 824-825. 287 See Roya Ghafele and Robert D. O´Brien, "Open Innovation for Sustainability : Lessons from the Greenxchange Experience," Munich Personal RePEc Archive, last modified 3 August 2012, accessed 29 March 2017 https://mpra.ub.uni-muenchen.de/40440/1/MPRA_paper_40440.pdf. 288 Ibid, 4-5. Its standardised licenses included options for licensing in favour of commercialization, both in return for and without a royalty payment, as well as licencing only for non-profit research purposes. Ibid. 289 Ibid, 6-9. 290 "Google Starter Program," Google, last modified accessed 22 March 2017 http://static. googleusercontent.com/media/www.google.com/fi//patents/licensing/doc/patent-starter-programannouncement.pdf. Only start-ups with revenues between 500 000 and 20 000 000 US dollars were eligible to participate. "Google Starter Program". 291 "Google Patent Starter Program FAQs," Google, last modified accessed 23 March 2017 https:// static.googleusercontent.com/media/www.google.com/fi//patents/licensing/doc/patent-starter-pro gram-faqs.pdf. 292 "Google Starter Program". Upon withdrawal from the LOT Network, ownership of the patents that were transferred as a part of the program would revert back to Google. "Google Patent Starter Program FAQs". 293 "How LOT Works," LOT Network, last modified n.d., accessed 31 December 2018 https://lotnet. com/how-lot-works/.

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alia, Google, Dropbox, and Canon.294 Members of the network receive a royalty-free license to patents that are sold to a PAE by another member of the network. Consequently, the members are defended from litigation by PAE with regard to that patent.295 The Google Patent Starter Program is predominantly motivated by the goal of expanding the defensive LOT Network,296 despite the fact that companies can use the assigned patents for follow-on innovation. While this particular program involved the transfer of patents, it was clearly driven by the MCM approach to resolving overprotection problems. In addition, Google benefited from the goodwill obtained by offering defensive patents to start-ups.297 Another example of defensive semi-openness is Microsoft’s Azure IP Advantage Program. This program allows Microsoft customers whose services are built upon on Microsoft’s Azure cloud-computing services to access Microsoft’s patent portfolio of 10,000 patents for the purpose of defending their services that run on Microsoft Azure against patent infringement suits.298 While this license is given for defensive purposes, this initiative may have the indirect effect of fostering follow-on innovation on the part of Microsoft’s customers. However, considering that PAEs are typically not deterred by defensive patent portfolios, the Advantage Program actually protects Microsoft’s customers from suits by operating companies.299 The consequent effect is the expansion of Microsoft’s defensive patent portfolio to its 294

"Asana, Canon, Dropbox, Google, Newegg and Sap Announce Formation of New Cooperative Patent-Licensing Agreement," LOT Network, last modified n.d., accessed 27 March 2017 http:// lotnet.com/asana-canon-dropbox-google-newegg-and-sap-announce-formation-of-new-coopera tive-patent-licensing-agreement/. 295 "Frequently Asked Questions," LOT Network, last modified n.d., accessed 23 March 2017 http:// lotnet.com/faq/. 296 The Patent Starter Program was preceded by Google’s patent-buying initiative. Allen Lo, "Announcing the Patent Purchase Promotion," Google Public Policy Blog, last modified 27 April 2015, accessed 22 March 2017 https://publicpolicy.googleblog.com/2015/04/announcing-patentpurchase-promotion.html; Kevin A. Rieffel, "Why Google Wins by Giving Away Patents to ‘Startups’ Willing to Join the Lot Network," IPWatchdog, last modified 2 August 2015, accessed 22 March 2017 http://www.ipwatchdog.com/2015/08/02/why-google-wins-by-giving-away-pat ents-to-startups-willing-to-join-the-lot-network/id¼60162/?utm_source¼Website+Subscribers+% 28RSS%29&utm_campaign¼d45c17ec76-Daily_RSS_Feed_LexisNexis_Webinar&utm_ medium¼email&utm_term¼0_98774de295-d45c17ec76-84018561. 297 Rieffel, "Why Google Wins"; "Google Starter Program". 298 Brad Smith, "Protecting Innovation in the Cloud," Microsoft Official Blog, last modified 2 August 2017, accessed 22 March 2018 https://blogs.microsoft.com/blog/2017/02/08/protecting-innova tion-cloud/#sm.0001e1v6nzzl5drztfz21n1swya4o. The customers will also receive wide indemnification coverage and reassurance that, upon Microsoft’s transfer of its patents to NPEs, they cannot be asserted against customers. 299 Barry Sookman, "Feeling Safer under Microsoft's Cloud Patent Shield? Don't.," Register, last modified 3 March 2017, accessed 22 March 2017 https://www.theregister.co.uk/2017/03/03/ feeling_safer_under_microsofts_cloud_patent_shield_dont/; Erich Andersen, "Microsoft Azure IP Advantage : A Closer Look at the 'Patent Pick'," Microsoft On the Issues, last modified 16 February 2017, accessed 22 March 2017 https://blogs.microsoft.com/on-the-issues/2017/02/16/microsoftazure-ip-advantage-closer-look-patent-pick/#sm.0001e1v6nzzl5drztfz21n1swya4o; Sookman, "Feeling Safer".

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network of customers and the strengthening of its position in the cloud services market. Essentially, considering that networked markets are prone to tipping, this defensive initiative may be ultimately motivated by an interest in reaching the status of a de facto standard. Hence, the social welfare effects of the defensive initiatives are ambivalent: On the one hand, they may reduce transaction costs and risks associated with offensive patent strategies; on the other hand, they may be used as a tool in standard wars. The semi-open examples reviewed above illustrate that a semi-open initiative may be simultaneously driven by several motives. Semi-open initiatives may be highly welfare enhancing, regardless of whether they are established in order to promote a public policy goal or follow-on innovation. At their best, they represent a method of price discrimination and a means of selectively fostering follow-on innovation while reducing the transaction costs of technology transfer or the expenses associated with offensive patent strategies. At their worst, patent holders may lack incentives to participate in semi-open initiatives; in addition, an initiative may not respond to the demands of the technology market, or it may risk having an undesirable effect on competition.

3.2.5

Open Licensing

Private ordering arrangements that provide follow-on innovators with indiscriminate access can be characterized as open. The exclusive right to patent is exercised in a reverse manner: “The exclusivity conferred by the intellectual property right is thus conceived not as an exclusionary power but as a liberty or monopoly to decide not to engage in exclusion.”300 This type of access can also be characterized as “general, total or global”.301 Such indiscriminate openness has no negative impact on competition,302 and is presumed to have positive impact on social welfare.303 This form of openness, which is based on establishing a private liability rule, is most closely described by UOCI, as well as, with respect to some constellations, by MCM. Openness can be achieved by individual means, such as with licenses of right or unilateral commitments to license indiscriminately. Furthermore, collaborative and collective licensing arrangements such as patent pools and clearing houses that provide indiscriminate access also represent forms of open licensing.304 These

300

Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1409. Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 105. 302 Reto M. Hilty, "Individual, Multiple and Collective Ownership : What Impact on Competition?," 42. 303 Annette Kur, "Openness in Trademark Law: A Viable Paradigm?" In Innovation, Competition and Collaboration, edited by Dana Beldiman, (Cheltenham, Edward Elgar 2015), 69. 304 Geertrui Van Overwalle, "Individualism, Collectivism and Openness in Patent Law : From Exclusion to Inclusion through Licensing," 90-91, 111-112. 301

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different forms of openness in patent law are discussed in greater detail in Sect. 3.3. However, it should be noted that access to openly licensed patents is not sustainable: “openness is established towards the first subsequent user, after which openness comes to an end.”305

3.2.6

Open Viral Licensing

Viral openness is also characterized by indiscriminate access.306 However, it also assumes sustainability: “openness does not end with the first subsequent user but is being ensured to all downstream users.”307 Viral openness is based on UOCI, as pioneered by FOSS development. For example, under the GPL license, modifications to software code are to be released under the same license conditions, which ensure access to source code, as well as the freedom to run, modify, and propagate the work.308 An open viral license prevents modifications to a computer program being integrated into inaccessible proprietary software.309 Creative commons licenses that allow modifications and require them to be shared under the same terms produce a similar effect.310 Open viral licenses, when applied to patents, “encompassing as a matter of principle a promise not to interfere with others’ freedom to use, improve or circulate the patented technology, dismantle the exclusivity principle of patent law. In exchange for unhampered access to improvement innovations, they transform the right to exclude others into a duty to include others on the condition that these others behave in the same sharing way”.311 The application of viral forms of open licensing to patents is still under development; this topic is analysed more thoroughly in relation to private liability rules in Sect. 3.3.5. In open viral licensing, the number of potential licensees, as well as the chains of licenses on the improvements made to the initial, virally licensed patent, can be infinite.312 However, open viral forms of access do not represent efficient solutions unless they are enforceable against subsequent privatization of the resource.313 For 305

Ibid, 113. See Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1409-1410. 307 Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 112. 308 "GNU General Public License". 309 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1399. Opensource licences sans a viral effect that are merely intended to ensure the availability of proprietary source code have no relevance in the context of patent law, which requires disclosure of inventions. Boettinger and Burk, "Open Source Patenting," 224. 310 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1401. 311 Van Overwalle, "Exclusive Ownership Versus Open Commons," 143. 312 Hilty, "Individual, Multiple and Collective Ownership," 28-30. Consequently, the open viral constellation effect can also be characterized as “collective ownership”. ibid, 30. 313 Ibid, 33. Courts have found FOSS licenses to be enforceable. For a discussion on the efficiency of open viral patent licensing solutions to prevent hold-up problems see Sect. 3.3.5.4. 306

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the open viral initiative to succeed, it is crucial that a new holder of the patent cannot terminate previously granted open licenses314 in order to maintain both the longevity and sustainability of access. Generally, viral openness is procompetitive, as no-one is excluded from using and modifying a resource. In addition, viral licenses may foster competition between openly licensed and proprietary technology.315 However, viral openness may involve some paradoxical inefficiencies: For example, companies that choose to operate in a more proprietary manner may forego building up cumulative innovations that rely on virally licensed software, possibly creating an anti-commons effect and negatively impacting dynamic efficiency.316 If the motivation to create a followon innovation depends on exclusivity, viral licenses may on some occasions restrict incentives to innovate. Furthermore, there exists a tension between normative pro-access ideology and its establishment on an exclusive right.317 Scholars have raised concerns that private ordering-based initiatives promote the normative standing point that all knowledge and information are subject to privatization.318 Furthermore, the incompatibility of viral licenses may also lead to anti-commons effects when the resources licensed under two different licenses cannot be combined for further development.319 Attempts to balance an interest in access against interest in exclusive use by means of private ordering may not be favourable to society at large.320

314

Ibid, 33. Michal S. Gal, "Viral Open Source : Competition vs. Synergy," Journal of Competition Law & Economics 8, no. 3 (2012): 471. 316 Ibid, 482-487, 505. See also Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 301; Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1414; Sara Boettinger and Brian D. Wright, "Open Source in Biotechnology : Open Questions," Innovations: Technology, Governance, Globalization 1, no. 4 (2006): 50; Rochelle Cooper Dreyfuss, "Does IP Need IP - Accommodating Intellectual Production Outside the Intellectual Property Paradigm," Cardozo Law Review 31, no. 5 (2010): 1472-1472. 317 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1396. 318 Niva Elkin-Koren, "What Contracts Cannot Do : The Limits of Private Ordering in Facilitating a Creative Commons," Fordham Law Review 74, no. 2 (2005): 398-399, 421; Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1412-1413, 1434. In some contexts, open viral licenses have been employed to create a viral effect for modifications of knowledge resources that are not subject to IPRs. Ibid, 1393-1394, 1413. 319 Maxine Lambrecht, "Fencing the Commons to Protect It from Appropriation? The Dilemma of Copyleft Licences" (paper presented at the 3rd IASC Thematic Conference on Knowledge Commons, Paris, October 20-21 2016). See also Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1425-1427. 320 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1394. 315

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Public Domain

An innovator engages in free revealing when he discloses his invention to the public instead of applying for a patent or when a patent holder decides to release a patent to the public domain prior to the expiration of the patent’s term. This practice is characteristic of UOCI. Free revealing has been employed for example in the context of genomic data, which has led to the emergence of public databases that build on discoveries that could otherwise be patentable.321 Similarly, foregoing applying for patents for particular geographic areas also constitutes an act of free revealing.322 The release of information contributes to the open-access commons of the public domain. However, the public domain is not a sustainable form of openness. Access is at risk of enclosure, because further improvements to freely revealed invention can be protected by IPRs that can be exercised in an exclusive manner.323 Provided that follow-on innovation will not take place in the absence of patent protection, enclosure is not necessarily undesirable from the perspective of dynamic efficiency.

3.2.8

Non-enforcement

The fact that patent holder has an exclusive right to a patent does not mean that she will actually exercise the right in relation to a follow-on innovator. In practice, a patent holder may tolerate certain infringements because the transaction costs involved in monitoring for such infringement and enforcing a patent may prove excessive.324 The harm caused by an infringement or the benefit of damages or royalty fees may be too small in relation to the cost of negotiating a license or obtaining a permanent injunction. Alternatively, the holder of an IPR may tolerate infringement because it yields complementary benefits to him.325 Patent holders may also tolerate infringements for in favour of less direct economic interests. For example, patent holders in a research community may forego enforcement due to

321

Ibid, 1402. For example, motivated by an interest in fostering generic manufacturing in the least developed and low-income countries, GlaxoSmithKline announced a patent policy of not filing patents for its medicinal products in particular countries. Catherine Saez, "GSK Eases IP Rights for Poorest Countries, Considers Patent Pooling for Cancer," Intellectual Property Watch, last modified 31 March 2016, accessed 22 March 2017 https://www.ip-watch.org/2016/03/31/gsk-eases-iprights-for-poorest-countries-considers-patent-pooling-for-cancer/. 323 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1402, 1407. 324 Rebecca S Eisenberg, "Noncompliance, Nonenforcement, Nonproblem? Rethinking the Anticommons in Biomedical Research," Houston Law Review 45, no. 4 (2008): 1098. see also R. Polk Wagner, "Information Wants to Be Free : Intellectual Property and the Mythologies of Control," Columbia Law Review 103, no. 4 (2003): 1010-1011. 325 Tim Wu, "Tolerated Use," Columbia Journal of Law & the Arts 31, no. 4 (2008): 630-632 in which the author discusses non-enforcement of copyrighted works. 322

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fear of losing the benefits of goodwill326 or a culture of sharing that may exist within a community.327 Furthermore, patent holders may decide to tolerate infringement by certain groups, such as research communities.328 A research community in the field of biotechnology has been reported to engage in “using technology without a license (i.e infringement), sometimes under informal and typically self-proclaimed research exemption”.329 When non-enforcement is employed as a social norm, the practise represents a form of UOCI, which may potentially be applied in parallel with the traditional exploitation of a patent. However, when non-enforcement “occurs” between two patent holders with overlapping patent portfolios, it may represent an informal practice of MCM.330 Non-enforcement is considered to mitigate anticommons problems such as bargaining breakdowns.331 Tolerating infringements can also be viewed as welfare-enhancing price discrimination.332 In certain contexts, tolerance may represent a social practice that is equivalent to a non-codified exception to patent protection.333 Hence, paradoxically, transaction costs may both create and mitigate anti-commons problems.334 Non-enforcement may explain why some overprotection problems are encountered infrequently. However, the phenomenon is understudied, and its prevalence is difficult to determine. Without empirical research on the matter, it is also difficult to discern deliberately chosen tolerance of infringement that is motivated by strategic goals of the patent holder from the non-enforcement that results from the excessive enforcement costs of remedying free-riding and compromises the patent holder’s incentives to continue investing in R&D. While non-enforcement at least allows less risk-averse follow-on innovators to use a patented invention, this type of openness provides the least certainty with respect to the longevity of access to the resource.335 By not providing approval for its 326

Walsh, Arora, and Cohen, "Effects Research Tool Patenting and Licensing and Biomedical Innovation," 325, 331, 334. 327 Ibid, 331, 334; Heller and Eisenberg, "Can Patents Deter Innovation?," 700-701; Eisenberg, "Noncompliance, Nonenforcement, Nonproblem?," 1093-1098; Katherine J. Strandburg, "User Innovator Community Norms : At the Boundary between Acedemic and Industry Research," Fordham Law Review 77 (2009), 2250, 2253. 328 Strandburg, "User Innovator Community Norms," 2254. 329 Walsh, Arora, and Cohen, "Effects Research Tool Patenting and Licensing and Biomedical Innovation," 331. 330 Colleen Chien, "Opening the Patent System : Diffusionary Levers in Patent Law," Southern California Law Review 89 (2016): 842. 331 Walsh, Arora, and Cohen, "Effects Research Tool Patenting and Licensing and Biomedical Innovation," 286, 324-328. 332 Ibid, 334. 333 The research community in the biotechnology field has been reported to engage in “using technology without a license (i.e. infringement), sometimes under an informal and typically selfproclaimed research exemption”. Ibid. 334 Eisenberg, "Noncompliance, Nonenforcement, Nonproblem?," 1098. 335 Chien has also addressed the problem of the longevity associated with the non-enforcement; see Chien, "Opening the Patent System," 842.

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use, the holder of a patent maintains the strategic option of enforcing his patent at the moment it becomes beneficial to him and creating a hold-up situation. From a follow-on innovator’s perspective, it would be preferable for the patent holder to employ a semi-open private ordering mechanism, which would provide the innovator with more legal certainty.

3.2.9

A Dynamic View of Openness

The static description of the continuum of openness fails to highlight a fundamental feature of an exclusive right to a patent: A patent holder may grant non-exclusive licenses to an infinite number of licensees. Therefore, the same patent can simultaneously be licensed without any market failures to n follow-on innovators and yet be exercised offensively against one. Consequently, a single patent can simultaneously be practiced in an exclusive, restrictedly open, and semi-open manner with regard to different follow-on innovators. All levels of openness and exclusivity have the potential to lead to a case-specific, efficient outcome from the perspective of dynamic incentive theory.336 However, the current configuration of the patent system, which is characterized by protection of an entitlement by means of a property rule, combined with the increasingly excessive transaction costs involved in clearing all pre-existing patents ex ante, allows patent holders to employ offensive patent strategies.337 Furthermore, the term of patent protection is 20 years (Art. 33 TRIPS) and right to patent is alienable (Art. 28 (2) TRIPS). Therefore, during its lifetime, the same patent may be exercised A) both in an exclusive and open manner, B) both in a justifiable and unjustifiable manner, and C) both simultaneously and consecutively following changes in the strategy of its owner or upon the sale of the patent in question to an owner with a different strategy. Large defensive patent portfolios, when traded, are at particular risk of becoming subjects of offensive practises.338 On the other hand, a patent holder may switch from an exclusive use of his patent to a more open use upon the appearance of substitutes on the market.339 Generally, licensing, even in restrictedly open forms, is procompetitive and efficient. In many cases, right holders have monetary incentives to license their patents, and these incentives are crucial for fostering innovation in the first place.

336

See also Ullrich, "Protecting Technology," 307. For a discussion on the interaction of defensive and offensive patent strtegies, see Sect. 2.3.1.1– 2.3.1.3. 338 See Chien, "Opening the Patent System," 842. 339 See Arora, Fosfuri, and Gambardella, Markets of Technology, 178-179, 192-193, 195. 337

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However, in the realm of restricted openness, which is most fully explained by OI, the risk of the simultaneous or later unjustified exclusion or exploitation of an individual follow-on innovator remains throughout the lifespan of a patent. Open innovation does not provide guidance concerning how to solve hold-up problems and other market failures associated with the unjustified exclusive use of patents. Hence, on the continuum that ranges from exclusive use to restricted openness, it can be concluded that the risk of market failures described in Sect. 2.3 remains and continues, in certain situations, to pose a threat to follow-on innovation. The most ambivalent category of access, that of non-enforcement, may provide an explanation as to why overprotection problems are encountered less frequently in practice than the theory suggests. However, the empirical evidence for and the understanding of non-enforcement is very limited, and, due to a lack of any guarantee of longevity, this form of openness does not prevent follow-on innovators from being subject to hold-up problems. Furthermore, it has not been ascertained on which occasions non-enforcement in fact represents an underprotection problem. In contrast, with the employment of private liability rules, no follow-on innovator may be foreclosed from using the initially patented invention as an input. Hence, a follow-on innovation is less likely to be subject to market failures of overprotection. Therefore, the next part reviews to what extent private liability rules are capable of resolving market failures associated with overprotection.

3.3

Private Liability Rules

3.3.1

Patent Pledges

3.3.1.1

Incentives

Unilateral commitments to license may take a number of different forms. The most well-known example is an undertaking to license on “fair, reasonable, and non-discriminatory terms (‘FRAND commitment’)” to those who seek to use the patent.340 However, a unilateral commitment341 can also take the form of a pledge not to assert the patent against a type of uses or users or a pledge to license either in return for royalties or royalty-free.342 Together, patent pledges can be defined as “commitments made voluntarily to limit the enforcement or other exploitation of their patents. They are made not to direct contractual counterparties, but to the public

340

Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 285. 341 By the term unilateral, I refer to a situation in which a patent holder makes a pledge to grant access to a previously unidentified group of users. Cf. Jorge L. Contreras, "Patent Pledges," Arizona State Law Journal 47, no. 3 (2015): 565, in which the term “unilateral” is used with another meaning. 342 Maggiolino and Montagnani, Pledges and Covenants, 7-8.

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at large, or at least to large segments of certain markets. In addition, they are made without any direct compensation or other consideration.”343 A FRAND commitment is typically made to the SSO in the context of de jure standard setting. Whereas the use of a license of right instrument (§ 23 PatG) is motivated by the reduction of renewal fees, a FRAND declaration is incentivised by the selection of the patent in to the standard and, by virtue of essentiality, the necessity of the standard implementers to take a license.344 On an individual level, openness may be motivated by the for-profit presumption of OI, but, collectively, de jure standard-setting represents MCM—an effort to avoid future market failures. In fact, pursuant to the European Commission’s guidelines for horizontal agreements, effective standard-setting requires that SSOs make the standard essentiality of patents conditional on their holders agreeing to an irrevocable FRAND commitment to the standard implementers.345 The objective of such a requirement is to avoid refusals to license and hold-up situations that would compromise the accessibility and implementation of the standard in question.346 Nevertheless, it must be noted that, due to overdeclaration of alleged SEPs to SSOs, not all patents licensed under FRAND terms are actually standard essential, with the consequence being that their holders are overrewarded by unfounded flows of licensing revenues. On the other hand, not all SEPs that belong to a de jure standard are encumbered by a FRAND undertaking. Their holders may be unaware of their patents reading on a standard, or, alternatively, they may subject the standard implementers to a patent ambush by intentional failures to declare their ownership of a standard essential technology and to make a FRAND commitment to the SSO. Both situations make the standard implementers vulnerable to hold-ups. Patent pledges and FRAND declarations are also made outside of the de jure standard setting context. Previously, pledges not to assert patents were given in the context of open-source software.347 However, the practice gained publicity upon Tesla’s announcement in 2014 that it would not assert its patents, highlighting the trend of patent pledges in environmental technology.348 Tesla’s initiative illustrates how a patent holder may simultaneously have a number of different incentives to license its patents more openly. Elon Musk

343

Jorge L Contreras, "Introduction," in Patent Pledges: Global Perspectives on Patent Law’s Private Ordering Frontier, ed. Jorge L. Contreras and Meredith Jacob (Cheltenham: Edward Elgar Publishing, 2017), 2. 344 Torsten Körber, Standardessentielle Patente, FRAND-Verpflichtungen und Kartellrecht : Eine Analyse unter besonderer Berücksichtigung der deutschen 'Orange-Book-Standard'Rechtsprechung (Baden-Baden: Nomos, 2013), 195. The interest in setting an interoperability standard contributes to willingness to license, particularly for vertically integrated companies, and sometimes incentivises commitments to license royalty-free. Contreras, "Patent Pledges," 576-577. 345 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 285. 346 Ibid, paras 285, 287. 347 Contreras "Patent Pledges," 544-545, 551-552. 348 Ibid, 544-545, 552-553.

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announced that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”349 Explicitly, the open patent scheme was motivated by the creation of a larger market for electronic vehicles and related products,350 the creation of a “common, rapidly-evolving technology platform” for the industry, and the greater goal of fostering environmentally friendlier means of transportation.351 The use of Tesla’s patents in good faith was conditional on, inter alia, refraining from challenging “(i) any patent or other intellectual property right against Tesla or (ii) any patent right against a third party for its use of technologies relating to electric vehicles or related equipment” or from challenging Tesla’s patents.352 Hence, from Tesla’s perspective, the patent pledge serves as an invitation to a de facto crosslicensing arrangement, reflecting the incentives associated with the MCM. From the perspective of the industries related to electric vehicles, the conditions of the patent pledge result in the creation of a loosely tied “commons”, which may contribute to the avoidance of hold-ups and patent thickets in the industry and ensure freedom of operation. In this respect, the strategy is aligned with both the MCM and UOCI. Tesla’s motivation for opening its patent portfolio was to foster the development of the infrastructure necessary and complementary to electric vehicles and also to incentivise competitors to contribute technology to an open de facto standard.353 Essentially, Tesla engages in competition for the market.354 Shortly after Huawei’s announcement, Toyota also pledged to license its hydrogen technology patents royalty-free,355 which confirms that automotive industry is subject to competition for standards for employing energy sources alternative to petrol fuel. When sharing their patents, both Tesla and Toyota seek to employ the UOCI model, under which a company shares some of its resources for free but retains other sources of revenue.356 The growth of infrastructure allows Tesla to both sell more electronic vehicles and, in addition, the batteries and other components required by electronic vehicles and their supporting infrastructure.357

349

Elon Musk, "All Our Patent Are Belong to You," Tesla, last modified 12 June 2014, accessed 29 July 2017 https://www.tesla.com/blog/all-our-patent-are-belong-you. 350 Contreras, "Patent Pledges," 583-584. 351 Musk, "All Our Patent Are Belong to You". 352 "Patent Pledge," Tesla, last modified 12 June 2014, accessed https://www.tesla.com/about/ legal#patent-pledge. 353 James E. Bessen, "History Backs up Tesla’s Patent Sharing," Harvard Business Review, last modified 13 June 2014, accessed 31 December 2018 http://www.hbs.edu/faculty/conferences/2014strategy-research/Documents/History%20Backs%20Up%20Teslas%20Patent%20Sharing.pdf. 354 Van Overwalle, "Inventing Inclusive Patents," 264. Similarly, see Contreras, "Patent Pledges," 583-586. 355 Sam Frizell, "Toyota Wants Everyone to Know How It Made Its Hydrogen-Powered Car," Time, last modified 5 January 2015, accessed 31 December 2018 http://time.com/3654899/toyota-miraipatents-hydrogen-power/. 356 See von Hippel and von Krogh, "Free Revealing," 303-304. 357 Contreras, "Patent Pledges," 583-584.

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Tesla and Toyota’s initiatives have also influenced the Ford Motor Company to commit to licensing its patents on electric vehicles in a more open fashion,358 which suggests that open licencing initiatives may have the secondary, indirect effect of encouraging further open practices in the industry. The impulse to introduce a more open approach to electronic vehicle patents stemmed from Tesla; however, patent pledges can also be used by a collective of companies to purposefully create an interoperable de facto standard359 or to achieve alternative objectives. These problems may, following the MCM, target market failures of overprotection,360 but they can also seek to fulfil other goals that require collective action, such as the dissemination of environmentally friendly technology, and therefore serve an additional altruistic goal.361 Such an altruistic goal may also involve some positive externalities that benefit the company in question, or participation may also have a favourable effect on the image of the company.362 Finally, patent pledges may also represent a codification of the patent holder’s non-enforcement strategy.363

3.3.1.2

Enforceability

Overall, the initiatives promoting open licensing, irrespective of their motivations, can be expected to have positive effects on social welfare and reduce the number of market failures, particularly in the presence of competition between standards. However, the effectiveness of a patent pledge in terms of preventing hold-up situations, and thus its status as a private liability rule, depends on the pledge’s enforceability in favour of a follow-on innovator. For example, the effect and enforceability of Tesla’s patent pledge is unclear364 and will depend on the contract law of a particular jurisdiction.365 Ultimately, the wording of the actual declaration 358

John Cangany and Chris Danowski, "Ford Opens Portfolio of Patented Technologies to Competitiors to Accelerate Industry-Wide Electrified Vehicle Development," Ford Motor, last modified 28 May 2015, accessed 29 July 2017 https://media.ford.com/content/fordmedia/fna/us/ en/news/2015/05/28/ford-opens-portfolio-of-patented-technologies-to-competitors-to-.html. The initiative appears to involve licensing in accordance with the open innovation model. 359 Contreras, "Patent Pledges," 580. 360 Patent pledges may be used, for example, for defensive purposes; see generally Schultz and Urban, "Protecting Open Innovation," 30-33. 361 Contreras, "Patent Pledges," 587, 590 who discusses the pledge-based Eco-Patent Commons as an example. See also Wayne Balta, "Welcome to the Eco-Patent Commons," Corporate Eco Forum, last modified 9 June 2015, accessed 1 August 2017 http://www.corporateecoforum.com/ welcome-to-the-eco-patent-commons/. on companies’ goals to contribute to the Eco-Patent Commons. 362 Contreras, "Patent Pledges," 590-591. Contreras, "Patent Pledges," 590-591. 363 See Wu, "Tolerated Use," 633-634 who describes an instrument that is similar to a pledge in copyright. 364 Maggiolino and Montagnani, Pledges and Covenants, 5, fn 20; Van Overwalle, "Inventing Inclusive Patents," 263-264. 365 Maggiolino and Montagnani, Pledges and Covenants, 5, fn 20.

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made to the SSO determines the strength of the implementers’ potential claim for a FRAND-compliant license;366 the same applies to other patent pledges.367 In addition, the longevity of access to pledged patents depends on whether the patent holder had committed to also bind the assignees of the patent by the pledge.368 A review of the correspondence of various patent pledges with different doctrines of contract law and the law of obligations and the effectiveness of claims that a follow-on innovator could invoke on the basis of a patent pledge is beyond the scope of this thesis.369 However, with regard to enforceability, in Germany, a FRAND commitment made to an SSO is not deemed to constitute a contract in favour of third parties.370 In the US, a FRAND commitment is considered a contract in favour of a third party,371 but a patent pledge given outside a de jure standard is unenforceable as a contract.372 However, even if a FRAND declaration would bind the patent holder to license to a follow-on innovator, non-infringing use of the patent would remain conditional on a conclusion of a licensing agreement or the patent holder’s permission. Consequently, the FRAND declaration does not represent a private liability rule.373 The same conclusion can be drawn regarding other patent pledges.

366

Claudia Tapia, Industrial Property Rights, Technical Standards and Licensing Practices (FRAND) in the Telecommunications Industry (Cologne: Carl Haymanns Verlag, 2010), at 47. With their IP terms, SSOs seek to balance the need to ensure access to SEPs against the need to make the terms sufficiently attractive for SEP holders to agree to. Farrell et al., "Standard Setting, Patents, and Hold-Up," 608-610, 624-644. On the different forms of FRAND commitments made to SSOs, see Contreras, "Patent Pledges," 566. 367 Catharina Maracke and Axel Metzger, "Voluntary Patent Pledges : Enforcement in Germany," in Patent Pledges. Global Perspectives on Patent Law’s Private Ordering Frontier, ed. Jorge L. Contreras and Meredith Jacob (Cheltenham: Edward Elgar Publishing, 2017), 146. 368 See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 285. See also Sect. 8.6.3 on transferability of FRAND obligations. 369 For an in-depth analysis, see, for example, Tapia, Industrial Property Rights; Körber, Standardessentielle Patente, FRAND-Verpflichtungen und Kartellrecht; Reto M. Hilty and Peter R. Slowinski, "Standardessentielle Patente - Perspektiven außerhalb des Kartellrechts," Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 64, no. 9 (2015); Maracke and Metzger, "Voluntary Patent Pledges." 370 Peter Picht, "ECJ Rules on Standard-Essential Patents : Thoughts and Issues Post-Huawei," European Competition Law Review 37, no. 6 (2016): 371 fn 58 with reference to LG Mannheim, GRUR-RR 2009, 222. 371 Microsoft Corp. v. Motorola Inc, 696 F.3d 872, 884 (9th Cir. 2012); see also Microsoft Corp. v. Motorola Inc., 904 F.Supp.2d 1109, 1115 (W.D. Wash 2012). 372 Contreras, "Patent Pledges," 516. However, the use of pledged patents may be subject to equitable principles. See Jorge L. Contreras, "Market Reliance Theory for FRAND Commitments and Other Patent Pledges," Utah Law Review 2015, no. 2 (2015): 517-521; Duane R. Valz, "Unilateral Patent Pledges : Motivations and Key Principles," in Patent Pledges: Global Perspectives on Patent Law’s Private Ordering Frontier, ed. Jorge L. Contreras and Meredith Jacob (Cheltenham: Edward Elgar Publishing, 2017), 54. For compulsory liability rules that rely on equitable principles see Sects. 7.3–7.4. 373 Krauspenhaar, Liability Rules in Patent Law. 30

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The enforceability and longevity of a follow-on innovator’s access to patents subject to a pledge is subject to legal uncertainty. Follow-on innovators who rely on a pledged technology may become vulnerable to market failures if the patent holder changes his strategy or transfers his open patents to a company that is interested in exercising them in a different manner. A follow-on innovator is also not typically protected from the removal or modification of the patent pledge.374 Furthermore, once an openly licensed technology has become a de facto standard to which an industry is locked-in, the patent holder could begin to induce an exploitative hold-up by charging higher prices for the use of its patents or by foreclosing some companies from the downstream market by means of excluding hold-up.375 Only when a pledge actually precludes the enforcement of a patent with an injunctive relief would it qualify as a private liability rule.376 In Unwired Planet v. Huawei, a FRAND declaration was found to constitute a binding contract with an SSO and in favour of third parties under French law.377 While the patent holder could not be forced to license, Judge Birrs stated that, upon the patent holder’s refusal to grant a license under the court-determined FRAND rate, “a court can and in my judgment should normally refuse to grant relief for patent infringement”.378 However, while this statement suggests that a FRAND declaration can constitute a liability rule, the effect derives from patent, not contract law.379 Whether this decision will represent the advent of a hybrid liability rule that combines contract and patent law380 and features elements of both private and compulsory liability rule remains to be seen.

374

Contreras, "Patent Pledges." 597-598 In the case of electric vehicles, Tesla’s incentives to maintain openness may be reduced in the event that electric cars supplant vehicles that operate on gasoline. Bessen, "Tesla’s Patent Sharing". 376 Krauspenhaar, Liability Rules in Patent Law, 30. 377 Unwired Planet International Ltd v. Huawei Technologies Co Ltd, [2017] EWHC 2988 (Pat) [2017] RPC 19, paras 122, 132, 139. 378 Ibid, para 143. An injunction should be granted against an implementer who refuses to license under FRAND conditions. Ibid. This suggests the introduction of a “conditional injunction”. Peter Picht, "Unwired Planet v. Huawei : A Seminal SEP/FRAND Decision from the UK," Journal of Intellectual Property Law & Practice 12, no. 10 (2017): 578. 379 J Birss’ argument rests on the presumption that FRAND undertaking has “substantive legal effect” on the grounds that it represents “an objective standard.” “Thus there is no need for contract law to go as far as creating a power to compel parties to enter into FRAND licences against their will because patent law already has the tools available to give legal effect to the FRAND undertaking.” Unwired Planet v. Huawei [2017] EWHC 2988 (Pat) [2017] RPC 19, para 143. 380 See Hilty and Slowinski, "Standardessentielle Patente," 790-791; Picht, "Unwired Planet v. Huawei," 577. 375

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3.3.2

Licenses of Right

3.3.2.1

A Switch to a Liability Rule

When a patent holder or patent applicant employs the legal instrument of a license of right, she makes a voluntary declaration to the DPMA of her willingness to allow anyone to use her patent in return for reasonable compensation.381 The license of right, as an instrument, enables a patent owner to switch, upon request, from the patent law’s default property rule to a liability rule.382 In exchange for selecting to employ a liability rule, the patent owner’s annual patent fees are reduced by half.383 The possibility of declaring willingness to license was introduced to German patent law in 1936. The purpose of the instrument is to incentivize the provision of access to patented inventions to the general public in return for compensation already prior to the end of the patent term,384 with the intention of fostering the dissemination of technology.385 Furthermore, licenses of right are considered to represent a policy tool alternative to a reduction of maintenance fees for certain types of patent owners, such as SMEs and universities, for the purposes of incentivizing patenting and technology transfer by these groups.386 The opportunity to declare a license of right is not available globally: Besides Germany, the option is available in the UK, Ireland, Italy, and Spain, among

381 § 23 (1), § 23(5) PatG. The term that corresponds to the license of right in German is Lizenzbereitschaft. However, the PatG only refers to an option to declare the willingness to license. The term “license of right” has been used in some countries to refer to compulsory licensing mechanisms, such as in the already abolished section 86 of the Patents Act 1970 of India. Patents Act 1970, No. 39, § 86, Acts of the Parliament 1970 (Ind.); UNCTAD-ICTSD, Resource Book on TRIPS and Development (Cambridge: Cambridge University Press, 2005), 462; N. S. Gopalakrishnan and Madhuri Anand, "Compulsory License under Indian Patent Law," in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 19; Cf. Patents Act 1970, No. 39, § 86, Acts of the Parliament 1970, as amended up to the Patents (Amendment) Act, 2005, WIPO Lex https://wipolex.wipo.int/ en/text/295102 (Ind.). 382 Krauspenhaar, Liability Rules in Patent Law, 20, 27; Ilja Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, Discussion Paper No. 415 (Munich: Governance and the Efficiency of Economic Systems, 2012), 1. The submission of the declaration is inadmissible as long as there is an entry in the Register regarding the grant of an exclusive license (§ 30 (4) PatG) or an application for such an entry is pending before the German Patent and Trade Mark Office (§ 23 (2) PatG). 383 PatG § 23(1). The patent holder may enjoy this fee reduction only after the third year from the date of filing (§ 17 PatG). Krauspenhaar, Liability Rules in Patent Law, 101. 384 Franz Hacker, "§ 23," in Patentgesetz, ed. Alfred Keukenschrijver and Rudolf Busse (Berlin: De Gruyter, 2016), at 7. 385 President of the EPO, Proposals for the Level of Renewal Fees for European Patents with Unitary Effect, SC/4/15 (Munich: EPO, 2015), IV, Art. 46. 386 See generally Kumiko Imai, "Desirable Financial Policies and Fee Systems for Industrial Property Rights," IIP Bulletin 18 (2009). For a broader overview of the objectives of § 23 PatG, see Krauspenhaar, Liability Rules in Patent Law, 104-106.

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others.387 It is also present in the jurisdictions of Russia, Belarus, the Czech Republic, Slovakia, Latvia, and Lithuania.388 In contrast, the jurisdictions of the US, Japan, and the Nordic countries do not feature this instrument. In France, the license of right was repealed as a dead letter from the French Intellectual Property Code in 2005.389 However, the international relevance of the license of right is increasing: It is included as a proposition for a future amendment of Chinese patent law.390 Furthermore, the ratification of the Agreement on Unitary Patent Court will introduce the instrument to jurisdictions in which it was previously unknown.391 Licenses of right are considered to facilitate OI.392 However, similarly to patent pledges, licenses of right may also be employed following the MCM or UOCI. The

Patents Act 1977 c. 37, §§ 46-47 (Eng.); Patents Act No. 1 of 1992, Arts. 68-69 (Ir.). http://www. irishstatutebook.ie/eli/1992/act/1/enacted/en/html; ”Codice della proprietà industriale, a norma dellàrticolo 15 della legge 12 dicembre 2002, n. 273” [Industrial Property Code], Art. 80, Decreto Legislativo 10 febbraio 2005, n. 30, G.U. 4 March, 2005, n. 52 – Supplemento Ordinario n. 28. (It.); Ley 24/2015, de 24 de julio, de Patentes, Arts. 87-89, B.O.E. 1985, 117 (Sp.). 388 Christoph Klamp, "License of Right : A Possibility to Reduce Maintenance Fees," Dennemeyer & Associates, last modified 2015, accessed 23 February 2016 http://www.dennemeyer.com/ fileadmin/user_upload/White_papers/PDFs/Licence-of-Right-Possibility-to-Reduce-MaintenanceFees.pdf. 389 "Annual Patent Fees Guide : France," RenewalsDesk, last modified n.d., accessed 23 February 2016 http://www.renewalsdesk.com/knowledge-base/france-patent-annual-fees-guide/; Loi n 2005-842 du 26 juillet 2005 pour la confiance et la modernatisation de l’économie, [Law 2005842 of 26 July on the Modernization of the Economy] Journal Officiel de la République Française, [J.O] [Official Gazette of France], 27 July 2005, 12160; Klamp, "License of Right". For a comparison of the license of right systems in Germany, the UK, and France (prior to abolishment), see Krauspenhaar, Liability Rules in Patent Law, 127-133; Imai, "Desirable Financial Policies," 27-28. 390 "China Patent Law Amendment : Further Promote the Protection and Use of Patent," Chinese National Intellectual Property Administration, last modified 16 December 2015, accessed 23 February 2016 http://english.sipo.gov.cn/news/official/201512/t20151216_1218049.html; Nathan Wakelin-King, "China to Amend Its Patent Law," Dezan Shira & Associates, last modified 18 December 2015, accessed 25 December 2018 http://www.china-briefing.com/news/2015/12/18/ china-to-amend-its-patent-law.html; “China: Draft Amendments to Patent Law released for comment.” EPO. Last modified 8 January 2019. Accessed 20 July 2019 https://www.epo.org/searchingfor-patents/helpful-resources/asian/asia-updates/2019/20190108.html. 391 The rules governing the licenses of right for unitary patents are established by Art. 8 and Art. 9.1 (c) of the Regulation (EU) No 1257/2012 of the European Parliament and of the Council of 17 December 2012 Implementing Enhanced Cooperation in the Area of the Creation of Unitary Patent Protection. 2012 O.J. (L 361) 1 [hereinafter Regulation 1257/2012], which were further clarified by the European Patent Organization’s (the EPO) decisions on adopting the Rules relating to Unitary Patent Protection and the Rules relating to Fees for Unitary Patent Protection. The EPO’s rules will enter into force simultaneously with the UPC Agreement. Art. 2; Art. 18.12 of the Regulation No 1275/2012; Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Fees for Unitary Patent Protection, European Patent Organization Official Journal A40 SC/D 2/15, (2015); Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Unitary Patent Protection, European Patent Organization Official Journal A39 SC/D 1/15, (2015). 392 Imai, "Desirable Financial Policies," 26; Krauspenhaar, Liability Rules in Patent Law, 133. 387

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instrument provides indiscriminate access to any willing user; however, a license of right does not provide sustainable openness.393 The developer of an improvement to an invention that is subject to a license of right declaration may exercise his dependent patent in an exclusive manner. For certain patent owners, licenses of right increase the value of patents. However, the instrument reduces the returns of the patent office.394

3.3.2.2

License of Right in Germany

Only patents for which there are no records of exclusive licenses in the Register or an application for such an entry pending can be subject to a declaration of the willingness to license.395 The declaration for a license of right is recorded and published in the Patent Gazette.396 After the declaration has been entered in the Register, any person who wishes to use the invention must, before exploiting it, notify the patent owner of his intention and specify the intended use before engaging in it.397 The user is obliged to pay a remuneration for the exploitation of the patent and report on the use every quarter year.398 The declaration represents a unilateral declaration of intent, which must be submitted in writing and by which the patent owner disposes to renounce essential parts of his right to exclude.399 Commentators have taken the view that, after its registration, the declaration functions as a general license offer to any third party who is willing to pay an appropriate remuneration.400 Following the notification, the user obtains a right to use (“Benutzunsgberechtigung”) with an effect on the future. The patent holder and the user thus form a purely private law-based relationship401

393

Van Overwalle, "Inventing Inclusive Patents," 237. Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 25. 395 § 23 (2) PatG. 396 § 23 (1) PatG. 397 § 23 (3) PatG. 398 § 23 (3) PatG. 399 Hacker, "§ 23," at 14; Lizenzbereitschaftserklärung I, BPatG, 12 January 1994, GRUR 1994, 605, 605-606. 400 Lizenzbereitschaftserklärung II, BPatG, 20 March 1996, GRUR 1996, 477, 477; Ingo Rinken, "§ 23," in Patentgesetz mit Europäischem Patentübereinkommen: Kommentar, ed. Rainer Schulte. 10th ed. (Cologne: Wolters Kluwer, 2017), 18; Rüdiger Rogge and Helga Kober-Dehm, "§ 23," in Patentgesetz, ed. Georg Benkard, 11th ed. (Munich: C. H. Beck, 2015), § 23 at 8. 401 BPatG, 28 March 2017, 7 W (pat) 22/15, GRUR 2017, 1025, 1026. 394

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that is similar to licensing agreement;402 however, the resulting relationship is not based on a contract.403 Nevertheless, the patent holder and the user are free to agree on what constitutes adequate compensation.404 The Patent Division determines the licensing fee upon written request from either of the parties.405 The request is conditional on the parties’ agreement to the existence of the obligation to pay. In addition to the Patent Division, the Lower Regional Courts may also decide on the remuneration.406 The advantage of determining a reasonable compensation in court is the possibility of receiving a decision on other matters related to the use of the patent.407 The relationship between the timing of the user’s notification and the patentee’s right to an injunctive relief is subject to debate. The case law and the majority of commentators presuppose that a patent holder who has made a declaration of willingness to license cannot seek an injunctive relief against an infringer who has made a notification (§ 23 (3) PatG) after commencing to use the patent.408 As a consequence, a liability rule created by the license of right would concern both negligent and wilful infringers.409 In such cases, the notification does not have a retroactive effect, and the patent owner remains entitled, inter alia, to damages for the infringement that took place before the notification (§ 139 (2) PatG).410 However, some authors maintain the stance that the wording of § 23 (3) PatG makes the liability rule conditional on filing the notification before the beginning to use the patent.411 Following such a view, the effect of the notification would resemble

402

Mehrfachkontaktanordnung, LG Düsseldorf, 13 June 2001, InstGe 1, 33, para 4; Rogge and Kober-Dehm "§ 23," para 11; Peter Mes, Patentgesetz, Gebrauchmustergesetz, 4th ed. (Munich: C. H. Beck, 2015), at 9-10. 403 Krauspenhaar, Liability Rules in Patent Law, 102-103; Cf. Lizenzbereitschaftserklärung II, GRUR 1996, 477, in which the court refers to the formation of a contract by means of notifying the patent holder. 404 Krauspenhaar, Liability Rules in Patent Law, 27. 405 § 23 (4) PatG. For a review of the criteria used in the determination of reasonable compensation, see Krauspenhaar, Liability Rules in Patent Law, 103-104. The determination of remuneration by the Patent Division is subject to a fee of 60 euros and, subject to the DPMA’s discretion, compensation for the costs of oral hearing and the taking of evidence. § 20 (4), § 62 PatG; "Information Concerning Costs, Fees and Expenses of the German Patent and Trade Mark Office and of the Federal Patent Court," German Patent and Trade Mark Office, last modified July 2016, accessed 31 December 2018 https://www.dpma.de/docs/english/formulare/allg_eng/2/a9510_1. pdf. 406 LG Mannheim, 29 June 1955, GRUR 1956, 412; Mes, Patentgesetz, Gebrauchmustergesetz, § 23 at 18; Krauspenhaar, Liability Rules in Patent Law, 103. 407 Krauspenhaar, Liability Rules in Patent Law, 103. 408 Mehrfachkontaktanordnung, InstGe 1, 33; Krauspenhaar, Liability Rules in Patent Law, 107; Rogge and Kober-Dehm, "§ 23," at 11. 409 Krauspenhaar, Liability Rules in Patent Law, 107. 410 Mehrfachkontaktanordnung, InstGe 1, 33; Krauspenhaar, Liability Rules in Patent Law, 107; Rogge and Kober-Dehm, "§ 23," at 11; Mes, Patentgesetz, Gebrauchmustergesetz, § 23 at 12. 411 Mes, Patentgesetz, Gebrauchmustergesetz, § 23 at 12.

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the prior effort requirement for applying a compulsory license (Art. 31 (b) TRIPS), which would preclude the positive effects of licenses of right on mitigating hold-up situations. In contrast, pursuant to wide interpretation of the scope of the liability rule constituted by a declaration of a willingness to licence, licenses of right may reduce the occurrence of unjustified refusals to license, excessive royalties, and exploitative and excluding hold-up situations. The patent owner maintains a right to injunctive relief in situations where the licensee fails to pay the reasonable compensation.412 Furthermore, the patentee maintains a right to switch back to the property rule by withdrawing her declaration. However, such withdrawal is possible only as long as no-one has notified the patentee of the use of his invention.413 A patent owner who withdraws her declaration is obliged to return the reduction annual fees she has enjoyed.414 This restriction on the withdrawal of a declaration ensures the longevity of access to the patent, making the instrument more favourable for follow-on innovators than the alternative means of engaging in OAI—patent pledges and strategic non-enforcement. However, in comparison to patent pledges, the instrument is less flexible, and it does not bend as easily to the establishment of more complex contractual constellations intended to ensure accessibility of patents.415

3.3.2.3

License of Right for Unitary Patents

In comparison to the detailed rules laid out in § 24 (1)–(7) PatG, Art. 8 of the Regulation 1257/2012 is worded in a somewhat minimal fashion. The proprietor of a unitary patent may file a statement with the EPO concerning his willingness to license his patent to any willing licensee in return for an appropriate consideration.416 The license of right for unitary patents is motivated by the promotion and facilitation of the economic exploitation of inventions protected by unitary patents. In exchange for giving a statement to the EPO regarding her willingness to license in exchange for an appropriate consideration, a patent proprietor should benefit from a reduction of renewal fees.417 The EPO administers the reception, registration, and withdrawal of these statements.418 The filing of a statement is not subject to a fee, and doing so entitles the patent owner to a 15% reduction of the renewal fees for the

§ 23 (4) PatG. The withdrawal will take effect upon filing a written notice with the Patent Office (§ 23(7) PatG). The question of whether a patentee has received a substantively valid notification of the use of an invention is to be evaluated in civil courts. GRUR 2017, 1025. 414 § 23 (7) PatG. 415 See for example "Patent Pledge," Tesla. 416 Art. 8 (1) Regulation 1257/2012. Licenses of right cannot concern applications for unitary patents. Cf. § 23 (6) PatG. 417 Rec. 15 Regulation 1257/2012. 418 Art. 9 (1) (c) Regulation 1257/2012. 412 413

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unitary patent after filing the statement.419 This fee reduction is considerably more modest than the 50% fee reduction that follows the declaration for a license of right in Germany.420 The Rules Relating to Unitary Patent Protection do not clarify how the “appropriate consideration” is to be determined. Given that Art. 8 (2) of the Regulation 1257/2012 states that the license obtained will have a status of a contractual license, it appears that the determination of the appropriate licensing fee will be left for the parties to agree upon.421 Optimistically, this leaves room to enable contracting into zero-sum liability rules and allowing access without a fee.422 In contrast to the GPMA, the EPO does not make decisions with regard to what constitutes adequate remuneration for unitary patents. In addition, no mediation assistance is offered to resolve disagreements concerning the appropriate licensing fees for patents subject to a license of right. Instead, the UPC holds exclusive competence with respect to requests for compensation for licenses for which a statement of willingness to give licences has made,423 and it will determine the appropriate compensation at the request of one parties of the licensing agreement.424 Given that the Rules of the Procedure of the UPC require that an application for appropriate compensation contains a license agreement referred to in Art. 8 (2) of Regulation 1257/2012,425 it is unclear how conflicts that concern the formation of a licensing agreement or other terms of a license should be resolved. This is particularly problematic considering that the UPC system does not provide details concerning licensees’ behaviour in the manner of § 23 (4) PatG. The resulting legal uncertainty may reduce the attractiveness of the instrument and the use of unitary patents subject to a license of right. In comparison to the GPMA, the determination of the licensing rate at the UPC is considerably more costly. According to the most recent information, determination of the appropriate compensation is subject to a fee of 11,000 euros. In addition, the applicant may need to pay an additional fee based on the value of the 419

Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Fees for Unitary Patent Protection; Rule 12; Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Unitary Patent Protection. Rule 12 (1); EPO, Unitary Patent Guide. Obtaining, Maintaining and Managing Unitary Patents 1st ed. (Munich: EPO, 2017), 29-32. 420 § 23 (1) PatG. 421 The possible national procedural rules concerning making a licence of right declaration will not complement Art. 8 of Regulation No 1275/2012, as the EPO is the recipient of the statement. 422 Van Overwalle, "Inventing Inclusive Patents," 237. 423 Art. 32(1)(h)UPCA; Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Fees for Unitary Patent Protection, Rule 12, explanatory note, para 15. 424 Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Fees for Unitary Patent Protection, Rule 12, explanatory note, para 15. 425 "Preliminary Set of Provisions for the Rules of Procedure ('Rules') of the Unified Patent Court," Unified Patent Court, last modified 19 October 2015, accessed 27 December 2018 https://www. unified-patent-court.org/news/draft-rules-procedure-updated-march-2017, Rule 80 (1)(c).

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compensation.426 The costs appear disproportional considering that the fee for an application to determine damages amounts to 3000 euros. The proposed fee also diverges from the predating draft of the rules of procedure, which presupposed the determination of damages and appropriate compensation to be subject to an equivalent fee.427 One explanation for the high cost of the fee is the objective of prompting parties to agree on appropriate compensation in private. In addition, the fee may predict the use of the license of right instrument for SEPs, for which the determination of value may be complex and costly. However, the UPCA and the Rules of Procedure of the UPC are silent on the possibility of and the extent to which a FRAND declaration or an alternative patent pledge given for a patent subject to a license of right may influence the determination of the ”appropriate compensation” of Art. 8 (2) Regulation 1257/2012. A request for the determination of adequate compensation may concern several licensees or patentees, as well as several patents, both under the German and the unitary patent system.428 Hence, the license of right instrument may also facilitate technology transfer for larger groups of patentees or licensees, as assumed by the MCM. Unlike in Germany (§ 23 (7) PatG), it is possible for the owner of a unitary patent to withdraw the statement of willingness to license after a license for an invention has been sought. Such a withdrawal is only contingent on the payment of a renewal fee reduction to the EPO.429 This creates substantial legal uncertainty with regard to the longevity of access: For example, a patent owner may withdraw her statement upon receiving a request from an undesirable user. In such a situation, the right of the user to access the patent in question would be based on the interpretation of unharmonized national civil laws (Art. 24 (1) (e) UPCA) regulating contract formation.

3.3.2.4

Incentives to Declare

In jurisdictions in which the license of right is available, a patent owner has three alternatives: retaining patent exclusivity and paying the full renewal fees, opting for

426

Preparatory Committee for the Unified Patent Court. Rules on Court Fees and Recoverable Costs. Final - Subject to Legal Scrubbing. Unified Patent Court, Last modified 25 February 2017. Accessed 10 July 2019. https://www.unified-patent-court.org/sites/default/files/agreed_and_final_ r370_subject_to_legal_scrubbing_to_secretariat.pdf, 7-8; "Preliminary Set of Provisions", rule 80 (3). 427 "Preliminary Set of Provisions", Rule 80 (2), Rule 132. 428 See § 23.4 PatG; Preparatory Committee for the Unified Patent Court. Rules on Court Fees and Recoverable Costs, 4. For unitary patents, the request for compensation will be subject to a fixed fee of 11 000 euros. Appeals concerning the determination of the compensation are subject to a fee of 11 000 euros and an additional, value-based fee. Ibid, 2, 7, 10. 429 Decision of the Select Committee of the Administrative Council of 15 December 2015 Adopting the Rules Relating to Unitary Patent Protection, Rule 12 (2).

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a liability rule in return for lowered royalty fees, or allowing the patent to lapse.430 “Assuming rational behaviour, the patent applicant will only declare [a license of right] if his expected returns from patent protection without the right to exclude net of the reduced renewal fees will exceed the expected returns from the full patent protection net of the regular renewal fees.”431 Broadly, the motivations for using this instrument can be divided into cost-saving motives and a commitment to license for profit.432 In Germany, declarations of a willingness to license were given for 6.08% of all patents granted between 1983 and 2008.433 The license of right is more commonplace among complex industries characterized by large defensive patent portfolios for cross-licensing, such as electrical engineering (11%), and is rare in among discrete industries, such as pharmaceuticals and chemicals. In the same vein, the instrument was rarely employed for “science-based” patents.434 The most frequent declarers of the license of right were large companies with substantial patent portfolios, whereas the instrument was not popular among SMEs, universities, and non-profit organizations. An increase in the number of declarations was observed among independent inventors.435 The patent owners were driven by an interest in cross-licensing, rather than entering into bilateral licensing agreement: 7.5% of the declared patents were subject to a cross-license but only 3.5% to a bilateral license, lower than the average for normal patents (5.86%).436 Cost-saving was found to be the only reason for employing the instrument in only 4.41% of the cases, and the proportion of such declarations rose towards the end of patents’ lifespans. Declarations motivated by

430

Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 2-3; Krauspenhaar, Liability Rules in Patent Law, 108. 431 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 3. 432 Ibid, 20, 24. In a study conducted in Japan, the respondents indicated that they would approve a license of right-system, if hypothetically introduced in Japanese patent law, for various reasons: In cases when patents are not being used (37.7 percent), for increasing the opportunities in terms of finding licensees (37.3 percent), for the purposes of cost reduction (36 percent), and upon perceived expense of renewal costs (15.6 percent). In contrast, the respondents, who were drawn from universities, research institutions, and companies, reported that they would forego using the instrument due to the necessity of protecting their patents (47.7 percent), the elimination of the option to select licensees (28.2 percent), and due to existing licensing commitments or joint ownership of patents (21.9 percent). Imai, "Desirable Financial Policies," 30-31. Krauspenhaar also found the need to prevent free riding to be the critical reason for the instrument not being employed. Krauspenhaar, Liability Rules in Patent Law, 124. Imai also found that a concern regarding becoming subject to unfair licensing terms was present both among patent owners and possible users. The former were also wary of a potential hold-out risk, while the latter raised concerns over enclosure by dependent patents Imai, "Desirable Financial Policies," 32. 433 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 16. 434 Krauspenhaar, Liability Rules in Patent Law, 119, 125. 435 Ibid, 120, 124. 436 Ibid, 123-124.

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cost-saving reduce social welfare by unnecessarily prolonging patent lifespan437 and may even contribute to anti-commons problems.438 Those patents subject to the declaration showed signs of a market for lemons.439 Generally, they were less valuable than patents on average, but a large part of their value was generated after the declarations had been made.440 Nevertheless, the instrument was deemed to be welfare enhancing, even when taking into consideration the GPMA’s losses in renewal fees.441 It alleviated the problems associated with blocking patents but failed to stimulate further investments in R&D or bringing products to market. In addition, its effect in terms of fostering OI was limited.442 The instrument appears to promote the open licensing of defensive and, frequently, sleeping patents. As a means to grant access to inventions, the license of right, even taking into consideration the reduced fees, is ultimately an expensive instrument, because it requires an invention to be patented and the patent to be valid.443 Consequently, it is unlikely to suit the more user-driven UOCI, especially in the absence of complementary sources of revenue that would suffice to cover the costs of patenting. Interestingly, empirical research into licenses of right is inconclusive with regard to the effect of the renewal fee discount on a patent owner’s willingness to employ this instrument. However, to encourage early declarations and to limit the number of licenses of right motivated purely by cost-saving motives, Rudyk suggested heightening the initial discount but reducing it progressively towards the end of the patent term. He also anticipated that excessively low renewal fee reductions would have the consequence of fostering sub-optimally late filings of declarations.444 The 15% discount renewal rate for the unitary patents was based on the EPO’s proposal. The fee reduction was considered to be “attractive enough to help SMEs or universities looking for licensing partners, without creating a purely financial instrument for firms engaged wholly or partly in licensing activities.”445 This justification is inconsistent with the previous empirical finding that universities and SMEs are most unlikely to declare their willingness to license.446 The EPO sought to keep the fee reduction low on the grounds that patent owners who employ the instrument in 437

Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 24-26. Krauspenhaar, Liability Rules in Patent Law, 132. 439 George A. Akerlof, "Market for 'Lemons' : Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84, no. 3 (1970) 489-490. 440 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 23, 26. Similarly, Krauspenhaar, Liability Rules in Patent Law, 123, 125. 441 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 24. Cf. Krauspenhaar, Liability Rules in Patent Law, 125. 442 Krauspenhaar, Liability Rules in Patent Law, 133. 443 Van Overwalle, "Inventing Inclusive Patents," 237. 444 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 25, 28. 445 President of the EPO, Adjusted Proposals for the Level of Renewal Fees for European Patents with Unitary Effect, SC/18/15 (Munich: EPO, 2015), III, Art. 21. 446 See Krauspenhaar, Liability Rules in Patent Law, 120, 124. 438

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Germany and the UK, being typically non-European companies, operate in complex technology fields “in which cross-licensing is very frequent or even – for standardessential patents – compulsory [sic].”447 The EPO’s proposal for the renewal fees did not feature any considerations with regard to the importance of access, the interests of third parties, or the effect that the instrument has on overprotection problems. The viewpoint is not explicit in Regulation 1257/2012 either, but the objective “to promote and facilitate the economic exploitation of an invention” in Rec. 15 can be understood not only to mean exploitation of the invention from the perspective of its owner, but also by subsequent innovators, who then contribute licensing fees to the owner of the initial patent. The current reduction of renewal fees can be expected to lead to an undesirably late issuance of statements regarding willingness to license. The limited fee reduction, the unconstrained right of withdrawal, the absence of a low-cost instrument determining the appropriate consideration, and the lack of a qualification on the unitary patent owner’s right to request an injunctive relief represent a missed opportunity to establish a European-wide private liability rule that, unlike patent pledges, would ensure long-lived, enforceable access to patents for follow-on innovators. Furthermore, the EPO did not follow the proposals of previous studies regarding offering clearing house-type services such as databases and the facilitation of the conclusions of licensing agreements to incentivize wider adoption of licenses of right.448 For these reasons, it seems unlikely that licenses of right to unitary patents will gain popularity or contribute to solving the overprotection problems that hinder cumulative innovation.

3.3.3

Patent Pools

3.3.3.1

Governance and Objectives

A patent pool can be defined as an “agreement between two or more patent owners to license one or more of their patents as a package to one another and to third parties willing to pay the associated royalties”.449 This private ordering instrument is not defined at the level of statutory law.450 In principle, “[a]ll patent pools share one

447

President of the EPO, Proposals for the Level of Renewal Fees for European Patents with Unitary Effect, IV, Art. 48. 448 Imai, "Desirable Financial Policies," 32; Krauspenhaar, Liability Rules in Patent Law, 133. 449 Brigit Verbeure et al., "Patent Pools and Diagnostic Testing," Trends in Biotechnology 24, no. 3 (2006): 115. Similarly, Shapiro, "Navigating the Patent Thicket," 127; Birgit Verbeure, "Patent Pooling for Gene-Based Diagnostic Testing : Conceptual Framework," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press, 2009), 5; TTBER Guidelines (2014), para 244; Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 312. 450 Krauspenhaar, Liability Rules in Patent Law, 27.

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fundamental characteristic: they provide a regularised transactional mechanism that takes the place of the statutory property rule baseline requiring an individual bargain for each transaction.451 In this presentation, I focus on patent pools that license to any third parties and hence represent private liability rules.452 In comparison to the cross-licensing that typically takes place between incumbent companies, such patent pools are significantly more favourable to follow-on innovators, who may not have any patents to contribute to the pool or which they can use to enter into crosslicensing arrangement. Neither patent pools nor their use to resolve overprotection problems is a new phenomenon—the first pool, the Sewing Machine Combination, was formed in the 1850s to address the anticommons problems in the sewing machine industry.453 Contemporary patent pools take very heterogeneous forms and vary considerably in size;454 the number of patentees in one pool may range from a few to several thousands.455 While patent pools may be governed by one of their members,456 larger patent pools are typically administered by an entity that is formally separate from the patent holders.457 The establishment of a patent pool is time-consuming due to the heterogeneity of the interests involved and the engagement of external, legal, and technical experts.458 Often, the pooled technology belongs to a certain de jure or de facto standard. However, pools represent entities that are separate from SSOs.459 From the perspective of competition law, patent pools are based on two contractual constellations: First, “agreements establishing the technology pool and setting out the terms and conditions for their operation”, and, second, an agreement regarding “[l]icensing out from the pool”, which are typically agreed upon between a number of licensors who belong to a particular pool.460 Ullrich has described this division as “artificial”.461 From the civil law perspective, the rights and obligations of the 451

Merges, "Contracting into Liability Rules," 1342. Krauspenhaar, Liability Rules in Patent Law, 27-28. Patent pools that only license to members represent a restricted form of openness, discussed under Sect. 3.2.3. 453 Adam Mossoff, "Rise and Fall of the First American Patent Thicket : The Sewing Machine War of the 1850s," Arizona Law Review 53 (2011): 211. 454 Merges, "Contracting into Liability Rules," 1342-1352; TTBER Guidelines (2014), para 244. For an overview of different patent pool administration models, see Verbeure, 7-9. 455 Jonathan M. Barnett, "From Patent Thickets to Patent Networks : The Legal Infrastructure of the Digital Economy," Jurimetrics 55, no. 1 (2014): 13. 456 Shapiro, "Navigating the Patent Thicket," 127, 134. 457 Barnett, "From Patent Thickets to Patent Networks," 19-20. 458 Verbeure et al., "Patent Pools and Diagnostic Testing," 116. 459 TTBER Guidelines (2014), para 245. The most famous example of a standard-related patent pool is MPEG LA, which pools technologies that belong to the MPEG-2 standard. Yuzuki Nagakoshi and Katsuya Tamai, "Licensing Organizations and the Formation of Patent Pools in the Age of Digital Broadcasting," Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 64, no. 9 (2015): 795. 460 TTBER Guidelines (2014), para 56. 461 Hanns Ullrich, "Gene Patents and Clearing Models : Some Comments from a Competition Law Perspective," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press, 2009), 341. 452

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various stakeholders in a patent pool may be determined though heterogeneous contractual arrangements.462 From the perspective of OAI, patent pools follow the MCM, representing a private ordering-based solutions to the market failures associated with overprotection.463 The central advantage of patent pools is the reduction of the transaction costs associated with licensing a technology.464 Patent pools also reduce the costs of litigating and enforcing a patent.465 In addition, participation in a patent

462

For example, Heyers identifies three different patent-related contracts: agreements that set up a patent pool and determine the content of its patent portfolio; licensing arrangements between the patent holders who join the patent pool; and, finally, licensing agreement(s) between the pool and the third parties. Johannes Heyers, "Effiziente Patentpoolkonstitution - zugleich ein Beitrag zum sog. More Economic Approach," Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 60, no. 3 (2011): 217. However, the licensing terms for pool members may also be incorporated in the agreement that established a pool. Furthermore, technology transfer to third parties typically occurs on the basis of standardised bilateral licensing agreements. Verbeure, "Patent Pooling for Gene-Based Diagnostic Testing," 5. 463 See Sect. 3.1.1.1. However, especially in relation to patent pools that are set up to promote public policy, participants may have non-pecuniary motivations. Ziegler, Gassmann, and Friesike, "Why Do Firms Give Away Their Patents for Free?."; Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 324-325. I do not discuss the incentives to join such pools, as they are often government-initiated. Ibid. Furthermore, they typically represent semi-open constellations, discussed Sect. 3.2.4. 464 Merges, "Contracting into Liability Rules," 1340; Heyers, "Effiziente Patentpoolkonstitution," 216; TTBER Guidelines (2014), para 245; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (Washington, DC: DOJ and FTC, 2017), § 5.5; Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 799; Erik Hovenkamp and Herbert Hovenkamp, "Patent Pools and Related Technology Sharing," in Cambridge Handbook of Antitrust, Intellectual Property, and High Tech, ed. Roger D. Blair and Daniel Sokol (Cambridge: Cambridge University Press, 2017), 364. First, instead of the individual valuation and negotiation of each license that are presupposed by the property rule, a patent pool licenses the pooled technologies on the basis of predetermined, regularized license rates. Merges, "Contracting into Liability Rules," 1328, 1340, 1342. Pool members usually divide the royalties collected by the patent pool on the basis of predetermined formulas, which address factors such as the number of licensed patents, the ages thereof, and the number of licensees. However, patent pools may also license technology royalty-free. Merges, "Contracting into Liability Rules," 1353; Michael Mattioli, "Power and Governance in Patent Pools," Harvard Journal of Law & Technology 27, no. 2 (2014): 446-449, 451-454, 461-465. Early patent pools also offered fixed royalty rates to their members on the basis of, for example, products sold downstream or a share of the royalty revenue. Some patent pools also pay dividends to patent holders. It is only in rare cases that patent pools feature a collective evaluation mechanism that allows for more democratic involvement of patent holders. Mattioli, "Power and Governance in Patent Pools," 440, 443, 463-465. 465 Heyers, "Effiziente Patentpoolkonstitution," 216; DOJ and FTC, Antitrust Enforcement, 84-85; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 5.5. Larger patent pools are more likely to have a unit focused on litigation. Josh Lerner, Jean Tirole, and Marcin Strojwas, Cooperative Marketing Agreements between Competitors : Evidence from Patent Pools, Working Paper No. 9680 (Cambridge, MA: National Bureau of Economic Research, 2003), 3.

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pool alleviates the costs of monitoring licensees’ behaviour.466 Even with the consideration of the expenses stemming from the establishment and administration of the pool, the transaction cost savings produced by a patent pool, both for patent holders and licensees, are dramatic, as they can reach hundreds of millions of dollars for large patent pools.467 Furthermore, patent pooling resolves the problem of blocking patents.468 For licensees, a patent pool offers a “one-stop-shop” for accessing complementary technology.469 As a consequence, pooling alleviates anticommons problems in the context of patent thickets.470 The pooling of complementary patents resolves the problem of double-marginalization471 and hence can be expected to interfere with royalty stacking. Second, patent pools help to alleviate hold-up risks.472 This effect is predicted to be strongest when a standard-related patent pool is formed at an early stage, before manufacturers have invested in the standard-compliant technology.473 Moreover, patent pools reduce the frequency of patent litigation between pool members:474 Patent pools allow their members to share important know-how related to patents.475 The pooling of complementary patents may have a favourable effect on the differentiation and quality of downstream products.476 Furthermore, patent pools enable downstream entry by providing affordable access to upstream technology.477 Pools that license standard-essential technology have been verified as accelerating vertical disintegration and fostering NPE-driven follow-on innovation.478 In addition, patent pooling may also enhance the implementation of standards.479

466

Heyers, "Effiziente Patentpoolkonstitution," 216. Robert P. Merges and Michael Mattioli, "Measuring the Costs and Benefits of Patent Pools," Ohio State Law Journal 78, no. 2 (2016): 281, 298, 303-313, 324, 346. 468 Shapiro, "Navigating the Patent Thicket," 123; DOJ and FTC, Antitrust Enforcement, 84; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 5.5. 469 Shapiro, "Navigating the Patent Thicket," 134; TTBER Guidelines (2014), para 245. 470 Shapiro, "Navigating the Patent Thicket," 123; Heyers, "Effiziente Patentpoolkonstitution," 217. 471 Shapiro, "Navigating the Patent Thicket," 123-124; Heyers, "Effiziente Patentpoolkonstitution," 216, 222; TTBER Guidelines (2014), para 245. 472 Barnett, "From Patent Thickets to Patent Networks," 10. 473 François Lévêque and Yann Ménière, "Patent Pool Formation : Timing Matters," Information Economics & Policy 23, no. 3 (2011): 243. 474 Krauspenhaar, Liability Rules in Patent Law, 139. 475 Verbeure, "Patent Pooling for Gene-Based Diagnostic Testing," 9. 476 Hovenkamp and Hovenkamp, "Patent Pools and Related Technology Sharing," 358. 477 Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 800. 478 Keyvan Vakili, "Collaborative Promotion of Technology Standards and the Impact on Innovation, Industry Structure, and Organizational Capabilities : Evidence from Modern Patent Pools," Organization Science 27, no. 6 (2016): 32, 35. The effect has been confirmed in relation to standard-related patent pools. 479 TTBER Guidelines (2014), para 245. 467

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Ultimately, patent pools foster technology dissemination by reducing the costs associated with manufacturing innovations and lowering the prices of consumer products.480 On the basis of the qualities identified above qualities, patent pools have a favourable impact in terms of resolving overprotection problems that may hinder follow-on innovation. However, the overall effect of patent pools on social welfare can be both negative and positive.481 Beside the antitrust risks discussed Sect. 3.3.3.2, patent pools have been found to have a negative effect on dynamic efficiency in some contexts.482

3.3.3.2

Patent Pools and Competition Law

Beyond the expected efficiencies, patent pooling raises a number of antitrust concerns under Art. 101 TFEU: First, the pooling of substitute patents may lead to price fixing and collective bundling, which can reduce competition between rival technologies. Second, pool members may collude by sharing sensitive information in the context of patent pooling. Third, a patent pool may compromise dynamic efficiency by foreclosing R&D on a competing technology or its market entry; this concern is particularly pronounced when pooling in de facto standard essential technologies.483 A pooling arrangement may also have a negative impact on its participants’ incentives to innovate, particularly if it features excessively broad grant-back clauses.484 In addition, pool members may unjustifiably refuse to license or engage in other type of concerted discriminative practices,485 which may become subject to the European Commission’s (hereinafter EC) scrutiny both on the basis of Art. 101 TFEU and Art. 102 TFEU. In Europe, a patent pool’s compliance with Art. 101 TFEU is subject to selfassessment, whereas, in the US, the initiators of a patent pool may request a business review letter from the Assistant Attorney General of the Antitrust Division of the 480

Barnett, "From Patent Thickets to Patent Networks," 1, 19-20, 30, 45-46. Similarly, see also Antitrust Enforcement, 71, 85; Heyers, "Effiziente Patentpoolkonstitution," 214; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 5.5. 481 Heyers, "Effiziente Patentpoolkonstitution." 213-215, 217; Herbert Hovenkamp et al., IP and Antitrust : An Analysis of Antitrust Principles Applied to Intellectual Property Law, vol. 1 (New York: Wolters Kluwer, 2017), 372-273. 482 See Amol M. Joshi and Atul Nerkar, "When Do Strategic Alliances Inhibit Innovation by Firms? Evidence from Patent Pools in the Global Optical Disc Industry," Strategic Management Journal 32, no. 11 (2011); Ryan Lampe and Petra Moser, "Do Patent Pools Encourage Innovation? Evidence from the Nineteenth-Century Sewing Machine Industry," Journal of Economic History 70, no. 4 (2010): 898; Thomas Jeitschko, D. and Nanyun Zhang, "Adverse Effects of Patent Pooling on Product Development and Commercialization," B.E. Journal of Theoretical Economics 14, no. 1 (2014):27. 483 TTBER Guidelines (2014), paras 246, 254, 259. 484 DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 5.5-5.6. 485 Hovenkamp and Hovenkamp, "Patent Pools and Related Technology Sharing," 359.

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Department of Justice to ascertain the initiative’s alignment with antitrust law.486 In the EU, neither the agreement that forms a patent pool nor the contract concerning licensing terms to third parties is subject to the Block Exemption for technology transfer agreements.487 However, the Guidelines on technology transfer agreements determine the principles by which the EC evaluates patent pools and identifies their safe harbour.488 The compliance of the agreement forming the patent pool and the conditions of licensing out the pooled technology with Art. 101 (1) TFEU are assessed as a whole. In its antitrust assessment, the EC places particular weight on the nature and composition of the technology subject to pooling arrangement.489 Patent pools can solve the problems associated with patent thickets, given the condition that patent holders pool complementary technologies.490 A pro-competitive patent pool licenses either (a) essential technology in the sense that “there are no viable substitutes (both from a commercial and technical point of view) for that technology inside or outside the pool and the technology in question constitutes a necessary part of the package of technologies for the purposes of producing the product(s) or carrying out the process (-es) to which the pool relates” or (b) standard essential technology. The essentiality of a technology also guarantees its complementarity.491 A pooling arrangement is subject to a safe harbour from the application of Art. 101 (1) TFEU when its creation was subject to open participation, it only features essential and non-exclusively licensed technology available to any party under FRAND-conditions, it does not provide an opportunity for the exchange of sensitive information, it allows licensees to challenge patents’ validity and essentiality, and it does not preclude the development of rival technologies or products.492 The applicability of the safe harbour is not contingent on the market power of the members of the pool.493 The pooling of substitute patents raises the pool’s royalty rate by limiting competition between rival solutions and represents both the price fixing and collective bundling prohibited by Art. 101(1) TFEU.494 A patent pool “comprising to a significant extent substitute technologies” is also unlikely to fulfil the conditions of

See 28 C.F.R. § 50.6. TTBER Guidelines (2014, para 247. 488 TTBER Guidelines (2014), para 261. 489 Ibid, para 248. In addition, the Commission considers the openness of a pool, participation in its creation, the selection of the pooled technology, the involvement of independent experts in the process, a pool’s operations, the existence of an independent dispute-resolution process, and the establishment of safeguards against the sharing of sensitive information upon reviewing a patent pool’s compliance with Art. 101 (1) TFEU. Ibid, paras 248, 249, 256-260. 490 Shapiro, "Navigating the Patent Thicket," 119-120. 491 TTBER Guidelines (2014), para 252. 492 Ibid, para 261. 493 Trevor Cook, "New EU Guidelines on Technology Transfer Agreements," Journal of Intellectual Property Rights 19 (2014): 231. 494 TTBER Guidelines (2014), paras 246, 253, 255. 486 487

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Art. 101 (3) TFEU.495 However, in practice, distinguishing substitute and complementary technologies from each other can prove very difficult.496 The pooling of complementary but non-essential patents may risk foreclosing competition by rival technologies and amount to collective bundling, thus amounting to a violation of Art. 101 (3) TFEU when the pool holds a “significant position on any relevant market”.497 The essentiality of a pooled technology must also be controlled after the formation of the pool, with a view to the emergence of new, rival complements.498 Nevertheless, a patent pool arrangement that features non-essential complementary technology may, subject to certain arrangements, yield to sufficient pro-competitive efficiencies, thus fulfilling the conditions of Art. 101 (3) TFEU.499 If the licensing arrangement complies with Art. 101 TFEU, the EC will examine how the pool’s licenses with third parties affect competition.500 In terms of compliance with Art. 101 TFEU, the importance of indiscriminate licensing practices increases with the market power of the patent pool.501 The licensing conditions of a market-dominant patent pool “should be non-excessive and non-discriminatory and license should be non-exclusive” in order to ensure the openness of the pool and harming or foreclosing downstream competition.502 More generally, a patent pool’s licensing conditions should not lead to the exclusion of third-party technologies from the pool or the prevent the formation of alternative pools. The agreement should also be devoid of the hardcore restrictions forbidden by Art. 4 of TTBER.503 Hence, patent pools that qualify as private liability rules are more likely to be procompetitive.504 However, the determination of royalty rates and shares, including non-discriminatory price differentiation for licensees, must not conflict

495

Ibid, para 255. The European Commission acknowledges that pooling may also yield an efficient outcome when the included technologies are partially substitutable, such as in a situation in which licensees find it necessary to incorporate both of the technological alternatives in their products. Ibid, para 254. Distinguishing complements from substitutes may also prove difficult due to differences between licensees and the variety of downstream applications. Hovenkamp and Hovenkamp, 363, 367. For a discussion of the relevance of the division between complementary and substitute patents, see Heyers, "Effiziente Patentpoolkonstitution," 219-222, 225; Krauspenhaar, Liability Rules in Patent Law, 147-149. 497 TTBER Guidelines (2014), para 262. 498 Ibid, paras 263. 499 Ibid, paras 264-265. These conditions have also been referred to as “the second safe harbour” for patent pools. Steven Anderman and John Kallaugher, Technology Transfer and the New EU Competition Rules : Intellectual Property Licensing after Modernisation (New York: Oxford University Press, 2006), 9.45. 500 TTBER Guidelines (2014), para 266. 501 Ibid, paras 267 b) 502 Ibid, paras 269. 503 Ibid, paras 267 c) and d) 504 However, a patent pool that does not form a private liability rule in a certain context can still have procompetitive effects. Hovenkamp and Hovenkamp, "Patent Pools and Related Technology Sharing," 369-372. 496

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with competition law.505 As long as the grant-back conditions apply only to essential improvements on a non-exclusive basis, they are considered to have a favourable effect on competition by virtue of limiting the risks of hold-ups by licensees.506

3.3.3.3

Incentives to Participate

In the context of patent thickets, an opportunity to lower transaction costs incentivizes the participation of both patent holders and licensees.507 In addition, the reduction of enforcement costs motivates patent holders to participate in a pooling arrangement,508 particularly on the part of smaller companies with limited capacity to transfer their technology or enforce their patents benefit from pool membership. A pool protects such patent holders from a hold-out, but it also has the effect of incentivizing the inclusion of less critical patents in the pool.509 The pooling of patents also secures them against invalidation claims.510 While the inclusion of invalid patents in a patent pool precludes their use in offensive strategies,511 shielding invalid patents has an undesirable effect on social welfare and follow-on innovation.512 Therefore, a patent pool should allow licensees to challenge patents without the risk of termination of the entire licensing agreement.513 Vertically integrated companies are more likely to pool their technology.514 Typically, they seek to lower the patent pool’s licensing rate and, at least in standard-related pools, promote indiscriminate licensing to drive up the demand for standard-compliant products.515 A pool administrator must balance the trade-off between offering sufficient economies of scale and revenue to patent holders and sustaining license rates that are low enough to attract licensees.516 Generally, “a pool’s objective is typically to choose the license fees that maximize aggregate

505

TTBER Guidelines (2014), paras 268-269. However, when a pool holds a dominant position on a market, its licensees should be treated equally, irrespective of their contributions to the patent pool. Ibid, para 269. 506 Ibid, para 271. 507 Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 799. 508 Merges, "Contracting into Liability Rules," 1324-1325, 1327. 509 Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 799. 510 Ibid. 511 Krauspenhaar, Liability Rules in Patent Law, 142. 512 Jay Pil Choi and Heiko Gerlach, "Patent Pools, Litigation, and Innovation," RAND Journal of Economics 46, no. 3 (2015): 517. 513 TTBER Guidelines (2014), para 272. 514 Anne Layne-Farrar and Josh Lerner, "To Join or Not to Join : Examining Patent Pool Participation and Rent Sharing Rules," International Journal of Industrial Organization 29, no. 2 (2011): 300. 515 Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 797, 799. 516 Barnett, "From Patent Thickets to Patent Networks," 40-41; Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 797. In addition, an administrator may need to

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licensing revenues, regardless of how those revenues are subsequently divided among members.”517 While patent pools are an attractive means of reducing costs for vertically integrated companies, the royalties shares offered may prove underrewarding for non-practicing patent holders.518 Holders of valuable patents are likely to forego joining patent pools that do not address the value of their patents in the determination of royalty fees.519 In an ethnographic study, patent pools were reported to have experienced increased difficulties in attracting members.520 This trend raises several questions with regard to the suitability of patent pools when it comes to resolving overprotection problems. First, are patent pools at risk of becoming subject to a market for “lemons”?521 A recent empirical study rebuts this assumption – SEPs selected into patent pools typically have higher than average intrinsic value in comparison to the non-pooled SEPs declared to SSO.522 Second, how does patent holders’ opting out from the pool affect the efficiencies provided by a pool and the sufficiency of patent pooling in terms of addressing overprotection problems, most importantly exploitative hold-ups?523 Previously, the non-participation of market-dominant firms and firms that owned essential patents was considered to reduce the social welfare effects of a patent pool.524 However, recent studies have shown that the decision to forgo participation in a patent pool does not directly indicate that a patent holder is seeking to employ an offensive patent strategy against downstream innovators. Instead, it may indicate a preference for employing the OI model over the MCM. Mattioli found that the non-participating holders of valuable essential patents typically have well-functioning in-house licensing departments, which they in some cases deemed more qualified to undertake the licencing of essential patents than the less experienced pool members.525 A patent

take into consideration the licensing rates of patent pools for other technologies that downstream users employ. Barnett, "From Patent Thickets to Patent Networks," 40-41. 517 Hovenkamp and Hovenkamp, "Patent Pools and Related Technology Sharing," 366. 518 Barnett, "From Patent Thickets to Patent Networks," 1, 45-46. 519 See Layne-Farrar and Lerner, "To Join or Not to Join," 295. Similarly, Reiko Aoki and Sadao Nagaoka, Consortium Standard and Patent Pools, Discussion Paper No. D04-32 (Tokyo: Institute of Economic Research, Hitotsubashi University, 2005), 18; Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 800. 520 Michael Mattioli, "Patent Pool Outsiders," Berkeley Technology Law Journal 33, no. 1 (2017): 10. 521 See Akerlof, "Market for 'Lemons' : Quality Uncertainty and the Market Mechanism," 489-490. See also Geertrui Van Overwalle, "Turning Patent Swords into Shares," Science 330 (2010): 1631. 522 Henry Delcamp, "Value of Patents in Pools and Its Implications for Competition," Criterion Journal on Innovation 1, no. 1 (2016): 161-162, 177. 523 Mattioli, "Patent Pool Outsiders," 9-10, 16. 524 Krauspenhaar, Liability Rules in Patent Law, 142. 525 Mattioli, "Patent Pool Outsiders," 32, 36, 45, 46. In the same vein, patent holders in the biotechnology sector reportedly prefer bilateral licensing to patent pooling. Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 331-332.

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holder may similarly also prefer to license independently in a situation in which he views himself as having better resources for enforcing his patents and ensuring a sufficient revenue flow than the patent pool. Against this background, patent holders who are repeated players on the market for essential technology may choose to either engage in OAI, following the MCM, or, when they have the management skills and resources required to do so, license their technology independently and for profit in accordance with the OI model. Both types of OAI may resolve the market failures associated with overprotection or preclude their emergence. Patent pools have been previously been reported to offer higher royalty shares in order to convince aggressively litigating holders of valuable patents to join pools.526 However, it was found to be socially preferable to maintain some level of fragmentation in the ownership of an essential technology between a patent pool and independently operating patent holders, as opposed to a scenario in which pool outsiders bargain to join the constellation in return for high royalties that raise the overall royalty rate of the pool.527 The reasons for this stem from the observation that patent holders who opt out of the pool constellations are more constrained in setting their own licensing fees than previously thought. Patent pools also indirectly affect other participants on the market for the essential technology, mitigating the royalty rates of non-participating patent holders.528 The finding confirms the validity of the broad MCM propagated by Barnett:529 Pools signal the value of an essential technology to the market, thus influencing the price setting of patent holders by establishing a benchmark both for the prospective licensees and for calculating damages in patent litigation.530 The study also found that prospective licensees who viewed licensing rates as deviating too far from a pool’s royalty level chose a hold-out strategy instead of obtaining a license and waiting for the patent holder to sue. For a patent holder, litigation is often undesirable due to the exposure to validity challenges and reputational risks. Alternatively, the users may take a license but underreport their use of the licensed technology in order to pay lower royalty rates. Consequently, pool outsiders were reported as being able to charge royalties only moderately higher than the benchmark of a patent pool.531 However, it is relevant that Mattioli studied the effects of patent pooling in a jurisdiction featuring a compulsory liability rule532 that constrained the possibilities that independent holders of essential technology had in terms of holding up pool

526

Nagakoshi and Tamai, "Licensing Organizations and the Formation of Patent Pools," 797. Mattioli, "Patent Pool Outsiders," 8-9, 17, 62-63, 65. 528 Ibid, 7, 50. 529 Barnett, "Property as Process," 431-433, 455-456. 530 Mattioli, "Patent Pool Outsiders," 7-8, 22-23, 27-30; see also Barnett, "Property as Process," 390-391, 412-413, 432. 531 Mattioli, "Patent Pool Outsiders," 30-33, 64. 532 eBay, 126 S. Ct. 1837, 1839, 1841; Mattioli, "Patent Pool Outsiders," 30. His research outcomes hence illustrate bargaining in the shadow of a liability rule. See Mark A. Lemley, "Contracting around Liability Rules," California Law Review 100, no. 2 (2012), 484. 527

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licensees. Hence, the indirect effect of patent pools on the licensing and pricing practices of pool outsiders is likely to be weaker in jurisdictions in which a patent holder is entitled to an injunctive relief by default. The success of the MCM depends upon the repeat play of patent holders. The homogeneity of a pool’s participants533 and symmetry between assets contributed to a technology standard increase the likelihood of efforts to form a patent pool.534 However, patent pools may also be a poor solution for certain industries, which explains the limited interest in adopting patent pools in the field of biotechnology.535 Obviously, a patent pool does not form when the ownership of the essential technology is not fragmented;536 there are also no incentives to establish a patent pool to license a technology that is essential only to an individual, radical follow-on innovation, as its innovator and patent holders will not be subject to repeat play. Due to the opaqueness concerning the ownership of essential technology, patent pools can reduce, but not eradicate, the hold-up risk.537 Furthermore, in the presence of the property rule, and the problems associated with it, the participation in patent pools is unlikely to be stimulated further.538 The most opportunistic owners of the essential patents, such as PAEs, are not repeat players and therefore are highly unlikely to join pooling arrangements.539 Hence, some of the patent holders may remain incentivized to refuse to license, to engage in a patent ambush, or to employ a hold-up strategy.540 In addition, the terms concerning the withdrawal from a pool may also leave licensees vulnerable to hold-ups.541 Similarly, the longevity of a pool may be compromised upon the transfer of an essential pooled patent to a subsequent owner. On this basis, it can be concluded that, while patent pools, in their competition law-compliant forms, are generally welfare enhancing and suitable for resolving the market failures associated with overprotection that may hinder follow-on 533

Aoki and Nagaoka, Consortium Standard and Patent Pools, 17. Layne-Farrar and Lerner, "To Join or Not to Join," 300. 535 Nicol and Hope, "Cooperative Strategies," 92-93; Jane Nielsen, Dianne Nicol, and John Liddicoat, "Sharing the Burden in Australian Drug Discovery and Development of Collaborative Trends in Translational Research," Intellectual Property Quarterly 2014, no. 3 (2014), 190, 196, 198, 208; Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 331. The scarcity of patent pools in the biotechnology sector may be explained with reference to the importance of tacit knowledge in the R&D processes that are conducted in this sector. Patent pooling in fields such as biotechnology and pharmaceuticals promotes spillovers, which may decrease downstream product differentiation and have undesirable effects on social welfare. Jeitschko and Zhang, "Adverse Effects of Patent Pooling," 48-49. 536 Verbeure et al., "Patent Pools and Diagnostic Testing," 119; Alexander Lee, "Examining the Viability of Patent Pools for the Growing Nanotechnology Patent Thicket," Nanotechnology Law & Business 3 (2006): 326-327. 537 Barnett, "From Patent Thickets to Patent Networks," 10, fn 30. 538 Krauspenhaar, Liability Rules in Patent Law, 157. 539 See Barnett, "Property as Process," 417-418. 540 Barnett, "From Patent Thickets to Patent Networks," 10, fn 30; Verbeure et al., "Patent Pools and Diagnostic Testing," 119. 541 Barnett, "From Patent Thickets to Patent Networks," 10, fn 30. 534

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innovation, they emerge and function efficiently only in specific contexts and fail to eliminate the risk of hold-ups in jurisdictions that are governed by the property rule.

3.3.4

Clearing Houses

3.3.4.1

Definition

Initially, the term clearing house referred to institutions established by banks to simplify their mutual transactions of cheques, bills, and other instruments and to settle their balances.542 However, already early in their history, clearing houses evolved to offer a wider array of functions and services associated with the clearing of transactions.543 Ultimately, the term has been broadened to apply to “[a]n agency or organization that collects and distributes something, especially information.”544 Following another definition, the concept of a clearing house refers to “any mechanism whereby providers or [sic] goods, services and/or information are matched”.545 In the context of IP law, the adoption of the clearing house model was pioneered in the context by copyright collection societies.546 More recently, the opportunities presented by clearing houses in terms of facilitating technology transfer and alleviating transaction costs and other overprotection problems have been studied, particularly in the context of biotechnology.547 With respect to OAI,

542

"Clearinghouse," Oxford University Press, last modified n.d., accessed 9 October 2014 http:// www.oxforddictionaries.com/us/definition/american_english/clearinghouse; James G. Cannon, Clearing-Houses : Their History, Methods and Administration (New York: D. Appleton and Company, 1908), 1-2, 11; Anatole F. Krattinger, "Financing the Bioindustry and Facilitating Biotechnology Transfer," IP Strategy Today 8 (2004): 20; van Zimmeren et al., "Clearing House for Diagnostic Testing," 353; Editors of Encyclopaedia Britannica, "Clearinghouse," Encyclopedia Britannica, last modified 16 December 2014, accessed 9 October 2014 http://www.britannica.com/ EBchecked/topic/120846/clearinghouse. 543 Cannon, Clearing-Houses, 1-2, 11-12. 544 Oxford Dictionaries, "Clearinghouse". 545 Krattinger, "Financing the Bioindustry," 20. 546 See Merges, "Contracting into Liability Rules," 1328-1340; Gregory Graff and David Zilberman, "Intellectual Property Clearinghouse for Agricultural Biotechnology." Nature Biotechnology 19, no. 12 (2001), 1179; Esther van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics : Conceptual Framework," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press), 79, 83-100. 547 See genenerally Gregory Graff and David Zilberman, "Towards an Intellectual Property Clearinghouse for Agricultural Biotechnology," IP Strategy Today 3, no. 1 (2001): "Intellectual Property Clearinghouse for Agricultural Biotechnology," Nature Biotechnology 19 (2001); Krattinger, "Financing the Bioindustry."; Lori Sheremeta and Richard E. Gold, "Creating a Patent Clearinghouse in Canada : A Solution to Problems of Equity and Access," Health Law Review 11, no. 3 (2003); Geertrui Van Overwalle et al., "Models for Facilitating Access to Patents on Genetic Inventions," Nature Reviews Genetics 7 (2005); van Zimmeren et al., "Clearing House for Diagnostic Testing."; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics."; Michael

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clearing houses are relevant both for the fulfilment of the MCM548 and for fostering OI.549 With respect to IP, “[a] clearinghouse is like a middleman in the market for technology that facilitates exchanges between IP owners and IP users.”550 Clearing houses are divided into instruments that offer information related to patents and those that also engage in patent licensing551 or otherwise standardise how inventions are used.552 The former are further divided into two subcategories, information clearing houses and technology exchange clearing houses, whereas the latter features open access clearing houses, standardized licenses clearing houses, and royalty collection clearing houses.553 Information clearing houses provide access to information about existing patents, their claims, and their ownership.554 Information clearing houses typically offer services in the form of an online database. They alleviate the problems of information asymmetry and imperfect information that may exist between patent holders and potential licensees.555 Hence, they reduce search costs and enable follow-on

Spence, "Comment on the Conceptual Framework for a Clearinghouse Mechanism," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press); Nicol and Hope, "Cooperative Strategies."; Edson Beas Rodrigues Jr, General Exception Clauses of the TRIPS Agreement : Promoting Sustainable Development (New York: Cambridge University Press, 2012), 195-197; Kourtney Baltzer, "Clearinghouse : The Solution to Clearing up Confusion in Gene Patent Licensing," Harvard Journal of Law & Technology 24, no. 2 (2011). For an early account of a patent clearing house outside of the biotechnology sector, see Carl A. Kukkonen, "Use of a Patent Licensing Center as an Intermediary for Facilitating the Licensing of Commecially Viable, Unused Patents," Virginia Journal of Law and Technology 3, no. 10 (1998). 548 Merges, "Contracting into Liability Rules," 1295-1296, 1308-1316, 1327-1340, referring to “Collective Rights Organizations”, Barnett, "Anti-Commons Revisited," 130, referring to “thirdparty intermediaries”. 549 See Krauspenhaar, Liability Rules in Patent Law, 159; Esther van Zimmeren, "IP Coordination Models : Revealing Some of the 'Magic' Behind Patent Pools and Clearinghouses," in User Generated Law: Re-Constructing Intellectual Property Law in a Knowledge Society, ed. Thomas Riis (Cheltenham: Edward Elgar Publishing, 2016), 139; Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 201-204; Nadine Roijakkers, Andy Zynga, and Caroline Bishop, "Getting Help from Innomediaries : What Can Innovators Do to Increase Value in External Knowledge Searches?," 242-243, 247-255. 550 Reiko Aoki and Aaron Schiff, "Promoting Access to Intellectual Property : Patent Pools, Copyright Collectives, and Clearinghouses," R&D Management 38, no. 2 (2008): 195. Similarly, see van Zimmeren, "IP Coordination Models," 137. 551 Aoki and Schiff, "Promoting Access to Intellectual Property," 196. 552 van Zimmeren et al., "Clearing House for Diagnostic Testing," 353. 553 Ibid, 353-354. See also Nicol and Hope, "Cooperative Strategies," 93. In practice, a clearing house may evolve from one type into another over time. Ibid, 99; van Zimmeren, "IP Coordination Models," 138. Furthermore, clearing houses may adopt certain characteristics of patent pools, and vice versa. Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 325-326. 554 van Zimmeren et al., "Clearing House for Diagnostic Testing," 353-354. 555 Graff and Zilberman, "Clearinghouse for Agricultural Biotechnology," 4.

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innovators determine their “freedom to operate”.556 Similarly to information clearing houses, technology clearing houses operate online and feature databases or listings on patent-related to specific technology. However, following an online business-to-business model, they also provide information concerning patent holders’ contact details and willingness to give licenses and facilitate the initiation of license negotiations with interested licensees.557 In addition, such clearing houses may offer services to mediate licensing negotiations or otherwise manage the process of technology transfer,558 which may take place also offline.559 A technology clearing house may also facilitate contracting into liability rules. For example, the ILP Vegetable clearing house, which focuses on patents concerning vegetable traits, facilitates bilateral negotiations between patent holders and licensees, mandates them to ensure that they take place on fair and reasonable terms, offers a standardised license agreement to support them, mediates unsuccessful negotiations, and, finally, offers a compulsory arbitration system to ensure that the parties reach an agreement.560 Beyond providing access to information, clearing houses can also facilitate the use of inventions.561 Open-access clearing houses inform follow-on innovators regarding inventions that are in the public domain and are available to use royalty-free.562 Hence, such a clearing house may facilitate free revealing. In addition, open-access clearing houses may collect patents subject to pledges to license them royalty-free and openly to any willing licensee.563 Standardized licenses clearing houses provide access to patented inventions under a pre-defined selection of standard of licenses for different users, uses, and inventions.564 A number of examples of standardised licenses clearing houses for

556

van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 71. Krattinger, "Financing the Bioindustry," 21; van Zimmeren et al., "Clearing House for Diagnostic Testing," 353; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 71-73; Graff and Zilberman, "Clearinghouse for Agricultural Biotechnology," 6. See also Reiko Aoki and Aaron Schiff, "Promoting Access to Intellectual Property", 197 In turn, a technology clearing house may transmit information concerning licensees’ needs. Baltzer, "Clearinghouse," 534. 558 Graff and Zilberman, "Clearinghouse for Agricultural Biotechnology," 6. 559 See Kukkonen, "Use of a Patent Licensing Center," 2-3. 560 Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 318-319; Michael A. Kock and Floris ten Have, "‘International Licensing Platform—Vegetables’ : Prototype of a Patent Clearing House in the Life Science Industry," Journal of Intellectual Property Law & Practice 11, no. 7 (2016): 506-507. 561 van Zimmeren et al., "Clearing House for Diagnostic Testing," 353-354. 562 Ibid, 353. An example of such an open-access clearing house would be the SNP Consortium. See van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 75-76; Nicol and Hope, "Cooperative Strategies," 102. 563 See van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 75 in which the author discusses the Eco-Patent Commons as an example of open access clearing house. 564 Ibid, 76, 79. Creative Commons licenses represent a famous standardised licenses clearing house initiative, see van Zimmeren et al., "Clearing House for Diagnostic Testing," 354; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 78. 557

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patents exist, most relevant of which are MPEG LA’s Librassay, which specializes in molecular diagnostics, and Sygenta’s e-licensing platform, which focuses on the field of agriculture.565 Librassay is an independent intermediary that features the patents of several different owners, which can be licensed on the basis of a standardised combination of fees and royalties.566 In contrast, Sygenta’s e-licensing platform offers only the company’s own patents on native traits and enabling technologies for R&D and breeding. Its licenses are royalty-free, unless the native trait is used to develop a new variety, in which case it is licensed on FRANDbased standardised licensing terms.567 Sygenta’s platform features elements of both a standardised clearing house and an open-access clearing house. However, the platform does not represent the pure private liability rule, as Sygenta maintains the option to refuse a license, despite its objective of licensing widely;568 therefore, it represents a form of semi-open access.569 Nevertheless, these examples suggest that standardized licenses clearing houses could be used to manage patent pledges that guarantee indiscriminate access. A royalty collection clearing house integrates the primary services offered by the other types of clearing houses; in addition, it takes upon itself the task of collecting and allocating royalties on the basis of its standardised terms.570 The most wellknown examples of royalty collection clearing houses are copyright collecting societies such as ASCAP and BMI.571 However, a royalty collection clearing house for patents has yet to be established.572 Such a clearing house would take licenses from patent holders that would allow it to grant non-exclusive licenses to third parties.573 A royalty collection clearing house also monitors the fulfilment of

565

Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 320-322. Van Overwalle also considers the Science Commons’ GreenXchange Project and Enza Zaden’s e-licensing platforms to represent standardised licenses clearing houses, but both of these initiatives are already inactive. 566 Ibid, 321; "Licensors," Librassay, last modified n.d., accessed 28 October 2017 https://www. librassay.com/LicensorMatrix.aspx. The licensors are predominantly research instututions. Ibid. 567 "Frequently Asked Questions," Syngenta, last modified accessed 28 October 2017 https://www3. syngenta.com/how-we-do-it/corporate-responsibility/frequently-asked-questions/our-business-faq. 568 Ibid. 569 Cf. Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 328. 570 van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics.", 80. 571 Merges, "Contracting into Liability Rules," 1328-1335; van Zimmeren et al., "Clearing House for Diagnostic Testing," 354; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 80. 572 Krauspenhaar, Liability Rules in Patent Law, 30; Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 322. 573 Sheremeta and Gold, "Creating a Patent Clearinghouse in Canada," 19; van Zimmeren et al., "Clearing House for Diagnostic Testing," 354; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 80.

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licensees’ obligations, enforces contracts,574 and may also feature a mechanism for dispute resolution.575 All clearing houses, with the exception of the information clearing house, may facilitate the employment of private liability rules. However, only the royalty collection clearing house establishes an actual private liability rule, by which the patent holder grants the clearing house the right to determine the licensing fees for his patents.576 These instruments differ from patent pools in their governance model, as they typically do not feature a contract between holders of complementary patents.577 Hence, unlike patent pools, clearing houses represent collective, not collaborative, licensing.578 A clearing house may license both complementary and substitute patents579 and offer a wider variety of services than a patent pool.580 Furthermore, clearing houses are not typically connected to a pre-existing de jure or de facto standard.581 Assuming that the royalty collection clearing houses are the most complex of the instruments, their sufficiency in terms of resolving the overprotection problems of the patent system is explored next. In this regard, it is presumed that a royalty collection clearing house is an independent, profit-driven intermediary that is founded voluntarily by private actors who are unaffiliated with upstream or downstream market participants.582

574

Graff and Zilberman, "Intellectual Property Clearinghouse."; van Zimmeren et al., "Clearing House for Diagnostic Testing," 353-354; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 80; Aoki and Schiff, "Third-Party Clearinghouses and Intellectual Property Licensing," 4, 11; van Zimmeren, "IP Coordination Models," 139. 575 van Zimmeren et al., "Clearing House for Diagnostic Testing," 353-354; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 80; van Zimmeren, "IP Coordination Models," 139. 576 Krauspenhaar, Liability Rules in Patent Law, 29-30; Cf. Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 102; "Patent Pools and Clearinghouses in the Life Sciences," 328, in which the author also considers standardised licensing pools to represent a form of private liability rules. 577 Aoki and Schiff, "Promoting Access to Intellectual Property," 194-196. 578 Van Overwalle, "Individualism, Collectivism and Openness in Patent Law," 104. 579 van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 105. 580 Aoki and Schiff, "Promoting Access to Intellectual Property," 195-196. 581 Cf. Geertrui Van Overwalle, "Designing Models to Plear Patent Thickets in Genetics," in Working within the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society, ed. Rochelle C. Dreyfuss, Harry First, and Diane L. Zimmerman (Oxford: Oxford University Press, 2010), 319-320. 582 On the different governance constellations of royalty collection clearinghouses, see van Zimmeren et al., "Clearing House for Diagnostic Testing," 355; Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 325; "Patent Thickets in Genetics," 321-322; Krauspenhaar, Liability Rules in Patent Law, 163-164. On the importance of the independence of a clearing house in terms of its economic efficiency, see Aoki and Schiff, "Promoting Access to Intellectual Property," 199.

3.3 Private Liability Rules

3.3.4.2

151

Efficiency Gains

Royalty collection clearing houses are considered to have potential to alleviate the search costs associated with patent licensing by providing information concerning patent holders and reducing the other transaction costs involved in licensing.583 They may alleviate royalty-stacking problems by means of standardizing licensing fees and employing anti-royalty stacking clauses.584 By enabling a more efficient clearance of rights in the context of patent thickets,585 they alleviate the anticommons problems586 and reduce the occurrence of hold-up situations.587 Royalty collection clearing houses are believed to be favourable in terms of patent holders’ incentives to innovate588 by virtue of increasing licensing revenues.589 They also benefit from the economies of scale,590 thus reducing the costs of monitoring licensees591 and litigation.592 Furthermore, they foster competition for innovation593 and facilitate downstream market entry.594 Overall, ideally, a royalty collection clearing house would represent a “licensing supermarket”595 that promotes both static and dynamic efficiency.596 Despite the anticipated efficiency gains, a number of factors make the emergence of large royalty collection clearing houses for patents unlikely. The success of a

583

Graff and Zilberman, "Intellectual Property Clearinghouse," 1179-1180; Sheremeta and Gold, "Creating a Patent Clearinghouse in Canada," 19; Nicol and Hope, "Cooperative Strategies," 95; Aoki and Schiff, "Promoting Access to Intellectual Property," 197; Baltzer, "Clearinghouse," 533; van Zimmeren et al., "Clearing House for Diagnostic Testing.", 356. 584 van Zimmeren and others, 356. 585 Graff and Zilberman, "Intellectual Property Clearinghouse," 1179-1180; Krauspenhaar, Liability Rules in Patent Law, 165. 586 van Zimmeren et al., "Clearing House for Diagnostic Testing," 356; Aoki and Schiff, "Promoting Access to Intellectual Property," 199, in which the authors condition the effect on complementarity of technology; Krauspenhaar, Liability Rules in Patent Law, 156. 587 Nicol and Hope, "Cooperative Strategies," 95; Aoki and Schiff, "Third-Party Clearinghouses and Intellectual Property Licensing", 9. 588 van Zimmeren et al., "Clearing House for Diagnostic Testing," 356; Reiko Aoki and Aron Schiff, Collective Rights Organizations and Investment in Upstream R&D Investment, Discussion Paper No. 457 (Tokyo: Institute of Economic Research, Hitotsubashi University, 2009): 3-4. 589 Aoki and Schiff, Collective Rights Organizations and Investment, 27; "Third-Party Clearinghouses and Intellectual Property Licensing," 11. 590 Aoki and Schiff "Promoting Access to Intellectual Property," 197, on benefits in negotiations and technology transfer. 591 Ibid, 202. 592 Krauspenhaar, Liability Rules in Patent Law, 159. 593 Graff and Zilberman, "Intellectual Property Clearinghouse.", 1180. 594 Aoki and Schiff, "Promoting Access to Intellectual Property," 199. 595 van Zimmeren, "IP Coordination Models," 138. 596 Aoki and Schiff, "Promoting Access to Intellectual Property," 199.

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clearing house is conditional on “continuous and ongoing demand” for its patents.597 Royalty collection clearing houses operate in a two-sided market, with patent holders on one side and the prospective downstream licensees on the other. The demand in the upstream market is dependent on the demand expressed and prices charged in the downstream market; in addition, these markets are subject to network effects.598 The establishment of a royalty collection clearing house would require attracting customers from both sides, which is considered to be very challenging.599 The structure, management, and revenue model of such a clearing house should aim to accommodate the interests of the relevant participants in both markets.600 In addition, the establishment of a standardised licensing scheme is very difficult and costly.601 As a consequence, the expenses involved in founding a royalty collection clearing house are likely to be very high, especially considering the expertise required to perform its various functions.602 Clearing houses may also suffer from the “matchmaker’s dilemma”, wherein patent holders and licensees connected by the clearing house forego using its services and negotiate licenses privately, without incurring the administrative fees of the clearing house.603 The private incentives for setting up a royalty collection clearing house are conditional on the prospect of profiting from the reducing of transaction costs on the technology market 604 and the possibility of recouping the costs of setting up the instrument. In this regard, Merges has acknowledged the potential need for governmental support in the establishment of clearing houses.605 Establishing a royalty collection clearing house for patents would be more difficult than one for copyright-protected works.606 Most importantly, a

597

van Zimmeren, et al., "Clearing House for Diagnostic Testing," 354. Similarly, see Van Overwalle, "Exclusive Ownership Versus Open Commons," 146. See Merges, "Contracting into Liability Rules," 1327-1332 on the importance of repeated interactions for the emergence of collective rights organizations. 598 Aoki and Schiff, "Promoting Access to Intellectual Property," 200; Aoki and Schiff "Third-Party Clearinghouses and Intellectual Property Licensing," 3. In the event that the royalty collection clearinghouse for patents would evolve into a system that is equivalent to a copyright collection society, they would no longer face the problem of gaining revenue from a two-sided market, as they would instead seek to maximize the patent holders’ royalty rates; see Aoki and Schiff "Promoting Access to Intellectual Property," 199-200. 599 Aoki and Schiff, "Promoting Access to Intellectual Property," 200. 600 van Zimmeren, "IP Coordination Models," 125-126. 601 Similarly, see Anne Kelley, "Practicing in the Patent Marketplace," University of Chicago Law Review 78 (2011): 123. 602 van Zimmeren et al., "Clearing House for Diagnostic Testing," 356. However, the costs of founding a royalty collection clearing house may still be lower than those associated with the establishment of a patent pool. Krauspenhaar, Liability Rules in Patent Law, 160. 603 Graff and Zilberman, "Towards an Intellectual Property Clearinghouse," 8. 604 Barnett, "Anti-Commons Revisited," 130. 605 Merges, "Contracting into Liability Rules," 1391. 606 The reasons for this are due to the differences between patent law and copyright law’s objects of protection, the frequency of the use of patented inventions, the investments required to produce

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wide-ranging royalty collection clearing house would represent contracting to a general liability rule. As patent holders are not incentivized to openly license strategically important patents,607 it would be highly unlikely that all patent holders or even the patent holders within a particular industry would voluntarily join such an instrument,608 particularly if it would license patents at a flat rate.609 Furthermore, larger companies with the substantial patent portfolios and expertise required to license independently are likely to be reluctant to use such an instrument.610 Hence, royalty collection clearing houses are more likely to appeal to SMEs and universities611 and are at risk of becoming markets for lemons.612 As a consequence, a royalty collection clearing house would be unlikely to resolve hold-up problems.613 Doubts have also been cast concerning the potential of royalty collection clearing houses to prevent royalty stacking, especially in comparison to patent pools.614 In addition, a royalty collection clearing house with insufficient coverage of the relevant patents in the industry could not resolve the anticommons problems. It may also fail to facilitate technology transfer when successful licensing would require know-how transfer or the employment of contractual instruments to support more interactive or collaborative business arrangements.615 Finally, a royalty collection clearing house that successfully attracts a critical mass of patent holders may actually foster anticommons problems by disrupting the existing patterns of non-enforcement and “wilful ignorance” of patents, which function as de facto research exceptions.616

them, and the availability of substitutes; see van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 109-113; Michael Spence, "Comment on the Conceptual Framework for a Clearinghouse Mechanism," 166-167. 607 Esther van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics : Conceptual Framework," 82. 608 Sheremeta and Gold, "Creating a Patent Clearinghouse in Canada," 19; van Zimmeren and others, 356 609 van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 102. 610 Ibid, 82. 611 Ibid, 110. 612 Akerlof, "Market for 'Lemons' : Quality Uncertainty and the Market Mechanism." 489-490; Van Overwalle, "Patent Thickets in Genetics," 319. 613 van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 82, 109; Michael Spence, "Comment on the Conceptual Framework for a Clearinghouse Mechanism," 166; Krauspenhaar, Liability Rules in Patent Law, 160. 614 Nicol and Hope, "Cooperative Strategies," 95; Spence, " Comment on the Conceptual Framework for a Clearinghouse Mechanism," 165-166; Hanns Ullrich, "Gene Patents and Clearing Models : Some Comments from a Competition Law Perspective," 347. 615 van Zimmeren, et al., "Clearing House for Diagnostic Testing," 356; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 110-111. 616 Michael Spence, "Comment on the Conceptual Framework for a Clearinghouse Mechanism," 163. On the other possible welfare-reducing effects that may stem from the reduction of transaction costs, see Reiko Aoki and Aaron Schiff, "Intellectual Property Clearinghouses : The Effects of Reduced Transaction Costs in Licensing," Information Economics & Policy 22, no. 3 (2010): 218.

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Royalty collection clearing houses may have a negative impact on competition.617 Due to the fact that the structure of a royalty collection clearing house differs from that of a patent pool, it is less likely to be treated as such during an antitrust assessment. As a consequence, the safe harbour of TTBER Guidelines for patent pools is unlikely to apply clearing houses.618 However, from the perspective of competition law, such an instrument could be equated with copyright collective societies, thus raising the importance of non-discriminatory practises and reasonable licencing rates.619 Furthermore, through the exchange of sensitive information, clearing houses may provide a forum for collusion.620 Royalty collection clearing houses are likely to feature both substitute and complementary technologies, and scholarly opinions differ with regard to the possible antitrust risks that this entails. The TTBER Guidelines were not drafted with the intention of addressing multilateral constellations that do not seek to license bundled complementary technology. As a consequence, antitrust assessments of clearing houses are subject to considerable legal uncertainty.621 Some scholars recommend that royalty collection clearing houses offer bundled essential patents for relevant technologies.622 However, a less knowledgeable licensee may on occasion fail to recognize that a bundle features substitutable technology. On this basis, it has been suggested that clearing houses should only bundle technology on the request of an individual licensee.623 In the author’s opinion, the bundling of frequently licensed technology is likely to yield efficiency gains. However, by offering bundles of complementary technology, a royalty collection clearing house shifts itself closer to patent pools’ raison d'être. As a consequence, the TTBER Guidelines’ safe harbour for patent pools would be mutatis mutandis also relevant to royalty collection clearing houses.624 This is consistent with earlier propositions regarding the necessity of royalty collection clearing houses being able to grant non-exclusive licenses,625 offer the patent holders the possibility of licensing all of their patents

617

Van Overwalle et al., "Models for Facilitating Access to Patents on Genetic Inventions," 146; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 109. 618 Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 326; Kock and ten Have, "Prototype of a Patent Clearing House in the Life Science Industry," 510. 619 van Zimmeren et al., "Clearing House for Diagnostic Testing," 354. On antitrust assessment of copyright collective societies, see van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 93-100; Jan Corbet, "Case 7 : The Collective Management of Copyright and Neighbouring Rights : An Example of a Royalty Collection Clearinghouse," in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press), 158-160. 620 Hanns Ullrich, "Gene Patents and Clearing Models : Some Comments from a Competition Law Perspective," 345. 621 Kock and ten Have, "Prototype of a Patent Clearing House in the Life Science Industry," 512. 622 Graff and Zilberman, "Clearinghouse for Agricultural Biotechnology," 355. 623 Aoki and Schiff, "Third-Party Clearinghouses and Intellectual Property Licensing", 24. 624 TTBER Guidelines (2014), para 261. On patent pools from the perspective of competition law, see Sect. 3.3.3.2. 625 van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 109.

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independently,626 and establish safeguards intended to ensure that the bundles do not contain non-essential patents.627 In addition, they should limit opportunities for the sharing and transmitting of sensitive information.

3.3.4.3

Future Perspectives for Clearing Houses

Royalty collection clearing houses and, analogously, other forms of clearing houses cannot resolve the problems of unjustified refusals to license, hold-ups, or royalty stacking. Royalty collection clearing houses are unlikely to attract sufficient numbers of patent holders willing to license their patents and are therefore expected to have little effect on mitigating anticommons problems. While, these instruments may emerge in the future in the context of individual fields of technology,628 their current relevance for the resolution of the patent system’s overprotection problems is merely theoretical.629 While clearing houses in the form of the private liability rule have little relevance in terms of resolving overprotection problems, several arguments support the stance that the less complicated forms of clearing houses have the potential to alleviate the problems caused by excessive search and transaction costs, which create a tragedy of anticommons through underuse as well as leave follow-on innovators vulnerable to hold-up risks. In addition, recent research suggests that clearing houses may be capable of resolving blockages caused by individual patents.630 First, neither the literature on broad MCM nor that on OI expresses a preference for a royalty collection clearing house. Barnett expects that third-party intermediaries will resolve transaction costs problems in an anticommons context631 without assuming that they will turn to the complicated organizational structure of a royalty collection clearing house. Roijakkers et al. stress the role of “innomediaries” in the facilitation of companies’ searches for externally developed knowledge.632 Hence, from the perspective of OI, clearing houses may offer a means by which the skills required in managing IP in OI processes can be outsourced. Furthermore, they may foster more interactive R&D by facilitating coupled OI processes between companies and other organizations.633 626

van Zimmeren et al., "Clearing House for Diagnostic Testing," 355; van Zimmeren, "Clearinghouse Mechanisms in Genetic Diagnostics," 107. 627 Aoki and Schiff, "Third-Party Clearinghouses and Intellectual Property Licensing", 25-26. 628 As suggested, for example, Graff and Zilberman, "Towards an Intellectual Property Clearinghouse for Agricultural Biotechnology," 9; van Zimmeren et al., "Clearing House for Diagnostic Testing," 354-356 ; Krauspenhaar, Liability Rules in Patent Law, 165. 629 See ibid, 169. 630 Van Overwalle, "Patent Pools and Clearinghouses in the Life Sciences," 332. 631 Barnett, "Anti-Commons Revisited," 130. 632 Roijakkers, Zynga, and Bishop, "Getting Help from Innomediaries." 242-243, 247-255. 633 Krauspenhaar, Liability Rules in Patent Law, 162, referring only to royalty collection clearinghouses. See also ibid, 162-170.

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Second, clearing houses may, consistently with OI, enable companies to find licensees for patents that they do not employ themselves.634 Other types of clearing houses may collect and record patent pledges and facilitate the conclusion of licensing agreements on that basis of the commitments to license indiscriminately. It is therefore relevant to explore whether such instruments could help to alleviate the uncertainties associated with patent pledges.635 Finally, for a clearing house to operate in a two-sided market, it is sufficient to reach a critical mass with respect to one of the markets, as, by virtue of network effects, the demand on the other market will follow.636 Patent holders or prospective licensees may also be encouraged to use clearing houses by virtue of policy choices.637 The existing literature on clearing houses has observed that patent holders are disincentivized to join licensing-based clearing houses on a level that would create the desired efficiencies. However, it is less clear what would provide the added value required for potential licensees to rely on such instruments en masse. Hence, while clearing houses will likely not solve overprotection problems, the potential of clearing houses other than those for royalty collection in terms of alleviating such problems remains unexplored. These instruments are easier to set up than royalty collection clearing houses and are likely to benefit from advances in the sectors of legal design and legal technology, such as the use of artificial intelligence or blockchain.638 Given the assumption that clearing houses will, in the near future, increase their efficiency and develop a wider portfolio of services, their ability to reduce transaction costs and prevent the tragedy of the anticommons will become worthy of reassessment.

634

See Roijakkers, Zynga, and Bishop, "Getting Help from Innomediaries," 243; van Zimmeren, "IP Coordination Models," 139, referencing Esther van Zimmeren, Sven Vanneste and Geertrui Van Overwalle, Patent Licensing in Medical Biotechnology, (Acco 2011). 635 For a discussion on enforceability of patent pledges see Sect. 3.3.1.2. 636 Aoki and Schiff, "Third-Party Clearinghouses and Intellectual Property Licensing", 13. 637 Ibid, 16. 638 On legal design and technology, see for example Nigel Swycher, "Wolter Kluwer Partners with AI Analytics Company, Aistemos.," Kluwer Patent Blog, last modified 27 October 2017, accessed 31 October 2017 http://patentblog.kluweriplaw.com/2017/10/27/wolters-kluwer-partners-with-aianalytics-company-aistemos/; Astrid Kohlmeier, “Legal Design : Die perfekte Kombination aus Recht und Design” Legal Revolutionary (2018): 42-55; Mark A. Cohen, "Global Legal Tech Is Transforming Service Delivery," Forbes, last modified 29 August 2017, accessed 31 December 2018 https://www.forbes.com/sites/markcohen1/2017/08/29/global-legal-tech-is-transforming-ser vice-delivery/#1393bd2a1346; "Legal Tech Lab," University of Helsinki, last modified 2017, accessed 31 October 2017 https://www.helsinki.fi/en/networks/legal-tech-lab.

3.3 Private Liability Rules

3.3.5

Open Viral Patent Licenses

3.3.5.1

Definition

157

As discussed in Sect. 3.2.6, open viral licenses seek to ensure sustainable access for follow-on innovators and have their origin in FOSS licenses. Adapting them to patents may entail a number of efficiency gains, as open viral software licenses reduce “the informational and transactional costs of licensing”.639 In the context of patents, royalty-free licensing in an open viral manner could prevent royaltystacking.640 Open viral licensing may introduce efficiency gains by enabling competition between developers641 and reduce the costs of follow-on innovation. In addition, such licensing reduces the risks faced by innovators’ by making fellow innovators’ successes and failures more transparent.642 To date, there is no scalable, standardized open license for patents with a viral effect similar to the GPL or certain Creative Commons licenses.643 In principle, open viral initiatives may be relevant to both patent holders following the MCM and UOCI. In the first example, the participants in an open viral initiative would seek to resolve an existing problem, such as the excessive transaction costs in a patent thicket, and thus prevent future anticommons problems from emerging.644 Hence, such initiatives do not follow the UOCI model, which assumes that contributions will be made by a distributed group of innovators, but rather introduces an open platform, “which, at an intermediate stage of development of new technologies, allow[s] access to research tools and/or materials because of some generally shared interest in equal access.”645 In the UOCI model, a patented invention(s) would emerge as the outcome of the innovation activity of either a single user-innovator or the distributed collaborative efforts of several innovators.646 Hence, such initiative would grow “bottom-up”.647 Patented inventions would be licensed under an open viral license to ensure that the protected innovation(s) can be freely developed further following the UOCI model. The open viral license would thus support the UOCI innovation process.648

639

Schultz and Urban, "Protecting Open Innovation," 19. Hope, "Open Source Genetics," 181. 641 Ibid, 180-181. 642 Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 827. 643 Schultz and Urban, "Protecting Open Innovation," 8-9; Van Overwalle, "Inventing Inclusive Patents," 238-246. 644 Merges, "New Dynamism in the Public Domain," 192, 200, 201. 645 Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 305. 646 See Sect. 3.1.3.1. 647 Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 806. 648 See Sect. 3.1.3.2. 640

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Hope identified three key objectives for translating open viral licenses from software to other fields of technology: “credible commitment”, “competition”, and “copyleft”.649 A credible commitment exists when the technology subject to a license is protected by an IPR and the terms of the license are enforceable.650 The enforceability of open viral licenses stems from the underlying IPR; this right can be enforced both against those who use the IP without a license and those who use it against the licensing terms.651 Hence, unlike technology that is freely revealed to the public domain, the benefit of the credible commitment is that technology subject to an open viral license would be protected both from the initial licensor and third parties’ attempts at enclosure. The credible commitment requirement increases the incentives to adapt and contribute to the development of the technology in question by minimizing the legal risks involved.652 Open viral software licenses have been found to be enforceable.653 Some scholars expect that courts are likely to treat open viral licenses for patents in a similar manner,654 but the issue remains unclear. Furthermore, certain licensing terms, such as transfer of know-how,655 are not attached to the IPR and therefore have only an inter partes effect.656 The criterion of competition “refers to a level playing field between the licensors and other users or distributers of the [. . .] technologies with respect to the legal freedom to use and commercialize both the technology itself and any downstream innovations.”657 The condition refers to non-discrimination between users658 with regard to technology659 and the type of use.660 According to Hope, the objective of competition serves as a counterpart of “forking” the software code, representing the freedom to initiate a new direction for a software development project independent of the control of the initial project leader.661

649

Hope, "Open Source Genetics," 179. Ibid. 651 Dusollier, "Commons as a Reverse Intellectual Propery," 276-277. 652 Hope, "Open Source Genetics," 179. 653 GPL, LG München, 19 May 2004, IIC 2004, 73; Jacobsen v. Katzer, 535 F3d 1373, 1381-1383 (Fed. Cir. 1995). 654 Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 818-819, 829. 655 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1408. 656 Dusollier, "Commons as a Reverse Intellectual Propery," 276-277. 657 Hope, "Open Source Genetics," 180. 658 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1409. “Any person to whom the technology is distributed may in turn become a licensee and exercise the same rights of distribution.” Hope, "Open Source Genetics," 180. 659 See Schultz and Urban, "Protecting Open Innovation," 23-24. 660 Hope, "Open Source Genetics," 180. Hence, an open viral license cannot feature restrictions on the use or distribution of a technology and its improvements or attempt to segment the market or discriminate against certain licensees. Ibid. 661 Ibid, 181-182. 650

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Finally, sustainability of the access depends on copyleft, the only exception to the licensees’ freedom to compete:662 “In the patent context, copyleft refers to a license mechanism by which the anti-exclusion effect propagates along the improvements on the original invention.”663 Each licensee is thus assured of on-going access to the subsequent innovator’s contributions.664 None of the initiatives typically discussed in relation to open viral patent licensing correspond to the principles outlined by Hope.665 The most important example, CAMBIA’s BiOS initiative, sought to establish an UOCI model for sharing and developing biological technologies.666 Its licensing terms require patents to be licensed non-exclusively, royalty-free, and worldwide, whereas both patented and unpatented improvements are subject to a grant-back condition.667 However, such grant-back licenses are not considered to have a viral character,668 as they place the

662

Ibid, 180. Van Overwalle, "Inventing Inclusive Patents," 240. 664 Hope, "Open Source Genetics," 182, 184. However, this is not required of in-house development. Ibid, 182. 665 HapMap sought to establish a sustainable database mapping variations in human DNA sequences. However, the object of its user conditions was information, not patents. See "About the International HapMap Project." National Human Genome Research Institute. Last modified 4 June 2012. Accessed 10 June 2019. https://www.genome.gov/11511175/about-the-internationalhapmap-project-fact-sheet, "Hapmap." National Center for Biotechnology Information. Last modified n.d. Accessed 2 November 2017 https://www.ncbi.nlm.nih.gov/genome/probe/doc/ ProjHapmap.shtml; Boettinger and Burk, "Open Source Patenting," 222; Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1408; Van Overwalle, "Inventing Inclusive Patents," 233, fn 121. The defensive patent license proposed by Schultz and Urban encompasses the establishment of a distributed defensive portfolio by virtue of patent holders’ reciprocal commitments to license their patents royalty-free for defensive purposes. Schultz and Urban, "Protecting Open Innovation," 38-41. However, the proposed model represents an unsustainable, limited form of access. Van Overwalle, "Inventing Inclusive Patents," 247. Open hardware licenses, despite seeking an open viral effect, do not involve patents. Ibid, 240-241, 249. Finally, a clause that precludes the licensing or transfer of a patent without the recipient’s commitment to the licensing terms of the open initiative is not an element of viral openness but instead a contractual instrument intended to ensure the longevity of access. Cf. Maggiolino and Montagnani, "From Open Source Software to Open Patenting - What's New in the Realm of Openness," 823, 824. 666 See "BiOS Initiative." Cambia. Last modified n.d. Accessed 2 November 2017 http://www.bios. net/daisy/bios/bios/bios-initiative.html. The initiative features an information clearing house (Patent Lens), a technology clearing house (BioForge), and a licensing initiative. See Nicol and Hope, "Cooperative Strategies," 96-97. 667 "BiOS Agreements FAQs." Cambia. Last modified. n.d. Accessed 10 June 2019, https://cambia. org/bios-landing/bios-faqs-bios-agreements/. 668 Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1415. 663

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participants in an initiative in a more favourable position than the rest of the public.669 Hence, the BIOS initiative represents semi-open access.670

3.3.5.2

The Challenge of Meeting Patentability Criteria

There is still room for the development of an open viral licensing model for patents.671 However, the adaptation of open viral licenses to patents is unlikely due to the differences in the nature of patent and copyright protection and the particularities of the UOCI process. The credible commitment of an open viral license rests upon the existence of an IPR, which innovators following the UOCI model will have considerable difficulties in obtaining. The nature of the UOCI process generally contradicts patent law’s novelty requirement (§ 3 PatG). Free revealing throughout the innovation process is a crucial element of UOCI, as it enables an indefinite number of users to improve an innovation incrementally.672 In order to seek a patent, a UOCI innovator would need to postpone the disclosure of his invention to the community.673 This may have adverse effect on the overall dynamic efficiency gains of UOCI by retarding the exchange of information and further cycles of improvement. Due to the novelty requirement in patent law, solutions in which access to an invention is offered after it has been patented on open platforms are likely to prevail over UOCI models.674 The modularity of tasks is critical for the success of distributed UOCI.675 As a consequence, individual contributions to a UOCI product are typically incremental and do not fulfil the requirement of non-obviousness (§ 4 PatG).676 While the end-product of a UOCI may involve an inventive step, the publication of incremental improvements during the innovation process will render it unpatentable. In contrast to the non-profit-driven UOCI, innovators following the MCM, OI model, and firm-driven, for-profit UOCI are likely to innovate in-house and therefore experience fewer difficulties in meeting patentability criteria.

669

Nicol and Hope, "Cooperative Strategies," 106; Hope, "Open Source Genetics," 182-184. Furthermore, reach-through clauses do not qualify as open viral licenses. Ibid, 182, 184; Boettinger and Burk, "Open Source Patenting," 228-229. 670 Van Overwalle, "Inventing Inclusive Patents," 243. 671 Ibid, 244. 672 See Sect. 3.1.3.3. 673 Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 302-305. 674 Ibid, 305. 675 See von Hippel, Democratizing Innovation, 11. 676 Asay, "Enabling Patentless Innovation," 436, 464-466.

3.3 Private Liability Rules

3.3.5.3

161

The Incentives to Create Sustainable Access

Due to the application costs, patent protection demands more investments than copyright.677 The costs must be incurred for each jurisdiction in which a patent holder wishes to establish an enforceable viral effect.678 In addition to the costs of acquiring and maintaining patent protection, the expenses incurred in monitoring for infringement and litigation also increase the transaction costs of coordinating an open viral patenting initiative.679 Depending on the field of technology, the investment required for an individual patent may be significantly higher than that incurred in coding software modules. The costs associated with patent protection have an effect on the incentives to obtain a patent and subject it to an open viral license, as well as the incentives to invest in follow-on innovations that build upon virally licensed patents. User and open collaborative innovation rarely relies on patent protection, because the patent system is not suitable for such a distributed approach to innovating. Decentralized OCI communities, let alone individual user innovators, lack the monetary resources required to apply for patents.680 Moreover, applying for a patent would be irrational when an UOCI innovator gains utility from the process of innovating and/or the use of her innovation or is incentivized by altruistic or reputational benefits.681 As a consequence, not-for-profit UOCI innovators are likely to always forego engaging in the costly patenting process. However, companies may nevertheless license patents under open viral license in the public interest.682 Following the MCM, an open viral initiative may also be undertaken in order to prevent the problems associated with patent thickets.683 The absence of rivalry between collaborators is one of the conditions of engaging in UOCI;684 hence, incentives to participate in open viral initiatives are more likely to be present in the development of “fundamental enabling technologies that are not a source of competitive advantage for the companies involved.”685 The incentives are likely to be lower closer to the stage of product commercialization and for companies whose business models rely on exclusivity.686 Companies operating

677

Hope, "Open Source Genetics," 190. Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1433. 679 Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 304-305. 680 Schultz and Urban, "Protecting Open Innovation," 8-9. 681 See Sect. 3.1.3.3. 682 See Ziegler, Gassmann, and Friesike, "Why Do Firms Give Away Their Patents for Free?," 21-23. Not-for-profit open viral initiatives could also be subsidized. von Hippel and von Krogh, "Free Revealing," 302 , 304. 683 Nicol and Hope, "Cooperative Strategies," 102. 684 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1403. 685 Hope, "Open Source Genetics," 186. 686 Ibid. 678

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under the proprietary model may be reluctant to improve upon virally licensed patents.687 Innovators operating following a for-profit UOCI model may have a number of incentives to undertake open viral patent licensing,688 as long as the complementary sources of revenues cover the costs of UOCI innovation.689 Finally, for a follow-on innovator, openness also needs to be more attractive than a strategy that involves obtaining complementary or blocking technology, with a consequent improvement in her cross-licensing negotiation position with regard to the patent holder, who seeks to license under the open viral initiative. The market positioning of the patent holder and the follow-on innovator, the costs of innovating on that market and the prospect of the market success of their technologies affect the follow-on innovator’s strategy choice.690

3.3.5.4

Protection Against Hold-ups

The rights afforded by copyright protection are conditional on access to the actual work or software; FOSS instrumentalizes this connection by conditioning the access to software as a copyright protected work on the acceptance of the licensing terms.691 The viral effect of the license is based on the chain of contracts that bind each user and modifier of the software.692 In patent law, it is difficult to embed the copyleft license in the object of the license in a manner similar to that of FOSS and Creative Common licenses.693 Follow-on innovators are free to patent improvements to the initial patent, because patent law does not feature a right similar to the right to adaptations.694 As a consequence, the acceptance of a license alone does not create a viral effect; rather, the effect derives from the licensing terms’ definition of an improvement and not the exclusive rights to patent.695 One solution would be to condition the viral effect to concern patents with overlapping claims.696 In the absence of a compulsory

687

See Gal, "Viral Open Source," 482-487, 505. See Sect. 3.1.3.4 and note 637. 689 Lerner and Tirole, "Some Simple Economics of Open Source," 231. Theoretically, open viral licensing in return for royalty payments would correspond to the OI model. 690 Ullrich, "Open Innovation, the Patent Exclusivity and Knowhow Secrecy," 303-304. The strategy to pursue cross-licensing negotiations reflects an OI, rather than UOCI approach. 691 Boettinger and Burk, "Open Source Patenting," 225. 692 Dusollier, "Commons as a Reverse Intellectual Property," 276. 693 Dusollier ,"Sharing Access to Intellectual Property through Private Ordering," 1414-1416. 694 §§ 3, 23 and 69c UrhG. 695 David W. Opderbeck, "Penguin's Genome, or Coase and Open Source Biotechnology," Harvard Journal of Law & Technology 18, no. 1 (2004): 199-200; Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1418-1420. 696 Boettinger and Burk, "Open Source Patenting," 225-227. 688

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license,697 the exercise of such dependent patents could be precluded by the owner of the first patent. Nevertheless, open viral initiatives cannot be imposed on those who exercise IP in a more exclusive manner.698 Due to the absolute nature of patent protection, even successful open viral licensing initiatives remain vulnerable to enclosures by third-party patent holders who have not agreed to the licensing conditions.699 Hence, an open viral license would not provide protection against hold-ups, unjustified refusals to license, or excessive royalties.

3.3.5.5

Normative Recommendations

The author is not convinced that the benefits of the open viral software licenses used in UOCI are transferable to patents due to the differing objects of protection in patent and copyright laws. Even if an enforceable open viral licensing initiative were to be developed in the future, its use is likely to be marginal, and it will likely not resolve the overprotection problems of the patent system. Nevertheless, in the absence of an open viral patent license, more narrowly open forms of licensing, such as grant-back conditions, may be sufficient to yield some desirable economic efficiencies,700 at least with regard to uses that follow the MCM and OI. They may also be appropriate for certain for-profit UOCI models adapted by companies. Nevertheless, several scholars have supported the establishment of an alternative, more inclusive regime for IPRs that would entitle their holders only to permit others to use their resources.701 Van Overwalle’s proposition encompasses “inclusive patents” that would not entitle to a right to exclude; rather, a holder would only be able to include and to demand royalties for the use of the patent. Inclusive patents would be subject to the general criteria of patentability, but the costs of obtaining them should be as low as possible. An inclusive patent would be subject to sustainable and universal access, either on the basis of private or public ordering.702 The initiative is also justified by the presumption of the desirability of sustainable access in the context of increased technological innovation.703

697

Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1419-1420. On compulsory licenses for dependent patents, see Sect. 6.4.1. 698 Ibid, 1434. 699 Boettinger and Burk, "Open Source Patenting," 225-227. 700 See Dusollier, "Sharing Access to Intellectual Property through Private Ordering," 1419; Van Overwalle, "Inventing Inclusive Patents," 244. 701 See Dusollier, "Commons as a Reverse Intellectual Property," 279-281; Chien, "Opening the Patent System," 857. 702 Van Overwalle, "Inventing Inclusive Patents," 249-262. See also Chien’s proposal for “defensive-only” patents, which would entitle patentees to the right to exclude when they become targets of patent litigation. Chien, "Opening the Patent System," 857-862. 703 Van Overwalle, "Inventing Inclusive Patents," 207, 225-226, 269-271.

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An inclusive patent regime is hypothesized to accommodate both patentees operating in OI model and UOCI.704 The author is not convinced of the need to establish an inclusive patent regime. First, the proposed instrument resembles a license of right.705 While inclusive patents would indeed be appropriate for supporting OI, considering the reported incentives to employ licenses of right, the instrument is likely to have limited popularity and suffer from the inclusion of low-value patents.706 Second, the instrument’s target group, namely technical innovators who follow the not-for profit UOCI model, will likely not apply for inclusive patents, no matter how low the application fee would be. The mere drafting of patent claims is too costly for an UOCI innovator to undertake in the absence of subsidies.707 However, in comparison to the current patent system, inclusive patents could provide greater incentives for for-profit UOCI innovators to ensure sustainable access by reducing the costs of obtaining protection. Finally, the assumptions that underlie inclusive patents remain unconvincing. Sustainable openness, when applied to patents, does not yield positive social welfare effects in every situation. It can discourage follow-on innovation by companies operating under a proprietary model of innovation and exacerbate anticommons problems.708 The problem is aggravated in relation to patent protection because inventing around unsubstitutable patents may prove impossible. Furthermore, unlike software protected by copyright, patented inventions must typically be embodied in physical products in order to be disseminated and consumed. User innovators have been found to lack sufficient incentives to disseminate their innovations.709 Considering that companies enjoy, at least until 3D printing becomes more prevalent, the benefit of economies of scale in manufacturing products710 and that patents may be necessary in certain contexts to incentivize further development, commercialization, and dissemination of innovation, the positive social welfare effects of sustainable openness for patents are not without exceptions.711 704

Ibid, 262-263. An inclusive patent differs from a license of right in that the patent holder chooses not to exercise the right to exclude ex ante, that she remains free to determine the level of royalties, and that the improvements made to the patent may be made sustainably accessible, ibid, see 250, 255-258. 706 For an overview of the incentives to employ licenses of right, see Sect. 3.3.2.4. 707 See von Hippel and von Krogh, "Free Revealing," 302 , 304. 708 See Gal, "Viral Open Source," Ibid, 482-487, 505; Lambrecht, "Fencing the Commons to Protect It from Appropriation?" 709 See de Jong et al., "Market Failure in the Diffusion of Consumer-Developed Innovations," 1863; von Hippel, Eric, et al., "Market Failure in the Peer-to-Peer Diffusion of User Innovations,” 121, 124. 710 Baldwin and von Hippel, "Modeling a Paradigm Shift," 1408-1409. The 3D printing sector has featured a number of patent disputes, including a case where a commercial company sued an entrant that emerged from an UOCI community. The increased litigation in the sector may hinder UOCI practices that rely on 3D printing. Lukaszewicz, "Patent Use Exception for User-Generated Inventions," 37-42. 711 In this regard, the inclusive patents proposed by Van Overwalle should feature certain balacing safeguards, such as “reverse” compulsory licenses or exceptions in favour of innovators whose 705

3.4 Conclusions Regarding Open Approaches to Innovation

165

On these grounds, instead of focusing on the creation of viral openness, it would be more relevant to find solutions based on public ordering that would sustain both UOCI and innovation that relies on the incentivising effect of a patent.712 The key is to prevent the foreclosure of UOCI initiatives, not dissemination of a product embodying an invention that emerges from a UOCI initiative or follow-on innovation that does not conform with the UPCI model. The existing exceptions and compulsory licenses do not sufficiently guarantee the freedom of UOCI.713 A new exemption from patent protection in favour of user innovators is likely to be the most appropriate instrument for protecting UOCI communities from the interference of patent holders.714 Exceptions in favour of UOCI would represent a sustainable semiopen solution, wherein those engaging in UOCI would have access to patents and their follow-on developments and be able to freely develop them further without the risk of foreclosure. Simultaneously, owners of pre-existing patents, as well as follow-on innovators who need patent protection to incentivise follow-on innovation, may continue exercising their patents either in an exclusive or restrictedly open manner outside of the UOCI community in question. What still requires more research are the relevant IP rights, incentives, and social welfare effects at play when a UOCI-type of innovation transitions from a non-profit initiative towards commercialization.

3.4 3.4.1

Conclusions Regarding Open Approaches to Innovation The Sufficiency of OAI to Resolve Overprotection Problems

The open approaches to innovation, generally, have welfare-enhancing effects. Private ordering instruments that seek to establish open or open viral access may reflect the MCM, OI or UOCI, or even follow several OAI models simultaneously.715 However, these instruments do not fully accommodate the interests of follow-on innovators due to their insufficient legal bindingness and, more importantly, the lack of incentives to employ them.

R&D efforts are completely conditional on the incentivizing effect of the right to exclude. However, considering that exclusivity is only one of the many means of obtaining competitive advantage, the “reverse” exceptions should be narrowly constructed. 712 User and open collaborative innovation scholars have viewed the patent regime as insufficiently accommodating innovative practices alternative to those that rely on incentive theories and strive to commercialize innovative products. von Hippel, Democratizing Innovation, 2-3. 713 Lukaszewicz, "Patent Use Exception for User-Generated Inventions," 168-174, 208. 714 See Strandburg, "Users as Innovators," 505-540 in which the author proposes a research use exemption; see Lukaszewicz, "Patent Use Exception for User-Generated Inventions," 214-217, for a proposal for a general exemption for not-for-profit UOCI. 715 Consider, for example, the heterogenous to use patent pledges, see Sect. 3.3.1.1.

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Of the instruments reviewed, patent pledges do not represent actual private liability rules, and it is also unclear whether a hypothetical open viral patent license may be classified as such. Both of the instruments are insufficiently legally binding and are therefore possibly unenforceable. Follow-on innovators who rely on patent pledges or patent licenses with allegedly viral effect remain vulnerable to market failures if the patent holder decides to change his strategy during the lifetime of the patent. Furthermore, the assignment of patents can threaten their accessibility to follow-on innovators.716 Consequently, the insufficient enforceability and longevity of some of the private liability rules make them unsuitable in terms of resolving the market failures associated with overprotection. Regrettably, in comparison to the German doctrine (§ 23 PatG), the licenses for right for unitary patents are likely evolve towards more fragile longevity. The review also reaffirms previous findings regarding the insufficiency of private liability rules to resolve market failures of overprotection on the grounds of patent holders’ insufficient incentives to license openly.717 First, both licenses of right and certain semi-open constellations have shown signs of a market for lemons and displayed failures in terms of fostering technology transfer of patents subject to a license of right or a patent pledge.718 Second, the welfare-enhancing, procompetitive operations of patent pools are subject to very restrictive conditions. As a consequence of the high costs of initiation and maintenance, they are not formed very often. Third, some of the instruments – specifically, royalty collection clearing houses and open viral licenses for patents – are theoretical and likely to remain so both due to the nature of patent protection and the lack of incentives to employ them. Ultimately, none of the reviewed instruments will be initiated in favour of a disruptive, cumulative follow-on innovation by an individual innovator. Patent holders are not motivated to license all of their patents in an indiscriminate manner. Most importantly, PAEs do not have incentives to join the initiatives that seek to establish indiscriminate and/or sustainable access. Thus, the hold-up problem is unsolvable with the use of private liability rules719 or private ordering in general.

716

For example, a transition from a manufacturing company to an NPE or an interest in entering a neighbouring market can alter a company’s approach with respect to the open licensing of IPRs. In addition, a company’s rise to a market-dominant position by virtue of creating a de facto standard may trigger changes in its open licensing strategies. A new patent owner may also be disinterested in maintaining indiscriminate or sustainable access. 717 Krauspenhaar, Liability Rules in Patent Law, 172. 718 See Sects. 3.2.4. and 3.3.2.4. 719 Krauspenhaar, Liability Rules in Patent Law, 172. See also Shapiro, "Navigating the Patent Thicket," 126, in which the author attributes the hold-up problem to the market failure of imperfect information.

3.4 Conclusions Regarding Open Approaches to Innovation

3.4.2

167

The Suitability of OAI to Alleviate Overprotection Problems

While the open approaches to innovation may not solve the overprotection problems, they do alleviate them. Patent pledges, in combination with clearing houses, offer a flexible instrument for fostering open licensing. Furthermore, the pioneering use of patent pledges appears to also encourage other market players to undertake open initiatives, either by virtue of network effects or indirectly. In the same vein, large patent pools have been found to have an indirect effect on the pricing decisions of non-members, alleviating the risks of excessive pricing and royalty stacking of companies that engage in repeated interactions with pool licensees.720 Furthermore, the fact that a patent holder does not participate in a collective of collaborative open initiatives does not mean that he will not grant access to follow-on innovators—the decision not to join may reflect his preference for OI over MCM and UOCI. The scope and the potential of the favourable effects of OAI in terms of preventing overprotection problems are yet unclear. Generally, in legal research, there is more room for taking into account how the managerial aspect of OI contributes to the prevention of market failures. Considering that hold-up problems largely stem from the excessive transaction costs involved in clearing patents ex ante, it should be investigated further whether technology transfer, open access, and standardised licensing clearing houses may alleviate hold-ups and combat the underuse that results from the excessive transaction costs incurred in negotiating a license. Legal research has few insights with regard to the relevance of IP for UOCI that shifts from a non-profit to a for-profit model, as well as for the incentives for disseminating the innovations that arise from UOCI. Finally, the effects of non-enforcement on follow-on innovation remain unclear. Despite these blind spots, when following the literature on OAI theories, it can be concluded that the patent holders have incentives to grant access to follow-on innovators when a) it produces revenue;721 b) the follow-on innovator has patents complementary to them;722

720

See Mattioli, "Patent Pool Outsiders," 7-9, 17, 22-23, 27-33, 50, 62-64, and the discussion Sect. 3.3.3.3. The Mattioli’s finding confirms both the relevance of Geradin, Layne-Farrar, and Padilla’s presumption on the explanation for the lack empirical findings of royalty stacking presented in Geradin, Layne-Farrar and Padilla, "Assessing the Evidence on Royalty Stacking", 165-168 and the relevance of Barnett’s broad MCM theory explained in "Property as Process," 431-433, 455-456, in connection with patent pools. 721 See Sect. 3.1.2.2. discussing incentives to engage in OI. 722 This motivation is recognized both in the context of MCM, see Sect. 3.1.1, and in relation with OI see Sect. 3.1.2.2.

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c) the patent holder has a source of revenue complementary to licensing or selling products protected by an exclusive right;723 d) the patent holder may receive other benefit from doing so, such as enhanced reputation or access to improved technology;724 e) the patent holder seeks to establish a de jure or a de facto standard or aims to compete against another standard;725 or f) a patent holder is motivated by reasons of public policy and altruism.726 Reasonable transaction costs, the substitutability of a patent,727 non-rivalry between a patent holder and the follow-on innovator,728 sufficient skills in terms of managing IP assets,729 and repeated interaction730 increase the likelihood of licensing to a follow-on innovator. In contrast, a patent holder will not license to a follow-on innovator when the transaction costs are excessively high731 or when exclusivity creates a competitive advantage. The presence of rivalry,732 the unsubstitutability of the patent,733 the lack of the capabilities necessary for successful technology transfer,734 and the unlikelihood of repeated interaction735 further reduce the incentives to provide access to the follow-on innovator. The excessive transaction costs represent a market failure, but a decision not to license or to license in return for a high royalty rate is a market failure only when it is not justified by the dynamic incentive theory. 723

This motivation is recognized both in the context of MCM, see Sect. 3.1.1.2, note 453 and especially in relation with UOCI, see Sect. 3.1.3.3. 724 See discussion on the incentives to engage in UOCI, Sect. 3.1.3.3. 725 The interest to establish a standard is acknowledged by all OAI. For MCM, see Sect. 3.1.1.2 and note 443; for OI, see Sect. 3.1.2.2; for UOCI, see Sects. 3.1.3.3 and 3.1.3.4 and note 638. 726 Altruism and public policy interests, as incentives are most closely associated with UOCI, see Sect. 3.1.3.3, as an incentive, is acknowledged by UOCI, see Contreras, "Patent Pledges," 587, 590-591; Hars and Ou, "Working for Free?," 28; Ziegler, Gassmann, and Friesike, "Why Do Firms Give Away Their Patents for Free?," 21-23. 727 See Arora, Fosfuri, and Gambardella, Markets of Technology, 192-193, 195. 728 See Nikolaus Franke and Sonali Shah, "How Communities Support Innovative Activities : Exploration of Assistance and Sharing among End-Users," Research Policy 32 (2003): 170-171; Baldwin and von Hippel, "Modeling a Paradigm Shift."; Shah, Sources and Patterns of Innovation in a Consumer Products Field, 1401, 1403. 729 See Chesbrough and Ghafele, "Open Innovation and Intellectual Property" 204-206. See also Vanhaverbeke and Cloodt, "Theories of the Firm and Open Innovation," 276. 730 See Merges, "Contracting into Liability Rules," 1321 and fn 76. 731 See Chesbrough and Ghafele, "Open Innovation and Intellectual Property," 197-201. 732 See Nikolaus Franke and Sonali Shah, "How Communities Support Innovative Activities : Exploration of Assistance and Sharing among End-Users," Research Policy 32 (2003): 170-171; Baldwin and von Hippel, "Modeling a Paradigm Shift."; Shah, Sources and Patterns of Innovation in a Consumer Products Field, 1401, 1403. 733 See Arora, Fosfuri, and Gambardella, Markets of Technology, 192-193, 195. 734 Chesbrough and Ghafele, "Open Innovation and Intellectual Property" 204-206. See also Vanhaverbeke and Cloodt, "Theories of the Firm and Open Innovation," 276. 735 See Barnett, "Property as Process," 417–418.

3.4 Conclusions Regarding Open Approaches to Innovation

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A refusal to license is not a market failure when exclusivity is necessary to maintain a patent holder’s incentives to innovate. The rationale of the patent system is indeed to protect such “crown jewel” technologies from free riding. However, pursuant to dynamic incentive theory, patent holders are not meant to internalize all of the externalities stemming from their inventions, and some manifestations of exclusive use, such as hold-ups, are unjustifiable. When the OAI fall short, the compulsory liability rules should seek to reduce the problem of excessive transaction costs and its consequences and target the market failures caused by offensive practices.

Chapter 4

Economic Foundations of Compulsory Liability Rules

Compulsory liability rules can focus on achieving a public policy goal, such as access to medicines, but this book concentrates on liability rules that aim at enhancing the patent system’s functional efficiency, such as sustaining dynamic competition. Existing economic research on liability rules focuses on generally applicable statutory licenses, although under the TRIPS Agreement compulsory licenses are meant to be applied only case-specifically. This chapter analyses other economic concerns related to the application of compulsory liability rules, negative effects on incentives to innovate, challenges in patent evaluation, possible hold-out risks, error costs, legal uncertainty, and the instrument’s underuse. It concludes that compulsory liability rules can be designed in a manner that fosters dynamic efficiency while mitigating the unfavourable effects associated with the instrument. A compulsory liability rule may also have an indirect, balancing effect on the licensing negotiations between a patent holder and a follow-on innovator, even when it is not used in practice.

4.1

A Typology

The following Chaps. 4–8 analyse the sufficiency of compulsory liability rules in terms of resolving those market failures that stem from the overprotection of patents and hinder follow-on innovation. According to Krauspenhaar, compulsory liability rules represent one of the three categories of liability rules in patent law. Compulsory liability rules can be characterized as constellations, wherein a patent is “protected by default by a property rule and [. . .] only under certain conditions a person or instance other than the patent owner may decide that liability rule applies”.1 Private liability rules, under which the “legislature may let the patent

1

Krauspenhaar, Liability Rules in Patent Law, 23.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_4

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holder decide if he prefers protection by property or liability rule”2 either contractually or, as in case of licenses of right, without a contract,3 were reviewed in the Chap. 3 of the thesis. The third category is liability rules by default, which covers constellations wherein liability rules apply “independently of the acts of parties [. . .] which could but need not take place directly after the patent grant”.4 The liability rules by default have limited relevance in the context of patent law.5 The compulsory liability rules can be further divided into two categories depending on whether they are available ex ante, before the infringing use of a patent has commenced—as is required from most of compulsory licenses (Art. 31 (b) TRIPS)—or ex-post, after the party willing to benefit from the compulsory liability rule has already used, and hence infringed, a patented invention.6 An ex post compulsory liability rule may become available during infringement proceedings or, for example, in proceedings intended to investigate the anticompetitive conduct of a patent holder. The division between ex ante and ex post liability rules is of importance in determining the availability of compulsory liability rules for follow-on innovators both before and after investments in an innovation that utilizes a pre-existing patent have been made. Some market failures, such as a refusal to license, occur before a patent has been used, whereas hold-up problems can arise only after a follow-on innovator has utilized the patent in her innovation. Compulsory liability rules encompass compulsory licenses and limitations of injunctive relief.7 A compulsory license can be based on substantive patent law8 or represent a remedy of competition law. A limitation of injunctive relief is “a constellation in which a patent owner, whose patented invention is used by a third 2

Ibid. Ibid, 7, 23, 98. 4 Ibid, 23. The liability rules by default may also allow a patent holder to switch to the private property rule. Ibid, 23-24. Cf. Castro Bernieri, who classifies liability rules by default as ex ante compulsory licenses “in a sense that a regulation, for instance, statutes, provide for a uniform application in all cases, and sometimes even for the due compensation”. Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 40. 5 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 40, fn 108. A contemporary example of such a constellation is an entitlement to compensation for the use of the subject matter of a published application (§ 33 PatG). Krauspenhaar, Liability Rules in Patent Law, 31. Historically, inventions have been protected by the default liability rule under communist regimes, sometimes with a parallel option to protect an invention by means of a property rule by default. On the “Wirtschaftspatente” of the German Democratic Republic, see ibid, 31-32 and, on the “certifications of authorship” of the Soviet Union, see Bernie R. Burrus, “Soviet Law of Inventions and Copyright,” Fordham Law Review 30, no. 4 (1962): 695-710. 6 Cf. Castro Bernieri, who uses the definition of an ex post compulsory license, “meaning that the ground for granting a license and the royalty will be assessed ex post and on case-by-case basis.” Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 40. 7 The term “limitation of injunctive relief” is interchangeable with the term “denial of an injunctive relief”. The former concept qualifies the status of the compulsory liability rule in the context of the patent system, whereas the latter describes the effect of the compulsory liability rule in infringement proceedings. 8 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 42-43. 3

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party without his consent, under certain conditions, which provide certain degree of flexibility, may not successfully apply for an injunction and may only be entitled to receive a certain amount of remuneration for the future use of the patented invention; the decision as to whether the conditions are fulfilled is made in infringement proceedings initiated by the patentee. The amount of remuneration is usually determined within these proceedings.”9 A limitation to injunctive relief can be qualified as an ex post compulsory liability rule. The possibility of limiting the right to an injunctive relief depends on the available patent law remedies in a particular jurisdiction and the respective margin of discretion of courts to choose between the property and liability rules.10 In addition to patent law, in some jurisdictions the injunctive relief may also be limited on the basis of competition law, pursuant to the civil law principle of abuse of rights.11 Furthermore, its availability may be limited upon collision of patent law with human, fundamental, or basic rights.12 However, this thesis focuses only on those compulsory liability rules that are based on patent and competition law. By definition, compulsory liability rules represent conditional access that is subject to a payment.13 However, certain constellations may also encompass zero-liability rules, such as compulsory licences intended to remedy anticompetitive practices14 and the US doctrine of misuse,15 which represents “an (uncompensated) denial of injunctive relief”.16 With respect to openness, the majority of compulsory licenses are accessible only to certain types of users and hence represent semi-open constellations.17 Given that compulsory licenses ought to be non-exclusive (Art. 31 (d) TRIPS), a patent holder retains the option to grant licenses to others or, alternatively, to exercise his right exclusively against all the other types of users. Furthermore, as the grant of a compulsory license should be considered on individual merits (Art. 31(b) TRIPS), the scope of openness of an individual compulsory license in patent law is limited. However, a compulsory license remedying an anti-competitive practice may provide semi-open access to a larger group of users who were harmed by the anti-competitive conduct of a patent holder.18 Limitations to injunctive relief result from the exercise 9

Krauspenhaar, Liability Rules in Patent Law, 207. Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 43. 11 See the discussion on the Orange Book Standard decision Sect. 8.6.4.2. 12 See Sect. 9.4.3.2 on human rights-based limitations to grant of injunctive relief. 13 Van Overwalle, “Exclusive Ownership Versus Open Commons,” 155, Table 1. 14 See Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 242. 15 For an analysis of the misuse doctrine, see Sect. 7.4. 16 Reto M. Hilty, “Legal Remedies against Abuse, Misuse and Other Forms of Inappropriate Conduct of IP Right Holders,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 377, 393. 17 Van Overwalle, “Individualism, Collectivism and Openness in Patent Law,” 105. Cf. “Exclusive Ownership Versus Open Commons,” 143, fn 34 and Table 1, which state that compulsory licenses can also represent a universal form of openness. 18 See Sects. 8.2.1–8.2.2 on compulsory licenses as behavioural remedies and commitments to grant access. Cf. Sect. 8.2.3 on compulsory licenses as defences in patent infringement proceedings. 10

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of the court’s discretion and therefore represent a limited form of access, as an injunction will be denied only with respect to a particular defendant.19 Finally, compulsory liability rules may be classified on the basis of their justification.20 Pursuant to TRIPS, compulsory licenses can be divided into two different groups: those that aim to maintain the functional efficiency of the patent system and those that secure other policy goals.21 The TRIPS objectives and principles that justify these measures vary depending on the type of compulsory liability rule. Broadly, Art. 8 (2) TRIPS justifies the former group and Art. 8 (1) TRIPS the latter. The first group represents compulsory licenses “that serve to maintain the functional efficiency of the system of protection [. . .] Compulsory licenses ensure an efficient operation of innovation markets by avoiding the risk that patents themselves become barriers to invention and innovation.”22 This group encompasses compulsory liability rules that primarily seek to foster dynamic efficiency and which can be implemented in both patent and competition law. The second group of compulsory liability rules under the TRIPS system serve as policy tools for societal interests other than functional efficiency.23 The compulsory liability rules for public policy typically emphasize allocative efficiency24 or other distributive goals. In this thesis, I will discuss the compulsory licenses that intend to implement public policy goals only to the extent to which they may, at least indirectly, foster dynamic efficiency.

4.2

A Context-Specific Instrument

Generally, the protection of patents by means of a property rule has a positive impact on social welfare by incentivising innovation and the dissemination of technology in the society. Only certain patents, in certain situations, are exercised in an unjustified manner that produces detrimental effects in terms of follow-on innovation and social

See Conde Gallego, Beatriz. “Die Anwendung des kartellrechtlichen Missbrauchsverbots auf “unerlässliche” Immaterialgüterrechte im Lichte der IMS Health- und Standard-Spundfass-Urteile.” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 55, no. 1 (2006): 17, 28. 20 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 37-40, 43. 21 Lamping et al., “Declaration on Patent Protection,” 688. Cf. Straus and Prinz zu Waldeck and Pyrmont and Ullrich, who identify three general categories of compulsory licenses: failure to work, dependent patents, and public interest. Joseph Straus and Wolrad Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation, Policy and Practice in Switzerland, Greece, Italy, the Netherlands, Norway, Poland, Spain and Sweden,” (2004), 3-4, fn 6; Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 336. Their categorisation, however, derives from observations concerning the most common types of compulsory licenses encountered in national legislation. I choose to rely on the looser categories of Lamping et al., as they better address the objectives of these measures and allow for exploration of the flexibilities of TRIPS. 22 Lamping et al., “Declaration on Patent Protection,” 688. 23 Ibid. 24 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 38. 19

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welfare. Such unjustifiable market failures can occur in a very context-specific manner: (a) The same patent can simultaneously be exercised by its holder in alignment with the dynamic incentive theory towards the majority of its licensees and competitors and in a manner that that creates a market failure with regard to an individual follow-on innovator. Hence, while the exclusive right indeed incentivized the creation of the invention in the first place, its exercise may create market failures that affect only certain market participants.25 (b) The same patent can be exercised over its lifetime both in pro-innovative and pro-competitive ways and in a manner that creates market failures that hinder follow-on innovation. The unjustified exercise of a patent may follow changes in the business model of its owner or its assignment to another owner.26 In comparison to the exceptions to and exclusions from the patent scope, compulsory liability rules are applied in a very case-specific manner. The granting of compulsory licenses shall be considered on individual merits (Art. 31 (a) TRIPS), while ex post liability rules are applied in court proceedings concerning an individual case. Compulsory licenses are suitable for intervening with the overprotection problems of the patent system due to their ad hoc nature and the narrow scope of the access that they provide. Consequently, such rules may offer a flexible solution to such context-dependent excesses without diminishing the value of a patent by stripping the patent holder of all of the remedies available to him.27 Hence, a compulsory liability rule makes it possible to intervene in a specific market failure, while enabling the patent holder to continue exercising patent in accordance with the objectives of patent law. In addition, it allows interference with the market failures that occur over the lifetime of a patent, as the patent itself may have been initially granted for purposes that were completely aligned with the objectives of patent law. However, the extent to which, for example, compulsory licenses could target dysfunctional uses of patents has been underexplored.28 Therefore, Chaps. 6– 8 evaluate the sufficiency of the existing compulsory liability rules in terms of resolving the market failures identified in Sect. 2.3.2 both in respect to SEPs and non-SEPs.

25

On this topic see also Sect. 3.2.9. See Sect. 2.3.1.3 on transitioning from defensive to offensive strategies. 27 Hilty, “Legal Remedies,” 377, 381-383, 392. 28 Ibid, 392-393. 26

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4 Economic Foundations of Compulsory Liability Rules

Economic Considerations Private vs. Compulsory Liability Rule

For the assessment of the compulsory liability rules’ capacity to bring balance to the patent system, it is necessary to analyse the arguments that have been brought in favour and against their use in the relation to patents. The efficiency of compulsory liability rules is a debated topic—indeed, one of the objectives of this thesis is to review whether compulsory or private liability rules are more appropriate for resolving the overprotection problems of the patent system. While Sect. 3.4 identifies several areas in which private liability rules can yield efficient outcomes, it concluded that the incentives of the right holders to employ private liability rules or to engage in other OAI are not sufficient to address all of the problems of overprotection that may hinder follow-on innovation. On the basis of the rebuttal of the MCM’s presumption of the superiority of property rules in terms of resolving market failures, it is reasonable to assume, pursuant to Calabresi and Melamed, that compulsory liability rules can be superior to property rules in “situations where markets may be too expensive or fail” or where “market evaluation of the entitlement is deemed inefficient, that is, it is unavailable or too expensive” due to the transaction costs.29

4.3.2

Effect on Incentives

A classic argument against establishing compulsory liability rules in patent law is their interference with the incentives to innovate. For example, Machlup viewed a liability rule by default as compromising the essential function of the patent system to protect innovators from free riding. Such a rule would discourage investments in patentable innovations other than the most important inventions that enjoy the highest demand.30 Similarly, the Chicago School’s view of the IP in the context of competition law opposes the imposition of compulsory liability rules.31 Kitch also

Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1109-1110. Machlup, Economic Review of the Patent System, 13-14. “Patentees, under such a system, could no longer hope for attractive monopoly profits, but only for such revenues as they would collect as royalties from their licensees and as “differential rents” due to the cost advantage over their royaltypaying competitors. These revenues might not be smaller than the potential monopoly profits in cases of relatively less strategic inventions, but they would probably be much smaller in cases of basic inventions and in all other instances where a strong patent position could permit a firm to control some of its markets. Thus, the hopes for the highest prizes to be won in the “patent lottery” would be dashed, and the anticipated returns from investment in innovations based on patented inventions would be reduced”[a footnote omitted], ibid. 31 “The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic 29 30

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strongly disapproved of compulsory licensing, arguing that “[a]ny form of compulsory licensing destroys the prospect function because the patent owner loses the ability to control who can use the patent” when improvers can be granted compulsory licenses.32 Rydyk found that the abolishment of property right for all patents would reduce their value by 81 percent, indicating that employment of default liability rule for patents would significantly diminish the incentivizing effect of patents on inventive activity.33 In addition to the reduction of incentives to innovate, excessive emphasis on the public interest in the patent system via the establishment of compulsory licenses may attract innovators to use alternative means of protection, leading to a lower rate of inventions being disclosed.34 Furthermore, investors’ behaviour towards a company may change subject to a reduction in the expected value of its investments in R&D.35 However, the dynamic incentive theory assumes that the right to exclude others from using an invention is only one of the mechanisms that allow companies to maintain their incentives to innovate on the competitive market.36 A presumption that an initial inventor should internalize all of the externalities arising from his invention would have a negative impact on dynamic competition. The necessity of the property rule for securing the incentives of a patent holder largely depend on the industry and competitive environment in question, her relationships with follow-on innovators, and changes in the business models of the patent holder and the subsequent assignees of the patent over the course of its lifetime. Pursuant to a statistical review of the impact of liability rules by default on the innovation incentives, Scherer was “persuaded that technical progress would not grind to a halt if a uniform policy of compulsory licensing at ‘reasonable’ royalties[. . .] were implemented.”37 However, an instrument subject to review would harm certain patent holders, such as innovative SMEs seeking to enter the market, and possibly the pharmaceutical sector and similar fields.38 Therefore, he favoured the development of a compulsory liability rule that “minimizes such losses”.39

growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct. Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” Trinko, 540 U.S. 398, 407-408. 32 Kitch, “Nature and Function of the Patent System,” 287. 33 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 25. 34 Gervais, TRIPS Agreement, 2.112. 35 Sidak, “Reply to Lemley and Shapiro,” 738. 36 See Sect. 2.1.6. 37 Scherer, Economic Effects of Compulsory Patent Licensing, 85. 38 Ibid, 85-86. 39 Ibid. Cf. Machlup, Economic Review of the Patent System, 13-14.

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Compulsory liability rules are considerably narrower liability rules than the default liability rule reviewed above. Therefore, even upon the enactment of a compulsory liability rule, in many contexts a patent holder may remain sufficiently rewarded by licensing fees or damages to maintain his incentives to innovate, even if he cannot exclude a follow-on innovator from using his patented invention. The possibility of recouping investments in R&D makes compulsory liability rules an instrument that is preferable to exceptions to patent rights.40 Calabresi and Melamed assumed that the choice between property and liability rules would be made on the basis of Pareto efficiency.41 However, balancing the interests of a patent holder and a follow-on innovator for the purposes of fostering dynamic competition is a very complex exercise, which does not yield to a Pareto efficient outcome42 and involves a great deal of uncertainty with respect to both parties’ future behaviours on the market. In fact, Calabresi and Melamed viewed dynamic efficiency, as a normative objective of determining a choice of remedies, to belong to the category of distributional goals that reflect societal preferences for wealth distribution. Hence, in their framework, efficiency encompasses only allocative efficiency, while distributional goals represent a group of normative preferences specific to a particular society.43 On that basis, it can be concluded that the balancing of the interests of patent holder and a follow-on innovator therefore inadvertently rests on a combination of efficiency goals with normative considerations.44 To ensure the availability of incentives to innovate, a patent holder should be able to recoup some of the value she has generated for a follow-on innovator by enabling the follow-on innovation to be developed at all or by reducing the costs of or accelerating its development. However, some of the social surplus must be left to the follow-on innovators in order to maintain their incentives.45 Following incentive theories, “a rational system of patent remedies would seek to avoid systematically over- or undercompensating patent owners, and would instead seek (at least as a first approximation) to ensure that patent remedies are proportionate to the economic value of the invention as understood by contemporary economic theory.”46 On a case-specific basis, the granting of a compulsory license to a follow-on innovator might enhance social welfare beyond the respective loss of the private incentives of the initial patent holder.47 Overprotection problems encompass situations in which the incentives created by the patent system for the individual patent

Thomas F. Cotter, “Intellectual Property and the Essential Facilities Doctrine,” Antitrust Bulletin 44, no. 1 (1999): 224, fn 114. 41 See Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1109-1110. 42 See Van den Bergh and Camesasca, European Competition Law and Economics, 31. 43 Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1098-1099, 1110. 44 The choice of remedies may be based both on efficiency and distributional goals. Ibid, 1110. 45 Scotchmer, “Standing on the Shoulders of Giants:,” 31. 46 Cotter, Comparative Patent Remedies, 10. 47 Rudyk, License of Right, Compulsory Licensing and the Value of Exclusivity, 25-26. 40

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holder overshoot what is justifiable from the perspective of the economic justification that underlies the patent system, with the effect of hindering follow-on innovation. A compulsory license is Kaldor-Hicks efficient, as it diminishes the excessive reward of the patent holder, but the entitlement to an adequate compensation shifts the intervention closer towards Pareto efficiency.48 Ultimately, under the dynamic incentive theory, a compulsory license for functional efficiency should never constrain a patent holder in a manner that would disincentivise her from continuing to invest in R&D in order to compete on the market on the merits.49 In contrast, a compulsory license may have a more significant impact on a patent holder’s incentives on the grounds of public policy or when patent law is in conflict with another, external body of law. In situations in which the right to injunctive relief collides with competition law, a larger intervention in the property rule than what is allowed under the dynamic incentive theory may in principle be justifiable for the purposes of protecting competition and promoting consumer welfare. Patent law entitles the patent holder both to receive a compensation for the use of his invention and to exclude others from using it. A well-targeted compulsory liability rule, which rests on an a carefully defined economic justification, has the capacity to interfere with the most significant overprotection problems of the patent system in relation to follow-on innovators without undermining the patent holder’s incentives to continue investing in R&D. On this basis, it can be concluded that appropriation of the flexibility between applying property and liability rule in patent law can yield to welfare-enhancing effects. Compulsory licenses that favour followon innovators can enhance dynamic competition; in addition, compulsory liability rules can improve allocative efficiency by reducing licensing fees, which may also translate into lower consumer prices.50

4.3.3

Patent Evaluation Problems

Compulsory liability rules are typically opposed based on the assumption that courtdetermined remuneration would undercompensate a patent holder.51 Undercompensation would have the consequence of reducing incentives to innovate.52 The concern about the inadequacy of such compensation is associated with the scepticism concerning the capacity and competence of courts or public authorities to determine the value of a patent and set appropriate rate for damages or a

See Parisi, “Positive, Normative and Functional Schools in Law and Economics,” 267, fn 7. See also Lamping et al., “Declaration on Patent Protection,” 683. 50 Carlos M. Correa, Trade Related Aspects of Intellectual Property Rights : A Commentary on the TRIPS Agreement (New York: Oxford University Press, 2007), 313. 51 See, for example, Richard A. Epstein, “Clear View of the Cathedral : The Dominance of Property Rules,” Yale Law Journal 106 (1997): 2093; Cotter, Comparative Patent Remedies, 54. 52 Krauspenhaar, Liability Rules in Patent Law, 45-46. 48 49

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licensing fee.53 The determination of a welfare-maximizing remuneration by the judiciary is viewed to involve excessive transaction costs.54 Furthermore, compulsory liability rules are also considered to impose high transaction costs on the parties involved, given that the evidence they provide to a judge should counteract his shortcomings, such as lack of industry-specific expertise, when determining adequate remuneration.55 However, patent evaluation is always complex. Furthermore, when carried out by private market participants, it can be burdened by uncertainties and asymmetrical information.56 In addition, courts may either equally over- or undercompensate a patent holder in their application of compulsory liability rules.57 Furthermore, remuneration could also be deliberately set below or above the objective value of the patent in order to achieve distributional policy goals.58 If a compulsory liability rule interferes with an unjustifiably excessive licensing fee or an exploitative holdup, the rate set by a compulsory license cannot be deemed as undercompensating, as it seeks to correct a market failure (as long as the patent holders incentives to continue investing in R&D are maintained). For the determination of adequate remuneration in a hold-up situation, “economics offers a guiding principle of seeking to restore what would have emerged from open, well-informed ex ante technology competition.”59 The application of compulsory liability rules inadvertently involves the administrative transaction costs incurred in educating the personnel of the court60 or the public authority applying the compulsory liability rule, as well as the costs of evaluating the patent.61 However, the challenges involved in determining an

53 “Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.” Trinko, 540 U.S. 398, 408. Cf. Unwired Planet v. Huawei [2017] EWHC 2988 (Pat) [2017] RPC 19, para 169. 54 Cotter, Comparative Patent Remedies, 54-55. 55 Merges, “Contracting into Liability Rules,” 1317. 56 Ben Depoorter, “Property Rules, Liability Rules and Patent Market Failure,” Erasmus Law Review 1, no. 4 (2008): 74. Consequently, evaluations of entire patent portfolios may be based on intuitive perceptions of suitable prices, rather than on careful calculations. 57 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 238, fn 766, referring to an earlier version of Thomas F. Cotter, “Patent Holdup, Patent Remedies, and Antitrust Responses,” Journal of Corporation Law 34, no. 4 (2009): 1175, fn 123.; discussing an earlier version of Mark A. Lemley, “Distinguishing Lost Profits from Reasonable Royalties,” William & Mary Law Review 51, no. 2 (2009): 667. 58 Krauspenhaar, Liability Rules in Patent Law, 42, 59; see also Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1098-1101, 1110. On the levels and rationales for deliberate under- and overcompensation under compulsory liability rules in patent law, see Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 242, Table 8. 59 Farrell et al., “Standard Setting, Patents, and Hold-Up,” 661. 60 Krauspenhaar, Liability Rules in Patent Law, 37. 61 For a more detailed review of the assessment costs, see ibid, 36-37.

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adequate remuneration for a patent “are not insurmountable”.62 Furthermore, courts have gained experience in patent evaluation by making decisions on damages awards in patent infringement cases,63 as well as by setting FRAND royalty rates.64 Nevertheless, it would be desirable for the authority to give an account of the commercial practices in the particular sector as well as the broad circumstances of the case, such as the competitive positioning and dynamics of the patent holder and the follow-on innovator, when determining the adequacy of the remuneration. Ultimately, the efficiency of establishing a compulsory liability rule should be determined by comparing the transaction costs related to patent valuation by courts and public authorities to the deadweight loss of the particular market failure stemming from the application of a property rule.65 The balance of the administrative transaction costs with the positive welfare effects of a compulsory liability rule essentially depends on the overall design of the mechanism, such as the criteria for applying it and the rules determining adequate remuneration, the fees for applying a liability rule, and the acquisition and accumulation of the education and the experience of the personnel involved. A well-designed compulsory liability rule that targets specific market failures will not systematically and unjustifiably undercompensate a patent holder.

4.3.4

Hold-Out Risks

Another concern regarding the establishment of a compulsory liability rule is the loss of the threat of an injunctive relief as a mechanism that incentivizes licensing negotiations.66 In the absence of the right to an injunctive relief, a SEP holder is argued to have no means of stopping the infringement and becomes obliged to litigate for damages for each patent individually.67 Consequently, patent holders may become subject to hold-outs by infringing users68 and may “prefer to settle for a licence on terms that would not provide a fair return on their investment, [. . .] rather

62

Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 259. Ibid, 237. Similarly, Unwired Planet v. Huawei, [2017] EWHC 2988 (Pat) [2017] RPC 19, para 169. 64 Ibid. 65 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 237-238, 259. 66 Cotter, Comparative Patent Remedies, 54. See also Miguel Rato and Mark English, “Assessment of Injunctions, Patents, and Standards Following the Court of Justice’s Huawei/ZTE Ruling,” Journal of European Competition Law & Practice 7, no. 2 (2016): 106. 67 Miguel Rato and Mark English, “Huawei/ZTE,” 106. However, the European Commission has remarked in this respect that injunctive relief must also be sought “on a patent-by-patent basis”. Case AT.39985, Motorola (29 April 2014), para 519. 68 See FTC, The Evolving IP Marketplace, 220. 63

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than face lengthy, onerous and uncertain court proceedings for the award of damages.”69 Generally, a liability rule does not preclude license negotiations. For example, Lemley showcased that IP owners also contract around liability rules under the condition that bargaining yields a more efficient outcome than the price set by a government agent.70 As a result, bargaining in the shadow of a liability rule may beget greater accuracy in the evaluation of the transaction than a property rule, which involves a hold-up risk.71 In the context of de jure standards, the “seeking of damages for a long-lasting and extensive (purported) infringement of an (alleged) SEP may serve to put considerable pressure on a prospective licensee as well.”72 Therefore, awards for damages may also suffice to incentivize ex ante licensing negotiations. However, the hold-out risk also depends on the patent holder and follow-on innovator’s resources to litigate. A property rule may be of a particular value to SMEs seeking licenses from larger companies, the companies could, in the presence of a liability rule, wait for a SME holding a patent to initiate infringement proceedings.73 Ultimately, a hold-out situation may constitute abuse of a dominant position under Art. 102 TFEU. However, in the majority of cases, neither the patent holder nor the follow-on innovator holds considerable market power. Whether the compulsory liability rule diminishes the incentives to conclude ex ante licensing agreements depends on the type of compulsory liability rule, its enforceability in a particular jurisdiction, and the expected level of damages to be awarded for the infringement. The problem of disincentivising licensing negotiations relates only to ex post liability rules, because ex-ante liability rules, by definition, require the prospective licensee to seek a voluntary license before using a patented invention. A liability rule can be expected to be effective in incentivizing licensing negotiations in jurisdictions in which damages for a patent infringement are on an equal level to or higher than the royalty rate negotiated ex ante. Furthermore, opaqueness with regard to the value of a patent and the consequent royalty rate and damages award may incentivize a risk-averse follow-on innovator to seek a license ex ante. In contrast, a liability rule may lead to hold-outs when a prospective licensee can predict both the privately negotiated license rate and the level of damages and the latter is expected to produce a lower sum. Hence, an ex post liability rule that features an unbalanced design may have an undesirable effect on ex ante licensing negotiations. The legislators who enact a compulsory liability rule should therefore take particular caution that the instrument will not disrupt the efficiency of technology transactions by companies that have adapted the OI model of licensing for profit and thus hinder vertical disintegration and specialization in R&D associated with OI.

Geradin and Rato, “Can Standard-Setting Lead to Exploitative Abuse?,” 119. Lemley, “Contracting around Liability Rules,” 471-483. 71 Ibid, 484. 72 Picht, “ECJ Rules on Standard-Essential Patents,” 374. 73 See FTC, The Evolving IP Marketplace, 220. 69 70

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The risk of a compulsory liability rule fostering hold-out situations may be mitigated by enhancing the enforceability of damage claims. Furthermore, a liability rule that retains the possibility of punitive damages could incentivize licensing negotiations in the same manner as a property rule. However, punitive damages are not desirable in situations wherein the infringer’s conduct is efficient, and they may, in such cases, even contribute to overprotection problems.74 Such situation would occur, for example, when a patent holder has adopted an offensive patent strategy. Consequently, the level of damages must be adjusted with caution, as, when set too high, it may also contribute to the creation of a hold-up situation.

4.3.5

Error Costs and Legal Uncertainty

Compulsory liability rules may diminish a patent holder’s incentives to invest in R&D due to the uncertainties associated with the application of the instrument—the patent holders may not know if and when their patents could be subject to liability rule.75 Furthermore, even a well-drafted compulsory liability rule may yield costly errors if the authorities applying it lack the resources and education required to make informed decisions76 Unlike the risk of under- or overcompensation, error costs involve mistakes in the application of the compulsory liability rule, i.e. false negatives and false positives. Such erroneous decisions may over time weaken the incentive mechanism of patent protection.77 As with the challenges of evaluation, error costs may be avoided with appropriate education and the allocation of sufficient resources to the authorities responsible for applying the compulsory liability rule; however, such allocation will also increase the transaction costs of employing the instrument. Furthermore, such measures cannot address errors stemming, for example, from the parties involved lacking the resources necessary to convincingly support their cases. Part of the error costs derives from the formulation of the compulsory liability rule as a “rule” or a “standard”. What sets rules and standards apart “is the extent to which the efforts to give content to the law are undertaken before or after individuals act.”78 A standard can be applied to changing technological settings with higher likelihood of errors than a rule; in contrast, a clearly defined rule offers more legal certainty but may incur costs due to its inflexibility.79

74

See Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 244. FTC, The Evolving IP Marketplace, 219. 76 Scherer, Economic Effects of Compulsory Patent Licensing, 87. 77 Cotter, Comparative Patent Remedies, 48. 78 Louis Kaplow, “Rules Versus Standards : An Economic Analysis,” Duke Law Journal 42, no. 3 (1992): 560. 79 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 254. 75

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When a compulsory licensing rule is a standard established by a court decision,80 it is typically followed by a period of legal uncertainty concerning its application before a more stable practice of applying the rule is established through case law. This period of uncertainty is costly both for plaintiffs and defendants.81 Clarifying the scope of application of such a standard is also costly for the judicial system. The establishment of a compulsory liability rule via statutory law may offer more predictability than one established by the judiciary, as different designs and effects for the rule can be thoroughly reviewed during the legislative process, which also produces preparatory materials concerning the future act in order to guide the interpretation of the law. However, the legislative process of drafting a more precise formulation of a rule will also incur costs.82 Hence, in the establishment of a compulsory liability rule for patents, the legal uncertainty of a standard must be balanced against the flexibility of rules.83 When deciding between rules and standards, the costs of establishing a rule must be weighed against the costs of applying a standard. Generally, a standard is preferred to a rule when the behaviour that the particular norm seeks to regulate occurs seldom and is unlikely to be frequently litigated.84 Considering that (1) Art. 31 (a) TRIPS requires authorization to be evaluated on individual merits; (2) market failures of overprotection are infrequent; and (3) the weighing of the interests of the patent holder and the follow-on innovator in the light of the objective to fostering dynamic competition is a very context specific exercise, the substantive criteria of a compulsory liability rule that seeks to interfere with market failures of overprotection can be expected to be more reminiscent of a standard than of a rule.

4.3.6

Underuse

Compulsory liability rules are often criticized as being underused. Indeed, in many countries, compulsory licenses are infrequently applied, and the case law concerning the use of these instruments is extremely limited. There are four possible explanations for the underuse of compulsory liability rules: First, compulsory liability rules may be infrequently applied as a consequence of their inefficient formulation. The procedure for applying a compulsory license may be too expensive and

80 See, for example eBay, 126 S. Ct. 1837, 1839, 1841; Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 77. 81 Kaplow, “Rules Versus Standards,” 622. 82 Ibid, 621. 83 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 130, fn 423. 84 Kaplow, “Rules Versus Standards,” 621.

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time-consuming for willing licensees who fulfil the substantive criteria of their application. As a result, a follow-on innovator may forego using the instrument, even in the face of a market failure that hinders his innovative efforts, to the detriment of the social welfare.85 Second, underuse may result from the fact that the substantial criteria of a compulsory liability rules do not address the specific market failure in question. Third, underuse may also result from the legal uncertainty of obtaining a compulsory license.86 Finally, when the substantial criteria of a particular compulsory liability rule are appropriate for addressing a market failure, its underuse can be explained with reference to the indirect effect. The presence of a compulsory liability rule in a jurisdiction enhances a follow-on innovator’s negotiation position in relation to the patent holder.87 Hence, a compulsory liability rule can alleviate overprotection problems, even if follow-on innovators never use the instrument.88 “The primary impact of the provisions governing the regime of compulsory licensing does not originate from their application in practice, but the perspective of their application, thus encouraging the parties involved to reach an agreement on a contractual licence.”89 Essentially, this represents contracting around liability rules in order to achieve a more efficient result than what could be obtained through reliance on compulsory liability rules,90 which involve transaction costs of obtaining the permission to use a patent and the risks in allowing a third party to determine the royalty rate. On these grounds, it can be concluded that a well-designed compulsory liability rule may foster dynamic efficiency, and the downsides of the instrument are controllable. However, in contexts in which a patent holder’s right to an injunctive relief is limited, the liability rule must be efficiently enforceable in order to sustain the patent holder’s incentives to innovate.

See also Hilty, “Legal Remedies,” 393. However, some commentators have even considered the transaction costs involved in using the compulsory liability rule to contribute to the maintenance of a patent holder’s incentives to invest in improvements to an invention. Duffy, “Rethinking the Prospect Theory of Patents,” 502. 86 See 4.3.5. See also Hilty, “Legal Remedies,” 393. 87 See Kur and Schovsbo, Expropriation or Fair Game for All?, 22. 88 See FTC, The Evolving IP Marketplace, 223. 89 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 1. 90 See Lemley, “Contracting around Liability Rules,” 479. 85

Chapter 5

Legal Foundations and Sources of Compulsory Liability Rules

The origins of the liability rules in intellectual property law are in the seventeenth century. Following industrialization, their application became more frequent and, being used to exploit inventions created in other countries, also controversial. The Paris Convention, which first addressed the instrument in 1925, left signatory states considerable leeway to enact compulsory licenses—an opportunity often used by developing countries. TRIPS narrowed down possible the scope of compulsory licenses and defined rules for their application on the procedural level. In the EU, compulsory licenses are subject to only limited harmonization and are mostly regulated on the national level. The UPC would offer little change to the situation. Generally, international law on compulsory licenses features little consideration for follow-on innovation, with the exception of compulsory licenses for dependent patents. However, both a patent holder and a follow-on innovator enjoy the fundamental rights to property and to conduct business. Under the ECHR, contracting states have broad freedom to enact compulsory licenses for functional efficiency and thus interfere with the patent holder’s right to property on the grounds of general interest. The interference remains proportional when it complies with the requirements of Art. 31 TRIPS.

5.1

Early History

Historically, compulsory licensing has been associated with a patent holder’s obligation to work an invention locally, which was first incorporated in the UK Statute of Monopolies of 1623.1 This obligation was frequently subject to the threat of the

1 Anja Eikermann, “Article 31,” in WTO: Trade-Related Aspects of Intellectual Property Rights, ed. Peter-Tobias Stoll, Jan Busche, and Katrin Arend (Leiden: Martinus Nijhoff Publishers, 2009), 558, fn 15.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_5

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forfeiture of a patent in the country in which it was granted.2 Similarly, the first actual compulsory licensing provision was introduced in the state of South Carolina in the Act for the Encouragement of Arts and Sciences in 1784, and the provision was intended to prevent useful machines being offered at unreasonable prices or insufficient numbers.3 Due to the process of industrialization, compulsory licenses became more frequently enacted in national legislation during the nineteenth century as a more lenient alternative measure to the established instrument of patent forfeiture.4 In addition, compulsory licenses played a role in ending the debate between the pro- and anti-patent movements in the nineteenth century. Representing a compromise between exclusivity and access, the acceptance of this instrument was followed with to a wave of enactments of national patent acts.5 While a number of compulsory licenses recognized the problem of blocking patents,6 concerns regarding follow-on innovation were not central to the early development and adoption of compulsory licenses in national legislation.

5.2

Paris Convention

In the arena of international patent law, compulsory licenses have attracted attention as a policy tool for limiting the use of the instrument of patent forfeiture while securing countries’ protectionist interests in terms of working patents within their territories.7 The first conditions for compulsory licenses in international patent law were set in 1925, in Art. 5 A of the Hague Act of the Paris Convention.8 This article

2

Ibid, 558. Act for the Encouragement of Arts and Science, South Carolina (26 March 1784). Thorvald Solberg (ed.), Copyright Enactments of the United States 1793-1906, Copyright Office Bulletin No. 3, 2th ed. rev. (Washington: U.S. Government Printing Office 1906), 23 at 15-45. This provision was drafted to address the authors of books and also applied to inventors. See also Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. 4 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. 5 Machlup, Economic Review of the Patent System, 5, and the following references. 6 For example, The Patents, Designs and Trademarks Act 1883, 46 & 47 Vict. c. 57, § 22 c) [no longer in force] (Eng.) recognized cases in which anyone is prevented from working or using to the best advantage an invention as ground for a compulsory license. 7 Jerome H. Reichman and Catherine Hasenzahl, Non-Voluntary Licensing of Patented Inventions. Historical Perspective, Legal Framework under TRIPS, and Overview of the Practice in Canada and the USA (Geneva: ICTSD, 2003), 10-11. 8 Paris Convention for the Protection of Industrial Property, The Hague Act (1925), adopted 6 November 1925, WIPO Lex No. TRT/Paris/005 (entry into force 1 June 1928), [hereinafter Act of Hague]. Since the Act of the Hague, further amendments to Art. 5 A PC have been made by the Acts of London and Lisbon. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. Paris Convention for the Protection of Industrial Property (1883), adopted 20 March 1883, WIPO Lex No. TRT/Paris/008 (entry into force 7 July 1884), has been subject to a number of revisions. The acts that are still in force are from the Conferences of Revision 3

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complements the broad initial objective of the Paris Convention to combat countries free-riding on the technical developments of the most industrialised states, such as the United Kingdom, which was facilitated by the preferential treatment of national patentees.9 The Hague Act introduced the right to take legislative measures to prevent the abuses that may result from exercise of the exclusive right conferred by the patent, such as failure to work (Art. 5 (2) Act of the Hague), and established the priority of compulsory licenses to forfeiture as a measure intended to prevent such abuses (Art. 5 (3) Act of the Hague).10 The limitation of the forfeiture of patents to very specific circumstances was one of the more remarkable consequences of Art. 5 A PC Act of the Hague.11 Another was the expansion of the adoption of compulsory licenses, both geographically, via the introduction of the instrument to new states,12 and with respect of the grounds that constitute abuse.13 The most current formulation of Art. 5 A of the Act of Stockholm of 1967, is one of the substantive provisions of the PC.14 While Art. 5 A (2) PC only provides member states with “the right to take legislative measures”, Arts. 5 A (1) and (3)– (4) PC pose more direct obligations with regard to the forfeiture of patents and

in The Hague (1925), London (1934), Lisbon (1958), and Stockholm (1967). The Brussels 1900 and Washington 1911 Acts are no longer in force. The Stockholm Act of 14 July 1967 of the Paris Convention is the most recent revision and has the largest number of signatories (Art. 2.1 TRIPS). Georg Bodenhausen, Guide to the Appliction of the Paris Convention for the Protection of Industrial Property as Revised in Stockholm in 1967 (Geneva: BIRPI, 1968), 9.; World Intellectual Property Organization., WIPO Intellectual Property Handbook : Policy, Law and Use (WIPO Publication No 489), 2nd ed. (Geneva: WIPO, 2004), 241-242; and Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. 9 Nuno Pires de Carvalho, TRIPS Regime of Patent Rights, 3rd ed. (Alphen aan den Rijn: Wolters Kluwer, 2010), 125. The establishment of rights of national treatment (Art. 2 and 3) and priority (Art. 4) by the PC was intended to resolve these free-riding problems. World Intellectual Property Organization., WIPO Intellectual Property Handbook, 243-246. 10 The subsequent Act of Lisbon 1958 amended Art. 5 A (2) to explicitly address compulsory licenses. Reichman, Non-Voluntary Licensing of Patented Inventions. Annex: Historical overview of the evolution of the Article 5A of the Paris Convention. See also Bodenhausen, Guide to the Appliction of the Paris Convention, 71-72. Legislative measures that have the same effect as forfeiture may be referred to as revocation, repeal, or the annulment of a patent. Ibid, 69, 71. 11 Reichman, Non-Voluntary Licensing of Patented Inventions, 11. The national adoption of the provision was, however, controversial in several countries. Stephen P. Ladas, Patents, Trademarks, and Related Rights : National and International Protection, III vols., vol. I (Cambridge, MA: Harvard University Press, 1975), 530-531 (with references). According to Art. 5 A (3) PC of the Stockholm Act, forfeiture of patents is only allowed in cases in which the grant of compulsory licenses would not have been sufficient to prevent abuse. In addition, Art. 5 A (3) allows proceedings for the forfeiture and revocation of patents to be initiated only after two years have expired since the grant of the first compulsory license. The sufficiency of compulsory licenses to address the abuses in question needs to be reviewed after the grant of initial, or even consecutive, compulsory licenses. Bodenhausen, Guide to the Appliction of the Paris Convention, 70. 12 Ladas, Patents, Trademarks, and Related Rights, I, 530. 13 Reichman, Non-Voluntary Licensing of Patented Inventions, 11. 14 Unless stated otherwise, the Stockholm Act is also the version of the Paris Convention that is analysed in this thesis.

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compulsory licenses in cases of failure to work or insufficient working. These “selfexecuting” provisions can be directly applied to private parties in monist legal systems.15 Considering the number of member states party to the PC alone, this provision was influential in setting the first international standard for compulsory licensing.16 Articles 1–12 and 19 of the Stockholm Act of the PC are incorporated into the TRIPS Agreement by virtue of Art. 2.1 TRIPS;17 as a consequence, the effect of the Stockholm Act reaches beyond the direct signatories of the Convention and the particular Act, as it requires that TRIPS member states’ legislation comply with Arts. 1–12 and 19 of the PC.18 However, it is notable that none of the provisions of Art. 5 A oblige member states to enact compulsory licensing provisions. Furthermore, despite the large number of signatory states, the impact of the provision was relatively limited with respect to compulsory licenses, as the Article did not rule on a patent holder’s right to remuneration and imposed few limitations on the procedure for establishing compulsory licensing mechanisms.19 Most importantly, Art. 5 A (2)–(4) PC are not intended to be exclusive with respect to legislating on the grounds for compulsory licenses.20 According to Bodenhousen, compulsory licenses and equivalent measures with objectives other than correcting abuses of exclusive rights fall altogether outside of the scope of the Art. 5 A PC. Examples of 15

Bodenhausen, Guide to the Appliction of the Paris Convention, 11-14. The number of signatories to this convention has since grown from the initial 11 to 176 in 2015. Ibid.; World Intellectual Property Organization., WIPO Intellectual Property Handbook, 241; World Intellectual Property Organization, “Treaties Statistics : Paris Convention for the Protection of Industrial Property,” WIPO, last modified n.d., accessed 15 January 2015 http://www.wipo.int/ treaties/en/StatsResults.jsp?treaty_id¼2&lang¼en. 17 The members party to the Paris Convention are not allowed to enter into special agreements on industrial property rights that contravene its provisions (Art. 19 PC). By incorporating Art. 19 PC into TRIPS, the status of TRIPS as a “Paris-plus” agreement was strengthened. Gervais, TRIPS Agreement, 2.45. Yusuf is of a view that due to the incorporation of PC via Art. 2 (2), mutual obligations of contracting parties to PC are sustained pursuant to Art. 30 (4) of the Vienna Convention on the Law of Treaties, open for signatures 23 May 1969, 1155 U.N.T.S. 331 (entry into force 27 January 1980), [hereinafter VCLT]. When countries are signatories to both treaties, Art. 2 (2) represents this intent. When only one of them is a signatory to TRIPS, then PC is applied. Abdulqawi A. Yusuf, “TRIPS : Background, Principles and General Provisions,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2008), 20-21. 18 Gervais, TRIPS Agreement, 2.45. 19 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 463. An initiative to include a rule on remuneration was refused by US at the Conference of Lisbon, as it would have contradicted national court practices to grant royalty-free licenses as antitrust remedies. Ladas, Patents, Trademarks, and Related Rights, I, 535; Reichman, Non-Voluntary Licensing of Patented Inventions, 12, fn 37. 20 Oliver Brand, “Article 2,” in WTO: Trade-Related Aspects of Intellectual Property Rights, ed. Peter-Tobias Stoll, Jan Busche, and Katrin Arend (Leiden: Martinus Nijhoff Publishers, 2009), 139-140; UNCTAD-ICTSD, Resource Book on TRIPS and Development, 463. Cf. Joseph Straus, “Implications of the TRIPS Agreement in the Field of Patent Law,” in From GATT to TRIPS - the Agreement on Trade-Related Spects on Intellectual Property Rights, ed. Friedrich-Karl Beier and Gerhard Schicker (Munich: VCH, 1996), 204-205. 16

5.3 TRIPS Agreement

191

these grounds are public interest, such as public health or security and the dependency of patents.21 The limited scope of application of Art. 5 A PC facilitated the trend of adopting compulsory licenses on the grounds of public interest.22 Hence, before the enactment of the TRIPS Agreement, member states party to the PC had much wider freedom when establishing compulsory licenses, both in respect to their grounds and procedural requirements, than the current Art. 31 TRIPS allows.

5.3

TRIPS Agreement

Dissatisfaction with and disagreement over compulsory licenses, particularly on the part of the developing countries, whose interest in wider access to technology has increased since the 1970s, were among the primary motivations behind the TRIPS initiative.23 However, during that era, balance between the initial and subsequent inventors was not central to the tension that existed between developed and developing countries;24 instead, developing countries took an interest in the use of patent protection for “developmental and social welfare objectives”. The implementation of stricter local working requirements and wider grounds for compulsory licenses are examples of flexible interpretation of the PC. The subsequent tension between the interests of developed and developing countries was heightened at the beginning of the 1980s, during the failed negotiations on the seventh revision of the Paris Convention.25 The developing countries’ proposal to further expand the rights to grant compulsory licenses was one of the factors that led to the breakdown of the negotiations concerning the revision of the PC and the subsequent shift from WIPO to GATT as the nucleus of international law for IP.26

21

Bodenhausen, Guide to the Appliction of the Paris Convention, 70. By the year 1990, the majority of European countries had established compulsory licenses for dependent patents. Hans Peter Walter, “Compulsory Licenses in Respect of Dependent Patents under the Law of Switzerland and Other European States,” IIC - International Review of Intellectual Property and Competition Law 21 (1990): 535-536. 22 Reichman, Non-Voluntary Licensing of Patented Inventions, 11-12. 23 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 463, fn 915 (with the following references). 24 The theme of dependent patents has occasionally arisen in the international arena; for example, Art. 5A III b) of the Resolution of AIPPI Congress of Tokyo of 1966 addressed this topic. Paul Mathély (ed.) AIPPI Annuaire 1966/I Congrès De Tokio - Rapport De Synthèse (Zurich: International Association for the Protection of Intellectual Property, 1966), 52-57 on the topic of “Reasons for Which the Rights of the Patentee Can Be Restricted”. With respect to the procedural aspects, the Resolution already included elements that would later become part of Art. 31 TRIPS. 25 Yusuf, “TRIPS,” 5; UNCTAD-ICTSD, Resource Book on TRIPS and Development, 463. 26 Reichman, Non-Voluntary Licensing of Patented Inventions, 10-11; Jerome H. Reichman, “Intellectual Property in International Trade : Opportunities and Risks of a GATT Connection,” Vanderbilt Journal of Transnational Law 22 (1989): 816-818, fn 315 (with references).

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The TRIPS Agreement represented a pro-protection approach that codified the interests of developed countries and patentees. The outcome was motivated by the threat of free-riding associated with innovative digital technologies and by the fact that the developing countries’ market access to developed countries was used on the part of the developed countries as a bargaining chip for heightened enforcement standards for IP.27 Art. 31 TRIPS governs “Other Use Without Authorization of the Right Holder”, “including use by the government or third parties authorized by the government.” While the article does not explicitly refer to compulsory licenses, it essentially establishes substantive and procedural criteria for them. Art. 31 elaborates upon Art. 5 A PC and limits “the freedom of the contracting countries to enact legislation regarding compulsory licensing.”28 However, the PC’s obligations regarding compulsory licenses, as expressed in Art. 5 A (3)–(5), are not derogated by the TRIPS agreement (Art. 2.2 TRIPS). In other words, “TRIPS neither eliminates the Paris Convention nor derogates from it, but the Paris Convention equally cannot be used to defeat the safeguards that TRIPS requires for licenses.”29 The procedural criteria for compulsory licenses established by Art. 31 TRIPS can be seen as reflecting the issues emphasized during the TRIPS negotiations.30 The grant procedures for compulsory licenses allowed under the PC were considered to lack transparency and to be undesirably rapid.31 In comparison to Art. 5 A PC, TRIPS addresses a greater number of individual grounds for compulsory licenses and also regulates their use by governments or third parties that are authorized by governments. Some commentators view TRIPS as warranting compulsory licenses in the specific cases mentioned in the article, with the exception of semiconductor technology (Art. 31 (c) TRIPS).32 However, despite subjecting certain uses to more

Yusuf, “TRIPS,” 6-7, 9. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. Due to Art. 2.1 TRIPS, the members of the TRIPS agreement are obliged to comply with Art. 5 (A) PC in respect to Art. 31 TRIPS. Because Art. 5 A PC is integrated into the TRIPS system, its implementation by the signatories of the TRIPS Agreement can become subject to the WTO dispute settlement proceedings. Gervais, TRIPS Agreement, 2.45. 29 Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 157. 30 Art. 31 TRIPS emphasizes case-specific evaluation, the conditions for compulsory licenses by competent authorities (Art. 31 (a)-(h) TRIPS), and the availability of judicial review for the decisions made (Art. 31 (g),( i)-(j) TRIPS). An important change from the PC is the requirement of adequate remuneration (Art. 31 (h) TRIPS). Moreover, Art. 31 (b) TRIPS establishes that compulsory licenses cannot be granted sans prior unsuccessful efforts to obtain a license from a right holder. Closely following the language of the last sentence of Art. 5 A (4), TRIPS extends the limitations on the scope of the compulsory license to all compulsory licenses, expands them, and regulates their duration (Art. 31 (c)-(f) TRIPS). 31 Eikermann, “Article 31,” 559, fns 25-26 with references to MTN.GNG/NG11/w/12/Add. 1, 21 October 1987 and MTN.GNG/NG11/5, 14 December 1987, para 9. 32 Gervais, TRIPS Agreement, 2.409. 27 28

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lenient procedural criteria,33 TRIPS does not oblige member states to pass legislation on compulsory licensing and hence to warrant compulsory licenses for such uses. Since the introduction of the TRIPS Agreement, two remarkable trends in international law have had an impact on the conditions for enacting compulsory licenses in national legislation, neither of which address the topic of follow-on innovation. The first trend reflects the increasing significance of the use of compulsory licenses as economic policy tools, particularly in respect to developing countries,34 which resulted in an amendment to the TRIPS agreement intended to ensure developing countries' access to medicine (Art. 31 bis TRIPS).35 The other trend is the conclusion of bilateral investment treaties, as well as regional and free trade agreements, among the WTO member states. These instruments are intended to protect foreign investments, which typically also include IPRs.36 These investment agreements often include clauses concerned with IP protection that explicitly heighten the minimum standard of protection established by the TRIPS Agreement; they have thus earned the name of “TRIPS-plus” agreements.37

33 See compulsory licenses that are granted as remedies to anti-competitive practices (Art. 31 (k) TRIPS) and those granted on the basis of public non-commercial use and national emergency or other circumstances of extreme urgency (Art. 31 (b) TRIPS). 34 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 4. 35 WTO, “WTO IP Rules Amended to Ease Poor Countries’ Access to Affordable Medicines,” WTO, last modified 23 January 2017, accessed 26 November 2017 https://www.wto.org/english/ news_e/news17_e/trip_23jan17_e.htm. See Doha Declaration; Implementation of Paragraph 6 Doha Declaration; WTO, Amendment of the TRIPS Agreement, 8 December 2005, WT/L/641. 36 Correa, “Investment Protection in Bilateral and Free Trade Agreements,” 331, 335. The trend of including IP clauses in bilateral trade agreements was already initiated by the USA during the 1980s, prior to the conclusion of the TRIPS Agreement, and was later accelerated by other developed countries when further possibilities to agree on IPRs in the context of the WTO reached an impasse. Ibid, 332-333. 37 For further discussions of free trade agreements and IP, see, for example, Christopher Heath and Anselm Kamperman Sanders, Intellectual Property and Free Trade Agreements (Oxford: Hart Publishing, 2007); Reto M Hilty and Thomas Jaeger, “Legal Effects and Policy Considerations for Free Trade Agreements: What Is Wrong with FTAs,” in Intellectual Property and Free Trade Agreements in the Asia-Pacific Region, ed. Christoph Antons and Reto M Hilty (55-84. Berlin: Springer, 2010); Henning Grosse Ruse-Khan, “The International Law Relation between TRIPS and Subsequent TRIPS-Plus Free Trade Agreements: Towards Safegoarding TRIPS Flexibilities,” Journal of Intellectual Property Law 18, no. 2 (2011); Josef Drexl, Henning Grosse Ruse-Khan, and Souheir Nadde-Phlix, EU Bilateral Trade Agreements and Intellectual Property: For Better or Worse? (Heidelberg: Springer, 2014).

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Compulsory Liability Rules in the EU Law

As a general rule, compulsory licenses are a subject of national legislation and are explicitly harmonized by EU law to only a limited extent.38 Nevertheless, in the EU, the possibilities in terms of establishing ex post compulsory liability rules are determined by the Enforcement Directive, whereas the Council Regulation (EC) No 1/2003 allows for awarding compulsory licenses to remedy anticompetitive practices. Both of these norms are discussed in detail in subsequent sections.39 Furthermore, compulsory licenses on the basis of failure to work are generally incompatible with Art. 36 TFEU.40

5.5

Unitary Patent System

Compulsory licenses will also remain national unharmonized instruments under the unitary patent system. Unitary patents will be granted with the same set of claims in all participating member states.41 They can only lapse or be limited, transferred, or revoked simultaneously in all participating member states. However, unitary patents can be licensed with territorial restrictions. While the UPC will have jurisdiction over the enforcement of patents with unitary effect, as objects of property, they are treated as national patents in member states.42 Consequently, the “[c]ompulsory licenses for unitary patents should be governed by the laws of the participating Member States as regards their respective countries”.43 Unlike earlier community patent initiatives,44 Regulation 1257/2012 and the UPCA do not address compulsory licensing in any other manner.

38

See Art. 12 of the Directive 98/44/EC of the European Parliament and of the Council of 6 July 1998 on the Legal Protection of Biotechnological Inventions, 1998 O.J. (L 213) 13 [hereinafter Biotechnology Directive]; Regulation 816/2006. 39 See Sects. 7.5, 8.2. 40 Case C-235/89, Commission v. Italian Republic, 1992 E.C.R. I-777, para 29; Case C-30/90, Commission v. United Kingdom of Great Britain and Northern Ireland, 1992 E.C.R. I-829, para 33. For more detail, see Sect. 6.4.3.2. 41 Art. 3 Regulation 1257/2012. 42 Art. 7, rec. 14 Regulation 1257/2012. 43 Rec. 10 Regulation 1257/2012. 44 See Arts. 46-48 Convention for the European Patent for the Common Market (Community Patent Convention) O.J. 1976 ( L 17) 1; Arts. 45-47, Agreement Relating to Community Patents, 1989 O.J. (L 401) 1; Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 19; Proposal for a Council Regulation on the Community Patent, 2000 O.J. (C 337E) 278; Rec. 6, Arts. 21-22 Council of the European Union, Working Document - Proposal for a Council Regulation on the Community Patent. Presidency Compromise Proposal Concerning Recital 6 and Articles 9a, 20, 21, 22, 24a to 24d, 44 and 53a, 14130/03 PI 111 (30 October 2003).

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The solution of subjecting unitary patents to national compulsory licenses has been considered to unbalance the UPC system in favour of right holders’ interests and to fragment the legislative basis of unitary patents. This solution may aggravate the problem of overprotection, as those in need of a compulsory license for a unitary patent would still need to deal with the unharmonized compulsory licensing regimes of each member state. Furthermore, the grant of compulsory licenses for unitary patents could be restricted for several reasons: on the basis of the primacy of EU law, the national authorities’ limited competence under Arts. 2 (2) and 4 TFEU and constrained limited freedom to diverge from EU law and jurisprudence concerning the enforcement of patents. It is also highlighted that “any granting of national compulsory licenses would quash the unitary effect, thus working against free trade rules”.45 Instead, compulsory licenses for unitary patents should have the same effect in every signatory state. Moreover, the power to grant compulsory licenses should be vested in the UPC, not the member states, in a manner similar to that which was proposed with regard to the earlier, failed initiative for a Regulation on the Community Patent.46

5.6 5.6.1

Human, Fundamental and Basic Rights Human Rights and IP

The interrelationship between human rights and IPRs has received considerable attention after the enactment of TRIPS, both from the scholarly47 and political

45 Reto M. Hilty et al., Unitary Patent Package : Twelve Reasons for Concern, Research Paper No. 12-12 (Munich: Max Planck Institute for Intellectual Property & Competition Law), 3-4, 5-6, 11. 46 See Rec. 6, Art. 21 and 22 of Proposal for a Council Regulation on the Community Patent, which would have allowed the EC to grant compulsory licenses on the basis of failure to work (Art. 21 para 1) and public interest (Art 21 para 3) and to dependent patents and plant variety rights (Art. 21 para 2), as well as for semiconductor technology (Art. 21 para 4). The later revisions suggested that this power would have been granted to the Community Patent Court. See Rec. 6, Arts. 21 and 22 of the Council of the European Union’s, Proposal for a Council Regulation on the Community Patent and Rec 6, Arts. 21 and 22 of the Council of the European Union’s, Revised Working Document, Proposal for a Council Regulation on the Community Patent, Revised Presidency Compromise Proposal Concerning Recital 6 and Articles 2, 9a, 20, 21, 22, 24a to 24d, 44 and 53a, 14130/1/03 REV 1 PI 111 (6 November 2003). The subsequent revision also envisioned the grant of compulsory licenses to remedy practices that were found to be anticompetitive on the basis of national merger regulation. See Art. 21 para 3 of the Council of European Union’s, Second Revised Working Document, Proposal for a Council Regulation on the Community Patent, Second Revised Presidency Compromise Proposal Concerning Recital 6 and Articles 2, 9a, 20, 21, 22, 24a to 24d, 44 and 53a, 14130/2/03 REV 2 PI 111, (13 November 2003). See also Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 30, 128-129. 47 See, for example, Laurence R. Helfer, “Human Rights and Intellectual Property : Conflict or Coexistence?,” Minnesota Intellectual Property Review 5, no. 1 (2003); “Toward a Human Rights

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perspectives.48 While certain rights, such as those to health, food and freedom of expression have been subject of scholarly interest,49 little research has been conducted on the relevance of human rights to a follow-on innovator’s position.50 Therefore, the following Sects. 5.6.2–5.6.3 describes which human, fundamental, and basic rights protect both patent holders and follow-on innovators, before turning to a brief overview of the freedom offered to enact compulsory licenses under the ECHR.

5.6.2

Patents in the Light of Human Rights

Several human, fundamental, and basic rights parallel the protection offered by IPRs. First, on the basis of Art. 27 (2) UDHR, all individuals have the right to the protection of the moral and material interests resulting from any scientific, literary, or artistic production of which they are the authors.51 This recognition is paired with the balancing right to freely participate in the cultural life of the community, to enjoy the arts, and to share in scientific advancement and its benefits (Art. 27 (1) UDHR).

Framework for Intellectual Property,” U.C. Davis Law Review 40 (2007); Peter K. Yu, “Reconceptualizing Intellectual Property Interests in a Human Rights Framework,” U.C. Davis Law Review 40 (2007); Xavier Seuba, “Human Rights and Intellectual Property Rights,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2008); “Human Rights and Intellectual Property Rights,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2016); Klaus Beiter, “Establishing Conformity between TRIPS and Human Rights : Hierachy in International Law, Human Rights Obligations of the WTO and Extraterritorial State Obligations under the International Covenant on Economic, Social and Cultural Rights,” in TRIPS Plus 20: From Trade Rules to Market Principles, ed. Hanns Ullrich, et al. (Heidelberg: Springer Verlag, 2016). 48 For example, TRIPS has been noted as conflicting with “the realization of economic, social and cultural rights in relation to, inter alia, impediments to the transfer of technology to developing countries, the consequences for the enjoyment of the right to food of plant variety rights and the patenting of genetically modified organisms, ‘bio-piracy’ and the reduction of communities’ (especially indigenous communities’) control over their own genetic and natural resources and cultural values” and “the right of everyone to enjoy the benefits of scientific progress and its applications, the right to health, the right to food and the right to self-determination” Office of the High Commissioner of Human Rights, Sub-Commission on the Promotion and Protection of Human Rights, Intellectual Property and Human Rights. Resolution 2000/7, Un. Doc. E/CN.4/ SUB.2/RES/2000/7, (2000), 1. 49 For an overview of the literature on the overlaps of different human rights and IPRs, see Seuba, “Human Rights and Intellectual Property Rights,” 474-476 (with references). 50 On access to essential technologies from the perspective of human rights, see generally Abbe E. L. Brown, Intellectual Property, Human Rights and Competition (Cheltenham: Edward Elgar Publishing, 2012). 51 United Nations General Assembly, Resolution, International Bill of Human Rights, A Universal Declaration of Human Rights, UN. Doc. A/RES/217(III) (10 December 1948) [hereinafter UDHR].

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These rights are also recognized in Art. 15 (c) of ICESC.52 However, the rights that ensure cultural participation, as protected by Art. 15 ICESC, are not equivalent to rights to IP and do not protect the interests of legal entities; instead, they stem from the “inherent dignity and worth of all persons”.53 However, in certain legal systems, IPRs are deemed to be protectable under the human right to property. The European Court of Human Rights has ruled that IPRs are protected under Art. 1 Protocol No. 1.54 Intellectual property is also protected under the basic right to property in Germany.55 The US Constitution guarantees exclusive rights to authors and inventors for the purposes of promoting “the progress of science and useful arts” (U. S. Const. Art. I, § 8, cl. 8). In the EU, Art. 17 (2) CFR expressly states that “intellectual property shall be protected”, thus giving the protection of IP the status of primary legislation in the EU (Art. 6 (1) TEU).56 Furthermore, the EU has acceded to ECHR (Art. 6 (2) TEU), making the case-law of ECtHR relevant to the interpretation of CFR. Art. 6 (3) TEU also confirms that fundamental rights, as recognized by the ECHR and as they result from the constitutional traditions that are common to the member states, shall constitute general principles of the law of the EU. It should be noted that human rights concerning IP are not isolated from the economic justifications for IP protection adapted either by the drafters of a constitution or a international agreement or the judiciary that applies a particular

52 International Covenant on Economic, Social and Cultural Rights, opened for signature 16 December 1966, 993 U.N.T.S. 3 (entered into force 3 January 1976) [hereinafter ICESC]. In addition, Art. 13 of the CFR recognizes the freedom of the arts and sciences. 53 UN Committee on Economic, Social and Cultural Rights (CESCR), General Comment No. 17 : The Right of Everyone to Benefit from the Protection of the Moral and Material Interests Resulting from Any Scientific, Literary or Artistic Production of Which He or She Is the Author (Art. 15, Para. 1 (C) of the Covenant), Un. Doc. E/C.12/GC/17 (12 January 2006), 2-3. Art. 15 (c) ICESC “safeguards the personal link between authors and their creations and between peoples, communities or other groups and their collective cultural heritage, as well as their basic material interests which are necessary to enable authors to enjoy an adequate standard of living.” Ibid, 2. For further analysis of the interrelationship between Art. 15 ICESC and IPRs, see generally Yu, “Reconceptualizing Intellectual Property Interests.”; Beiter, “Establishing Conformity between TRIPS and Human Rights,” 458-460. 54 Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 20 March 1952, E.T.S. 9 (entered into force 18 May 1954). [hereinafter Protocol 1 ECHR]; Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), ECLI: CE:ECHR:2007:0111JUD007304901, para 72. Right to property is recognized in Art. 17 UDHR, but it was not included as a human right in the ICESC and International Covenant on Civil and Political Rights (opened for signature 16 December 1966) 999 U.N.T.S. 171 (entered into force 23 March 1976) [hereinafter ICCPR]. 55 § 14 Grundgesetz [GG] [Basic Law], translation at https://www.gesetze-im-internet.de/englisch_ gg/ (Ger.); School Book, BVerfG, 7 June 1971, IIC 1972, 394. 56 Consolidated version of the Treaty on the European Union, 2012 O.J. (C 326) 13, [hereinafter TEU]; Christophe Geiger, “Intellectual ‘Property’ after the Treaty of Lisbon : Towards a Different Approach in the New European Legal Order?,” European Intellectual Property Review 32, no. 6 (2010): 257.

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instrument. For example, while the wording of U. S. Const. Art. I, § 8, cl. 8 reflects the incentive theory as a justification for the protection of IPRs,57 In contrast, Art. 17 (2) of the CFR can be found to echo the prospect theory. These economic theories differ dramatically with regard to their normatively preferred scopes of patent protection and views on dynamic competition.58 The wording of Art. 17 (2) CFR has been criticized as being vague and allowing for expansionist protection of IP.59 However, Art. 17 (1) is intended to be subject to the same guarantees and limitations as the right to property pursuant to Art. 17 (2) CFR.60 The ECHR and the case law of the European Court of Human rights establish the “minimum standard” for the protection of fundamental rights (Art. 52 (3) CFR), which can be expanded under the CFR.61 Nevertheless, the right to property, even when it encompasses IP, can be subject to limitations in the general or public interest, irrespective of whether it is protected as a human,62 fundamental,63 or basic right.64 In addition, the right to property can, pursuant to the principle of proportionality, be limited as a result of the need to protect other human, fundamental, or basic rights with which it may conflict.65 Furthermore, in EU law, Art. 101 and Art. 102 TFEU hold the same status as the fundamental rights identified in the CFR; hence, in the event of a conflict, they would need to be balanced with the right to property pursuant to the principle of proportionality.66 In addition to the right to property, the right to conduct business (Art. 16 CFR) is also relevant to a patent holder. When read together with Art. 20 CFR, which guarantees equality before the law, Art. 16 CFR can be interpreted as protecting

57 Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14. The argument underlying the incentive theory has also been attributed to Thomas Jefferson; see Jefferson, “To Isaac McPherson Monticello”; Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 48-49. 58 See Sect. 2.1.2 on the incentive theories, cf. Sect. 2.1.3 on the prospect theory. 59 See Christophe Geiger, “Intellectual Property Shall Be Protected!? Article 17(2) of the Charter of Fundamental Rights of the European Union : A Mysterious Provision with an Unclear Scope,” European Intellectual Property Review 31, no. 3 (2009): 115; Geiger, “Intellectual “Property” after the Treaty of Lisbon,” 257; Jonathan Griffiths and Luke McDonagh, “Fundamental Rights and European IP Law : The Case of Art 17 (2) of the EU Charter,” in Constructing European Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2013), 80. 60 Explanations Relating to the Charter of Fundamental Rights, 2007 O.J. (C 303) 17, explanation on Article 17; Geiger, “Intellectual Property Shall Be Protected!?,” 116; Tuomas Mylly, “Constitutionalization of the European Legal Order : Impact of Human Rights on Intellectual Property in the EU,” in Research Handbook on Human Rights and Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2015), 106. 61 Mylly, “Constitutionalization of the European Legal Order:,” 105-106. 62 Art. 1 Protocol 1 ECHR. 63 Arts. 17 (2) and Art. 52 (1) CFR. 64 See § 14 GG. 65 See Art. 52 (1) CFR. 66 See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 42.

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the right to compete, which collectively translates to the freedom of competition.67 Art. 16 CFR can also be viewed as reflecting the dynamic incentive theory: On the one hand, it ensures a patent holder’s right to exploit her patent and engage in licensing practices characterized by different levels of openness while enjoying protection from free riding, and, on the other hand, it protects the competitive interests of follow-on innovators from potentially dysfunctional behaviour on the part of the patent holder, such as offensive practices.68 The freedom to compete and to conduct business also encompasses the freedom of contract, which refers to an individual’s rights to choose with whom he does business and to determine prices for his services.69 This interpretation, however, has been criticized as being excessively expansive, as it introduces fundamental rights consideration to any case involving IP.70 Nevertheless, the CJEU has continued to expand the fundamental rights dimension of IPRs by deeming the enforcement of IPRs to be protected under the right to access the courts (Art. 47 CFR); thus, its treatment of IPRs leans towards the prospect, rather than the incentive, theory.71

5.6.3

Follow-on Innovation and Human Rights

Generally, follow-on innovators who patent enjoy the same basic, fundamental, and human rights as any patent holder. Art. 1 Protocol 1 ECHR establishes a right to peaceful enjoyment of possessions. Patents,72and presumably also patent applications,73 qualify as possessions pursuant to Art. 1 Protocol 1 ECHR. Hence, followon innovators who have patented technology of their own or have applied for patents are entitled to protection under Art. 1 Protocol 1 ECHR.

Gustavo Ghidini and Andrea Stazi, “Freedom to Conduct Business, Competition and Intellectual Property,” in Research Handbook on Human Rights and Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2015), 410. 68 Ibid, 416-420. 69 Case C-283/11, Sky Österreich GmbH v. Österreichischer Rundfunk, 2 C.M.L.R. 25 (2013), paras 41-43 (2013), with the further references to CJEU case law. For criticism of this expansive interpretation, see Mylly, “Constitutionalization of the European Legal Order,” 129. 70 Mylly, “Constitutionalization of the European Legal Order:,” 129. 71 See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 42; for further discussion see Sect. 9.4. 3.2. 72 Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990), ECLI:CE:ECHR:1990:1004DEC001263387; Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), para 72. 73 Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), para 78. See also Laurence R. Helfer, “New Innovation Frontier? Intellectual Property and the European Court of Human Rights,” in Intellectual Property and Human Rights, ed. Paul L. C. Torremans (Alphen aan den Rijn: Wolters Kluwer Law & Business, 2015), 47-55. 67

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The concept of “possession” under the ECHR is autonomous.74 In addition, “assets, including claims, in respect of which the applicant can argue that he or she has at least a ‘legitimate expectation’ of obtaining effective enjoyment of a property right” qualify as possessions under Art. 1 Protocol 1 ECHR,75 subject to the condition that the claims to such assets are enforceable.76 Hence, Art. 1 Protocol 1 ECHR does not create a right to inherit or obtain possessions in the future.77 Thus, a follow-on innovator’s technology will enjoy the protection offered under Art. 1 Protocol 1 ECHR only after she files a patent application for it. Innovators whose technology is not protectable under IPRs or who, for example, choose to engage in free revealing instead of obtaining IP, will not enjoy protection under Art. 1 Protocol 1 ECHR.78 Also compulsory and statutory licenses may be viewed as possessions under the definition of Art. 1 Protocol 1 ECHR.79 Hence, a follow-on innovator may enjoy protection under the ECHR for his entitlement to use a patent on the basis of a compulsory license or a legitimate expectation to obtain such a compulsory license in the future. However, a technology that a follow-on innovator may develop in the future does not receive protection under Art. 1 Protocol 1 ECHR.80 Follow-on innovation may also be protected as a human right on the basis of its competitive nature. In EU law, the interests of a follow-on innovator may be balanced against the patent holder’s right to property on the basis of Art. 101 and 102 TFEU and Art. 16 CFR. The latter provision, in particular, can be interpreted to

74 Monica Carss-Frisk, Right to Property. A Guide to the Intepretation of Article 1 of Protocol No. 1 to the European Convention on Human Rights, Human Rights Handbooks, No. 4 (Strasbourg: Directorate General of Human Rights, 2003), 13, 17. 75 Kopecký v. Slovakia, no. 44912/98 (28 September 2004), ECLI:CE: ECHR:2004:0928JUD004491298, para 35. 76 “[T]he hope of recognition of a property right which it has been impossible to exercise effectively cannot be considered a “possession” within the meaning of Article 1 of Protocol No. 1, nor can a conditional claim which lapses as a result of the non-fulfilment of the condition” ibid. 77 Marckx v. Belgium, no. 6833/742 (13 June 1979), ECLI:CE:ECHR:1979:0613JUD000683374, para 50; Aida Grgić, Zvonimir Mataga, Matija Longar and Ana Vilfan, Right to Property under the European Convention on Human Rights: A Guide to the Implementation of the European Convention on Human Rights and its Protocols, Human Rights Handbooks, No. 10 (Strasbourg: Council of Europe, 2007), 7. “Future income [. . .] is only a “possession” once it has been earned, or an enforceable claim to it exists”. Malik v. The United Kingdom, no. 23780/08, (13 March 2012) ECLI: CE:ECHR:2012:0313JUD002378008, para 93. 78 In principle, UOCI, when relying on existing, protected technology, could be protected under the right to share in scientific advancement and its benefits (Art. 27 (1) UDHR), the right to enjoy the benefits of scientific progress and its applications (Art. 15 (b) ICESC), and the freedom of the sciences (Art. 13 CFR). These provisions could be considered to justify, for example, research exemptions or other exceptions in favour of UOCI. However, no equivalent provision has been incorporated into the ECHR. Therefore, on the level of human rights, the interest of such follow-on innovators would need to be accommodated in the ECHR system on the basis of public and general interest that justifies interferences with the right to property under Art. 1 Protocol 1 ECHR. 79 Helfer, “New Innovation Frontier?,” 41, fn 63. 80 See Kopecký v. Slovakia, no. 44912/98 (28 September 2004), para 35.

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limit the ability of a patent holder to exercise the rights conferred by a patent. Ghidini and Stazi propose, implicitly relying on the dynamic incentive theory, that a patent holder’s own “freedom to conduct a business in coherence with the overarching principle of free competition and consumer protection [. . .] may require a regulatory or judicial ‘interference’ on the freedom to exploit IPRs, if and when the exercise of said rights would exceed, with harmful impact on constitutionally protected interests, the limits of the aforesaid need either to prevent economically significant free riding, or to ‘include’ independent business partners for purposes of ‘competition compatible’ cooperation.”81 The establishment of compulsory liability rules, under the condition that IPRs remain enforceable against free riding that diminishes incentives to innovate, is considered to be proportionate in the context of the CFR.82 However, recent CJEU case law, as discussed later in this thesis, suggests that EU law offers a higher level of protection for a patent holder’s interests, than what the dynamic incentive theory would presuppose.83

5.6.4

The Freedom to Enact Compulsory Liability Rules

In essence, compulsory licenses represent control over the uses of a patent holder’s property, which is protected under Art. 1.1 Protocol 1 ECHR84 and Art. 17 CFR. Since the state has the right “to enforce such laws as it deems necessary to control the use of property in accordance with the general interest” (Art. 1.2 Protocol 1 ECHR),85 it is necessary to evaluate under which conditions a compulsory liability rule will satisfy the requirement of general interest under ECHR. Generally, member states enjoy a wide margin of appreciation with regard to defining public or general interest and implementing social and economic policies. Consequently, the ECtHR will review the judgements of national authorities with regard to public interest only when they are “manifestly without reasonable foundation”86 or “flawed by arbitrariness”.87 The relationship between a measure taken and the objective of promoting general interest must be proportionate.88 Essentially, a fair balance must be “struck between the demands of the general interest of the community and the requirements of the

Ghidini and Stazi, “Freedom To,” 420. Ibid, 416-420. 83 See Sects. 8.8.1.5 and 9.4.3.2, discussing the implications of the Huawei decision. 84 Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). 85 Similarly Art. 17.1 CFR. 86 James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), ECLI:CE: ECHR:1986:0221JUD000879379, para 45. 87 Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), para 45. 88 James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 50. 81 82

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protection of the individual's fundamental rights”.89 The measure taken in the public interest may not pose “an individual and excessive burden” on the individual.90 Nevertheless, a measure established in favour of private parties can also serve a general interest.91 Any interference with the right granted by Art. 1 Protocol 1 ECHR must be lawful; hence, such interference must be “exercised by enforcing ‘laws’” and it should be ensured “that the applicable provisions of domestic law are sufficiently accessible, precise and foreseeable in their application.”92 However, the criterion of lawfulness also encompasses judicial interpretation of the law,93 thus allowing for certain flexibility in the laws that interfere with the right to property, such as the use of standards, rather than rules, in the formulation of a legal norm.94 The European Commission of Human Rights reviewed the alignment of a compulsory license for a dependent patent with the right to property under Art. 1 Protocol 1 ECHR in Smith Kline admissibility decision. The applicant complained that a compulsory license, which was granted to a company that owned a dependent patent interfered with his right to peaceful enjoyment of possession on the grounds that the license was too broad and that criteria for granting it did not take into account the public interest.95 In its decision, the Commission followed the rule-of-law paradigm that entails minimal review of national decisions.96 The Commission recognized that many contracting states limit the exclusive rights conferred by a patent by allowing other persons to use it “for the purpose of preventing the long term hampering of technological progress and economic activity.” The Commission deemed the compulsory license for the dependent patent lawful and as promoting “a legitimate aim of encouraging technological and economic development”. In this respect, it noted that the dependent patent, which had satisfied the criteria of patentability, could not have

89

Kirilova and Others v. Bulgaria, nos. 44912/98, 44038/98, 44816/98 others (9 June 2005), ECLI: CE:ECHR:2005:0609JUD004290898, para 106. See also Sporrong and Lönnroth v. Sweden, nos. 7151/75, 7152/75 (23 September 1982) ECLI:CE:ECHR:1982:0923JUD000715175, para 69; James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 54. 90 Sporrong and Lönnroth v. Sweden, nos. 7151/75, 7152/75 (23 September 1982), para 70; James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 50. 91 “[A] taking of property effected in pursuance of legitimate social, economic or other policies may be ‘in the public interest’, even if the community at large has no direct use or enjoyment of the property taken.” James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 45. 92 Edwards v. Malta, no.17647/04, (24 October 2006), ECLI:CE: ECHR:2006:1024JUD001764704, para 60. 93 SIA AKKA/LAA v. Latvia, no. 562/05 (12 July 2016), ECLI:CE: ECHR:2016:0712JUD000056205, para 65. 94 See Kaplow, “Rules Versus Standards,” 560-563. 95 Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). 96 Helfer, “New Innovation Frontier?,” 65-71.

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been worked without a compulsory license to the applicant’s patent.97 Albeit the grant of the license was not conditional on the Patent Office’s finding of general interest, the Commission accepted that it fell within the contracting state’s margin of appreciation to enact laws intended “to prevent abuse of monopoly situations and encourage development”. On this basis, the instrument was deemed proportionate with respect to the interests of the patent holder and the general interest under Art. 1 Protocol 1 ECHR.98 Art. 1 Protocol 1 ECHR implicitly requires that a right holder is compensated for the taking of property.99 However, member states also enjoy a wide margin of appreciation with regard to establishing the conditions of compensation for control over the use of a property.100 In Smith Kline, the scope of the dependent license, which covered only that which was necessary for working the dependent patent and entitled the right holder both to remuneration and a reciprocal license, was deemed proportional.101 Hence, a compulsory license that guarantees a patent holder remuneration in accordance with Art. 31 TRIPS should also be sufficiently compliant with the conditions of ECHR for legitimately interfering with the protection of possessions on the ground of general interest and in accordance with the principle of proportionality.102 It must be acknowledged that the case-law of ECtHR can be viewed to attach certain positive obligations to Art. 1 Protocol 1 ECHR, such as providing for patent holders with the basic procedural safeguards that allow them to take the measures necessary to protect their IPRs against infringements.103 However, according to Helfer, this would not preclude a state from limiting injunctive relief on the basis of the margin of discretion of the courts in a constellation similar to that established by eBay.104 On this basis, the ECHR does not preclude the establishment of the ex post liability rules.

97

Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). 98 Ibid. 99 James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 54. 100 Lithgow and Others v. The United Kingdom, nos. 9006/80, 9262/81, 9263/81, 9265/81, 9266/81, 9313/81, 9405/818, (8 July 1986), ECLI:CE:ECHR:1986:0708JUD000900680, para 122. 101 Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). 102 “[T]he taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be considered justifiable under Article 1 (P1-1). Article 1 (P1-1) does not, however, guarantee a right to full compensation in all circumstances. Legitimate objectives of “public interest”, such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value.” James and Others v. The United Kingdom, no. 8793/79 (21 February 1986), para 54. 103 Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), para 83; Helfer, “New Innovation Frontier?,” 61, 84. 104 Helfer, “New Innovation Frontier?,” 73-74 and fn 219. See eBay, 126 S. Ct. 1837, 1839, 1842.

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Overall, under the ECHR, contracting states have a wide degree of freedom to enact compulsory licenses for functional efficiency.105 Hence, whenever a compulsory license satisfies the conditions established by TRIPS, most importantly by Art. 7, Art. 8, Art. 31 TRIPS and Chapter III as well as Art. 5 A PC, it will also satisfy the criteria of general interest and proportionality established under Art. 1 Protocol 1 ECHR. However, as will be discussed further, the CJEU’s recent interpretation of the CFR presumes a narrower margin for enacting compulsory liability rules.106

105

However, it has been questioned how wide the margin of appreciation is with respect to other limitations to IPRs, such as exceptions, on the grounds of public interest. Helfer, “New Innovation Frontier?,” 63-64. In Smith Kline, the applicants also complained that the Special Division of the Patent Office that granted the compulsory license was not an independent tribunal in the meaning of Art. 6.1 ECHR and that the decision was not subject to review by any judicial organ pursuant to Art. 13 ECHR. Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). The fact that the Netherlands was amending the Patent Act to correspond with the conditions of TRIPS contributed to the settlement of the case. Helfer “New Innovation Frontier?,” 64. Given that TRIPS also introduced rigorous procedural criteria for the grant of compulsory licenses, it is likely that compulsory licenses granted in accordance with Art. 31 TRIPS would not intervene with Art. 6 and Art. 13 ECHR. Cf. Helfer “New Innovation Frontier?,” 64, in which the author argues that vesting the power to grant compulsory licenses to an administrative organ may breach Art. 6 ECHR. 106 See Sects. 8.8.1.5 and 9.4.3.2.

Chapter 6

Compulsory Licenses in Patent Law

The chapter reviews the conditions for compulsory licenses for functional efficiency set in international law and the instruments’ adequacy to address the market failures that hinder follow-on innovation. Under the TRIPS Agreement, compulsory licenses (Art. 31) are a mechanism distinct from exceptions to patent protection (Art. 30). Of the general and procedural conditions of Art. 31 TRIPS, the requirement of prior effort to obtain a license before using a patent largely precludes the application of compulsory licenses to hold-up problems. Otherwise, TRIPS features considerable, albeit underused, procedural flexibilities for the application process of a compulsory license. Compulsory licenses for dependent patents (Art. 31 (l) TRIPS) have too narrow a scope of application to sustain the interests of follow-on innovators adequately. In theory, the market failures resulting from the deliberate conduct of a patent holder could be addressed on the grounds of abuse of rights. However, the instrument is toothless due to the requirement of prior effort. Essentially, only compulsory licenses that aim at remedying an anti-competitive practice are liberated from the condition of preliminary effort to obtain a license and could address the broadest range of market failures that hinder follow-on innovation.

6.1

Property and Liability Rules Under TRIPS

Internationally, the foundation of the property rule in patent law derives from TRIPS, which defines the minimum standards for the protection and enforcement of IPRs. Pursuant to Art. 28 (1) (a) TRIPS, the exclusive rights conferred by a patent, namely making, using, offering for sale, selling, or importing a product for these purposes, require the owner’s consent.1 According to Article 28 (2) TRIPS, a patent owner has

1 With regard to process patents, a patent owner has a right to prevent third parties from using a process without her consent; in addition, she can also prevent them from using, selling, and/or

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_6

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a right to assign, or transfer by succession, her patent and to conclude licensing contracts. The enforcement of these exclusive rights is governed by part III of TRIPS, most importantly by Art. 44 (1) TRIPS, which authorizes judicial authorities to grant injunctive reliefs. Together, Art. 28 (1) and Art. 44 (1) TRIPS adopt the property rule as a default mode of patent protection under international law for the duration of the patent term, which is 20 years from the filing date (Art. 33 TRIPS). TRIPS determines member states’ flexibility to protect patents by means of a liability rule. Article 7 TRIPS requires that the protection and enforcement of IPRs contributes “to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations”. Measures can be taken both to promote public interest (Art. 8 (1) TRIPS) and to ensure functional efficiency of the patent system (Art. 8 (2) TRIPS), provided that they are consistent with the provisions of TRIPS.2 The most important means of establishing a compulsory liability rule under TRIPS are compulsory licenses, the framework for which is established by Art. 31 TRIPS. This article primarily determines the procedural criteria for introducing a compulsory license in the national legislation of member states. It is generally recognized that Art. 31 TRIPS and Art. 5 A PC do not set boundaries on the grounds for compulsory licenses, only on the application and grant procedures.3 However, the TRIPS system recognizes several grounds that directly address functional efficiency: compulsory licenses against abuses of the rights conferred by a patent (Art. 5 A (2) PC, Art. 8 (2) TRIPS), failure to use (Art. 5 A (4) TRIPS), dependent patents (Art. 31 (l) TRIPS) and compulsory licenses intended to remedy anticompetitive practices (Art. 31 (k) TRIPS). Hence, TRIPS provides member states with freedom to address the functional inefficiencies of the patent system by means of compulsory licenses on the basis of patent law and, pursuant to Art. 8 (2) TRIPS, Art. 31 (k) TRIPS, and Art. 40 (2) TRIPS also on the basis of competition law. Furthermore, compulsory licenses justified by public policy goals may be employed in order to indirectly contribute to the fulfilment of the goal of functional efficiency.4 In addition, the property rule may be limited by creating an exception to the rights conferred by a patent (Art. 30 TRIPS). Finally, Art. 44 (1) TRIPS does not

importing for these purposes at least the product obtained directly by the patented process (Art. 28 (1) (b) TRIPS). 2 See Sect. 4.1. 3 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 462, 468; Lamping et al., “Declaration on Patent Protection,” 688. Semiconductor technology is the only field that is explicitly regulated in the TRIPS agreement. Under TRIPS Art. 31 (c), compulsory licenses to such technology can only be granted for public non-commercial use or as remedies to practices that have been determined to be anti-competitive after a judicial or administrative process. The scope of the field of semiconductor technology has been suggested to exceed that of semiconductor topography rights. Semiconductor technology thus represents an exception to the non-discrimination principle of the TRIPS Agreement, and should hence be interpreted narrowly. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 16. 4 See Sect. 6.4.5.

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oblige judicial authorities to grant permanent injunctions;5 therefore, a compulsory liability rule can be established by limiting the right to injunctive relief. This chapter seeks to identify how the existing compulsory licenses established for the purpose of maintaining the functional efficiency of the patent system address the overprotection problems that hinder follow-on innovation. First, it discusses the interrelationships that exist between exceptions (Art. 30 TRIPS) and compulsory licenses (Art. 31 TRIPS) under the TRIPS framework. Second, it reviews the general requirements for a compulsory license, such as the requirement of prior effort and adequate remuneration, and then proceeds to consider the procedural requirements established by Art. 31 TRIPS in light of their effect on resolving overprotection problems. Third, it explores how individual grounds for compulsory licenses that are intended to enhance the functional efficiency of the patent system balance the interests of patent holders and follow-on innovators. While this chapter discusses Art. 31 (k) TRIPS as a justification for a compulsory license on the grounds of competition law, the actual compulsory liability rules based on competition law and their effectiveness in terms of resolving the overprotection problems that hinder follow-on innovation are reviewed in Chap. 8. The flexibility of TRIPS in terms of limiting the granting of injunctive relief and the possibilities with regard to denying injunctive relief in the US and in the EU are analysed in Chap. 7.

6.2

Interrelationship of Art. 30 and Art. 31 TRIPS

Art. 30 TRIPS, which addresses exceptions to the rights conferred, is closely related to Art. 31 TRIPS, which concerns other uses of a patent without the authorisation of its owner. According to the panel in the Canada Pharmaceuticals case, the connection between Art. 30 and 31 TRIPS arises from the fact that both articles “permit exceptions to patent rights subject to certain mandatory conditions”.6 As exceptions, both provisions balance the goal of incentivising investments with other policy interests.7 Art. 30 TRIPS regulates uses against which a patent owner cannot enforce her exclusive right, whereas Art. 31 TRIPS establishes conditions for compulsory liability rules. Art. 31 TRIPS is significantly more detailed and concrete than Art.

Ansgar Ohly, ““Patenttrolle” Oder : Der patentrechtliche Unterlassungsanspruch unter Verhältnismäßigkeits-vorbehalt? - Aktuelle Entwicklungen im US-Patentrecht und ihre Bedeutung für das deutsche und europäische Patentsystem,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 57 (2008): 790. 6 Report of the Panel, Canada – Patent Protection of Pharmaceutical Products, WTO Doc. WT/DS114/R (adopted 17 March 2000) [hereinafter Canada Pharmaceuticals], 7.91. 7 Lionel Bently and Brad Sherman, “Limiting Patents,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 319. 5

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30 TRIPS, which sets three criteria for exceptions in a format similar to that of the three-step test used for copyright exceptions (Art. 9.2 BC).8 According to the panel in Canada Pharmaceuticals, the conditions are cumulative, and each of them has a distinct meaning.9 This cumulative interpretation of Art. 30 TRIPS, however, has been criticized in favour of a “comprehensive overall assessment”.10 A number of different views have been expressed with regard to the interrelationship between Art. 30 and Art. 31 TRIPS. In the most narrow view, Art. 30 TRIPS is considered to present an additional layer of limitations to the interpretation and implementation of Art. 31 TRIPS. The test of Art. 30 TRIPS should hence be used to justify compulsory licenses granted on the basis of Art. 5 A PC and Art. 31 TRIPS.11 Also the BGH viewed Art. 30 TRIPS as applying to compulsory licenses in Polyferon.12 However, this interpretation of the supremacy of Art. 30 over Art. 31 is opposed to the conventional reading of the TRIPS agreement, which states in footnote 7 that the “Other use” of Art. 31 refers to use other than that allowed under Article 30.13 In Canada Pharmaceuticals, the word “use” in Art. 31 was interpreted as referring to “derogations from exclusive rights” that are “not covered by Article 30”.14 A view that subjects Art. 31 TRIPS to Art. 30 TRIPS would be contrary to the ordinary meaning of the concept of “other use” in the context of TRIPS Agreement (Art. 31.1 VCLT). Instead, Art. 31 TRIPS on compulsory licenses should be interpreted as having the status of lex specialis with respect to Art. 30 TRIPS on exceptions to patent protection.15

8 According to Art. 30 TRIPS, “Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.” In comparison to Art. 30 TRIPS, Art. 9 (2) of the Berne Convention for the Protection of Literary and Artistic Works (as amended on September 28 1979), adopted 28 September 1979, WIPO Lex No. TRT/BERNE/001 (entered into force 19 November 1984), [hereinafter BC], does not include the qualification of “not unreasonably conflict[ing] with the normal exploitation of the patent”, as well as the last passage concerning the interests of third parties. 9 Canada Pharmaceuticals 7.20-7.21. See also Appellate Body Report and Panel Report, United States - Standards for Reformulated and Conventional Gasoline, WTO Doc. WT/DS2/9 (adopted 20 May 1996), 23, fn 24 (and the references there). 10 Lamping et al., “Declaration on Patent Protection,” 687. 11 Chung-Lun Shen and Jyh-An Lee, “Review of Granted Compulsory Licences,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung: Liu (Heidelberg: Springer Verlag, 2015), 304-306, 308, fns 65 and 67. 12 Polyferon, BGH, 5 December 1995, IIC, 1997, 242, 246. 13 For commentators who share the same view, see Straus, “Implications of the TRIPS Agreement,” 204, fn 185. 14 Canada Pharmaceuticals, 7.91. 15 Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 68; Gervais, TRIPS Agreement, 2.396. Cf. Justin Malbon, Charles Lawson, and Mark Davison, WTO Agreement on Trade-Related Aspects of Intellectual Property : A Commentary (Northhampton, MA: Edward Elgar Publishing, 2014), 31.01.

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De Carvalho suggests that Art. 31 TRIPS should be interpreted a contrario in relation to Art. 30 TRIPS. Pursuant to his view, Art. 31 TRIPS defines the additional conditions for exceptions that exceed one of the criteria of Art. 30 TRIPS.16 In some situations, Art. 31 TRIPS could indeed allow for compulsory licenses for uses that would not qualify as exceptions under Art. 30 TRIPS. However, de Carvalho’s interpretation disregards the case-specific nature of compulsory licenses in patent law. The limitations established under Art. 30 TRIPS have a “more general effect”, while the procedures prescribed by Art. 31 TRIPS are intended to allow for the granting of compulsory licenses in individual cases.17 In addition, de Carvalho’s statement does not take into account the difference in the manners in which these instruments affect the rights conferred by a patent. The exceptions allowed by Art. 30 TRIPS carve limitations that fall outside of the scope of patent protection. In contrast, Art. 31 TRIPS does not interfere with the scope of protection, as it only regulates uses that lack the consent of the right holder. Consequently, Art. 30 TRIPS can neither be interpreted as narrowing down nor expanding the scope of Art. 31 TRIPS.18 It is not entirely clear whether Art. 30 TRIPS was intended to regulate only exempted, uncompensated uses and the applicability of Art. 31 TRIPS to be limited uses for which the patent holder is entitled to a compensation.19 The fact that the three-step test applied in copyright law (Art. 13 TRIPS) covers both limitations and compulsory licenses would support the interpretation of the mutually exclusive scope of application of the articles. Furthermore, the Berne Convention’s Drafting Committee’s report notes that paying equitable remuneration to an author would heighten the threshold breaching the three-step tests’ prohibition of unreasonably prejudicing the legitimate interests of the author.20 However, the same passage from the Drafting Committee’s report was used in the interpretation of the concept of “legitimate interests” of Art. 30 TRIPS by the panel in Canada Pharmaceuticals.21 This suggests that the provision could allow for exceptions to the patent protection

16 de Carvalho, TRIPS Regime of Patent Rights; TRIPS Regime of Patent Rights, 1st ed. (The Hague: Kluwer Law International, 2002), 251; TRIPS Regime of Patents and Test Data, 4th ed. (Alphen aan den Rijn: Kluwer Law International, 2014), 388. 17 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 462. From a more pragmatic point of view, a compulsory license may be implemented in national legislation as a lenient alternative to an exception to patent protection, especially considering the fact that compulsory licensing provisions are rarely used. 18 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 11. 19 Cf. Carlos M. Correa, Intellectual Property Rights and the Use of Compulsory Licenses : Option for Developing Countries (Geneva: South Centre, 1999), 7, in which the author views Art. 30 TRIPS as only covering uncompensated uses. 20 “Report on the Work of Main Committee I (Substantive Provisions of the Berne Convention : Articles 1 to 20),” in Records of the Intellectual Property Conference of Stockholm (1967) Volume II, ed. World Intellectual Property Organization (Geneva: WIPO), para 85. 21 See Canada Pharmaceuticals, 7.14-17.15, 17.70-17.73 and fn 419.

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that would amount to small-scale statutory licenses, the use of which would be compensated by a fixed fee, not case-specifically as under Art. 31 TRIPS. One can therefore conclude that, while Art. 30 and Art. 31 TRIPS are distinct from each other in the manners in which they interfere with the exclusive rights of a patent holder, they could, when implemented and applied, lead to parallel legal effects. Arguably, Art. 30 TRIPS could permit the establishment of a default compulsory liability rule with a very limited scope.22 Similarly, Art. 31 (k) TRIPS allows for an uncompensated compulsory license (the so-called zero-sum liability rule) to be granted in order to remedy an anticompetitive practice.23 Hence, there is an area in which a member state may choose whether to employ exceptions or a compulsory license in order to reach a specific policy goal.

6.3

General and Procedural Requirements

6.3.1

Prior Effort

6.3.1.1

The Objective of the Prior Effort Requirement

Article 31 (b) TRIPS establishes the most important requirement for an applicant seeking a compulsory license. The use of the subject matter of a patent without the authorization of the right holder “may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time” (Art. 31 (b) TRIPS). This condition of Art. 31 (b) TRIPS is often referred to as the “prior negotiation” requirement.24 However, as Lin notes, this provision only requires effort from the side of the willing licensee, not mutual negotiation.25 In the interests of terminological clarity, the term “prior effort” is used to refer to this requirement of Art. 31 (b) TRIPS.

22

Cf. Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 68-69, who argues that a compulsory license is the only legislative instrument that allows the uses and the implementation of the objectives specifically identified in Art. 31 TRIPS and the Decision of the General Council. 23 For example, the misuse doctrine in the US, which is discussed in Sect. 7.4, features a zero-sum liability rule (Hilty, “Legal Remedies against Abuse,” 377, 393) which is applied as a defence in infringement proceedings; this rule features elements of an exception to a patent right (Art. 30 TRIPS), a compulsory license for anticompetitive practices (Art. 31 (k) TRIPS), and a limitation to injunctive relief (Art. 44 TRIPS). 24 See UNCTAD-ICTSD, Resource Book on TRIPS and Development, 469. 25 Xiuqun Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing : Practice, Problem, and Proposal,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 170. This enables a prospective user to provide evidence of his efforts to obtain a license, even in the event that patent

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Art. 31 (b) TRIPS is essentially a procedural criterion for the granting of a compulsory license.26 Its introduction entailed a significant departure from the freedom to grant compulsory licenses provided under Art. 5 A PC. The prior effort requirement can be seen to emphasises the importance of a patent holder’s freedom to conclude licensing contracts under Art. 28 (2) TRIPS. Hence, it reaffirms the status of voluntary licensing as the primary means of gaining access to an invention and underscores the exceptionality of the use of compulsory licenses as an instrument that interferes with the exercise of exclusive rights. Furthermore, it indicates a preference for determining licensing fees and conditions on the market through negotiations between patent holders and prospective licensees. As price determination on a competitive, well-functioning market is deemed to be more efficient than price determination by a third party,27 it is economically justifiable to encourage a potential user to obtain a license without government-induced interference with any of the exclusive rights of the patent holder. This provision provides a patent holder with an opportunity to negotiate a more advantageous voluntary license when compared to the compensation provided by a compulsory license.28 However, this requirement does not only favour the patent holder: Compulsory licenses have an indirect effect in terms of enhancing the negotiating position of a prospective licensee.29 Hence, the mere existence of compulsory licenses may reduce the likelihood of a patent holder refusing a license or setting excessive fees for it during voluntary negotiations. In addition, voluntary negotiations enable the patent holder and the licensee to agree on the licensing terms that are wider and more flexible that those of a compulsory license.30 The prior effort requirement is economically justified in an environment that is characterised by low transaction costs and in which innovations are discrete products. However, when applied to the anti-commons context, this procedural requirement becomes increasingly challenging to fulfil. A prospective licensee, such as a

holder remains passive with regard to the user’s attempt to conclude a licensing agreement. Ibid, 169-170. 26 See ibid, 167-170 for a review of the negotiation history supporting this view. Similarly, see § 24 (1) PatG; Polyferon, IIC 1997, 242, 244; Rogge and Kober-Dehm, “§ 24,” § 24 para 12. Cf. Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 167-168 who views Art. 31 (b) TRIPS as an independent ground for compulsory licenses. I support the procedural view, as treating a mere refusal as a ground for a compulsory license would open the door to the creation of a much wider intervention in the exclusive rights of the patent holder than that which the existing grounds for compulsory licenses, such as failure to work (Art. 5 A (4) PC), allow for. For example, the specific criteria for dependent patents (Art. 31 (l) TRIPS) would have been redundant had the member states intended to establish prior effort as a general ground for a compulsory license. Conditioning the grant of a compulsory license on a mere refusal to provide a license on reasonable terms would risk diminishing a patent holder’s incentives when the right to exclude is critical in order to recoup his investments in innovation. 27 See Sect. 4.3.3, on patent evaluation problems associated with compulsory licenses. 28 See Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 170. 29 On indirect effect, see Sect. 4.3.6. 30 See Art. 31 (c)-(f), (h).

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follow-on innovator of a complex product, would first need to identify all of the pre-existing patents ex ante and then approach the patent holders with reasonable offers that feature reasonable commercial terms and conditions. The following Sect. 6.3.1.2 examines the wording of Art. 31 (b) TRIPS and its application to follow-on innovation in the contemporary patent landscape more closely, commenting on Lin’s recent work on the subject.31

6.3.1.2

Interpretation of the Prior Effort Requirement

“Efforts” A limited number of criteria can be identified concerning the nature and amount of effort that Art. 31 (b) requires; efforts that are suitable in the context of a particular industry may fulfil this requirement. A singular effort to obtain authorization in good faith is sufficient; on-going or repeated efforts are not required: “At least, it should be conducted in good faith and in accordance with normal commercial practices. Thus, the general principles of contract law should be observed.” In addition, such prior effort should have encompassed an offer to conclude a contract or an invitation to treat on “reasonable terms and conditions”.32 In the German case Raltegravir, the BGH expressed the view that the measures taken should be “appropriate to the specific situation to reach an agreement with the patent proprietor on the grant of a license”, a matter which is to be evaluated on a case-specific basis.33 “Prior to Such Use” The term “prior to such use” in Art. 31 (b) TRIPS refers to the timing of efforts made to obtain a voluntary license. Lin discussed whether prior effort should be made prior to applying for a compulsory license or before the granting of such a license and supported the former interpretation on the basis that it protected the patent holder’s interests.34 In the author’s opinion, both of the interpretations are based on an imprecise reading of Art. 31 TRIPS: First, as a consequence of the prior effort being a procedural requirement, a prospective licensee should make efforts to obtain a voluntary license before initiating compulsory licensing proceedings. Second, the term “prior to such use” refers to uses that are protected by the patent holder’s exclusive rights (Art. 28 TRIPS), which, under the conditions of Art. 31 TRIPS, are, exceptionally, allowed without the authorisation of the right holder. Hence, Art. 31 (b) TRIPS establishes a condition that, prior to a prospective licensee engaging in

See Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing.” Ibid, 170-171. 33 Raltegravir, BGH 11 July 2017, IIC, 2018, 94, para 19. 34 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 170. 31 32

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uses of a patent that are protected by the exclusive rights of the patent holder, he needs to seek a voluntary license. If these efforts are not successful, he can apply for a compulsory license. The prospective licensee can commence use, such as manufacturing a patented component necessary for a follow-on innovation, either according to the terms of a voluntary agreement or when the competent authority authorises it pursuant to Art. 31 TRIPS—this, however, depends on the procedural rules governing compulsory licensing of the nation in question. The requirement of prior effort as a procedural precondition for applying for a compulsory license has historically been more flexible than what the wording of Art. 31 (b) TRIPS presupposes. As a general rule, a person seeking a license should attempt to obtain it (§ 24 (1) no 1 PatG) before raising a claim for a compulsory license in court.35 However, the RG already confirmed in 1926 that a license seeker may seek to obtain a license voluntarily after proceedings have commenced but before making a claim for a compulsory license.36 Recently, Raltegravir further expanded the qualification of § 24 (1) no 1 PatG on the basis of “general principles”, with the consequence that an effort to obtain a voluntary license can now also be made after filing a claim for a compulsory license (as long as such efforts are undertaken before the oral hearing), provided that the efforts “have extended over a reasonable period of time”.37 This qualification, however, is at odds with the wording of Art. 31 (b) TRIPS in situations in which a license seeker is already using a particular patent, unless the compulsory license in question is subject to an exemption from the prior effort requirement specified by Art. 31 (b) TRIPS and Art. 31 (k).38 “Reasonable Commercial Terms” Due to the context-specific nature of the term “reasonable”, Art. 31 (b) TRIPS leaves considerable room for interpretation,39 as the qualification “reasonable commercial terms and conditions” is very flexible. Generally, it refers to terms that are typical of voluntary licensing. According to Lin, at the very least, such terms should be “prima facie commercially sensible” and include “terms on royalty rate and scope of the

Rogge and Kober-Dehm, “§ 24,” § 24 para 13. RG, 11 March 1926, 113 RGZ 115 (Ger.); Rogge and Kober-Dehn, “§ 24,” § 24 para 13. 37 Raltegravir, IIC 2018, 94, para 19. 38 § 24 (1) PatG defines the conditions for granting compulsory licenses in the public interest, which, generally, are subject to an exception from requirement of prior effort (Art. 31 (b) TRIPS). Hence, the German patent law has established more demanding conditions for granting compulsory licenses in the public interest than what TRIPS requires. However, BGH’s interpretation of the timing of the prior effort requirement in Raltegravir, IIC 2018, 94, is also applicable to compulsory licenses granted under § 24 (2) PatG; the grant of compulsory licenses for dependent patents has thus become subject to more lenient criteria than the minimum standards established by TRIPS. 39 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 469. 35 36

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license”.40 The reasonableness of such terms should be interpreted considering the case-specific transaction at hand and the industry in question; in addition, the differences between what could be reasonably concluded voluntarily and what can be imposed under a compulsory license should be taken into account.41 Gervais suggests that relevant international commercial practices should be taken into account in the determination of “reasonableness” if the patent’s field of technology is underdeveloped in the country where the compulsory license is sought.42 Naturally, the value of the technology—determined on the basis of its level of maturity and the likelihood of the success of the product in question—has an impact on determining the royalty rate.43 However, it is in the interest of the licensee to also set more detailed terms for a voluntary license, including grant-back conditions and the use of additional technology, such as the trade secrets that may be necessary to implement the technology.44 According to a more conservative interpretation, a willing licensee should not be obliged to make a detailed license offer to a patent holder. In Germany, determining a specific numerical amount is not necessary.45 In a situation in which the patent holder refuses a license, it will suffice that a willing licensee has made a declaration, for example in a letter to the patent holder, “of its willingness in principle to do so. It is not necessary that it specify [sic] the exact or appropriate amount that is subsequently to be deemed appropriate by the Patent Court.”46 Offers “which are clearly not serious and which are only used to get to the stage of applying for of a compulsory license” are unlikely to satisfy the conditions of § 24 (1) no 1 PatG.47 Nothing prevents the member states from determining what constitutes “reasonableness” in greater detail.48 Considering the challenges that arose in the interpretation of the concept of “willing licensee” in the negotiation framework developed by Huawei,49 it can be recommended that the amount of effort required on the part of a

Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 174. Ibid, 172, 174, 179. 42 Gervais, TRIPS Agreement, 2.409. 43 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 469. 44 Ibid, 470. 45 Rogge and Kober-Dehm, “§ 24,” § 24 para 13. It is no longer necessary, but possible, to lodge a security. Ibid. See also Raltegravir, IIC 2018, 94, para 17. 46 Polyferon, IIC 1997, 242, 244. 47 Peter R. Slowinski, “Comment on the German Federal Supreme Court Decision “Raltegravir”,” IIC - International Review of Intellectual Property and Competition Law 49, no. 1 (2018): 127. 48 In Raltegravir, the fact that the offer for a royalty payment made by the applicant of a compulsory license was different the patent holder’s offer or involved the proposition of a lump sum payment did not disqualify the applicant’s attempt to obtain a license for the patent. In this particular case, the BGH took into consideration the questionable validity of the patent. Raltegravir, IIC 2018, 94, paras 22-24; Slowinski, “Comment” 127. 49 For more detailed discussion, see Sect. 8.6.5. 40 41

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proposed user in her first contact with a patent holder be determined in more detail.50 Finally, the flexibility of Art. 31 (b) TRIPS also enables member states to qualify what type of royalty rate would be deemed as excessive. However, because the prior effort requirement is not a justification for a compulsory license, a compulsory license must address the market failure of excessive pricing on other grounds, such as abuse of the rights conferred by a patent or competition law. Lin further suggests that the meaning of the term “commercial” should interpreted be expansively, as licensing in response to the threat of compulsory licensing is not a “normal commercial” situation.51 The author of this thesis, however, disagrees with this view: If the objective of prior efforts to obtain a voluntary license is, as Lin suggests, to warn the patent owner of the compulsory licensing process,52 the drafters of TRIPS could have imposed upon the applicant for a compulsory license an obligation to inform the patent holder of her intention to apply for the compulsory license and provide him with an opportunity to make a voluntary offer. Compulsory licenses that support the functional efficiency of the patent system are intended to mitigate the market failures of inefficient bargaining in voluntary licensing and the abusive exercise of patent rights. The majority of situations in which a voluntary license is sought, agreed upon, or even refused do not qualify as market failures; consequently, the majority of licensing transactions are not negotiated under the “threat” of a compulsory license. Thus, the term “commercial” should here be interpreted as meaning that a licensee would need to make efforts to obtain a license, as she would have to do in a conventional commercial situation.

Reasonable Time Art. 31 (b) TRIPS qualifies the time period within which efforts to obtain a voluntary license should be made as “reasonable”. The provision appears to protect the licensee from patent holders that play for time though passivity;53 the same applies to license negotiation that are deliberately drawn out for strategic reasons.54 However, this provision can be viewed as protecting the interests of both parties, as the patent holder has sufficient time to react and to conclude a license. The flexibility of the term “reasonable” also favours interpretations that take into account a pressing

50 The qualification should address both the interests of the prospective licensee and the patent holder. For example, in certain situations, it may be very difficult for a follow-on innovator to make a “reasonable” offer if he is not familiar with the licensing practices of the industry in question. In such a situation, active inquiry into a patent holder’s license rates with an interest in negotiating a license should suffice as an initial effort to obtain a license. A patent holder must not be expected to accept unreasonably low offers. 51 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 172. 52 Ibid. 53 Ibid, 174. 54 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 470.

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need to obtain a license in a particular use.55 For example, in Raltegravir, the BGH stated that the reasonableness of the amount of time invested in the attempts to obtain a license will be evaluated case-specifically, in connection with the review of the appropriateness of the said attempt.56 However, given that the reasonableness requirement defines the period of time in which a prospective licensee is entitled to apply for a compulsory license, Lin recommends that this vague term be specifically defined in national legislation in a manner that leaves little room for interpretation.57 This would also be desirable from the perspective of preventing hindrances in follow-on innovators’ R&D due to slow negotiations or the passivity of a patent holder. A national formulation of reasonable time that maintains purpose-specific flexibility but sets an ultimate limit on the duration of licencing negotiations would prove most advantageous.

6.3.1.3

Prior Effort in the Context of Overprotection Problems

The prior effort requirement is justifiable from the perspective of the economic justifications that underlie patent protection in an environment that features reasonable transaction costs and relatively simple innovations. It is also very flexible from the perspective of establishing compulsory licenses intended to address unjustified refusals to license and excessive royalties. However, this requirement also renders the majority of compulsory licenses incapable of addressing hold-up problems and other ex post market failures. Exceptions to the requirement of prior effort are allowed only on the grounds of national emergency, other circumstances of extreme urgency, in cases of public non-commercial use (Art. 31 (b) TRIPS), or when a compulsory license functions as a remedy to an anti-competitive practice (Art. 31 (k) TRIPS). Consequently, the majority of compulsory licenses in patent law are unsuitable when it comes to addressing ex post market failures. Furthermore, as general rule, a failure to comply with the requirement of prior effort would preclude the use of a compulsory license as a defence in a subsequent patent infringement suit. Hence, pursuant to TRIPS, a compulsory license as a defence in infringement proceedings would be permissible only in situations in which a patent holder has engaged in anticompetitive practices or when a patent is used by the government or one of its contractors (Art. 44 (2) TRIPS).58

55

Ibid. Raltegravir, IIC 2018, 94, para 19. 57 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 176, 179. 58 However, an effect similar to that of a compulsory license may be achieved by limiting the right to injunctive relief pursuant to Art. 44 TRIPS. For a more detailed discussion see Sect. 7.2. 56

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217

Adequate Remuneration

Pursuant to Art. 31 (h) TRIPS, a right holder is entitled to adequate remuneration, taking into account the circumstances of each case and the economic value of the authorization to use the patent. The requirement of adequate compensation is a novel feature of the TRIPS agreement, as the PC did not regulate this matter.59 This provision is subject to two exceptions: The first is made in favour of compulsory licenses intended to remedy anti-competitive practices; the need to correct such practices may be taken into account when setting the compensation rate (Art. 31 (k) TRIPS). Consequently, member states have flexibility when accounting for the misconduct in question or the need to enable market entries when determining adequate remuneration in the case of a patent holder who is involved in anticompetitive conduct.60 The provision has been interpreted as allowing a court to lower the royalty rate to zero for the purposes of deterring and punishing anticompetitive practices.61 The second exception is contained in the Decision on Implementation of the Doha Declaration, which is intended to prevent “double compensation” in compulsory licensing for export of pharmaceutical products to eligible member states.62 The provision defines the principles for determining remuneration both for compulsory licenses established in favour of the public interest and for those that seek to enhance the functional efficiency of the patent system.63 The majority of the commentary on this provision focuses on the determination of the remuneration to be provided for pharmaceutical products licensed on the grounds of public policy.64 Such compulsory licenses are intended to provide access to drugs to patients, particularly in developing countries, and hence promote allocative efficiency and distributive goals. It has been recognized that the provisions governing the 59

UNCTAD-ICTSD, Resource Book on TRIPS and Development, 475. Ibid, 476. Art. 31 (h) and Art. 31 (k) TRIPS reflect a balance between the objective of patent law to incentivise innovation and that of competition law to maintain healthy competition. Antony Taubman, “Rethinking TRIPS : ‘Adequate Remuneration’ for Non-Voluntary Patent Licensing,” Journal of International Economic Law 11, no. 4 (2008): 945. 61 Nuno Pires de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information (The Hague: Kluwer Law International, 2008), 142. 62 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 477; Implementation of Paragraph 6 Doha Declaration, para 3. 63 See Taubman, “Rethinking TRIPS,” 931-932. However, the author discusses compulsory licenses that aim at enhancing functioning competition, rather than the general functional efficiency of the patent system. 64 For further discussion, see for example Michelle McGrath, “Patent Provisions in TRIPS : Protecting Reasonable Remuneration for Services Rendered - or the Latest Development in Western Colonialism?,” European Intellectual Property Review 18, no. 7 (1996); Susan Vaughan, “Compulsory Licensing of Pharmaceuticals under TRIPS : What Standard of Compensation?,” Hastings International and Comparative Law Review 25 (2001); Elli Välimäki, “Calculation of Royalties in Compulsory Licensing of Pharmaceutical Patents in Europe - How Much Is Justified?,” Nordic Journal of Commercial Law 1, no. special edition (2011). 60

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remuneration of a compulsory license should be interpreted, and hence also calculated differently, for compulsory licenses that are motivated by competition concerns.65 However, the existing literature does not elaborate on how Art. 31 (h) TRIPS for compulsory licenses that seek to enhance the functional efficiency of the patent system should be evaluated on the basis of either patent and competition law. Hence, the existing literature is silent on how adequate remuneration should be determined in cases in which the compulsory licensee is a follow-on innovator. Three concepts are relevant to the interpretation of Art. 31 (h) TRIPS: “adequate remuneration”, “the circumstances of the case”, and the “economic value of the authorization”. The most important concept, “adequate remuneration”, provides room for significant interpretive flexibility.66 This concept stemmed from a US initiative; a number of countries supported the qualification of “fair and equitable”.67 Given the drafters’ choice, “adequateness” would refer to payment that is “sufficient, or meets the minimum standards, not more than that”.68 From this perspective, adequate remuneration would be lower than what would constitute an equitable remuneration.69 In the light of developing countries’ need to access pharmaceutical products, compensation that is lower than the potentially monopolistic market price can nevertheless be considered adequate.70 However, it can be questioned whether the hurdle for adequate remuneration can justifiably be as low in the context of compulsory licenses intended to promote functional efficiency. Nevertheless, lowerthan-equitable remuneration for a compulsory license may incentivise a patent holder to seek to contract around a liability rule.71 Furthermore, Art. 31 (h) TRIPS is a minimum standard; therefore, a member state may instead entitle a patent holder to an equitable remuneration. Taubman proposes an alternative interpretation of “adequate remuneration” that seeks to qualify the adequacy of the remuneration with respect to the legitimate interests of the patent holder. Based on the contextual reading of TRIPS in light of Arts. 7, 30 and 31 TRIPS, he arrives at the conclusion that remuneration should be equitably balanced.72 While Art. 7 TRIPS should indeed guide the interpretation of Art. 31 (h) TRIPS, especially when a compulsory license seeks to balance the

Taubman, “Rethinking TRIPS,” 945, 953; Välimäki, “Calculation of Royalties,” 24; Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 189. 66 Taubman, “Rethinking TRIPS,” 951. 67 Gervais, TRIPS Agreement, 2.409. 68 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 475. This view represents a literal reading of Art. 31 (h) TRIPS. Taubman, “Rethinking TRIPS,” 952-953. 69 Taubman, “Rethinking TRIPS,” 952-953. 70 Robert Weissman, “Long, Strage TRIPS : The Pharmaceutical Industry Drive to Harmonize Global Intellectual Property Rules, and the Remaining WTO Legal Alternatives Available to Third World Countries,” University of Pennsylvania Journal of International Economic Law 17 (1996): 1114-1116; UNCTAD-ICTSD, Resource Book on TRIPS and Development, 477; Vaughan, “What Standard of Compensation?,” 100, fn 110. 71 See Lemley, “Contracting around Liability Rules,” 476, 497. 72 Taubman, “Rethinking TRIPS,” 956. 65

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interests of a patent holder and a follow-on innovator, it is a mistake to interpret this provision in light of Art. 30 TRIPS.73 The panel in Canada Pharmaceuticals myopically viewed “the normal practice of exploitation” as encompassing all of the externalities created by a patent, leaving no space for the interests of follow-on innovators or dynamic competition.74 Consequently, interpreting Art. 31 (h) TRIPS on the basis of the three-step test of Art. 30 TRIPS, as proposed by Taubman75 would lead to inefficiently high royalty rates that would render compulsory licenses useless in terms of resolving market failures that hinder follow-on innovation.76 The panel’s implicit support for the prospect theory conflicts with Art. 7 TRIPS, which clearly reflects incentive theories as the economic justification that underlies patent protection. Consequently, on the basis of interpreting Art. 31 (h) TRIPS in light of Art. 7 TRIPS, a remuneration for a compulsory license that seeks to alleviate market failures that hinder follow-on innovation should be deemed adequate when it allows the patent holder to maintain his incentives to innovate, even if the follow-on innovator receives authorization to use the patent in question. In pursuing this objective, the other two qualifications established by Art. 31 (h) TRIPS should also be considered. According to Lin, interpretation of this article can be informed by the purpose of the compulsory license, thus connecting the condition of “adequate remuneration” to “the circumstances of each case”. Pursuant to this interpretation, the fulfilment of the interest of the patent holder would be determined with reference to the context and the objective of the compulsory license in a particular case.77 Given the article’s emphasis on the circumstances of a case, licensing rates cannot be schematic.78 Commentators have made proposals about the relevant circumstances, which the authorities that determine remuneration should take into account, but they are predominantly tailored towards compulsory licenses that address public policy concerns.79 However, the remunerations set for

73

See Sect. 6.2. “The normal practice of exploitation by patent owners, as with owners of any other intellectual property right, is to exclude all forms of competition that could detract significantly from the economic returns anticipated from a patent’s grant of market exclusivity.” Canada Pharmaceuticals, 7.55. In the opinion of de Carvalho, the panel’s view, which equates “normal exploitation” with the exclusion of competition, was mistaken and excessive. The correct reference point for “normal” exploitation should have been “exploitation that conforms with the general standards and objectives of the law”, which would exclude abusive exploitation or exploitation that violates antitrust law. de Carvalho, TRIPS Regime of Patent Rights, 419. 75 Taubman, “Rethinking TRIPS,” 957. 76 With the exception of compulsory licenses intended to remedy anti-competitive conduct (Art. 31 (k) TRIPS). Ibid. 77 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 180-181, 189. Similarly, Taubman, “Rethinking TRIPS,” 954. Cf. Gervais, TRIPS Agreement, 2.409, who interprets the concept as referring to the economic circumstances in a particular member state. 78 de Carvalho, TRIPS Regime of Patent Rights, 366; Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 184. 79 See Reichmann, Non-Voluntary licensing of patent inventions: historical perspective, legal framework under TRIPS and an overview of the practice in Canada and the USA; UNCTAD74

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compulsory licenses remedying anti-competitive practices should be determined differently to those intended to alleviate a social crisis.80 This is emphasized by the fact that Art. 31 (k) TRIPS allows courts to order lower royalty payments when correcting anti-competitive practices.81 However, compulsory licenses intended to promote functional efficiency can also be granted on grounds other than remedying anticompetitive practices. For example, for compulsory licenses that target abusive practices either in patent or competition law, “the circumstances of each case” would need to include the conduct of both the patent holder and the licensee. Of the compulsory licenses intended to promote functional efficiency, only Art. 31 (k) TRIPS allows for determining a punitive compensation that is below the remuneration that would ensure that a patent holder maintains incentives to invent. However, for compulsory licenses issued on the grounds of the abuse of the rights conferred by a patent (Art. 5 A (2) PC, Art. 8 (2) TRIPS), adequate compensation may, on the basis of the circumstances of the case and the abusive behaviour of the target of the compulsory license, still justifiably range from the potentially monopolistic market price to a minimal level that maintains the patent holder’s incentives to invest in R&D. Furthermore, in the context of conflict of interests between a patent holder and a follow-on innovator, the relevant circumstances would encompass factors such as the competitive relationship that may exist between the patent holder and the follow-on innovator, the innovativeness of the patent in question and its contribution to the overall innovativeness of the follow-on innovation, innovation cycles and licensing practices within the industry in question, the behaviour of the parties involved in terms of attempting to license voluntarily, and the accumulated royalty rate of the particular follow-on innovation. The economic value of an authorization must be taken into account when determining adequate remuneration (Art. 31 (h) TRIPS). It is noteworthy that the provision refers neither to the market value of a patent nor the losses that a compulsory license imposes upon the patent holder; rather, the economic value of the authorization depends on the actual scope of the license, taking into consideration the qualifications of Art. 31 (c)–(f) TRIPS and the factual circumstances of the case.82 However, the benchmark to be used when determining the economic value of an authorization and its weight in the determination of adequate remuneration are subject to debate.83 Taubman states that the economic value represents the “potential value” that “would have been obtained from the opportunity to exploit the patent for ICTSD Project on IPRS and sustainable development, 2003, (as cited in Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 184-185); Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 184-185. See also James Love, Remuneration Guidelines for Non-Voluntary Use of a Patent on Medical Technologies, Health Economics and Drugs. TCM Series No. 18 (Geneva: World Health Organization, 2005), 62. 80 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 180-181, 189. 81 See Gervais, TRIPS Agreement, 2.409; Taubman, “Rethinking TRIPS,” 953-954. 82 Taubman, “Rethinking TRIPS,” 954-955. 83 See ibid, 955-956.

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the actual authorization itself”.84 However, Taubman’s expansive view is considered to conflict with the wording of Art. 31 (h) TRIPS,85 which does not make the determination of adequate remuneration subject to the economic value of the authorization in question.86 Gervais interprets this provision as reflecting what the license “would normally cost if available from the patent holder”; he considers the inventiveness of a patent and its market size as factors that are relevant in the determination of economic value.87 The economic value of the authorization should play a larger role in the determination of adequate remuneration for compulsory licenses intended to promote functional efficiency than for those that fulfil a public policy objective.88 In the context of follow-on innovation, qualification of the economic value of the authorization could take into account the effect of the authorization on the competitive relationship that may exist between the patent holder and the follow-on innovator. In practice, the numerical value of an adequate remuneration can be determined in several different ways.89 Examples suggested in the literature encompass, inter alia, the expected “market rate” of a typical license,90 a rate based on evidence concerning R&D expenditures,91 a rate based on the guidelines of an international organization,92 a rate derived from the specific percentage of the sales of the end product of the licensee,93 and a rate based on adequate damages.94 The different methods of calculating remuneration are argued to, in practice, yield royalty rates that fall within a predictable range.95 Despite the plurality of approaches, the determination of adequate remuneration is possible96 and can be calculated in a manner that does

84

Ibid, 955; similarly, de Carvalho, TRIPS Regime of Patent Rights, 366. Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 182. 86 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 475. 87 Gervais, TRIPS Agreement, 2.409. 88 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 477. 89 See, for example ibid, 476-477; Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 238-245; Välimäki, “Calculation of Royalties,” 8-18; Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 181-184. 90 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 476. 91 Ibid. 92 Ibid. For example, see Love, Remuneration Guidelines for Non-Voluntary Use of a Patent on Medical Technologies, 51-57, 62-65. 93 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 476. 94 de Carvalho, TRIPS Regime of Patent Rights, 366. 95 See Taubman, “Rethinking TRIPS,” 946. See also Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 241-242. Cf. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 115-116, who note that little data were available concerning the determination of the royalty rates in European jurisdictions; this is due to the fact that the relevant statutes did not address the issue, the instruments were rarely used and in many cases did not mention licenses, and possibly also because the licenses granted are typically not subject to further litigation. 96 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 259. 85

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not systematically and unjustifiably undercompensate the patent holder.97 Irrespective of the method chosen, it would be desirable that “the rules and procedures for setting the CL remuneration should be simple to administer and easy to predict”.98 It is beyond the scope of this thesis, and possibly also legal methodology, to evaluate how the various methods for determining an adequate level of remuneration may assist in resolving overprotection problems. However, given that both excessive royalties and exploitative hold-ups overreward patent holders, any calculation of adequate remuneration for compulsory licenses that target such market failures should seek to discount the unjustifiably high element of the price from the royalty rate. In exploitative hold-ups, the most suitable benchmark would be the market price of the authorization,99 or, when such information is not available, as accurate as possible an approximation thereof. A patent with a high level of inventiveness could justify a higher royalty rate.100 However, when a license rate is excessive, it may not be a consequence of the technological excellence of the invention in question; instead, it may, for example, stem from its status as an SEP. In such a case, an adequate market price could be approximated with a FRAND license for the technology in question.101 Market price would also be the preferred benchmark for determining adequate remuneration for compulsory licenses that target unjustified refusals to license and excluding hold-ups. Information concerning market price is likely to be available in situations in which a hold-up concerns a substitutable technology. However, it is often difficult to employ a market value for the determination of adequate remuneration due to the challenge involved in identifying a royalty rate to compare the rate of a compulsory license with.102 First, in situations in which there is a substitutable technology, patent holders are likely to be less willing to refuse a license.103 Consequently, unjustified refusals to license are more likely to concern unsubstitutable technology. Nevertheless, market prices may be available in situations in which a patent holder has licensed his patent to other voluntary licensees that are not subject to exploitative hold-ups. Such a situation would occur, for example, when an SEP holder unjustifiably discriminates against an individual prospective licensee.

97

See Sect. 4.3.3. Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 189. 99 Market rate can be qualified with reference to “what the licensee would have been required to pay as compensation to the patent holder for a commercial licence under ordinary circumstances.” UNCTAD-ICTSD, Resource Book on TRIPS and Development, 476. 100 Gervais, TRIPS Agreement, 2.409. 101 An excessive royalty rate may also reflect an offensive intention to preclude a follow-on innovator’s access to a patent in a manner that equates to an unjustified refusal. 102 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 181. 103 See Arora, Fosfuri, and Gambardella, Markets of Technology, 192-193, 195. 98

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When a technology is not licensed on a national market, Gervais suggests addressing relevant international pricing practices.104 However, when a patent holder refuses to license a patent to a technology that is unsubstitutable, there will be no market for the technology that can be used to determine a price range. In such a situation, an alternative method of calculation that would allow for the determination of an adequate compensation that would not undercompensate the patent holder and hence maintain his incentives to innovate, while simultaneously fulfilling the objectives of the compulsory license, should be employed.105

6.3.3

Scope and Assignability

The conditions concerning the scope, duration, assignability, and termination of a compulsory license are determined by Art. 31 (c)–(f) TRIPS. Art. 31 (c) TRIPS limits the scope of a compulsory license only to its purpose. A license should be proportional, and it can also be limited with respect to the patent claims it covers.106 Compulsory licenses with “an unencumbered field of application” are likely to exceed this limitation of this scope.107 The limitation of scope is subject to two exceptions: First, compulsory licenses for semiconductor technologies may only be granted for public non-commercial use (Art. 31 (c) TRIPS). Second, the scope may correspond to the purpose of remedying a practice that has been “determined after [a] judicial or administrative process to be anti-competitive” (Art. 31 (c) TRIPS). The scope of such a license is flexible under TRIPS and may, for example, be granted either for the purposes of importation or local production.108 Art. 31 (d) and (e) TRIPS concerning the non-exclusivity and non-assignability of a compulsory license expand on the conditions set by Art. 5 A (4) PC for compulsory licenses granted on the basis of failure to work to concern all compulsory licenses.109 The non-exclusive nature of a license (Art. 31 (d) TRIPS) means that, unlike voluntarily negotiated exclusive licenses, a licensee can seldom avoid the risk of competition from the patent holder and other licensees. The non-exclusivity of such

104

Gervais, TRIPS Agreement, 2.409. One example of such an alternative method would be “requiring each patent holder to present a detailed justification for its royalty request.” UNCTAD-ICTSD, Resource Book on TRIPS and Development, 476. Another could be “considering licence fees in similar situations with a comparable market environment”. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 116-117. 106 Gervais, TRIPS Agreement, 2.409. 107 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 472. 108 Carlos M. Correa, “Patent Rights,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2016) [hereinafter “Patent Rights 2016”], 298. 109 de Carvalho, TRIPS Regime of Patent Rights, 328. 105

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a license has been noted as reducing the investment incentives of licensees,110 particularly if they are unaware of the competitive strategy of the patent holder.111 However, this argument is less convincing in the context of reuse than in respect to imitative use. In follow-on innovation, it is the additional innovative contribution that the follow-on innovator competes with, not the patent for which the compulsory license is granted. Compulsory licenses should be non-assignable, except as a part of an enterprise or goodwill which enjoys such use (Art. 31 (e) TRIPS).112 This limitation is intended to prevent the establishment of secondary markets for compulsory licenses; it is also balanced with the possibility of transferring a compulsory license as a part of the goodwill. Hence, an applicant for a license may establish a legal entity in connection with the compulsory license and assign them together.113 The “non-assignable” concept has been interpreted as precluding sub-licensing.114 From the perspective of a follow-on innovator, it would be desirable to obtain a compulsory license that allows him to use sub-contractors when necessary in order to produce the desired products. Authorization should predominantly be aimed at supplying the domestic market (Art. 31 (f) TRIPS). The term “predominantly” allows for flexible interpretation. As long as over half of a production is intended to supply a national market, a compulsory license can also be issued for exports. A compulsory license may allow both for the production and importation of a patented product.115 Compulsory licenses granted as remedies for anti-competitive practices (Art. 31 (k) TRIPS) and those granted in order to supply the demand for pharmaceutical products in eligible countries pursuant to the Decision on Doha Declaration are notable exceptions to the requirement of Art. 31 (f) TRIPS.116 An important shortcoming of the narrow scope of compulsory licenses is the fact that they do not address know-how related to an invention. In addition to the non-exclusivity of a license, this feature may also render this instrument unappealing to a potential applicant.117 However, this problem is relevant only in the context of

110

UNCTAD-ICTSD, Resource Book on TRIPS and Development, 473. de Carvalho, TRIPS Regime of Patent Rights, 327. 112 In the case of dependent patents, assignability is subject to even stricter condition; the first patent may be assigned only with the second patent (Art. 31 (l) (iii) TRIPS). 113 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 473. Cf. Helfer “New Innovation Frontier,” 64. 114 de Carvalho, TRIPS Regime of Patent Rights, 328-329; Gervais, TRIPS Agreement, 2.409. However, the differences in the wording of Art. 5 A (4) PC and Art. 31 (e) TRIPS could also allow for the interpretation that the latter permits sub-licenses. 115 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 474. 116 Implementation of Paragraph 6 Doha Declaration. 117 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 355. See also Richard Li-dar Wang, “Anchillary Orders of Compulsory Licensing and Their Compatibility with the TRIPS Agreeent,” 203, who argues in favour of adding an obligation to transfer know-how to compulsory licenses. However, such an ancillary order would be unjustifiable, as there is no 111

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pure ex ante refusals to license. Indeed, Ullrich notes that this problem may be less pronounced in the context of dependent patents, as the holder of a second patent is likely to be knowledgeable of the means to exploit the first patent.118 Similarly, the lack of know-how transfer is less of an issue in the context of cumulative innovation, where patent infringement often results from independent invention. Despite the interpretative flexibilities offered by Art. 31 (c)–(f) TRIPS, the overall scope permitted by a compulsory license is considerably narrow. The limitation of such a license in terms of predominantly being intended to supply domestic markets makes the instrument unattractive to follow-on innovators who operate internationally. Given that, in patent law, compulsory licenses are granted nationally, a followon innovator would need to seek a compulsory license in each jurisdiction in which it seeks to operate. Obtaining compulsory licenses in several jurisdictions is subject to considerable uncertainty, as this aspect of patent law is unharmonized: TRIPS does not oblige member states to pass legislation on compulsory licensing. However, the limited scope of compulsory licenses may play an important role in reducing the indirect effect of a compulsory license. A compulsory licensing instrument generally enhances the negotiating position of a prospective licensee, with the effect that she will be more likely to obtain a license voluntarily and subject to more reasonable conditions. Nevertheless, the limitations set for a compulsory license by Art. (c)–(f) TRIPS balance out this negotiation advantage, making it permanently more attractive for a prospective licensee to obtain a voluntary license, which could be wider in scope, have a longer duration, cover a larger international area than a compulsory license, and also include terms concerning know-how transfer. On the other hand, irrespective of the ground of a compulsory license in question, a patent holder is not mandated to provide access beyond what is deemed necessary in a particular case.

6.3.4

Duration and Termination

The duration of a license is also limited to the purpose of its authorization (Art. 31 (c) TRIPS); nevertheless, the duration should be sufficient to incentivize investments in the production of the product.119 The fulfilment of this objective may often require the duration of a compulsory license to cover the entire patent term.120 The termination of a compulsory license is regulated via the rather complex Art. 31 (g) TRIPS. Generally, a license can be terminated if the circumstances on the

legal entitlement to know-how. Hence, a patent holder cannot be obliged to share her trade secrets on the basis of a compulsory license, which is a carefully calibrated instrument that is intended to balance the patent system from the perspectives of functional efficiency and other policy goals. 118 Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 355. 119 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 473. 120 Correa, “Patent Rights 2016,” 298.

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basis of which a license was granted cease to exist and are unlikely to recur. A review of any change of circumstances is subject to the adequate protection of the legitimate interests of the individuals so authorized. When a license is granted in order to remedy anti-competitive practices, the competent authorities shall have the authority to refuse termination of an authorization if and when the conditions which led to such authorization are likely to recur (Art. 31 (k) TRIPS). Pursuant to Art. 31 (g) TRIPS, a review will be conducted by a competent authority upon a motivated request. A request for a termination is most likely to be made by the patent holder. It is recommended that national legislation specify how the process of reviewing changes of circumstances would be initiated in practice.121 The expression the “legitimate interests of the persons so authorized” can be interpreted narrowly or broadly. Gervais understands this qualification as referring to the “reasonable investments” that have been made by the time that circumstances have changed. He mentions the right to dispose of excess products as an example of taking into account the interests of licensee.122 In contrast, some commentators interpret Art. 31 (g) TRIPS more expansively, viewing it as also covering the compulsory licensee’s incentives to invest in the production of an innovation incorporating a patent. The Resource Book on TRIPS recommends to address a licensee’s interest already upon the grant of a compulsory license by establishing certain safeguards for its duration, such as a minimum term. Also automatic extensions may come into question, also, provided that the conditions for the termination of a license under Art. 31 (g) TRIPS have not been materialized.123 This wider interpretation would be more appropriate for compulsory licenses intended to enhance functional efficiency. In contrast, Gervais’ more narrow interpretation is more justifiable with regard to compulsory licenses that focus on public policy goals, especially, when they are motivated by an emergency.

6.3.5

Individual Merits

The requirement that authorization for use shall be considered on individual merits (Art. 31 (a) TRIPS) emphasises the distinct character of compulsory licenses when compared to the other limitations to rights conferred by a patent.124 This provision disallows general statutory licenses and makes the granting of compulsory licenses conditional to a case-specific review of the fulfilment of the conditions for the authorization of such use. Members may not enact automatic compulsory licenses

121

UNCTAD-ICTSD, Resource Book on TRIPS and Development, 475. Gervais, TRIPS Agreement, 2.409. 123 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 474-475. 124 For a discussion on the interrelationship of Art. 30 and Art. 31 TRIPS, see Sect. 6.2. 122

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for specific types of inventions125or specific groups of patentees.126 Nevertheless, this condition is flexible in the respect that it places a burden of proof that the conditions of a compulsory license are not fulfilled on the patent holder.127 Correa does not view this provision as precluding the granting of compulsory licenses to several patents that cover the same process or product. While implicitly discussing compulsory licenses for imitative use and not follow-on innovation, he does not consider specific identification of the patents underlying the same complex innovation critical, stating that a compulsory license may cover all of the patents that risk being infringed by exploitation of the product.128 In contrast, Ullrich appears to adopt the stance that Art. 31 (a) requires a patent-specific procedure.129 While Correa’s approach is justifiable in the context of compulsory licenses intended to support public policy goals, it should be applied more cautiously to compulsory licenses for functional efficiency. Nevertheless, at least in situations in which a follow-on innovation incorporates multiple patents owned by the same patent holder, it should be possible to grant a compulsory license to a relevant patent portfolio. Similarly, the same should apply when a compulsory license targets a patent thicket that consists of several patents held by multiple patent holders. However, in such situation, any intervention would need to be justifiable both by functional efficiency (Art. 8 (2) TRIPS) and other public policy goals (Art. 8 (1) TRIPS).

6.3.6

Decision by an Authority

The authority that grants a compulsory license is responsible for providing a casespecific justification for such authorization by reviewing the existence of the grounds for the license and determining its scope;130 however, TRIPS does not identify the authority that has the power to grant compulsory licenses. This solution reflects the objective of allowing for the flexible implementation of the procedural criteria of compulsory licenses in the member states’ heterogeneous jurisdictions. Therefore, such power could, for example, be assigned to an executive administrator.131 In

125

Gervais, TRIPS Agreement, 2.409. Michael Blakeney, Trade Related Aspects of Intellectual Property Rights : A Concise Guide to the TRIPS Agreement (London: Sweet & Maxwell, 1996), 91. 127 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 468. Also, with regard to governmental use, the review on individual merits can also take place ex post, after a license has been granted. Ibid. 128 Correa, Trade Related Aspects of Intellectual Property Rights, 320. Similarly, according to Gervais, “the provision would not prevent a license that would apply to a group of patents that a contractor would need to produce a product.” Gervais, TRIPS Agreement, 2.409. 129 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 355, fn 111. 130 Shen and Lee, “Review of Granted Compulsory Licences,” 295. 131 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 477-478. 126

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addition, nothing prevents member states from establishing specialized authorities for granting compulsory licenses.

6.3.7

Judicial Review

The TRIPS Agreement’s emphasis on the procedural safeguards of compulsory licenses manifests once again in Art. 31 (i)–(j) TRIPS. According to these provisions, the legal validity of any decision relating to the granting of a compulsory license or providing remuneration, including decisions concerning the termination of a compulsory license (Art. 31 (g) TRIPS), shall be subject to judicial or other independent review by a distinct higher authority. The articles allow for considerable flexibility in determining which authority is responsible for reviewing such decisions. The granting of a compulsory license can be reviewed by a judicial authority in either a civil or administrative process. Such a review can be conducted by either a relevant appellate court or a specialized court.132 A judicial review serves the purpose of balancing the interests of a patent owner, his competitors, and the public.133 Alternatively, TRIPS allows for such decisions to subject to an independent review. The Resource Book on TRIPS provides more detailed interpretations of this provision. “Independence” in this context applies both to the authority that grants a compulsory license or determines a payment and to the power and freedom “to modify or reverse” its decisions.134 Both the qualifications of “distinct and “higher authority” can be interpreted as further ensuring the independence of decision-makers. When the same governmental agency that is responsible for issuing licenses is responsible for reviewing such decisions, there must be sufficient distinction between the decision-makers.135 Moreover, the reviewing body would need to be hierarchically above the body that makes the decisions.136 The requirements of judicial review do not preclude the granting of a compulsory license with an interim effect.137 Unless member states allow for immediately enforceable compulsory licenses, the lengthy review proceedings may “frustrate the purpose pursued with the grant of the compulsory licence.”138 No systematic

132

Ibid, 478. Shen and Lee, “Review of Granted Compulsory Licences,” 295. 134 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 478. 135 Ibid. 136 Similarly ibid. 137 Carlos M. Correa, “Patent Rights,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2008) [hereinafter “Patent Rights 2008]”, 252, fn 263. 138 Correa, “Patent Rights 2016,” 300. 133

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information is available concerning the jurisdictions that subject compulsory licenses to the interim effect. For example, in Germany, the compulsory license is applied by means of filing an action to the Federal Patent Court (§ 81 PatG), which follows civil procedure. The process of granting a compulsory license can be extremely lengthy, especially if the decision of the first instance is appealed, making it an inefficient instrument for use in fast-paced technological fields.

6.3.8

Conclusions on the General and Procedural Requirements

The procedural requirements of Art. 31 TRIPS generally emphasize the case-specific application of the instrument. The fact that Art. 31 TRIPS applies both to compulsory licenses intended for public policy and for functional efficiency goals complicates the interpretation of the criteria. The drafters of TRIPS have included several nudges towards voluntary licencing into Art. 31 TRIPS. The most important of these is the criterion of prior effort, which also stands out as the most problematic condition with respect to resolving ex post market failures. Furthermore, the scope of compulsory licenses is narrow, which makes it more appealing to obtain a voluntary license. Of the procedural conditions, the requirement of adequate remuneration is the most complex to interpret, in particular with regard to the heterogeneous grounds that justify compulsory licenses. It encapsulates the balance of the objectives of Art. 7 TRIPS into a liability rule. While the process of doing so involves considerable flexibility, adequate remuneration should be determined very carefully, as a decision may either succeed at fostering social welfare by resolving overprotection problems in a balanced manner or hamper the objectives of the patent system by frustrating the objective of the instrument by setting an excessive royalty rate or by undercompensating the patent holder. While all relevant decisions related to compulsory licensing are subject to judicial review, Art. 31 TRIPS offers considerable flexibility in determining the procedure for granting authorization and appealing decisions, thus accommodating the plurality of jurisdictions of the member states. Another question is whether they take full advantage thereof, such as use the opportunity to ensure that compulsory licenses have an interim effect, even if the decisions concerning them become subject to appeal.

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Grounds for Compulsory Licenses

6.4.1

Dependent Patents

6.4.1.1

The Objectives of Art. 31 (l) TRIPS

A compulsory license granted on the basis of dependency (Art. 31 (l) TRIPS) is the only compulsory licensing instrument in TRIPS that expressly addresses the cumulative nature of inventive activity.139 This provision subjects compulsory licenses that “permit the exploitation of a patent (‘the second patent’) which cannot be exploited without infringing another patent (‘the first patent’)” to three additional criteria (Article 31 (l) (i)–(iii) TRIPS).140 Art. 31 (l) TRIPS was the first instrument of international law to specifically address compulsory licenses for dependent patents.141 Originally, Art. 5 A PC was flexible with respect to establishing compulsory licenses on the basis of dependency; however, Art. 31 (l) TRIPS imposed a significant limitation on this freedom.142 More generally, provisions were intended to discipline countries with more liberal compulsory licensing policies in favour of dependent patents.143 According to Blakeney, the conditions of Art. 31 (l) TRIPS “are intended to restrict the unbridled use of patents of improvement, where technological advance may be more imagined than real and which have been used as a device to extort access to earlier more substantial technology.”144 However, the rationale behind establishing a special compulsory license for dependent patents is to prevent patent right from hindering improvements to an 139

Abello, La License, 217-218. TRIPS does not employ the terms “dependent patents” or “blocking patents” in Art. 31 (k). 141 Friedrich-Karl Beier, “Exclusive Rights, Statutory Licenses and Compulsory Licenses in Patent and Utility Model Law,” IIC - International Review of Intellectual Property and Competition Law 30, no. 3 (1999): 266. 142 Straus, “Implications of the TRIPS Agreement,” 206-207; Matthias Leistner, “Requirements of Compulsory Dependency Licences : Learning from the Transformative Use Doctrine in Copyright Law,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 222. In 1996, Straus identified nine industrialized countries in which the threshold for granting compulsory licenses on the basis of dependency was lower than that established in Art. 31 (l) (i) TRIPS. Straus, “Implications of the TRIPS Agreement,” 206. Cf. an overview of compulsory licenses for dependent patents in Europe prior to TRIPS provided by Walter, “Compulsory Licenses,” 537-538. See also Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 49, 56, 103. Sweden and Finland’s provisions with regard to dependent patents remain much more lenient than Art. 31 (l) TRIPS would require; see ch. 6 § 46 Patentlag 1967: 837 (Svensk färfattnigssamling [SFS] 2018:19. (Swed.); ch. 6 § 46 Patenttilaki 15.12.1967/550 (Fin.) 143 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 16. The underlying objective of these instruments was also often to enable local companies to access patented technology. Correa, Trade Related Aspects of Intellectual Property Rights, 317; Gervais, TRIPS Agreement, 2.409. 144 Blakeney, Trade Related Aspects of Intellectual Property Rights, 93. 140

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initial invention.145 In this manner, the instrument contributes to technological innovation under the meaning of Art. 7 TRIPS.146 Furthermore, it fosters technology transfer, to the benefit of reusers. The provision therefore balances the interests of the holders of initial and subsequent patents.147 Hence, Art. 31 (l) TRIPS is intended to resolve market failures of overprotection in the context of blocking patents by providing access to the first patent. However, in order to prevent the market failure of underprotection, it only targets reuse, not imitative use of the first patent.148 The instruments enacted on the basis of Art. 31 (l) TRIPS are viewed as having a distinct and neutral nature in relation to other compulsory licenses. In Germany, compulsory licenses based on dependency have gained an independent status from compulsory licenses intended to promote the public interest (§ 24 (2) PatG).149 The amendment brought the compulsory license for depended patents outside of the scope of the strict requirements for public interest established by Polyferon.150 The requirement of public interest for compulsory dependency licenses would also be redundant due to their objective of fostering the functional efficiency of the patent system.151 The instrument strives to incentivise incremental innovation, as opposed to other public policy goals.152 Hence, the concept of public interest is neither relevant to the interpretation of Art. 31 (l) (i) TRIPS nor can it be interpreted as being embedded in the provision.153 Compulsory licenses for dependent patents are also distinct from those that derive their justifications from abusive practices, as the criteria of Art. 31 (l) TRIPS do not qualify the behaviour of patent holders. Finally, Ullrich emphasises that this instrument does not strive to remedy anticompetitive practices, despite the fact that its actual effect may be pro-competitive. The instrument establishes a compulsory liability rule when two patents are deemed to be dependent on the basis their scope, irrespective of the competitive positions of their holders or their potential strategic behaviours.154 Overall, the fact that Art. 31 (l) TRIPS establishes three

Focke Höhne, “Artikel 31,” in TRIPS - Internationales und europäisches Recht des Geistigen Eigentums : Kommentar, ed. Jan Busche, Peter-Tobias Stoll, and Andreas Wiebe (Cologne: Carl Heymanns-Verlag, 2013), 591. See also Walter, “Compulsory Licenses,” 532. 146 See also Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 69. 147 Höhne, “Artikel 31,” 591. 148 Similarly, see Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 342; Abello, La License, 217-222. 149 Since the amendment of the PatG in 2005 following the implementation of the Biotechnology Directive, only the general condition of previous attempt to grant a license has been applied to dependent patents (§ 24 (2) no.1 PatG). See Mes, Patentgesetz, Gebrauchmustergesetz. § 24 at 20. 150 Polyferon, IIC 1997, 242, 245-248. 151 See Lamping et al., “Declaration on Patent Protection,” 688. 152 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 340. 153 Ibid. 154 Ibid, 339, 341-342. Cf. de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 145, in which the author rejects the competition-neural view of the instrument, claiming that Art. 31 (l) TRIPS showcases the scepticism of the drafters of TRIPS about “the efficient work of market 145

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additional criteria for compulsory licenses that target dependent patents while remaining silent concerning both the behavioural aspects and the competitive positions of the patent holders involved underscores the distinct and competition-neutral nature of this instrument when compared to other compulsory licenses that seek to promote functional efficiency.

6.4.1.2

The Conditions of Art. 31 (l) TRIPS

Conditions (i)–(iii) of Art. 31 (l) TRIPS are cumulative, complementing the other general conditions laid out in Art. 31 (a)-(k) TRIPS.155 The article does not explicitly refer to dependent patents. Instead, Art. 31 (l) TRIPS only requires that a second patent “cannot be exploited without infringing” the first; in other words, a second patent is dependent when its holder cannot exercise one or more of his rights to the invention as defined in Art. 28 TRIPS without breaching the rights of the initial patent holder. Such dependency may thus concern any of the rights conferred by a patent. Ullrich further stresses that, irrespective of the requirement of a technical advancement of considerable economic significance (Art. 31(l) (i) TRIPS), dependency is “defined strictly in terms of patent law. It occurs where and to the extent that the use of an invention as protected by a second patent infringes the first patent in that it comes within the scope of the latter’s claims, entirely or in part.”156 Art. 31 (l) (i) identifies the situations in which the legislator may interfere with the blocking effect of a first patent.157 This provision qualifies the dependent patent with two terms: Its requirements concerning the “important technical advance” of “considerable economic significance” of the second invention are separate and cumulative.158 While technical advancements were a typical criterion of national compulsory licenses that targeted dependent patents, the requirement of considerable economic significance was a novelty introduced by TRIPS.159

forces”. The cross-licensing obligation, in his opinion, may even have the effect of increasing prices for end-consumers. De Carvalho also associates Art. 31 (l) TRIPS with the essential facilities doctrine. Ibid, 145-147. In my opinion, de Carvalho’s consideration disregards the narrowness of the instrument and the potential strategic interest of the holder of a first patent in obtaining a license to a second patent. The entitlement to a cross-license of Art. 31 (l) (ii) TRIPS benefits the first patent holder and ensures consumers access to the improved technology. Furthermore, compulsory licenses granted on the basis of the essential facilities doctrine are governed by Art. 31 (k) TRIPS. 155 Straus, “Implications of the TRIPS Agreement,” 206; Beier, “Patent and Utility Model Law,” 266; Leistner, “Requirements of Compulsory Dependency Licences,” 222. Hence, a mere economic interest is not sufficient to fulfil the requirement. Höhne, “Artikel 31,” 591-592. 156 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339. 157 Ibid, 340. 158 Leistner, “Requirements of Compulsory Dependency Licences : Learning from the Transformative Use Doctrine in Copyright Law,” 223, fn 6. 159 Ibid, 223. In many European jurisdictions, the adoption of the new criteria was accelerated via the Biotechnology Directive, ibid, 223-224. Art. 12 (3) b) of the Biotechnology Directive, which concerns compulsory cross-licensing of dependent patents and plant variety rights. It requires a

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Both terms are considered to leave room for interpretation by a competent authority.160 The general and contemporary interpretations of Art. 31 (l)(i) are relative, as this provision requires the fulfilment of the criteria “in relation to the invention claimed in the first patent”. The subject of comparison would thus be the subject matter of the first patent.161 However, nothing prevents signatory states from adopting stricter measures for protection than what TRIPS presupposes.162 The requirement of an “important technical advance” is intended to set the par for compulsory license above attempts to free-ride technologically important inventions and to enter a patent holder’s market after making very little improvements to the technology that was patented first.163 Some commentators have interpreted the term as allowing for a more flexible, subjective judgement.164 One of the yardsticks suggested in the literature is the inventive step between the first and second invention.165 The author of this thesis, however, finds this measure to be misguiding, as Art. 31 (l) concerns patented inventions, all of which must have passed the threshold of the inventive step (Art. 27 (1) TRIPS). The improvement would need to be important; hence, it demands more than mere patentability:166 “It must therefore bring about an appreciable evolution of the state of the art”.167 Scholarly opinions differ with respect to qualifying the evolution of a follow-on technology. According to Leistner, such progress should be considered in relation to the first patent. The term “important technical advance” hence refers to the distance between the first and second inventions in terms of technological progress. Leistner suggests a method of interpretation analogous to the review of the transformativeness of a derivative work in copyright law. The inventive step embodied in the second patent should be compared both relatively and functionally with that of the first patent; he concludes that “a comparatively substantive, technical dependent invention or a plant variety right to display “significant technical progress of considerable economic interest” in relation to the right it depends upon. The Directive is viewed to extend the minimum requirements of TRIPS by mandating the EU member states to enact compulsory licensing provisions, instead of leaving the question to their own discretion. Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 27-28. 160 Straus, “Implications of the TRIPS Agreement,” 208. 161 Ibid. 162 Prior to the amendment of § 24 (2) PatG, compulsory licenses for dependent patents were subject to narrower interpretation; this drew from the earlier German doctrine of strict general public interest criteria for compulsory licenses, which also applied to dependent patents. This so-called “absolute interpretation” would have subjected the requirements for a dependent compulsory license, and especially finding of considerable economic significance, to the public interest criterion. Leistner, “Requirements of Compulsory Dependency Licences,” 223, fn 9, and 227, fn 27, with references. 163 Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 69. 164 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 481. 165 Ibid. 166 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 41. Cf. Eikermann, “Article 31,” 578. 167 Walter, “Compulsory Licenses,” 534.

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advance” on the part of the second patent would be sufficient to fulfil this requirement.168 In contrast, Ullrich argues that this provision is neutral with respect to the level of technological advance of the first patent. Given that the objective of this provision is to enable improvement by second patents, a substantial contribution to its functionality or efficiency or one that expands the breadth of its utility would be sufficient to qualify as an important technical advance.169 However, both Leistner and Ullrich’s approaches lead to an outcome in which it would be easier to pass the threshold when the first patent features only a minor technological contribution.170 When the original patent is fundamental, as, for example, in the case of research tools, Ullrich’s interpretation is more inclusive.171 The additional requirement of considerable economic significance in Art. 31 (l) (i) TRIPS was intended to further heighten the threshold to grant such a compulsory license.172 This measure is not absolute;173 consequently, the concept is open to a number of different interpretations and implementations in national legislation. The term can be viewed as referring, for example, to the economic incentive of the holder of a second patent or/and for the field of technology. Alternatively, it may be an indirect qualification of her seriousness in terms of disseminating a dependent invention. According to Correa, the concept is relative and can be defined by a member state in a manner that reflects its level of development or tailor it to addresses the size of a company.174 Straus and Prinz zu Waldeck and Pyrmont take the view that, unless the requirement of considerable economic significance is further specified in national legislation, a review of the fulfilment of this condition would need to include “all economic details” of the case and the economic importance of the second patent, both to its holder and to the industry in question.175 In contrast, De Caravalho holds that a “new technical application for the first invention” is sufficient to fulfil the requirement of economic significance.176 Some commentators have suggested that the requirement of economic significance should address the competitive positions of the patent holders. Drawing from the fair use doctrine of transformative use of copyright law in the US, Leistner claims that this requirement should also be interpreted relatively.177 He recommends

Leistner, “Requirements of Compulsory Dependency Licences,” 228-229. Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 340-342. 170 See Leistner, “Requirements of Compulsory Dependency Licences : Learning from the Transformative Use Doctrine in Copyright Law,” 229; Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 340-341. 171 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 340. 172 Gervais, TRIPS Agreement, 2.409. 173 de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 144. 174 Correa, Trade Related Aspects of Intellectual Property Rights, 318. 175 Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 41. 176 de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 144. 177 Leistner, “Requirements of Compulsory Dependency Licences,” 222, 228, and fn 31-33. 168 169

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undertaking “a concrete economic analysis of the impact of this use upon the potential market for or value of the dominant patent”. This analysis should be also informed by patent holder’s right to an adequate remuneration under Art. 31(h).178 However, this interpretation does not take into account the competition-neutral nature of compulsory dependency licenses—they intend to secure cumulative incremental innovation irrespective of the market conditions.179 While the expression “in relation” in Art. 31 (l) (i) does invite relative comparison of the technical qualifications of a second patent with the first, the wording of this provision suggests that it was not intended to establish a balancing test for the economic interests of initial and subsequent inventors. If this had been the intention of the drafters, the provision would have been worded in a manner more similar to that of the balancing test in Art. 30 TRIPS. Moreover, the economic interests of the holder of the first patent are addressed via entitlement to a cross-license in Art. 31 (l) (ii) and ultimately by the right to adequate remuneration. Article 31 (l) (ii) TRIPS entitles the owner of a patent to a cross-license to use the invention claimed in a second patent on reasonable terms. This provision can be viewed as striking a balance between patent holders by allowing the holder of the first patent to also benefit from the improvement.180 Ullrich implies that this provision actually reflects the policy objective of fostering innovation, as it invites the holder of the first patent to collaborate in the subsequent innovative activity, despite the narrow scope of the compulsory license.181 Reasonable terms upon crosslicensing may entail that the royalties will be paid to the patent holder who owns the more valuable of the two inventions.182 Finally, according to Art. 31 (l) (iii) TRIPS, a granted compulsory licence pursuant to Art. 31 (l) TRIPS is assignable only following the assignment of the second patent. Eikermann views this condition as substituting Art. 31 (e) TRIPS. Hence, a compulsory license to a first patent can be assigned only in connection with the second patent.183 It is argued that the underlying, yet insufficiently articulated goal, of this provision is to ensure that dependent patents will actually be worked by licensees.184

178

Ibid, 230. Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 341-342. Ullrich, however, makes a contradictory statement, suggesting that “the economic significance may be determined by reference to the relevant (national?) markets.” Ibid, 341, fn 33. 180 Eikermann, “Article 31,” 578. 181 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 342. 182 de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 144. 183 Eikermann, “Article 31,” 578. Similarly, de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 144-145. with reference to Art. 31 (c) TRIPS (sic). 184 Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 343. 179

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Review

Compulsory licenses for dependent patents are a competition-neutral instrument intended to enhance the functional efficiency of the patent system by interfering with the blocking patents situations.185 However, although Art. 31 (l) TRIPS is the only compulsory license that addresses the balance of interests in follow-on innovation,186 it alleviates overprotection problems in a very limited manner. It allows for interference with refusals to license and excessive royalties only in situations in which the follow-on innovation features a second patent whose claims overlap those of the first patent.187 In this respect, it can alleviate market failures associated with simple subsequent innovations and upstream patents on research tools. Despite being a rarely used instrument, it may still facilitate the conclusion of voluntary licenses where negotiations would otherwise have been likely to fail.188 Hence, it can be viewed as having the indirect effect of strengthening the negotiating position of the holder of a dependent patent.189 However, several features of the instrument may limit its effectiveness in terms of resolving the market failures that it targets. First, the cross-licensing condition and the neutrality of the instrument towards the competitive context may make it, as a whole, unattractive to certain holders of dependent patents. For example, in a situation in which the holder of the first patent is an incumbent company, while the second patent represents an essential component of the competitive advantage of an SME, a cross-license would strip the SME of that advantage and the possibility of competing with the established company. Second, because this instrument is subject to the prior effort requirement of Art. 31 (b) TRIPS, it cannot be applied to hold-up situations. Hence, the holder of a dependent patent may not rely on this instrument as a defence if accused of patent infringement.190 Third, unless the jurisdiction in question allows for interim effects,191 the lengthy application procedure may provide access to invention only after a number of years.192 Finally, besides being time consuming, the procedure also fails to fulfil its objectives due to its costs and unpredictability. The instrument targets only individual patents; in addition, it is subject to national legislation and is largely unharmonized within the See Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339, 341-342. Abello, La License, 217-218. 187 See Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339, 341-342. 188 Straus, “Implications of the TRIPS Agreement,” 208. 189 See Leistner, “Requirements of Compulsory Dependency Licences,” 226-227, fn 26, with references, on the relevance of the indirect effect in the sphere of genetic inventions. 190 Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 355-356. 191 The BGH confirmed the possibility to grant a interim compulsory license in the public interest in preliminary proceedings. Raltegravir, IIC 2018, 94; Slowinski, “Comment” 128. 192 Hans Peter Walter, “Compulsory Licenses in Respect of Dependent Patents under the Law of Switzerland and Other European States,” IIC - International Review of Intellectual Property and Competition Law. 21 (1990): 536, fn 12, with the following references. 185 186

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EU. Consequently, a willing applicant must deal with a multitude of different national procedures if he decides to seek a compulsory license on the basis of dependency. The fact that the unitary patent system will maintain compulsory licenses as national instruments further aggravates the inefficiencies associated with compulsory licenses for dependent patents.193 Article 31 (l) TRIPS is formulated following the “one-patent-per-product” presumption. Consequently, it does not accommodate well situations where a follow-on innovation incorporates a number of overlapping patents and it is completely inapplicable to complex cumulative innovations when an initial patent does not overlap the technology of a follow-on innovator. Arguably, this instrument does not preclude granting compulsory licenses to a first patent in favour of several holders of dependent patents.194 In such a situation, the holder of the first patent would be in the most favourable situation, as he would receive a cross-license to all of the dependent patents. However, when an innovation consists of multiple patents that overlap with a number of pre-existing patents and an innovator faces several refusals to license, Art. 31 (l) TRIPS becomes difficult to apply. In principle, this instrument could be applied to resolve the patent overlaps in such a patent thicket.195 However, effective interference with patent thickets is conditional on interpreting the requirement of Art. 31 (l) (i) TRIPS in a manner that addresses the technological advance and the economic significance of the entire cumulative follow-on innovation. However, it is difficult to read the requirement of considerable economic significance in a manner sufficiently expansive to address the economic value of a complex cumulative innovation in relation to an individual first patent. Art. 31 (l) (i) TRIPS stresses the relationship between a first and second invention; therefore the threshold to the granting of a compulsory license when a single second patent has little individual economic significance in comparison to the first patent would remain high. Does the narrow applicability of the instrument reflect a conscious decision on the part of the drafters of TRIPS or a failure to predict increasing technological complexity? Clearly, the objective of this provision was to introduce a stricter international standard for compulsory licenses that target dependent patents. The requirements of overlapping scope and the important technological advance of the second patent presuppose the close technological vicinity of the dependent patents. However, the additional criteria of Art. 31(l) (i) TRIPS can be seen as intended to prevent free-riding on the first patent by means of imitation.196 Hence, Art. 31 (l) TRIPS can be interpreted as fundamentally protecting further improvements, irrespective of the quality of the first patent, the competitive positions of the patent holders, and the possibilities in terms of inventing around or substituting the first

Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 355-356. Ibid, 340, fn 27. 195 See Van Overwalle et al., “Models for Facilitating Access to Patents on Genetic Inventions,” 147. 196 See Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 69. 193 194

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patent.197 On this basis, it can thus be presumed that, while the drafters did not intend to make these neutral criteria applicable to a wide array of situations, they did not mean Art. 31 (l) TRIPS to exclusively govern all situations that involve follow-on innovation. Hence, Art. 31 (l) TRIPS does not preclude member states from interfering with market failures that the provision does not resolve, for example by means of compulsory licenses justified by the abuse of patent rights (Art. 5 A PC) or for the purpose of remedying anti-competitive practices (Art. 31 (k) TRIPS).

6.4.2

Abuse of Rights

Article 5 A (2) PC grants signatory states “the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuse that might result from the exercise of the exclusive rights conferred by the patent.”198 Beyond the abuses explicitly mentioned in the PC, Art. 5 A (2) PC provides member states with the freedom to define what constitutes abuse of exclusive rights. Therefore, they may enact compulsory licenses that, for example, target certain refusals to license, excessive pricing, or that establish a requirement to supply at sufficient levels.199 Some commentators view Art. 5 A (2) PC as potentially allowing contracting states to define “almost any activity or a circumstance” as abusive.200 Abuse can be defined in national IP law; alternatively, it can be addressed in competition law or general legislation.201 The incorporation of the PC into the TRIPS agreement brought Art. 5 A (2) PC into the interpretive context of its principles and objectives, with the most important being Art. 8 (2) TRIPS. This article allows for the establishment of appropriate measures, provided that they are consistent with the provisions of this Agreement, when they may be needed to prevent the abuse of IPRs by right holders. Can Art. 8 (2) TRIPS define the grounds for any “appropriate measures” against abuse of rights? Provided that Art. 8 (2) TRIPS requires consistency with the rest of the Agreement, it must be interpreted in conjunction with Art. 5 A PC. Historically, Art. 5 A PC was intended to narrow down the instruments used for interference with abuses of patent rights; therefore, Art. 8 (2) TRIPS cannot be viewed as expanding the scope for such measures beyond that allowed under Art. 5 A PC.202 Some commentators have considered Art. 5 A (2) PC as establishing an overarching precondition for all compulsory licenses intended to prevent abuses of patent

Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 340-343. [Emphasis added]. 199 Bodenhausen, Guide to the Appliction of the Paris Convention, 71, and the following references. 200 Malbon, Lawson, and Davison, WTO Agreement, 31.03. 201 Hilty, “Legal Remedies,” 387. 202 Ibid, 385. 197 198

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rights under TRIPS, including those granted on the basis of public interest.203 However, this view is mistaken both in the view of the German case law204 and from the perspective of the scheme of the TRIPS Agreement itself.205 Hence, similarly to Art. 5 A (2) PC, the actual concept of abuse under Art. 8 (2) TRIPS is left open to national interpretation.206 Essentially, an abusive practice contradicts the core purpose or the objectives of patent protection in terms of fostering the innovation and dissemination of technology, irrespective of the market position or dominance of the patent holder.207 Hence, in the context of TRIPS, abuse would feature “uses (conduct) conflicting with the functions of the IP system and insofar with Art. 7 TRIPS; regarding such uses (or conduct), the term ‘dysfunctional’ might describe best why such uses (or conduct) may not be tolerated: they ultimately risk perverting the objectives for which IP rights are granted—patents might impede new innovation, copyrights may hinder access to protected works etc.”208 Of the justifications for compulsory licenses intended to promote the functional efficiency of the patent system, the abuse of rights conferred by a patent provides legislators with the leeway to address any market failure that involves the conduct of a right holder that contravenes the justifications for patent protection, most importantly, from the perspective of a follow-on innovator, the dynamic incentive theory. Hence, in principle, it would be possible to enact a compulsory license for unjustified refusals to license, excessive royalties, and hold-up problems, especially when they stem from the use of offensive patent strategies. While Art. 5 A PC and Art. 8 (2) TRIPS provide wide flexibility in terms of addressing overprotection problems, the prior effort requirement of Art. 31 (b) TRIPS limits the possibilities in terms of addressing ex post market failures, unless the abusive practice also qualifies as anti-competitive under Art. 31 (k) TRIPS. In addition, the national compulsory licensing instruments that are justified by abuse are typically not drafted in a manner intended to address individual market failures, making them inefficient when it comes to addressing dysfunctional uses.209 Furthermore, market failures that do not result from the unjustifiable behaviour of patent holder(s) cannot be addressed on the grounds of abuse. Hence, the tragedy of the anticommons, wherein the underuse of pre-existing patents in favour of follow-on innovation results from the excessive transaction costs associated with clearing all of the patents involved, and the problem of royalty stacking, Straus, “Implications of the TRIPS Agreement,” 204-205. Cf. Correa, Trade Related Aspects of Intellectual Property Rights, 315. 204 The BGH confirmed that public interest is a ground for a compulsory licence independent of Art. 5 A 2 PC. Polyferon, IIC 1997, 242, 245-246. See also Eikermann, “Article 31,” 564. 205 Art. 8 (1) TRIPS, paras 4 and 5 b) of the Doha Declaration. In addition, compulsory licenses issued on the basis of dependency do not require abusiveness on the part of a patent holder. See Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339, 341-342. 206 Hilty, “Legal Remedies,” 384-385. 207 UNCTAD-ICTSD, Resource Book on TRIPS and Development, 548. 208 Hilty, “Legal Remedies,” 381. 209 Ibid, 387. 203

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which refers to situations in which none of the individual patent holders charge unjustifiably high licensing fees, cannot be addressed with a compulsory license on the grounds of abuse.

6.4.3

Failure to Work

6.4.3.1

A Subtype of Abuse of Patent Rights

Article 5 A (2) PC mentions failure to work as one of the examples of abuses that result from the exercise of exclusive rights. However, the PC subjects compulsory licenses that target this type of conduct and insufficient working to the mandatory criteria established in Art. 5 A (4) PC. These criteria, which are not restated in TRIPS, must be fulfilled in addition to the general requirements of Art. 31 TRIPS.210 First, according to Art. 5 A (4) PC, a compulsory licence based on the grounds of failure to work or insufficient working may not be applied for until four years have expired since the date of the filing of the patent application or three years after the grant of the patent, whichever expires last. In addition, previous efforts to obtain a voluntary license must have failed (Art. 31 (b) TRIPS). The time limits reflect the need to balance the legislative objective of promoting further exploitation of patents against the need for the right-holder to make the necessary arrangements for such exploitation in her respective country.211 Secondly, the compulsory license shall be refused if the patentee justifies his inaction by legitimate reasons (Art. 5 A (4) PC). The existence of legitimate reasons is to be determined by a competent authority, and they “may be based on the existence of legal, economic or technical obstacles of exploitation or more intensive exploitation, of the patent in the country.”212 The definition of “failure to work” is left to the member states.213 While the PC refers both to failure to work and insufficient working, most commentators do not make a distinction between these terms. For example, Frankel and Lai view both of these terms as referring to situations in which “the patent owner does not make or supply the market for the invention.”214 A more important question, both in respect to the interpretation of law and trade policy, is whether the concept of working encompasses only local manufacturing or also includes importation.215 This type of compulsory license is the primary instrument for ensuring the national working of a patent. When this instrument does not fulfil this objective,

Straus, “Implications of the TRIPS Agreement,” 205. Bodenhausen, Guide to the Appliction of the Paris Convention, 70. 212 Ibid, 73. 213 Ibid, 71. 214 Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 154. 215 See Ullrich, “Mandatory Licensing under Patent Law and Competition Law : Different Concerns, Complementary Roles,” 343-348. 210 211

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the ultimate remedy to insufficient working is patent forfeiture (Art 5 A (3) PC).216 Articles 5 A (2) and (4) PC reflect the objective of working and using a patent as one of the justifications of patent protection.217 Another aim of this measure is preventing the suffocation of national patent offices with unworked patents.218 Generally, such provisions are not common in industrialized countries with strong exports. For example, neither Germany nor the US has included such a provision in their jurisdictions.219 This instrument can be considered as being a protectionist relic.220 However, it must be noted that compulsory licenses against failure to work or insufficient working often also seek to fulfil policy goals other than the maintenance of the functional efficiency of the patent system.221

6.4.3.2

The Controversy Over Local Working Requirement

According to Bodenhousen, working a patent would mean “working it industrially, namely, by manufacture or the patented product, or industrial application of a patented process”; the mere importation of a patented product would not fulfil the requirement to work a patent.222 The topic of local working requirements was very controversial during the last attempts to revise the PC. Reflecting these controversies, Art. 27 TRIPS was formulated to protect the enjoyment of patent right without discrimination, irrespective of whether products are imported or locally produced.223 Otherwise, the TRIPS Agreement does not refer at all to the failure to work as one of the grounds for compulsory licenses.224 Consequently, TRIPS is ambiguous concerning the question of whether exclusive importation constitutes the sufficient

Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 3. Bodenhausen, Guide to the Appliction of the Paris Convention, 70. 218 Blakeney, Trade Related Aspects of Intellectual Property Rights, 88. 219 Beier, “Patent and Utility Model Law,” 263. 220 Ibid, 262. 221 For example, in the context of developing countries, such a compulsory license could provide a means to access foreign technology and to develop a local technological base. See Rec. 6 TRIPS Preamble. 222 Bodenhausen, Guide to the Appliction of the Paris Convention, 71. 223 Blakeney, Trade Related Aspects of Intellectual Property Rights, 90-91. See also Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses.” 155. During the drafting process, the topic was subject to intense debate in both developed and developing countries; see Carlos M. Correa, “Use of Compulsory Licenses in Latin America,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 47, fn 14 for a history of the negotiations conducted during the Uruguay round. 224 Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 155. 216 217

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local working of a patent.225 This issue was not resolved in the WTO’s dispute resolution proceedings.226 According to a more restrictive line of interpretation, Art. 27 (1) TRIPS prevents the establishment of compulsory licenses on the basis of a failure to work a patent locally; the importation of patented products or the products that result from process patents should be sufficient to fulfil the requirement of working a patent.227 In contrast, Correa claims that, had it been drafters’ intention, Art. 5 PC would have been excluded from incorporation into TRIPS. He argues further that the non-discrimination requirement of Art. 27 (1) TRIPS concerns only infringing products and that the objectives of Art. 7 TRIPS support measures intended to promote technology transfer, which may include compulsory licenses on the grounds of failure to work.228 The drafters of the Patent Declaration rejected the applicability of Art. 27 (1) TRIPS to Art. 31 TRIPS altogether and reclaimed states’ freedom to establish local working requirements, provided that the instrument is proportional and balanced by enabling patent holder to prepare for local working.229 To conclude, the flexibility that member states may have in terms of establishing compulsory licenses under TRIPS on the basis of failure to work remains an unresolved issue.230 In the US, a patent holder is not obliged to work a patent;231 in contrast, the patent laws of New Zealand, the UK, and Australia incorporate a compulsory license on the basis of failure to work.232 However, in the EU,

Ana María Pacón, “What Will TRIPS Do for Developing Countries,” in From GATT to TRIPS the Agreement on Trade-Related Spects on Intellectual Property Rights, ed. Friedrich-Karl Beier and Gerhard Schicker (Munich: VCH, 1996), 340. 226 The US initiated dispute resolution proceedings against Brazil, claiming that its local working requirement for patents violated Art. 27 and Art. 28 TRIPS. However, the matter was settled before the panel reached a decision on the matter. See Request for the Establishment of a Panel by the United States, Brazil - Measures Affecting Patent Protection, WTO Doc. WT/DS199/3 (adopted 9 January 2000); Notification of Mutually Agreed Solution, Brazil - Measures Affecting Patent Protection, WTO Doc. WT/DS199/4 (adopted 19 July 2001). 227 de Carvalho, TRIPS Regime of Patent Rights, 436; Straus, “Implications of the TRIPS Agreement,” 205; Gervais, TRIPS Agreement, 2.409. An even more restrictive view is taken by Wang, who views the principle of non-discrimination to apply also to Art. 5 A (4) PC on the basis of Art. 31 (1) VCLT in the light of the panel’s view in Canada Pharmaceuticals, see Wang, “Anchillary Orders of Compulsory Licensing,” 201-204, relying on Canada Pharmaceuticals, 7.91. Similar outcome derives from interpretation of Art. 2 (2) TRIPS, which prevents derogation of the obligations derived from a PC. However, since Art. 5 A (4) PC creates a right and not an obligation, Art. 27.1 TRIPS can be interpreted as enabling restrictions to compulsory licenses on the basis of their discriminatory character Art. 5 A (4) PC. UNCTAD-ICTSD, Resource Book on TRIPS and Development, 483, fn 947. 228 Correa, “Use of Compulsory Licenses in Latin America,” 48-49. Cf. Wang, “Anchillary Orders of Compulsory Licensing and Their Compatibility with the TRIPS Agreeent,” 202-203. 229 Lamping et al., “Declaration on Patent Protection,” 688-689. 230 Correa, Trade Related Aspects of Intellectual Property Rights, 317. 231 See Hartford-Empire Co. v. United States, 323 U.S. 386, 432-433 (1945). 232 See Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 154-155. 225

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compulsory licenses that require local working are inapplicable.233 Compulsory licenses granted to patents or plant varieties on the basis of failure to work or insufficient working in a national territory amount to measures that have an effect equivalent to quantitative restriction under Art. 30 EEC Treaty (Art 36 TFEU) when a country’s domestic demand can be satisfied through imports from other member states.234

6.4.3.3

Applicability to Market Failures

In principle, Art. 5 A PC does not prevent the establishment of a compulsory license that addresses the needs of follow-on innovators and a patent holder’s failure to meet the demands of the technology market. Even in the narrowest interpretation, in which the obligation to work a patent can be fulfilled via importation, not only via local working, it may be used as an instrument for accessing patents that are not used by their holders in any way, including defensive patents or patents entangled in patent thickets.235 Compulsory licenses issued on the basis of the passivity of the patent owner are justified when the failure to work is deemed abusive. Abuse can be identified in situations in which “the patent holder’s inactivity is supplemented by subjective or objective circumstances in the light of which his conduct seems reprehensible or unreasonable. Examples of abuse include [. . .] repression of a trail-blazing invention, obstruction of a more recent advanced invention though a defensive patent which is not worked or insufficient supply of the market with essential commodities – all cases where the public interest would also justify a grant of a compulsory license.”236 The instrument could also employ a global non-working requirement, which would allow for interference with abusive patent suppression without constituting a discriminatory, protectionist practice.237 Hence, at the outset, compulsory licenses issued on the basis of failure to work could interfere with unjustified refusals to license. However, due to the additional criteria of Art. 5 A (4) PC, this instrument is impractical for use against the abovementioned market failures: In rapidly developing technological fields, the grace period mandated by Art. 5 A (4) PC may prove excessively lengthy. It may also be difficult for an applicant to prove that a patent is not actually being worked by its holder, especially if the working requirement were to be interpreted globally. A patent holder could also justify his inaction on the basis of still being engaged in R&D activities that will lead to working of the patent. While

Straus and Prinz zu Waldeck und Pyrmont, “Survey of Compulsory Licensing Legislation,” 21. Case C-235/89, Commission v. Italian Republic, 1992 E.C.R. I-777, para 29; Case C-30/90, Commission v. UK and Northern Ireland, 1992 E.C.R. I-829, para 33. 235 Similarly, Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 87-88. 236 Beier, “Patent and Utility Model Law,” 263. 237 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 87-88. 233 234

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this is an important defence for the purposes of balancing innovation incentives, an applicant is likely to have little opportunity to contest such a justification.

6.4.4

A Remedy to Anti-competitive Practices

6.4.4.1

Substantial Criteria

Compulsory licenses granted to remedy anti-competitive practices (Art. 31 (k) TRIPS) represent a special instrument in the context of TRIPS. In comparison to other compulsory licenses for functional efficiency, it is characterized by a number of flexibilities: First, such a compulsory license is exempt from several of the requirements posed for other types of compulsory licenses, most importantly that of prior effort to obtain a voluntary license (Art. 31 (b) TRIPS). Consequently, this instrument can be used to address ex post market failures. In addition, this instrument is exempt from the condition of Art. 31 (f) TRIPS that requires the use of a patent to be authorized predominantly for the supply of the domestic market of the member state that authorises such use. Consequently, from the perspective of a follow-on innovator who also seeks to export her innovations, the terms of a compulsory license intended to remedy anti-competitive practices are considerably more favourable. Some commentators view the lower, specific criteria for compulsory licenses aimed at remedying anti-competitive practices as indicating the high importance assigned to competition in the TRIPS system.238 Beyond Art. 31(k) TRIPS, Art. 8 (2) TRIPS and Art. 40 TRIPS also provide set guidelines for the application of competition law to IPRs. While earlier, in the context of TRIPS, competition law has been viewed as a tool intended to enhance technology transfer, its role has gradually shifted to that of a tool for innovation that ensures the openness of the markets to innovations and their dissemination in accordance with the principles of competition law, highlighting the complementarity between competition and patent law.239 Art. 8 (2) TRIPS confirms member states’ freedom to take measures needed to prevent the abuse of IPRs by right holders or the resort to practices that unreasonably restrain trade or adversely affect the international transfer of technology.240 This provision Andreas Heinemann, “Antitrust Law of Intellectual Property in the TRIPS Agreement of the World Trade Organization,” in From GATT to TRIPS - the Agreement on Trade-Related Aspects on Intellectual Property Rights, ed. Friedrich-Karl Beier and Gerhard Schicker (Munich: VCH, 1996), 244. Cf. Mor Bakhoum and Beatriz Conde Gallego, “TRIPS and Competition Rules : From Transfer of Technology to Innovation Policy,” in TRIPS Plus 20: From Trade Rules to Market Principles, ed. Hanns Ullrich, et al. (Heidelberg: Springer Verlag, 2016), 554 in which the authors argue that the drafters of TRIPS had an inimical view of the interrelationship of competition and IP law. 239 Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 530-531, 538, 544-545. 240 Reichmann views Art. 8 (2) TRIPS as referring to the concrete measure of Art. 31 (k) TRIPS. Jerome H. Reichman, “Universal Minimum Standards of Intellectual Property Protection under the 238

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justifies interference with strategic uses of patents that may hinder follow-on innovation, such as refusals to licence, enforcement of SEP, and offensive patenting.241 The possibility of using competition law as a tool for innovation is further reinforced by the fact that no unitary international understanding exists regarding the criteria to be used in identifying anti-competitive conduct.242 The concept of “anti-competitive practices” in Art. 31 (k) TRIPS is undefined and left for member states to specify.243 Hence, the term can be interpreted in highly flexible and heterogeneous ways.244 Consequently, a compulsory license intended to remedy anticompetitive practices could interfere with the market failures of unjustified refusals to license,245 excessive royalties, and patent hold-ups, all of which compromise dynamic competition.246 This view is supported by the wide flexibility that the concept of abuse referred to in Art. 8 (2) TRIPS provides.247 As one can observe, a compulsory license intended to remedy anti-competitive practices can target the same overprotection problems as compulsory licenses intended to combat the abuse of rights conferred by a patent, but with the flexibility necessary to address hold-up problems. However, as a result of TRIPS’ flexibility and the absence of international harmonization of competition law, the compulsory liability rules based on competition law address overprotection problems in highly varied ways. The adequacy of EU and US competition law instruments in terms of resolving market failures that hinder follow-on innovation are reviewed in detail in Chap. 8.

TRIPS Component of the WTO Agreement,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2008), 34-35. In contrast, de Carvalho holds the views that Art. 8 (2) TRIPS does not address the situations regulated under Art. 31 (k) TRIPS because the instrument of Art. 31 (k) TRIPS is used to remedy anti-competitive practices, whereas Art. 8.2 TRIPS regulates measures that are aimed at their prevention. de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 106, fn 187. 241 Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 553. When interpreted in conjunction with Art. 7 and Art. 8 TRIPS, Art. 40 (1) and Art. 40 (2) TRIPS are deemed to allow for measures that seek to ensure access to FRAND-encumbered SEPs. Peter Picht, “From Transfer of Technology to Innovation through Access,” in TRIPS Plus 20: From Trade Rules to Market Principles, ed. Hanns Ullrich, et al. (Heidelberg: Springer Verlag, 2016), 518. 242 Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 161. For examples of anti-competitive practices, see United Nations Conference on Trade and Development, United Nations Set of Principles and Rules on Competition, United Nations Conference on Trade and Development, Td/Rbp/Conf/10/Rev.2 (Geneva: United Nations, 2000):10-15. 243 Pacón, “What Will TRIPS Do for Developing Countries,” 340, fn 72. 244 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 178. 245 Cf. de Carvalho, TRIPS Regime of Patent Rights, 436, who considers compulsory licenses targeting refusals to license altogether as unjustified under the TRIPS system. 246 As in the case of compulsory licenses against the abuse of the rights conferred by a patent, the instrument cannot address market failures that do not involve an active practice on the part of a right holder, such as underuse due to excessive transaction costs or royalty stacking. See Sect. 6.4.2. 247 See Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 524.

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Procedural Criteria

Some commentators have questioned whether the special norms of Art. 31 (k) TRIPS concerning anticompetitive practices are actually lower than the general requirements for compulsory licenses. They argue that the requirement of first establishing a practice as being anti-competitive in judicial or administrative proceeding under Art. 31(k) TRIPS is in fact stricter than the general procedural criteria for compulsory licenses.248 From the perspective of alleviating overprotection problems that hinder follow-on innovation, this requirement indeed creates another, potentially very time-consuming and expensive, hurdle. The procedure is, at minimum, subject to Art. 62 (4) and Art. 41(2)–(3) of TRIPS. A patent owner must have the right to defend himself in accordance to the principle of due process, even if the practice in question is ruled as anti-competitive per se.249 Nevertheless, competition law is addressed in a very limited manner under TRIPS. Given member states’ freedom to determine the appropriate method of implementing TRIPS’ provisions within their own legal system and practice (Art. 1(1) TRIPS), they have therefore considerable flexibility when enacting procedures that effectively address anticompetitive practices that compromise dynamic competition. In practice, both national and EU court proceedings, as well as the administrative proceedings of the EC, qualify as administrative or judicial processes under Art. 31 (k) TRIPS,250 as do the proceedings of national competition authorities. Furthermore, the determination of anti-competiveness and the granting of a compulsory license can take place in the same proceedings, as long as the former decision is subject to Art. 62 (4) and Art. 41(2)–(3) of TRIPS.251 Consequently, decisions to grant compulsory licenses as consequence of a competition law-based defence in infringement proceedings would fulfil the procedural requirement of Art. 31 (k) TRIPS.252 The term “remedy” underlines the ex post nature of this instrument, as anticompetitive conduct must be identified by the administrative or judicial authority in the concrete case. However, the risk of an anticompetitive effect is sufficient to employ this measure—the actual manifestation of the effect is not a precondition for the granting of such a compulsory license.253 This interpretation allows a follow-on innovator to seek such a compulsory license during the early stages of the innovation process. However, de Carvalho considers that ex ante remedies for anticompetitive Straus, “Implications of the TRIPS Agreement,” 206-207. de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 142-143. 250 Picht, “From Transfer of Technology,” 520. 251 See de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 142-143. 252 Cf. Picht, “From Transfer of Technology,” 520. However, whether such a decision would also fulfil the procedural requirement of Art. 31 (k) TRIPS for applicants for compulsory licenses who have not been parties to proceedings is uncertain. Ibid. 253 de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, at 31-12-31.12. de Carvalho therefore views the provision as allowing for compulsory licenses as a means of exercising preventive control over mergers. Ibid, 31-15. 248 249

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practice aimed at “preventing, controlling or repressing anti-competitive uses of patent rights (and their effects)” would not be free from the requirements of Art. 31 (b) and (f) TRIPS.254 In the author’s view, this interpretation is overly restrictive: First, there does not seem to be any justification for narrowing the scope of a compulsory license that may be granted to to remedy anti-competitive conduct ex ante in comparison to an ex post remedy. Second, the ex ante market failures of refusal to license and excessive royalties, by definition, presuppose prior efforts to obtain a license, thus fulfilling the requirement of Art. 31 (b) TRIPS.

6.4.4.3

Multiple Options for Implementation

From the perspective of a lawmaker, TRIPS offers multiple options to address the same anti-competitive practice. It is neither unjustified nor uncommon to “address concerns of competition by laws other than those of antitrust.”255 In addition to relying on Art. 31 (k) TRIPS, relevant measures can also be taken on the basis of Art. 30 TRIPS and Art. 40 (2) TRIPS. Reichman notes that a legislator may also employ a normal compulsory license that fulfils the procedural requirements of Art. 31 TRIPS. Member states may also establish a compulsory license on the basis of public interest, pursuant to Art. 8 (1) TRIPS. In addition, Art. 8 (2) TRIPS allows developing countries to take measures intended to prevent practices that adversely affect the international transfer of technology.256 Hence, as discussed in the following Sect. 6.4.5, the boundaries between establishing compulsory licenses for functional efficiency and public interest under TRIPS may be fluid.257 The instrument of Art. 31 (k) rests at the intersection of patent law and competition law. Compulsory licenses intended to promote functional efficiency, irrespective of whether they are based on patent or competition law, are to be interpreted in light of Art. 8 (2) TRIPS, which offers wide flexibility in terms of defining abusiveness. This raises a question concerning the distinction between compulsory licenses motivated by patent law and those justified by competition law under TRIPS: Should the procedure and the grounds for determining the anticompetitiveness of a certain practice under Art. 31(k) TRIPS be governed exclusively by competition law, or can they also be nested in patent law, for example integrated with the concept of the abuse of rights conferred by a patent? The topics of

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de Carvalho, TRIPS Regime of Patent Rights, 504. Lamping et al., “Declaration on Patent Protection,” 689. 256 Reichman, “Universal Minimum Standards of Intellectual Property Protection,” 35, fn 73. However, the conventional compulsory licenses, which are subject to the constraints of Art. 31 (b), (c) and (f) TRIPS would be inefficient in terms of interfering with market failures involving SEPs, particularly if they concern semiconductor technology. Picht, “From Transfer of Technology,” 525. 257 See Sect. 6.4.5. See also Esther van Zimmeren and Geertrui Van Overwalle, “Paper Tiger? Compulsory License Regimes for Public Health in Europe,” IIC - International Review of Intellectual Property and Competition Law 42 (2011): 24-26, 32-37. 255

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the interchangeability of and the interrelationships between the instruments based on Art. 5 A (2) PC and Art. 31 (k) are further explored in Sect. 9.4.3.3.

6.4.5

Dynamic Efficiency as a Public Interest

Compulsory licenses that are justified by public policy seek to maintain the balance between exclusive rights to patents and “other socio-economic interests”.258 Such compulsory licenses may encompass government use259 or use by third parties authorized by a government (Art. 31 TRIPS), which together are referred to as public non-commercial use (Art. 31 (b) TRIPS). In addition, compulsory licenses, which may be granted on the basis of national emergency or other circumstances of extreme urgency (Art. 31 (b) TRIPS), are motivated by Art. 8 (1) TRIPS.260 Both public non-commercial use, including compulsory licenses to semiconductor technology (Art. 31 (c) TRIPS) and uses motivated by emergency or extreme urgency (Art. 31 (b) TRIPS), are exempt from the requirement of prior effort.261 The right to enact compulsory licenses that are intended to benefit the public interest is grounded in Art. 8 (1) TRIPS. Compulsory licenses may be established for the protection of public health and nutrition and also for the promotion of public interest in sectors that are of vital importance to the socio-economic and technological development of member states (Art. 8 (1) TRIPS).262 Generally speaking, two different motivations behind compulsory licenses for public interest can be derived

Lamping et al., “Declaration on Patent Protection - Regulatory Sovereignity under TRIPS,” 688. Government use is sometimes also referred to as Crown use. However, the scopes of of compulsory licenses for crown use in the U.K. and for government use in the U.S. are different. Celeste C. Yang, “Crown Use and Government Use,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015): 397-398. 260 Cf. de Carvalho, who argues that Art. 31 TRIPS represents an “internal” exception to the rights conferred, and, as a result, it is not subject to the criteria of Art. 8 (1) TRIPS, which regulates the “external” exceptions and limitations that are based on the public interest. Therefore, only Art. 7 TRIPS on objectives and paragraph 4 of the Preamble have the effect of restricting the use of compulsory licenses to cases, in which the grant of a compulsory license is justified by social and collective interests. de Carvalho, TRIPS Regime of Patent Rights, 432-433, 436. This interpretation counters the panel’s view in Canada Pharmaceuticals that “[b]oth the goals and the limitations stated in Articles 7 and 8.1 [. . .] as well as those of other provisions of the TRIPS Agreement which indicate its object and purposes” must be kept in mind when interpreting limitations to exclusive rights. Canada Pharmaceuticals, 7.26. Frankel and Lai also note that fn 5 (a) of the Doha Declaration highlighted the status of Art. 7 and 8 as the most central sources for identifying the object and purpose of TRIPS. Frankel and Lai, “Recognized and Appropriate Grounds for Compulsory Licenses,” 159. 261 Such use, however, is subject to an obligation to notify or inform the patent holder; see Art. 31 (b) TRIPS. 262 More generally, Art. 8 (1) TRIPS aims to ensure flexibility via the use of positive measures. This objective is further reinforced in the Doha Declaration with respect to health issues (Art. 4 Doha 258 259

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from the article: The first is the objective of facilitating users’ access to technological products.263 One of the motivations of government and crown use can be interference with situations in which the market fails to adequately supply nationals with essential public goods.264 Such use is rarely motivated by dynamic efficiency, as it enables identical uses of a patented technology and does not foster follow-on innovation. However, compulsory liability rules established primarily on public policy grounds may indirectly foster dynamic efficiency.265 The second motivation is granting compulsory licenses for the purpose of promoting the public interest in sectors that are of vital importance to member states’ technological development (Art. 8 (1) TRIPS).266 Such compulsory licenses are typically motivated by access considerations for the local producers and users of such technological knowledge (Art. 7 TRIPS).267 Even when such measures would serve the developmental interest, with the primary objective of promoting access to existing technology and not the development of new solutions, their indirect and possibly even long-term consequence may be promotion of innovation in the vital sectors that benefits also follow-on innovation.268

Declaration). Yusuf, “TRIPS,” 13-14. The Doha Declaration Art. 5 c) further specifies that public health crises can constitute emergencies under the meaning of Art. 31(b) TRIPS. 263 Lamping et al., “Declaration on Patent Protection,” 688. 264 Ibid, 690. 265 See Correa, Trade Related Aspects of Intellectual Property Rights, 313. 266 The preamble and Art. 7 TRIPS affect the interpretation of the notion of “the public interests in sectors of vital importance”. Yusuf, “TRIPS,” 13-14. In addition, Rec. 5 of the preamble recognizes societal and technological objectives as a part of both the societal and public policy objectives that member states have with regard to the protection of IP. See Florian Keßler, “Preamble,” in WTO: Trade-Related Aspects of Intellectual Property Rights, ed. Peter-Tobias Stoll, Jan Busche, and Katrin Arend (Leiden: Martinus Nijhoff Publishers, 2009), 71-72. Likewise, Rec. 6 of the TRIPS Preamble emphasizes the least developed countries’ flexibilities with respect to the domestic implementation of laws and remedies in order to facilitate the development of a “sound and viable technological base”. 267 For example, a compulsory license may respond to a refusal to license crucial technology for the establishment or development of a local sector. Lamping et al., “Declaration on Patent Protection,” 688. 268 See Correa, Trade Related Aspects of Intellectual Property Rights, 313. In addition, the different public policy objectives may also operate simultaneously. For example, Art. 66 (1) TRIPS and Rec. 6 of the Preamble, when read in conjunction with Art. 7 and 8 TRIPS, empower the least developed countries to determine compulsory licenses for sectors of vital importance for socio-economic and technological development with the purpose of ensuring technology transfer in order to develop a sound and viable technological base. Reichman, “Universal Minimum Standards of Intellectual Property Protection,” 36. Hence, the flexibilities provided in TRIPS for developmental policy purposes are at least indirectly intended to serve the general objectives of TRIPS with regard to the enforcement and protection of IP and in order to promote innovation, technology transfer, and the dissemination of technological knowledge in a manner conducive of social and economic welfare (Art. 7 TRIPS).

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Functionally efficient compulsory liability rules largely serve the public interest.269 For example, compulsory licenses intended to remedy anticompetitive conduct ultimately seek to foster consumer welfare, and those that target failure to work are intended to implement a public policy goal. Similarly, a compulsory license may foster follow-on innovation, either directly or indirectly, in the name of public interest. The distinctions and interrelationships between compulsory licenses intended to promote functional efficiency and public interest vary between jurisdictions. In Germany, Polyferon confirmed that abusive exploitation was not found to be a prerequisite for the fulfilment of the requirement of public interest.270 The finding of public interest was hence rendered distinct from the potential competitive interests of the plaintiff, even if he was factually in the position of a cumulative innovator.271 However, several countries feature compulsory licenses that cannot unequivocally be labelled as instruments intended to target abuse, remedy anticompetitive practice, or function as policy tools. Furthermore, it is sometimes difficult to distinguish whether the instrument represents an exception under the meaning of Art. 30 TRIPS or an ex post liability rule. For example, according to Art. 40 (b) of the Swiss Patent Act, anyone who wishes to use a patented biotechnological invention as an instrument or tool for research is entitled to a non-exclusive license.272 The use thereof is subject to the prior effort requirement.273 This instrument is driven by a public policy objective, as its application requires neither abuse on the part of the patent holder nor any type of exceptional circumstances.274 The instrument compensates for the narrow scope of the Swiss research exemption, which does not cover research tools.275 From the perspective of TRIPS, this instrument could be justified as an exception that is combined with a liability rule (Art. 30 TRIPS) or, more uncomfortably, as a public, non-commercial use under Art. 31 (b) TRIPS. The author agrees with Kur and Schovsbo’s argument that such an instrument could be employed to ensure access to technology that is subject to specific public interest or to prevent hold-ups.276 The

269

Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 38. Polyferon, IIC 1997, 242, 245-246. In the court’s view, neither national or international law, § 14 GG on the right to property, nor the Art. 5 A PC or Art. 30 TRIPS required the use of the patent to be of an abusive nature in order to fulfil the requirement of public interest of PatG § 24 (1). Other justifications may “include other circumstances, particularly of a technical, economic, sociopolitical and medical nature [citations omitted]. Account must be thereby be taken of the wellbeing of the general public, particularly in the field of general health care”; Polyferon, IIC 1997, 242, 246. 271 Beier, “Patent and Utility Model Law,” 265. 272 Bundesgesetz über die Erfindungspatente [SPatG] [Federal Law on Patents for Inventions] 25 June 1954, SR 232.14 (Switz.). 273 SPatG Art. 40 (e). 274 Kur and Schovsbo, Expropriation or Fair Game for All?, 23-24. 275 van Zimmeren and Van Overwalle, “A Paper Tiger? Compulsory License Regimes for Public Health in Europe,” 17. 276 Kur and Schovsbo, Expropriation or Fair Game for All?, 24. 270

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former objective would accord with Art. 8 (1) TRIPS, while the latter would be in line with Art. 8 (2) TRIPS. In the last decade, several countries adapted compulsory licenses against diagnostic gene patents. The instruments were employed as a reaction to Myriad Genetic’s restrictive licensing of patents on genes concerning human breast cancer.277 While these instruments rely on different justifications under the TRIPS system, they all promote the interest of public health.278 In Switzerland, this encompassed the enactment of a compulsory license intended to remedy anticompetitive practices with respect to inventions relating to a product or a method of diagnosis in humans. The anti-competitiveness of a practice is determined in separate judicial or administrative proceedings279 In contrast, France and Belgium addressed the same market failures by means of ex officio compulsory licenses in the interest of public health that concerned larger categories of patents in the medical field.280 The former is subject to the prior effort requirement, while the other is not because it is justified by public non-commercial use and national emergency.281 According to van Zimmeren and Van Overwalle, these instruments seek to balance the patent system in favour of public interest and health, despite the differences in their implementation.282 These examples illustrate that compulsory licenses motivated, at least partially, by public policy are appropriate for addressing overprotection problems that involve research tools and other follow-on innovations that rely on fundamental upstream patents. Compulsory licenses intended to promote the public interest may target certain behaviours, such as refusals to license that compromise the public interest in “the establishment or development of domestic industries”.283 In addition, unlike compulsory licenses that target abuse or anticompetitive practices, their applicability is not dependent on a patent holder’s conduct. Hence, compulsory licenses

van Zimmeren and Van Overwalle, “A Paper Tiger? Compulsory License Regimes for Public Health in Europe,” 12-17, 24. For further discussion on BRCA controversy, see Gert Matthijs, “The European Opposition against BRCA Gene Patents,” Familiar Cancer 5, no. 1 (2006): 97-99, 101; Miri Yoon, “Gene Patenting Debate: The Meaning of Myriad,” John Marshall Review of Intellectual Property law 9 (2010): 969-974. 278 See van Zimmeren and Van Overwalle, “A Paper Tiger? Compulsory License Regimes for Public Health in Europe,” 39. 279 SPatG Art. 40 (c). The anti-competitiveness was intended to encompass the foreclosure of diagnostic services through the exercise of fundamental gene patents, with the consequence of increasing prices for diagnostic testing, to the detriment of patients’, and hence public, health. van Zimmeren and Van Overwalle, “A Paper Tiger? Compulsory License Regimes for Public Health in Europe,” 28. 280 See ibid, 28-29. Code de la propriété intellectuelle [Intellectual Property Code] version consolidée au 1 juin 2019, Arts. L. 613-16-L 613-17 (Fr.); Code De Droit Économique/Wetboek van Economisch Recht [Code of Economic Law] Art. XI.38 (Belg.). 281 See van Zimmeren and Van Overwalle “A Paper Tiger? Compulsory License Regimes for Public Health in Europe,” 35. 282 Ibid, 39. 283 Lamping et al., “Declaration on Patent Protection”, 688. 277

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motivated by public policy concerns may target market failures that cannot be addressed via compulsory licenses that require certain unjustifiable behaviour on the part of a patent holder. They may therefore be employed to resolve anticommons problems in certain well-defined fields that are subject to underuse. In principle, such a compulsory license could also target a field that is demonstrably subject to royalty stacking. However, a public policy-driven compulsory license that contributes to the resolution of market failures associated with overprotection should be very carefully restricted in terms scope. First, pursuant to Art. 8 (1) TRIPS, such a license may target “sectors” of vital importance. Second, this characterization must be balanced with the principle of non-discrimination (Art. 27 (1) TRIPS). The definition should offer predictability to companies operating in a particular sector and be narrow enough to avoid interference with the efficient transactions that may already occur and justifiable incentives to innovate. It would be desirable that the establishment of such a compulsory license would rely on empirical evidence concerning the market failures that occur in the sector in question and evidence of harm to the public interest, or at least evidence of the high likelihood of the future emergence of an overprotection problem. However, these considerations may conflict with legislators’ need to react swiftly to an abrupt patent-related deadlock in a particular industry. While compulsory licenses intended to promote public interests may, at least indirectly, target dynamic inefficiencies that other instruments do not address, the compulsory licenses for functional efficiency are nevertheless more appropriate instruments for the resolution of market failures that hinder follow-on innovation. Similarly to exceptions, compulsory licenses for public policy must determine exempted situations ex ante, which may lead to both false negatives and positives. In addition, unless they are combined with instruments that target functional efficiency, they may prove too blunt to balance a conflict of interests between a patent holder and a follow-on innovator in all of its complexity. For example, a compulsory license that targets a specific sector may not be applicable to market failures that arise from the convergence of one or more technological fields. In contrast, compulsory licenses intended to remedy abuse and anti-competitive practices interfere only with certain unjustified uses of a patent and are sensitive to the strategic motivations of patent holders and follow-on innovators, while leaving efficient transactions, refusals, prices, and efforts to enforce a patent undisturbed. For these reasons, compulsory licenses intended to promote functional efficiency should be the primary instrument used to resolve overprotection problems.

6.5 Interim Conclusions

6.5

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Interim Conclusions

Of the compulsory licenses that seek to enhance the functional efficiency of the patent system, that which specifically addresses follow-on innovation, compulsory license for dependent patents,284 is the least appropriate when attempting to resolve market failures associated with overprotection. Reflecting the one-patent-per-product assumption, its scope of application is extremely narrow and excludes infringing sequential, cumulative innovations or infringing innovations that utilize research tools that do not feature overlap between initial patent holders’ and follow-on innovators’ patent claims. Due to the requirement of prior effort, compulsory licenses for dependent patents cannot be invoked as a defence in infringement proceedings. In addition, the instrument is unattractive due to the requirement of cross-licensing. Abuse as a justification for a compulsory license can be interpreted as encompassing a number of market failures, such as unjustified refusals to license, excessive royalties, and hold-ups. Hence, in principle, it appears to be most fitting ground for intervening in overprotection problems that result from a patent holder’s strategic behaviour. However, due to the prior effort requirement, it is impossible to establish a compulsory license on the basis of abuse that would target ex post market failures. Furthermore, some market failures, such as underuse due to the tragedy of the anti-commons or royalty-stacking problems, do not directly result from abusive behaviour on the part of patent holders. These market failures cannot be addressed with a compulsory license that targets abuse resulting from the exercise of the exclusive rights (Art. 5 A (2) PC). Prima facie, compulsory licenses for failure to work appear to be suitable for intervening with overprotection problems involving patents that are not worked by their owners, such as those held by PAEs. However, the market failure that typically involves unexercised patents is a patent hold-up, and a compulsory license for failure to work cannot be employed as a defence in infringement proceedings for the purposes of resolving the ex post market failure. In addition, such a compulsory license is absent from the jurisdictions of many developed countries and is subject to the possible constraints posed by Art. 27 TRIPS and the case law of CJEU.285 Finally, a compulsory license on the grounds of failure to work is ill-suited for resolving market failures in rapidly developing technological fields, as it can only be applied for after four years have lapsed since the filing of a patent application or three years from the point in time when the patent was granted (Art. 5 A (4) PC). Overall, of the compulsory licenses intended to promote functional efficiency, those justified on the grounds that they remedy anti-competitive practice appear to offer the most flexibility in terms of interfering with the market failures caused by overprotection. Most importantly, such compulsory licenses are exempt from the prior effort requirement that precludes interference with ex post market failures for 284 285

Abello, La License, 217-218. For a discussion controversy over local working requirement, see Sect. 6.4.3.2.

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other compulsory licenses. However, the use of this instrument is conditional upon the finding of anticompetitive practice in an administrative or judicial process. The extent to which competition law may address the overprotection problems associated with patent law is reviewed in Sect. 8. The grounds for the issuing of compulsory licenses under the TRIPS and PC system do not distinguish between SEP and non-SEP patents; however, both compulsory licenses for remedying anticompetitive practices and the abuse of the rights conferred by a patent appear appropriate for addressing market failures in the standard-setting context. Overall, Art. 31 TRIPS and the compulsory licenses implemented in national patent laws in the light of the article are not easily adaptable to address the overprotection problems that may hinder follow-on innovation. First, the most important roadblock to balancing the overprotection problems of the patent system in favour of follow-on innovators by means of compulsory licensing is the prior effort requirement, which precludes interference with ex post overprotection problems. Second, the procedural rules established under Art. 31 TRIPS are intended to make the process of applying for a compulsory license burdensome and unappealing. The rules of the procedure for obtaining a compulsory license should be less ambiguous, and TRIPS’ flexibilities should be further employed for the purposes of reducing the bureaucracy associated with compulsory licensing.286 While TRIPS leaves considerable room for member states to determine by which authority and using which procedure a compulsory license should be granted, the procedures involved in applying for compulsory licenses are often slow and costly and do not take into account interim effects. Third, while some of the existing grounds for compulsory licenses may address some of the market failures associated with overprotection, national compulsory liability licenses are generally not established with a view to foster follow-on innovation. The only exception is the compulsory licence for dependent patents,287 which has an insufficiently narrow scope of application. Fourth, neither the existing grounds for compulsory licenses nor the procedures for applying them address market failures that involve multiple patents and patent holders simultaneously. Consequently, the compulsory licenses in patent law cannot address multiparty hold-ups due to the importance of the prior effort requirement and their strict procedural criteria. Furthermore, Art. 31 TRIPS and Art. 5 A PC do not easily lend themselves to finding the grounds for or establishing a procedure for interfering with the tragedy of the anticommons or royalty-stacking. The former market failure may not involve any specific refusals or strategic behaviours on the part of patent holders, but could simply arise as a mere consequence of a risk-averse follow-on innovator foregoing investments in its own product in the face of excessive transaction costs. In the latter market failure, individual patent holders may not charge unjustifiably excessive

286 287

Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 197-199. Abello, La License, 217-218.

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prices, but the cumulative royalties required for several patents may make follow-on innovation efforts unprofitable.288 To conclude, the existing compulsory licenses in patent law are not suited to addressing the problems of the modern patent landscape that compromise follow-on innovation. Art. 31 TRIPS was drafted to balance past controversies and the excesses of the compulsory licenses that sought to enable protectionist, imitative use, and therefore pays little attention to the potential of compulsory licenses in terms of sustaining dynamic efficiency. Consequently, the establishment of a compulsory license in patent law that would foster follow-on innovation would require further interpretation of Art. 31 TRIPS and Art. 5 PC in light of the principles and objectives of TRIPS.289

288

See also Areeda and Hovenkamp, Antitrust Law, X, at 1782g fn 204. This is approach is taken in connection with the normative recommendation for a novel compulsory licensing instrument, see Sect. 9.4.

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Chapter 7

Denial of Injunctive Relief

Based on Arts. 41 and 44 TRIPS, courts have a margin of discretion in the granting of permanent injunctions. In the US, the doctrine of equitable discretion, reinforced by the eBay judgement allows the court to deny injunctions on the grounds such as irreparable harm, public interest, or disproportionality. The instrument has proved to be fitting to address hold-ups created by patent assertion entities. However, it cannot interfere with ex ante market failures, such as refusals to license. The patent misuse doctrine is an equitable defence that may be raised in patent infringement proceedings. It represents a zero-sum-liability rule, where a patent holder does not maintain an entitlement a monetary remedy. Due to its narrow scope of application, the doctrine has little relevance in enabling follow-on innovation. In the EU, the potential of the Enforcement Directive to limit the grant of permanent injunctions is subject to debate. Whereas in the UK, a doctrine of equitable discretion would allow courts to deny injunctive relief in certain situations, the right to obtain permanent injunctions is traditionally more absolute in countries with a civil law system, such as Germany.

7.1

Introduction

This chapter focuses on limitations to the grant of a permanent injunction against a follow-on innovator in infringement proceedings. First, it discusses the foundations of limiting injunctive relief under TRIPS. Sections 7.2–7.3 and 7.5 review the margins of discretion of the judiciaries in the US and Europe to refuse to grant an injunctive relief with regard to the sufficiency of this type of compulsory liability rule in terms of resolving the overprotection problems in patent law. Section 7.4 reviews the US doctrine of the misuse of patents, which represents an ex post zeroliability rule.1 Each of the sections presents interim conclusions regarding the

1

See Hilty, “Legal Remedies,” 377, 393.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_7

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sufficiency of the instruments discussed in terms of resolving the overprotection problems of the patent system. Section 7.6 concludes by discussing the relevance of denials of injunctive reliefs to balancing the incentives of both patent holders and follow-on innovators.

7.2

Limitations to Injunctive Relief Under TRIPS

The minimal standards for remedies against the infringements of rights conferred by a patent (Art. 28 TRIPS) are established in Part III of TRIPS. According to Art. 44 (1) TRIPS, judicial authorities shall have the authority to order a party to desist from an infringement. This provision concerns only the right to grant permanent injunctions.2 Pursuant to Art. 41 (1) TRIPS, enforcement procedures shall allow for effective action against infringements of IPRs. These provisions provide the contours for the property rule in the WTO member states. However, TRIPS does not establish an absolute right to a permanent injunction.3 Instead, several TRIPS provisions grant the WTO member states the flexibility to establish an ex post compulsory liability rule. First, in order to fulfil the obligation imposed by Art. 44 (1), it is sufficient that “judicial authorities must have the power to order the measures specified” in the particular member state. Hence, TRIPS does not require injunctions to be issued;4 however, “systematic refusal” may amount to a breach of the obligations established by the TRIPS Agreement.5 Second, the requirement of the first sentence of Art. 44 (1) TRIPS is not mandatory with respect to “innocent infringers”. Therefore, in principle, it is possible to deny a permanent injunction in a situation in which a follow-on infringer has unwillingly infringed a patent in the face of the excessive transaction costs associated with clearing a pre-existing technology ex ante. Third, when an injunction is inconsistent with a member state’s law, declaratory judgements and adequate remuneration shall also be available as remedies (Art. 44 (2) TRIPS).6 Four, as a balancing factor to the issuance of injunctive relief, TRIPS specifies that the procedures should be applied in such a manner so as to avoid the creation of barriers to legitimate trade and to

2 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 90. The authority to issue preliminary injunctions is guaranteed by Art. 50 TRIPS. Unlike permanent injunctions, they are granted prior to the finding of an infringement. Hence, Art. 51 (1) TRIPS “mandates the availability of injunctions to stop (new or further) infringement from occurring.” Gervais, TRIPS Agreement, 2.588. Art. 44 (2) TRIPS limits remedies against uses by governments or uses authorized by governments to adequate remuneration in the circumstances of a case pursuant to Art. 31 (h) TRIPS. 3 Sujitha Subramanian, “Different Rules for Different Owners - Does a Non-Competing Patentee Have a Right to Exclude? A Study of Post-eBay Cases,” IIC - International Review of Intellectual Property and Competition Law 39, no. 4 (2008): 446. 4 Ohly, “Patenttrolle,” 780; Gervais, TRIPS Agreement, 2.529, 2.541. 5 Gervais, TRIPS Agreement, 2.539, 2.541. 6 Ibid, 2.539.

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provide for safeguards against their abuse (Art. 41 (1) TRIPS) on the basis of Art. 44 TRIPS. In addition, enforcement procedures shall be fair and equitable (Art. 41 (2) TRIPS). Finally, the provisions governing the issuance of a permanent injunction should be read in conjunction with Art. 8 TRIPS, which specifies the grounds for limiting an injunctive relief on the basis of public interest or abuse, and Art. 7 TRIPS, which stresses the importance of balance between the interests of a patent holder, a follow-on innovator, and the public. Commentators have also reviewed the compliance of limitations to injunctive relief with Art. 30 TRIPS.7 However, as also noted by Cotropia,8 the exceptions to exclusive rights permitted under Art. 30 TRIPS, such as prior, experimental, or private, non-commercial use, are typically constructed rather narrowly and are specific with respect to the permitted use.9 In contrast, the limitations to injunctive relief are often defined in a considerably more ambiguous manner. Consequently, when the ex post compulsory liability rule is focused on the criteria for granting remedies, rather than on identifying a specific category of uses or users subject to an exception, a denial of injunctive relief does not represent an exception within the meaning of Art. 30 TRIPS.10 In addition, unlike Art. 31 TRIPS, Art. 30 TRIPS predominantly governs exceptions to patent rights in which a patent holder is not entitled to remuneration.11 Therefore, of the denials of injunctive relief, only zerosum liability rules, such as the patent misuse doctrine, may be further qualified by Art. 30 TRIPS. It is also often presumed that a denial of injunctive relief should comply with Art. 31 TRIPS.12 Indeed, a limitation to an injunctive relief may amount to an effect very

See, for example, Subramanian, “Different Rules For Different Owners,” 447; Christopher Anthony Cotropia, “Compulsory Licensing under TRIPS and the Supreme Court of the United States’ Decision in eBay v. MercExchange,” in Patent Law: A Handbook of Contemporary Research, ed. Toshiko Takenaka and Rainer Moufang (Cheltenham: Edward Elgar Publishing, 2008): 576-579. Cf. Wolfgang von Meibom and Ralph Nack, “Patents without Injunctions? - Trolls, Hold-Ups, Ambushes and Other Patent Warfare,” in Patents and Technological Progress in a Globalized World: Liber Amicorum Joseph Straus, ed. Wolrad Prinz zu Waldeck und Pyrmont, et al. (Heidelberg: Springer Verlag, 2009): 511. 8 Cotropia, “Compulsory Licensing under TRIPS,” 579, fn 103. 9 See, for example, Correa, “Patent Rights 2008,” 244-245; Trade Related Aspects of Intellectual Property Rights, 303-311; Susanne Reyes-Knoche, “Article 30,” in WTO: Trade-Related Aspects of Intellectual Property Rights, ed. Peter-Tobias Stoll, Jan Busche, and Katrin Arend (Leiden: Martinus Nijhoff Publihsers, 2009), 547-552. 10 Cotropia, “Compulsory Licensing under TRIPS,” 579. 11 See Sect. 6.2. 12 See, for example, Subramanian, “Different Rules For Different Owners,” 447; Andrew C. Mace, “TRIPS, eBay and Denials of Injunctive Relief : Is Article 31 Compliance Everything?,” Columbia Science and Technology Law Review 10 (2009): 264, viewing this to approach to represent the broad interpretation of Art. 31 TRIPS; Charlene A. Stern-Dombal, “Tripping over TRIPS : Is Compulsory Licensing under eBay at Odds with U.S. Statutory Requirements and TRIPS?”, Suffolk University Law Review 41 (2007): 268, 272-277; Alexander von Mühlendahl, “Enforcement of Intellectual Property Rights - Is Injunctive Relief Mandatory?,” IIC - International Review of 7

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similar to that of a compulsory license.13 However, a compulsory license entails “systematic impossibility to obtain an injunction and obtain only actual damages.”14 Furthermore, due to the prior effort requirement of Art. 31(b) TRIPS, compulsory licenses, as a general rule, represent ex ante liability rules. Art. 31 TRIPS specifies two exceptions to this main rule: public non-commercial use in the case of national emergency (Art. 31 (b) TRIPS) and compulsory licenses given to remedy an anticompetitive practice (Art. 31 (k) TRIPS). In addition, Art. 44 (2) TRIPS states that, “[n]otwithstanding the other provisions of this Part and provided that the provisions of Part II specifically addressing use by governments, or by third parties authorized by a government, without the authorization of the right holder are complied with, Members may limit the remedies available against such use to payment of remuneration in accordance with subparagraph (h) of Article 31.” Art. 44 (2) TRIPS serves two objectives: First, it offers governments and their contractors who use a patent pursuant to Art. 31 (b) TRIPS a defence against permanent injunction in infringement proceedings. Second, it creates a foundation for compulsory licenses in favour of public policy goals other than that mentioned in Art. 31 (b) TRIPS, including security interests (Art. 73 (b) TRIPS).15 The first sentence of Art. 44 (2) TRIPS has been interpreted as also governing the ex post liability rules established on the basis of the equitable discretion of the courts.16 However, the wording of this provision identifies the government of a member state as a source of authorization. It would be against the wording of Art. 44 (2) TRIPS to interpret it as also applying to uses authorised by the judiciary on the basis of its discretion. The explicit reference of the provision to governmental use provided in Part II of TRIPS strengthens this interpretation. In the same vein, the November 23, 1990 Draft of Art. 44 TRIPS refers to “use by governments [. . .] without the authorization of the right holder”, which bears close resemblance to the wording of Art. 31 TRIPS. Therefore, the second sentence of Art. 44 (2) TRIPS cannot be interpreted as extending to apply to denials of injunctive relief, the application of which rests on the discretion of the judiciary with regard to choosing suitable remedies in the face of an infringement. Instead, limitations to injunctive relief represent a constellation of compulsory liability rules distinct from those subject to Art. 31 TRIPS.17 Consequently, on the basis of Art. 44(1) TRIPS or also the second sentence of Art. 44 (2) TRIPS,18 it is Intellectual Property and Competition Law 38 (2007): 379-380; von Meibom and Nack, “Patents without Injunctions?,” 510. 13 Cotropia, “Compulsory Licensing under TRIPS,” 574. 14 Gervais, TRIPS Agreement, 2.439. 15 Ibid, 2.396 and fn 669, 2.539. Some commentators consider liability rules established on the basis of the first sentence of Art. 44(2) TRIPS to be subject to the requirements of Art. 30 and 31 TRIPS; see Cotropia, “Compulsory Licensing under TRIPS,” 580. 16 HTC Corp. v. Nokia Corp. [2013] EWHC 3378 (Pat), para 31. 17 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 281. 18 Cotropia, “Compulsory Licensing under TRIPS,” 580-581, views the eBay decision as belonging to the category outlined by the second sentence of Art. 44 (2) TRIPS.

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possible for member states determine the scope and the criteria of discretion, under which the court may decide not to issue an injunctive relief against an infringer, with the consequence being that the right holder remains entitled only to the right to claim damages (Art. 45 (1) TRIPS) in a particular case. Most notably, in the US, the availability of injunctive relief upon the infringement of a patent has been limited on the basis of equity. In contrast, the flexibility of the courts to choose between applying the property and liability rules in the EU is considerably more limited. The following Sects. 7.3–7.4 discuss the effect of the availability of ex post liability rules on resolving the overprotection problems of patent law in the US and the EU.

7.3 7.3.1

eBay v. MercExchange A Doctrine Based on Equity

In common law jurisdictions, such as the US and the UK, injunctive relief is a remedy of equity, subject to the discretion of the court, whereas damages are a remedy of common law.19 The margin of discretion is also expressed in 35 U.S.C § 283 (2012), which states that “[t]he several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.”20 While subject to equitable discretion, US courts previously granted injunctions to patents almost automatically.21 Courts denied permanent injunctions “in rare instances” on the grounds of public interest,22 such as public health.23 However, in the landmark eBay v. MercExchange decision (hereinafter, eBay), the Supreme Court held that, in patent disputes, “the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that discretion must be exercised consistent with the traditional principles of

19

See Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 95-96. Cursive added. 21 “Infringement having been established, it is contrary to the laws of property, of which the patent law partakes, to deny the patentee’s right to exclude others from use of his property .35 U.S.C. § 261 [. . .]It is the general rule that an injunction will issue when infringement has been adjudged, absent a sound reason for denying it[. . .]In matters involving patent rights, irreparable harm has been presumed when a clear showing has been made of patent validity and infringement.”[citations omitted]. Richardson v. Suzuki Motor Co., LTD, 868 F.2d 1226, 1246-1247 (Fed. Cir. 1989); MercExchange, L.L.C. v. eBay, 401 F.3d 1323, 1329 (Fed. Cir. 2005). However, the Federal Circuit did not hold the right to exclude to be absolute. Donald S. Chisum, Chisum on Patents : A Treatise on the Law of Patentability, Validity, and Infringement, vol. 7 (New York: Matthew Bender, 2016), § 20.04[2][a]; Odetics, Inc. v. Storage Tech. Corp., 185 F.3d 1259, 1272-1274 (Fed. Cir. 1999). 22 Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (Fed. Cir. 1995). 23 City of Milwaukee v. Activated Sludge, 69 F.2d 577, 593 (7th Cir. 1934). 20

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equity”.24 For the court to grant a permanent injunction, “[a] plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”25 The court emphasised that neither general rules for granting injunctions nor expansive categorical rules that exclude the availability of injunctive relief for a wide array of cases would represent the correct application of this four-factor test.26 The concurring opinions expressed in eBay represented both conservative and liberal interpretations of the application of the principles of equity to patents.27 In his concurring opinion, Justice Roberts explained that the historical tradition of granting permanent injunctions against infringers “in the vast majority of patent cases” showcased the relevance of the first two factors for the test, in the face of “the difficulty of protecting the right to exclude through monetary remedies that allow the infringer to use an invention against the patentee’s wishes”.28 He emphasised the need to follow case law in the application of the four-factor test in patent infringement proceedings, instead of “writing on an entirely clean slate”.29 This interpretation appears to support the application of a general property rule in patent law.30 In contrast, Justice Kennedy viewed that the existing practice of applying the principles of equity in the context of patents concerned a homogenous set of situations, for which it remains relevant.31 He stressed the importance of the flexibility that the principles of equity provide, taking the view that “[t]he equitable discretion over injunctions, granted by the Patent Act, is well suited to allow courts to adapt to the rapid technological and legal developments in the patent system.”32 He further drew attention to the emergence of firms that operate solely in the market of technology and that can use the threat of injunction to create exploitative hold-up situations.33 While Justice Kennedy refers to NPEs, it must be noted that the fourfactor test does not categorically preclude granting permanent injunctions to patents held by NPEs, such as “university researchers or self-made inventors”.34 In addition,

24

eBay, 126 S. Ct. 1837, 1841. Ibid, 1839. 26 Ibid, 1840-1841. 27 Subramanian, “Different Rules For Different Owners,” 435-437. 28 eBay, 126 S. Ct. 1837, 1841. (Roberts J concurring). The argumentation of Justice Roberts is not economical, and he does not appear to refer to free-rider problems. Rather, he appears to stress the intrinsic value of the right to exclude to a patent holder. 29 Ibid, 1841-1842. (Roberts J, concurring). 30 Subramanian, “Different Rules For Different Owners,” 436. 31 eBay, 126 S. Ct. 1837, 1842. (Kennedy J, concurring). 32 Ibid. 1842. (Kennedy J, concurring). 33 Ibid, 1842. (Kennedy J, concurring), with reference to FTC, To Promote Innovation, 38-39. 34 eBay, 126 S. Ct. 1837, 1840. 25

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Justice Kennedy questioned the fulfilment of the four-factor test in the context of cumulative innovation: “[w]hen the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.”35

7.3.2

Post-eBay Practice

7.3.2.1

Irreparable Harm and Inadequacy of Monetary Damages

The eBay decision was not detailed with regard to the interpretation of the four factors, creating legal uncertainty regarding the application of the test.36 Nevertheless, in practice, U.S. courts have followed Justice Kennedy’s line of interpretation of eBay by denying injunctive relief against NPEs but granting them in favour of competing companies.37 After eBay, district courts have granted permanent injunctions in 72.5 percent of cases.38 Pursuant to eBay, patent holders are no longer presumed to suffer irreparable harm from an infringement in the absence of injunctive relief.39 The first two factors, irreparable harm and the inadequacy of monetary damages, are mandatory to the exercise of equitable discretion and in the subsequent cases are often analysed together.40 Essentially, they deal with the issue of the sufficiency of patent remedies in terms of sustaining a patent holder’s incentives to innovate.41 The burden of proof of showing irreparable harm is generally on the patent holder.42 The

35 Ibid, 1842. (Kennedy J, concurring). In addition, acknowledging that the injunctions given to business method patents “may have different consequences” for business method patents, he suggests that their “potential vagueness and suspect validity of some of these patents” be addressed through the application of the principles of equity in infringement proceedings concerning such patents. Ibid. (Kennedy J, concurring). 36 FTC, The Evolving IP Marketplace, 217. 37 Subramanian, “Different Rules For Different Owners,” 437, 448. 38 Christopher B. Seaman, “Permanent Injunctions in Patent Litigation after eBay : An Empirical Study,” Iowa Law Review 101 (2016): 1987-1990, 2006. The average rate varies across districts; furthermore, the grant rate was above 90 percent for patents covering pharmaceuticals or biotechnology, whereas, in the electronics, medical devices, and software sectors, permanent injunctions were granted in fewer than 70 percent of cases. Ibid, 1985-1986. 39 Robert Bosch LLC v. Pylon Mfg. Corp., 659 F3d 1142, 1149 (Fed. Cir. 1995). Marketa Trimble, “Injunctive Relief, Equity and Misuse Rights in US Patent Law,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 61 (2012): 519. 40 Chisum, Chisum on Patents, 7, § 20.04[2][c][ix], § 20.04[2][c][iii]. 41 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 136. 42 Toshiko Takenaka et al., Patent Enforcement in the US, Germany and Japan (Oxford: Oxford University Press, 2015), 13.08.

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fulfilment of this criterion is subject to the establishment of two requirements: “(1) that absent an injunction, it will suffer irreparable harm; and (2) that a sufficiently strong causal nexus relates the alleged harm to the alleged infringement.”43 Generally, upon reviewing the existence of an irreparable harm, courts attempt to determine the presence of a competitive relationship between the patent holder and the infringer.44 Injunctions are likely to be granted when a patent holder practices her invention and directly competes with the defendant.45 However, the existence of an indirect competitive relationship in fields in which market players compete for “design wins”, for example through the incorporation of a patented chipset in a new mobile telephone model, may also qualify as rendering monetary damages inadequate.46 Furthermore, the lack of a competitive relationship between parties to a dispute does not preclude courts from finding irreparable harm.47 This observation aligns with the FTC’s recommendation that courts should not make straightforward presumptions on the basis of these facts and should also address the potential competitive relationships that may exist on the market of technology.48 Empirically, beyond losses in terms of market shares, courts have found irreparable harm to occur through loss of goodwill and business opportunities, erosion of prices, and the infringer’s foreseen failure to pay damages.49 In addition, a liability rule is not sufficient to compensate a patent holder when “an infringer saturates the market for a patented invention with an infringing product or damages the patent holder's good will or brand name recognition by selling infringing products”.50 In addition, “[p]laintiffs are also frequently successful when their patented technology is at the core of its business, and/or where the market for the patented technology is volatile or still developing.”51 Pursuant to Justice Kennedy’s opinion, denying an injunction to a component would not necessarily amount to irreparable harm.52 However, determining the absence of irreparable harm only on the basis of the existence of additional competitors on the market and the “non-core” nature of the infringed technology in the context of the patentee’s business constitutes a legal error. Pursuant to eBay, no categorical rules can be applied when issuing injunctive

43

Apple, Inc. v. Samsung Electronics Co., Ltd. (Apple II), 695 F.3d 1370, 1371 (Fed. Cir. 2012). Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.08; Chisum, Chisum on Patents, 7, § 20.04[2][c][iv][A]. 45 Trueposition Inc. v. Andrew Corp., 568 F.Supp.2d 500, 531 (D. Del. 2008). The existence of a two-sided competitive relationship between parties favours a finding of irreparable harm. Chisum, Chisum on Patents, 7, § 20.04[2][c][iv][A]. 46 Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 702-704 (Fed. Cir. 2008). 47 Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.12, who note that the case-law is at times inconsistent in this respect. 48 FTC, The Evolving IP Marketplace, 229-231. 49 Seaman, “Permanent Injunctions in Patent Litigation after eBay,” 1993. 50 Z4 Technologies, Inc. v. Microsoft Corp., 434 F.Supp.2d 437, 441 (E.D. Tex. 2006). 51 Trueposition, 568 F.Supp.2d 500, 531. 52 eBay, 126 S. Ct. 1837, 1842, (Kennedy J, concurring). 44

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relief, also in favour of the defendant allegedly infringing a patent,53 such as the de jure standard implementer subject to the enforcement of a FRAND-encumbered SEP.54 Nevertheless, eBay also allows interventions in hold-ups that involve FRANDencumbered de jure SEPs, as the first two criteria of the test are difficult to establish for such patents. Damages are viewed to suffice in such situations, and the denial of injunctive relief is not deemed to cause irreparable harm when an SEP holder has licensed to a large number of licensees, including competitors.55 However, “an injunction [for such patents] may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.”56 The threshold of finding irreparable harm, particularly with regard to small components, was heightened with the introduction of the “causal nexus” requirement by the Federal Circuit in the Apple cases.57 To fulfil the latter criterion, it is necessary to show “to what extent the harm resulting from selling the accused product can be ascribed to the infringement.”58 This addition to the irreparable harm criterion has made it possible for courts to review “whether the patentee’s allegations of irreparable harm are pertinent to the injunctive relief analysis, or whether the patentee seeks to leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant.”59 The causal nexus requirement invites more detailed economic reasoning from the courts. Indeed, the consistent and efficient application of this criterion can be very challenging, unless courts choose to engage in more detailed economic analysis of “the competitive gain” that stretches beyond the “inventive contribution” of the patent in the light of the economic theories that justify patent protection. From the perspective of the dynamic incentive theory, the causal nexus requirement allows for more accurate recognition of situations in which a patent holder may be overrewarded both on the basis of exploitative hold-ups, in which he strives to gain higher licensing fees, as well as excluding hold-ups, wherein the patent holder seeks to block a follow-on innovator’s competing product. From the perspective of a patent holder, the fulfilment of this criterion requires evidence that the patented

53

Bosch v. Pylon, 659 F3d 1142, 1850-1852. Apple Inc. v. Motorola Inc., 757 F.3d 1286, 1331-1332 (Fed. Cir. 2014); Igor Nikolic, “Who Needs Injunctions? Alternative Remedies in Standard Essential Patents Disputes,” Journal of Intellectual Property Law & Practice 12, no. 2 (2017): 128. 55 Apple v. Motorola, 757 F.3d 1286, 1332; Nikolic, “Who Needs Injunctions?” 128. 56 Apple v. Motorola, 757 F.3d 1286, 1333. 57 Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.10; Ichiro Nakayama and Yoshiyuki Tamura, “Denial of Injunctive Relief on the Grounds of Equity,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 277-278; Apple, Inc. v. Samsung Electronics Co., Ltd. (Apple I), 678 F.3d 1314, 1324 (Fed. Cir. 2012). 58 Apple II, 695 F.3d 1370, 1375. 59 Ibid. 54

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component drives the sales of the infringing product.60 With respect to mitigating overprotection problems, the requirement of evidence is desirable; however, the high threshold may underreward patent holders in certain situations. Some commentators have noted that, in fields characterized by cumulative innovation, the causal nexus requirement is difficult to satisfy when “even selected features, which may drive customer demand, are subject to many patents other than the infringed ones”.61 Furthermore, the high burden of proof may lead to situations in which patent holders end up being underrewarded due to having insufficient resources available for litigation.

7.3.2.2

Disproportionality of Hardships

The review of the disproportionality of hardships involves the “balancing of the relative conveniences and inconveniences” that may possibly stem from granting an injunction.62 Of the principles of equity, the third factor encompasses the widest margin of discretion.63 However, the hardships caused to third parties, such as customers, are not assessed under the third factor.64 Chisum stresses that, given the wording of the eBay decision, courts should focus on identifying specific hardships and not the “inevitable ‘harm’” that a decision regarding injunctive relief may bring to either party of the dispute.65 Takenaka et al. in turn note that the analysis of the third factor focuses on the hardship experienced by the defendant, as the assessment of irreparable injury typically takes into account the hardships suffered by the patent holder.66 Courts have sometimes rejected the claims of a defendant’s hardship on the basis that “[o]ne who elects to build a business on a product found to infringe cannot be heard to complain if an injunction against continuing infringement destroys the business so elected.”67 This justification for granting a permanent injunction can be criticized for ignoring eBay’s

Apple I, 678 F.3d 1314, 1324. “There might be a variety of ways to make this required showing, for example, with evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions. It might also be shown with evidence that the inclusion of a patented feature makes a product significantly more desirable. Conversely, it might be shown with evidence that the absence of a patented feature would make a product significantly less desirable.” Apple, Inc. v. Samsung Electronics Co., Ltd. (Apple III), 735 F.3d 1352, 1364 (Fed. Cir. 2013). 61 Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.10. 62 Rice & Adams Corp. v. Lathrop, 278 U.S. 509, 514 (1929). 63 Chisum, Chisum on Patents, 7, § 20.04[2][c][vi] & § 20.04.[2][c][viii]. 64 Acumed LLC v. Stryker Corp., 551 F.3d 1323, 1330 (Fed. Cir. 2008). 65 Chisum, Chisum on Patents, 7, §20.04.[2][c][vi]. 66 Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.14. 67 Windsurfing Intern. Inc. v. Amf, Inc., 782 F.2d 995, 1003, fn 3 (Fed. Cir. 1986). See Broadcom v. Qualcomm, 543 F.3d 683, 704, which confirmed that an injunction should not be denied on the basis “that successful exploitation of infringing technology shields a party from injunctive relief” (citing the district court’s decision on permanent injunction). 60

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mandate with respect to the third factor68 and for disregarding the fact that many infringements occur due to the excessive transactions costs of clearing patents ex ante. Instead, the FTC recommends that courts “consider the hardship of an infringer facing a hold-up” and reject complaints concerning hardships only when a defendant has engaged in willful infringement.69 In practice, the balance of hardships usually tips in favour of the defendant when a patent covers only a small component of an infringing product70 or when the infringed technology is standard essential.71 In contrast, the exercise of discretion favours the patent holder when an infringing patent represents the core technology used in an infringing product,72 when a patent is critical to the business of the patent holder because it protects primary sources of revenue,73 or when the defendant’s business relies, for the most part, on non-infringing products.74

7.3.2.3

Public Interest

The public interest requirement creates “a mandatory, negative threshold” for the grant of an injunction.75 This factor is subject to a plurality of interpretations, and it had also been applied to deny injunctions prior to eBay.76 Here, the exercise of discretion may reflect the public interest under the meaning of Art. 8 (1) TRIPS. Nevertheless, courts have often viewed permanent injunctions against patent infringers as serving the public interest in the strong patent system.77 Such a categorical assumption has generally been regarded as inadequate for the assessment of the fourth factor.78 For example, Chisum suggests that courts inquire “will an injunction harm a specific public interest that ‘outweigh[s] the public’s interest in a robust patent system’?”79 Such a specific public interest could be the interest of the public in accessing a product critical for health or safety reasons or possibly “other products or services [that are] of widespread importance to an industry or

68

Hynix Semiconductor Inc. v. Rambus Inc., 609 F.Supp.2d 951, 970 (N.D. Cal. 2009). FTC, The Evolving IP Marketplace, 232. 70 See Z4 Technologies v. Microsoft, 434 F.Supp.2d 437, 441-443. 71 Hynix v. Rambus, 609 F.Supp.2d 951, 984-985. 72 See Chisum, Chisum on Patents, 7, 20.04[2][iv][C], fn 338 with the respective case law. 73 Martek Biosciences Corporation v. Nutrinova Inc., 520 F.Supp.2d 537, 559 (D.Del.2007). 74 See Chisum, Chisum on Patents, 7, 20.04[2][c][iv][A], fn 319 with the respective case law. 75 See ibid, 20.04[2][c][ix]. 76 See City of Milwaukee, 69 F.2d 577, 593; Rite-Hite v. Kelley, 56 F.3d 1538, 1547. 77 See for example: Tivo Inc. v. Echostar Communications Corp., 446 F.Supp.2d 664, 670 (E.D. Tex. 2006). 78 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 137; FTC, The Evolving IP Marketplace, 233; Chisum, Chisum on Patents, 7, § 20.04[2][c][vii]. 79 Chisum, Chisum on Patents, 7, § 20.04[2][c][vii] who refers to Amgen, Inc. v. F. Hoffmann-La Roche Ltd., 581 F.Supp.2d 160, 168 (D. Mass. 2008). 69

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consumers”.80 The FTC supports a much wider interpretation of the fourth factor, arguing that the grant permanent injunctions in hold-up situations would be against public interest because doing so could lead to higher consumer prices and retard dynamic competition.81 Thus, the standard essentiality of a patent may also prove relevant in the finding of public interest.82

7.3.3

Effect on Overprotection Problems

The rates at which injunctions are granted differ dramatically between practicing and non-practising companies. When the patent holder is a practicing company, permanent injunction is granted against competitors in 84 percent of cases; it is granted in 21 percent of cases when the defendant does not compete with the plaintiff. In contrast, when the patent holder is an NPE, a permanent injunction is granted in only 16 percent of cases.83 In an earlier study, courts were found to grant injunctions to PAEs in 26 percent of the total and 7 percent of the contested requests.84 Overall, the amount of patent infringement cases in which a permanent injunction was granted decreased post-eBay. The change reflects patent holders’ decreased frequency of seeking for injunctive relief. Also, practicing companies are more likely to obtain a permanent injunction than NPEs.85 The re-establishment of the principles of equity for governing the grant of injunctions in patent infringement cases has allowed US district courts to address a number of market failures that may compromise follow-on innovation. Generally, eBay has been viewed as alleviating the risk of exploitative hold-ups86 and resolving PAE-driven patent hold-up problems in the district courts.87 However, eBay also

Chisum, Chisum on Patents, 7, § 20.04[2][c][vii]. FTC, The Evolving IP Marketplace, 233. Cf. Chisum, Chisum on Patents, 7, §20.04[2][c][vii]. The FTC’s argumentation in favour of consumer interests can be seen to parallel the final criterion of the European essential facilities test as established in the Microsoft case, discussed Sect. 8.5.4.2. 82 Obiter dicta, “the public has an interest in encouraging participation in standard-setting organizations, but also that SEPs are not overvalued.” Apple v. Motorola, 678 F.3d 1314, 1322. 83 Seaman, “Permanent Injunctions in Patent Litigation after eBay,” 1983 also includes firms that conduct R&D but do not commercialize technology in his definition of PAE; however, he excludes universities from the category. Ibid, 1988, fn 243. Cf. Chien, “From Arms Race to Marketplace,” 328. 84 Colleen v. Chien and Mark A. Lemley, “Patent Holdup, the ITC and the Public Interest,” Cornell Law Reviw 98, no. 1 (2012): 10. 85 Gupta and Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases, 22-26, 37, 38. 86 Trimble, “Injunctive Relief, Equity and Misuse Rights in US Patent Law,” 521. 87 Chien and Lemley, “Patent Holdup, the ITC and the Public Interest,” 2. However, eBay increased the appeal of the ITC as a forum to PAEs; see ibid. 80 81

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increased the appeal of the ITC as a forum for PAEs, given that it does not exercise discretion in the granting of injunctions and does not award damages as a remedy.88 Under the ITC system, the exclusion order may be denied on the grounds of certain public interest criteria,89 but this occurs very rarely.90 An exclusion order concerning FRAND-encumbered de jure SEPs has been disapproved by a US Trade Representative on public interest grounds. On that basis, the evidence of a hold-up or hold-out of such patents is of relevance in the ITC’s assessment of public interest.91 Following Apple I-III, the interpretation of eBay has become even more favourable to cumulative innovation, as it became more difficult to obtain a permanent injunction against patents used in multicomponent products. In contrast to PAEs, it is more difficult to deny a permanent injunction in cases that involve the offensive practices of practicing companies.92 However, Apple I-III enable courts to deny injunctions also in favour of practicing patent holders when they seek to create exploitative or exclusionary hold-up situations. Furthermore, the third factor of eBay permits addressing the standard essentiality of a patent in the exercise of discretion, thus making it possible to address hold-up problems in the context of de facto and de jure standards.93 Indirectly, the resolution of hold-up problems may also alleviate the problem of royalty stacking and multi-party hold-ups in relation to both SEPs and non-SEPs. For some follow-on innovators, the compulsory liability rule established by eBay may reduce overinvestment in patent search costs.94 In comparison with the market failure of hold-ups, the ability of the four factors of eBay to address unjustified refusals to license is limited. Pursuant to Continental Paper Bag, patent holders are not obliged to exercise their patents,95 and refusal to license does not qualify as misuse.96 Furthermore, consistent refusal to license is weighted in favour of the patent holder in the application of the eBay test.97 88

See ibid. 19 U.S.C. § 1337 (d) (1) (2012). Namely 1) public health and welfare, 2) competitive conditions in the United States’ economy, 3) the production of like or directly competitive articles in the United States, and 4) United States consumers. 19 U.S.C. § 1337 (d) (1). 90 Nikolic, “Who Needs Injunctions? Alternative Remedies in Standard Essential Patents Disputes,” 129. 91 Letter from Michael B. G. Froman, Ambassador, Office of the U.S Trade Representative Office to Irving A. Williamson, Chairman, U.S. International Trade Commission. (2 August 2013); Nikolic, “Who Needs Injunctions? Alternative Remedies in Standard Essential Patents Disputes,” 128-130. See also Vincent Angwenyi, “Hold-up, Hold-out and F/RAND : Quest for Balance,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 66, no. 2 (2017): 107-109. 92 Lemley and Melamed, “Missing the Forest for the Trolls,” 2140-2144. 93 See fn 1683. 94 Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, 259. 95 Continental Paper Bag, 210 U.S. 405, 429. See also Hynix v. Rambus, 609 F.Supp.2d 951, 968: “The reasoning of Continental Paper Bag suggests that it is entirely equitable for a patent holder to suppress the use of an invention to maximize its profits from other endeavors.” 96 35 U.S.C § 271 (d) (4). 97 3M Innovative Properties Co. v. Avery Dennison Corp., Civil No. 01-1781 (JRT/FLN), 2-3 (D. Minn. Sep. 25, 2006); See also Chisum, Chisum on Patents, 7, § 20.04[2][c][v][B]. 89

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However, the fact that a patentee has previously licensed its patents will be taken into consideration in the review of the two first eBay factors, but, alone, it does not suffice to apply them in favour of the defendant.98 This is consistent with eBay, precludes the establishment of a categorical rule that a previously demonstrated willingness to license prevents a patent holder from obtaining an injunction.99 Crucially, the four-factor test reaffirmed in eBay does not constitute a compulsory license that would provide a user who is willing to take a license with the means to obtain it against the will of the patent holder. Consequently, a follow-on innovator who has the resources necessary to clear the patents that his product infringes ex ante may, in the presence of an unjustified refusal, (a) refrain from using the patent and from innovating, (b) seek a possible substitute, (c) design around, or (d) use the patent, with the risk that, in the following infringement proceedings, the four-factor test will be weighted in favour of the patent holder. Therefore, in the absence of a compulsory licensing mechanism, most risk-averse follow-on innovators would likely choose to refrain from using a patent, which, in the absence of substitutes, may halt follow-on innovation, at least for the time period required to design around the necessary patent. One of the most important critiques of eBay is the problem of distinguishing PAEs from other NPEs.100 The exercise of discretion could hence result in “false negatives” with respect to NPEs that engage in R&D activity and who would have justifiably benefited from the grant of an injunctive relief. The right to an injunction can, for such companies, serve the purposes of incentivising innovation and attracting capital investments.101 However, empirical studies confirm that courts subject different NPE’s to different treatment,102 and that PAEs were least likely to obtain a obtaining a permanent injunction of all NPE’s.103 Furthermore, the review of the first two factors of the eBay test provides sufficient flexibility to also address the needs of start-ups companies and other NPEs. The possibility of seeking injunctive relief serves also an important function in terms of incentivising potential licensees to enter into license negotiations and agreements on market prices with patent holders.104 The four-factor eBay test could also be criticized as undermining a follow-on innovator’s incentives to clear pre-existing patents in advance and seek a license ex ante from the patent holder, with the effect of creating hold-out problems, particularly for SMEs.105 Hence, eBay

98

Acumed LLC v. Stryker Corp., 551 F.3d 1323, 1328. eBay, 126 S. Ct. 1837, 1840-1841; Chisum, Chisum on Patents, 7, § 20.04[2][c][v][B]. 100 Subramanian, “Different Rules For Different Owners,” 420. 101 FTC, The Evolving IP Marketplace, 219. See also Seaman, “Permanent Injunctions in Patent Litigation after eBay,” 2006. 102 See Chien and Lemley, “Patent Holdup, the ITC and the Public Interest,” 10; Gupta and Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases, 33-37. 103 Gupta and Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases, 36. 104 Ohly, “Patenttrolle,” 790. 105 FTC, The Evolving IP Marketplace, 220, 224-225. 99

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may encourage large companies “to wilfully infringe patents, especially of those holders who do not have the ability to effectively engage in patent litigation”.106 However, these concerns also appear to be exaggerated: First, a compulsory liability rule does not preclude parties from negotiating more efficient solutions.107 Second, 35 U.S.C § 284 allows courts to issue treble damages against wilful infringers.108 Given that the threshold for determining wilfulness has recently been lowered by the US Supreme Court’s decision in Halo Electronics,109 the US patent system can be considered to provide sufficient deterrence against wilful hold-out situations.110 Nevertheless, the ex-post liability rule of eBay, together with the system of awarding of treble damages for willful infringement pursuant to 35 U.S.Code § 284 and the reported practices of ignoring patents111 are characteristics of a patent system that fosters late determination of a patent holder’s remuneration. In contrast, patent systems that do not allow to deny injunctive relief and do not award treble damages and where compulsory licenses are subject to the requirement of prior effort (Art. 31 (b) TRIPS) can be perceived to foster the determination of damages at an earlier point of time.

7.4 7.4.1

Patent Misuse Doctrine An Equitable Defence

Beside the limitations of injunctive reliefs pursuant to eBay, U.S law features another equity-based instrument, namely the patent misuse doctrine. A claim of patent misuse is an affirmative defence that can be raised by the defendant in patent infringement proceedings. On the basis of equity, a court “may appropriately withhold their aid where the plaintiff is using the right asserted contrary to the public interest.”112 The effect of a finding of misuse is the unenforceability of the misused patent against infringers.113 This instrument thus represents an ex post-zero sum liability rule that yields to non-enforcement of an infringed patent. Unlike in antitrust violations, a defendant who raises a successful claim is neither entitled to damages

Subramanian, “Different Rules For Different Owners,” 433. Lemley, “Contracting around Liability Rules,” 479. 108 35 U.S.C. § 284 (2012); Hovenkamp et al., IP and Antitrust, 1, § 2.02[F]. 109 Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., No. 14-1513, slip. op. at 15 (Sup. Ct. 13 June 2016). 110 However, with regard to infringements of weak patents, such monetary remedies would prove overrewarding. 111 Lemley, “Ignoring Patents,”, 80. 112 Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 494 (1942), and the references to cases. 113 Ibid, 493. 106 107

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nor an injunction.114 The patent holder may remedy the unenforceability my showing that “the improper practice has been abandoned and that the consequences of the misuse of the patent law have been dissipated”.115 “[P]atent misuse is a judge-made doctrine”116 that originated from the U.S. Supreme Court case Motion Picture Patents v. Universal Manufacturing in 1917.117 It encompasses practices that expand a legal patent monopoly beyond either the scope or the term of the patent.118 A typical example of such practice is “tieing [sic] the sale or use of the patented article to the purchase or use of unpatented ones”.119 In practice, misuse has been claimed with respect to heterogeneous practices beyond tying arrangements, such as claiming royalties for expired, invalid, or unissued patents or for products that do not employ the patent in question; package licensing; and grant-backs and reach-through royalty agreements.120 As is evident from its applications, the misuse doctrine is characterized by occupying the intersection between patent and antitrust law. Since the origination of the doctrine in 1917, its development has been marked by courts and Congress’ attempts to determine its position between these two fields of law. From the perspective of international law, the misuse doctrine can qualify both as a compulsory license that targets the abuse of patents, pursuant to Art. 5 A PC, and as a remedy against an anticompetitive practice, on the basis of Art. 31 (k) TRIPS. However, its nature as an ex post zero-liability rule means that it fits awkwardly with the TRIPS conditions for patent exceptions (Art. 30 TRIPS), compulsory licenses (Art. 31 TRIPS), and limitations of injunctive relief (Art. 44 TRIPS). In the first half of the twentieth century, the U.S. Supreme Court’s decisions drew its justifications from patent law, sketching out a misuse doctrine that was distinct from antitrust. The expansion of the legal monopoly of a patent, for example, to a non-patented product via a tying arrangement was deemed to contradict the public policy:121 “The grant to the inventor of the special privilege of a patent monopoly carries out a public policy adopted by the Constitution and laws of the United States ‘to promote the Progress of Science and useful Arts, by securing for limited Times to. . .Inventors the exclusive Right. . .’ to their ‘new and useful’ inventions. United States Constitution, Art. I, § 8, cl. 8; 35 U.S.C. § 31. But the public policy which includes inventions within the granted monopoly excludes from it all that is not embraced in the invention. It equally forbids the use of the patent to secure an exclusive right or limited monopoly not granted by the Patent Office and which is

114

Ibid. Ibid. 116 Princo Corp. v. ITC, 616 F.3d 1318, 1321 (Fed. Cir. 2010). 117 Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 517-519 (1917). 118 See ibid, 518; Morton Salt, 314 U.S. 488, 492; Brulotte v. Thys. Co., 379 U.S. 29, 33 (1964). 119 Brulotte, 379 U.S. 29, 33. 120 Areeda and Hovenkamp, Antitrust Law, X, at 1782; see also Lim, Patent Misuse and Antitrust Law, 90-154. 121 Motion Picture Patents, 243 U.S. 502, 517-518. 115

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contrary to the public policy to grant.”122 Because the unenforceability of a patent derives its justification from public policy, a defendant does not need to show harm caused by the misuse.123 On the basis of equity, a patent holder could not enforce her patent against a contributory infringer who competes in the sales of unpatented products that are subject to a tying arrangement.124 The application of the antitrust statutes in misuse cases was deemed unnecessary; however, they were acknowledged as expressions of the public policy.125 Hence, it was not necessary to show an antitrust violation in a misuse case.126 A finding of misuse neither ensured an additional finding of an antitrust violation127 nor entitled the alleged infringer to respective remedies pursuant to the Clayton Act.128 In response to the gradual expansion of the doctrine through case law, in 1952, Congress enacted 35 U.S.C. § 271,129 in order to limit the scope of the misuse defence in contributory infringements.130 The evolvement of the misuse doctrine over the subsequent decades paralleled the development of antitrust law and the rise of Chicago School economics.131 The necessity of the independent misuse doctrine was also called into question, given that antitrust law addressed anticompetitive practices, including those involving patents, without the doctrine’s “debilitating uncertainty”.132 Furthermore, since its establishment in 1982, the case law of the Federal Circuit began to increasingly subject the misuse doctrine to the criteria of antitrust.133 Most importantly, with respect to misuse involving licensing agreements, the Federal Circuit adopted an interpretation that the application of the doctrine of misuse required a proof of anticompetitive effect.134 In addition, the Federal Circuit ruled that the finding of misuse in non-tying situations was to be analysed under the rule of reason.135 The trend was reinforced by the Misuse Reform

122

Morton Salt, 314 U.S. 488, 492. See similarly Motion Picture Patents, 243 U.S. 502, 517-518. Morton Salt, 314 U.S. 488, 494. 124 Motion Picture Patents, 243 U.S. 502, 510; Morton Salt, 314 U.S. 488, 491. 125 Motion Picture Patents, 243 U.S. 502, 513. 126 Morton Salt, 314 U.S. 488, 494. 127 Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 140 (1969). 128 Morton Salt, 314 U.S. 488, 490; Zenith Radio, 395 U.S. 100, 140. 129 Act of July 19, 1952, ch. 950, 66 Stat 811, as codified at 35 U.S.C. § 271 130 Hovenkamp et al., IP and Antitrust, 1, § 3.02[A]. This statute was thus intended to overturn Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944). Ibid. The current version of the statute is 35 U.S.C. § 271 (2012). 131 Lim, Patent Misuse and Antitrust Law, 430. 132 USM Corp., v. SPS Techs., Inc., 694 F.2d 505, 512 (7th Cir. 1982). 133 See Robert J. Hoerner, “Decline (and Fall?) of the Patent Misuse Doctrine in the Federal Circuit,” Antitrust Law Journal 69, no. 3 (2002): 672-675; Lim, Patent Misuse and Antitrust Law, 60-89; Hovenkamp et al., IP and Antitrust, 1, § 3.02[A]. 134 Windsurfing Intern. Inc. v. Amf, Inc. 782 F.2d 995, 1001-1002; Princo, 616 F.3d 1318, 1334. 135 Virginia Panel Corp. v. Mac Panel Co., 133 F.3d 860, 869 (Fed. Cir.1997). 123

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Act in 1988, which substantially reduced the applicability of the doctrine.136 First, 35 U.S.C. § 271 (d) (5) conditioned the application of the misuse doctrine in tying situations contingent on a finding of patent holder’s market power in the relevant market for the patent or the tied product.137 Second, pursuant to 35 U.S.C. § 271 (d) (4) a refusal to license did not qualify as misuse.138 Hence, the opportunity to rely on the misuse doctrine as an instrument analogous to a compulsory license with a prior effort requirement (Art. 31 (b) TRIPS) has been foreclosed. Overall, judges have become increasingly reluctant to apply the misuse doctrine.139 In line with USM,140 Lemley has criticized the misuse doctrine for being economically irrational and supports its abolishment.141 More generally, the instrument has been criticized on the grounds of being vague and overdeterring, as well as having excessively inclusive standing requirements.142 However, despite statutory changes and the Federal Circuit’s narrow interpretation of the doctrine,143 other commentators have taken the view that an exercise of a patent may also violate the public policy and amount to misuse in areas that do not overlap with antitrust law and its principles. However, the finding of such misuse should be carefully justified.144 Hence, the misuse doctrine has been considered as having relevance as a doctrine separate from antitrust law that can be applied in cases in which patent misuse harms innovation in a manner that cannot be addressed by antitrust law.145 Lim views the doctrine’s positioning between two fields of law as an advantage that offers judges flexibility in the application of the instrument.146 Some European scholars have even 136

Patent Misuse Reform Act, Pub. L. Np. 100-703, 102 Stat. 4674 (1988). For a discussion of the development of the interpretation of this provision, see Areeda and Hovenkamp, Antitrust Law, X, 1781d. 138 The statute does not condition a refusal on the market power of the right holder. Trimble, “Injunctive Relief, Equity and Misuse Rights in US Patent Law,” 516. 139 Lim, Patent Misuse and Antitrust Law, 154. 140 See USM v. SPS, 694 F.2d 505, 512. 141 See Mark A. Lemley, “Economic Irrationality of the Patent Misuse Doctrine,” California Law Review 78, no. 6 (1990): 1599. 142 Lim, Patent Misuse and Antitrust Law, 155-199. 143 See Princo, 616 F.3d 1318, 1321, 1329, 1334. 144 Hovenkamp et al., IP and Antitrust, 1, § 3.02[E]. 145 Areeda and Hovenkamp, Antitrust Law, X, at 1781. Antitrust has a common, relatively undisputed foundation in neoclassical economics. It has focused on assessing relatively predictable and quantifiable static competition and has developed strict standards of causation and harm. In contrast, dynamic efficiency is considerably more difficult to model, measure, and foresee and the welfare-enhancing effects of patent policy are widely debated. According to Areeda and Hovenkamp, it is possible for misuse policy, given its less strict standards of proof, to address the less robust features that are inherent to innovation and are beyond the reach of antitrust policy. As an instrument of IP, policy misuse serves the goal of promoting innovation. Ibid, 1781 and 1982. 146 “Because of its roots in patent and antitrust policies, patent misuse offers itself as an alternative to antitrust law through which judges may consider the societal implications of both the alleged misconduct and the estoppel on innovation. Because of its antitrust fixtures, patent misuse allows 137

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argued in favour of introducing the misuse doctrine to Europe for the purposes of bringing more balance to the patent system and addressing unjustifiable conduct, such as the exercise of IPRs in a manner that exceeds their scope.147

7.4.2

Applicability to Overprotection Problems

The misuse doctrine serves the role of providing a defence against expansions of patent scope and term in favour of the public interest. Unlike compulsory liability rules justified by public policy concerns under the meaning of Art. 8 (1) TRIPS, the public policy considerations of the misuse doctrine deal with the functional efficiency of the patent system. However, its effectiveness in terms of resolving the overprotection problems identified in this thesis is very limited. First, on the basis of 35 U.S.C. § 271 (d) (4), unconditional refusals to license or use any rights to a patent do not qualify as misuse. Furthermore, even concerted refusals to license are beyond the scope of the misuse doctrine, even though they may nevertheless amount to antitrust violations.148 However, refusals given in combination with other types of egregious conduct by the patent holder could be deemed conditional.149 Second, as a general rule, requests for excessive royalties do not qualify as misuse: “A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly.”150 However, certain approaches to the calculation of the royalty rates, such as seeking royalties from products that do not incorporate the licensed patent, can amount to misuse.151 Therefore, the misuse

the court to apply a rule of reason analysis to also weight the effect of both the alleged misconduct and estoppel on the competitive process. It allows, but does not require, complex economic analysis. It reacts to misconduct, but imposes no threat of litigation unless the patentees themselves choose to provoke its application. It imposes no fines or damages, but instead acts as guardian of fair play in the patent arena by suspending the enforcement of the patent.” Lim, Patent Misuse and Antitrust Law, 200. 147 Ilkka Rahnasto, Intellectual Property Rights, External Effects and Anti-Trust Law : Leveraging IPRs in the Communications Industry (Oxford: Oxford University Press, 2003), at 7.19. 148 Princo, 616 F.3d 1318, 1331-1333. In Princo, Philips and Sony agreed to incorporate an analogue technological solution in the Orange Book standard for CD-Rs and CD-RWs. Sony had a patent on digital technology that overlapped with the standard. Philips and Sony agreed that Sony would not license the patent to competing digital technologies beyond package licenses for the analogue technology. Ibid, 1322-1332. The dissenting Judge Dyk criticized the majority’s interpretation of the misuse doctrine as being too strict with regard to providing protection for nascent competitive technologies. Ibid, 1357. 149 See Daryl Lim, “Misconduct in Standard Setting : The Case for Patent Misuse,” IDEA: The Journal of Law and Technology 51, no. 4 (2011): 585, in which the author discusses this possibility in relation to de jure SEPs. 150 Brulotte, 379 U.S. 29, 33. 151 See Zenith Radio, 395 U.S. 100, 135; Lim, Patent Misuse and Antitrust Law, 123-124.

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doctrine could, in theory, alleviate royalty stacking or other anticommons problems.152 Third, because neither requests for excessive royalties nor refusals to license generally qualify as misuse, it is difficult for a follow-on innovator subject to a holdup situation to raise a successful misuse claim as a defence to a patent holder’s request for an injunctive relief. The applicability of the doctrine to hold-up situations involving SEPs has been discussed;153 however, it may prove difficult to apply the misuse doctrine to hold-ups involving SEPs for the same reasons as for non-SEPs.154 In the context of de jure standard setting, the doctrine may apply to an exploitative hold-up because as a refusal to license that involves egregious conduct may not qualify as “unconditional” in the meaning of 35 U.S.C. § 271 (d) (4).155 Furthermore, patent hold-up situations may be addressed indirectly when a patent holder has engaged in some other type of misuse, such as tying a license offer to the purchase of a non-patented product (35 U.S.C. § 271 (d) (5)), that the defendant of the infringement proceeding has rejected.156 152

The misuse doctrine could potentially interfere with the use of reach-through royalties, which are calculated on the basis of sales of products, when they have the effect of hindering innovation. For example, by assigning such royalties, a patent holder may expand the scope of his patent though controlling follow-on innovation and reducing the incentives to innovate downstream. Areeda and Hovenkamp, Antitrust Law, X, 1782g. In the context of a patent thicket, the use of reach-though royalties by a number of patent-holders could lead to the creation of a royalty-stacking problem and reduce incentives to innovate. Ibid, 1782g, fn 204; Lim, Patent Misuse and Antitrust Law, 124. Nevertheless, from the perspective of the misuse doctrine, the potential harmful effects that can derive from reach-though royalties are separate from royalty-stacking and anti-commons problems, which are not considered to be remediable as misuses. First, a misuse claim is a defense against an individual patent holder in infringement proceedings and is therefore inappropriate for addressing a market failure that results from the uncoordinated actions of individual patent holders who seek to maximize their welfare. Second, a misuse claim on the basis of royalty stacking would be difficult to justify, as it would suggest that a patent holder would be precluded from demanding a particular licensing fee due to the royalties demanded by other licensors for the same downstream product. Areeda and Hovenkamp, Antitrust Law, X, at 1782g, fn 204. 153 See Janice M. Mueller, “Patent Misuse through the Capture of Industry Standards,” Berkeley Technology Law Journal 17, no. 2 (2002): 669-684; Lim, “Misconduct in Standard Setting,” 582-606; Apostolos Chronopoulos, “Patenting Standards - a Case for US Antitrust Law or a Call for Recognizing Immanent Public Policy Limitations to the Exploitation Rights Conferred by the Patent Act?,” IIC - International Review of Intellectual Property and Competition Law 40, no. 7 (2009) 800–816.; Marshall Leaffer, “Patent Misuse and Innovation,” Journal on Telecommunications and High Technology Law 10 (2010): 165 -167; Lim, Patent Misuse and Antitrust Law, 217-226. 154 See Townshend v Rockwell Int’l Corp., 55 U.S.P.Q.2d (BNA) 1011 (N.D. Cal. 2000), as cited in Mueller, “Patent Misuse through the Capture of Industry Standards,” 669; Lim, Patent Misuse and Antitrust Law, 217-219. 155 See Lim, “Misconduct in Standard Setting,” 585. 156 The misuse defense has been unsuccessfully invoked in litigation against a non-practicing entity employing an offensive litigation strategy on the basis of collecting royalties from weak patents; see Intellectual Ventures I LLC v Capital One Fin. Corp. 1:13-CV-00740 AJT, 2013 WL 6682981 (E.D. Va. Dec 18. 2013), as cited in “Standard Essential Patents, Trolls, and the Smartphone Wars : Triangulating the End Game,” Penn State Law Review 119 (2014): 84-87, fn 483. However, in other

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7.4.3

277

The Relevance of the Misuse Doctrine

The misuse doctrine offers follow-on innovators an additional litigation strategy in an infringement suit:157 “It is one tool that courts use to maximize net social welfare by invalidating inefficient restrictions through which patent holders earn rewards that are incommensurate with the patent grant and suppress technological progress.”158 However, due to statutory limitations, this instrument has little practical relevance when it comes to resolving the overprotection problems studied in this thesis. Furthermore, it is also questionable whether the misuse doctrine is the most appropriate instrument for balancing the interests of initial and subsequent innovators within a patent system. The remedy that this doctrine prescribes is a strict zerosum liability rule;159 as a consequence, upon a court’s finding of misuse, a patent holder will be stripped of any remedies, including the right to remuneration for the use of his invention that would allow him to recoup investments in R&D. In comparison to the misuse doctrine, other compulsory liability rules offer more flexibility in terms of balancing the incentives of right-holders and follow-on innovators by means of an adequate remuneration determined by a court or administrative authority. While the misuse doctrine is generally inapplicable to refusals to license, excessive royalties, and hold-up problems, some of these market failures can nevertheless be resolved on the basis of equity pursuant to eBay. In comparison to the misuse doctrine, the liability rule established by eBay is more balanced with respect to maintaining the incentives of the right holder, who remains entitled to damages and licensing fees.

proceedings initiated by the same non-practicing entity, the court treated the patent hold-up as an instance of the tying of valid patents with invalid patents, but it did not reach a conclusion on the matter due to a lack of factual evidence. Intellectual Ventures I LLC v. Symantec Corp. No 13-cv440. 2014 WL 4773954 (D Del Sept 24. 2014) as cited in Michelle D. Miller and Janusz A. Ordover, “Intellectual Ventures v. Capital One : Can Antitrust Law and Economics Get Us Past the Trolls?,” CPI Antitrust Chronicle 12 (2015): 19. 157 Lim, Patent Misuse and Antitrust Law, 199. However, the misuse defence could, in principle, be raised in litigation against virally licensed patents. Such open-source initiatives are arguably aligned both with public policy and the rule of reason and hence do not represent patent misuse. Robert Feldman, “Open Source Biotechnology Movement : Is It Patent Misuse?,” Minnesota Journal of Law, Science & Technology 6, no. 1 (2004), 167. 158 Leaffer, “Patent Misuse and Innovation,” 167. 159 See Hilty, “Legal Remedies,” 377, 393.

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7 Denial of Injunctive Relief

Enforcement in Europe Enforcement Directive

The Enforcement Directive was enacted with the objective of approximating the legal systems of the EU member states and ensuring “high, equivalent and homogeneous level of protection in the internal market”.160 The Directive is intended “to ensure full respect for the intellectual property” pursuant to Art. 17 (2) of the CFR.161 The remedies and procedures that it obliges member states to provide shall be fair and equitable, as well as effective, proportionate and dissuasive.162 The flexibility to deny permanent injunctions under EU law stems from Art. 11 of the Enforcement Directive and its limitations. Article 11 obliges member states to ensure that judicial authorities may issue injunctions against infringers. The term “may” used in Art. 11 of the Enforcement Directive indicates the existence of a margin of discretion, in the same manner as that of Art. 44.1 TRIPS, the language of which the provision employs. A contrary interpretation would be dissonant with the legal system of the UK, where the granting of injunctions is subject to equitable discretion,163 as well as the civil law tradition of making the granting of an injunction contingent on the likelihood of an infringement occurring or persisting.164 The scope of the margin of discretion provided by the Enforcement Directive is subject to debate. Hilty views the margin of discretion as being limited to that defined in Art. 12 of the Enforcement Directive.165 Pursuant to Art. 12 of the Enforcement Directive, EU member states have the opportunity to allow judicial authorities to apply a liability rule in situations in which the infringer had acted unintentionally and without negligence if execution of the measures in question would cause him disproportionate harm and if the pecuniary compensation for the infringement appears reasonably satisfactory.166 This flexibility provided by Art. 12 of the Enforcement Directive in the context of patent law has been criticized for being too narrow.167 In addition, the margin of discretion outlined by Art. 12 of the

160

Rec. 10 Enforcement Directive. Rec. 32 Enforcement Directive. 162 Art. 3(2) Enforcement Directive. 163 Ansgar Ohly, “Three Principles of European IP Enforcement Law : Effectiveness, Proportionality, Dissuasiveness,” in Technology and Competition: Contributions in Honour of Hanns Ullrich, ed. Josef Drexl (Brusseles: Larcier, 2009), 264. 164 von Mühlendahl, “Is Injunctive Relief Mandatory?,” 377-378. 165 Reto M. Hilty, Role of Enforcement in Delineating the Scope of IP Rights, Research Paper No. 15-03 (Munich: Max Planck Institute for Innovation & Competition, 2015), 16-17. 166 See rec 25 Enforcement Directive. 167 Ohly, “Three Principles of European IP Enforcement Law,” 259, 264; Hilty, Role of Enforcement in Delineating the Scope of IP Rights, 16. 161

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Enforcement Directive has limited practical relevance, as more than half of the jurisdictions within EU forewent its implementation.168 In contrast, Ohly argues that Art. 3 (2) and Art. 11 of the Enforcement Directive together allow for a margin of discretion on the basis of the principle of proportionality, which incorporates the principles of fairness and equity, irrespective of Art. 12 of the Enforcement Directive.169 Furthermore, the wording “create barriers to legitimate trade” of Art. 3 (2) of the Enforcement Directive can be seen as encompassing PAEs’ business models.170 The interpretation that the granting of permanent injunctions is, at least to a certain extent, subject to the discretion of the courts is further supported by recital 17 of the Enforcement Directive.171 Consequently, he argues that the Enforcement Directive could exceptionally allow for the denial of injunctive relief on the basis of disproportionality, for example when the losses caused by an injunction are disproportional in comparison to the value of royalty fees for the patent patent in questions; in cases where a patent is only a small component of an infringing product; when the patent holder is an NPE;172 when the patent holder has developed an invention independently or had been only marginally negligent; or when the infringed patent is weak.173 In the same vein Walz has taken a view that Art. 3 (2) of the Enforcement Directive is as flexible with regard to limiting injunctions to SEPs as remedies provided under Art. 102 TFEU.174 Following the Huawei decision, which appeared to have constrained the possibilities to interfere with the enforcement of patents on the grounds of Art. 102 TFEU,175 also the EC stressed the importance proportionality considerations upon court’s application of

168

Commission Staff Working Document, Analysis of the Application of Directive 2004/48/EC of the European Parliament and the Council of 29 April 2004 on the Enforcement of Intellectual Property Rights in the Member States, COM (2010) 779 final (22 October 2012), 6. For example, Art. 12 was not implemented in Germany, France, the Netherlands, and Italy. Mark Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions : A Comparative Study,” Journal of Intellectual Property Law & Practice 10, no. 3 (2015), 181-186. 169 Ohly, “Three Principles of European IP Enforcement Law,” 258, 266. 170 Ibid, 261-262. 171 Rec. 17 Enforcement Directive, which specifies that “[t]he measures, procedures and remedies provided for in this Directive should be determined in each case in such a manner as to take due account of the specific characteristic of that case, including the specific features of each intellectual property right and, where appropriate, the intentional or unintentional character of the infringement.” 172 Cf. von Meibom and Nack, “Patents without Injunctions?,” 497, 519 who argue that, in Europe, the potential problems associated with PAEs would need to be resolved on the basis of competition law and outside of patent law. 173 Ohly, “Three Principles of European IP Enforcement Law,” 266-267. 174 Axel Walz, “Patentverletzungsklagen im Lichte des Kartellrechts,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 62, no. 8-9 (2013): 727-728, 731. 175 The implications of the Huawei decision on the scope of application of compulsory licenses of competition law are discussed Sects. 8.6.4.5 and 8.7.3.1–8.7.3.2.

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Art. 3 (2) of the Enforcement Directive especially with regard to interests of third parties and the public in the context of digital economy.176 However, Art. 3 (2) of the Enforcement Directive is considered to correspond to Arts. 41 and 48 TRIPS, and therefore address only procedural abuses. As consequence it is viewed to allow only indirect interference with the dysfunctional exercise of patents.177 In addition, some commentators consider that the principles expressed in Art. 3 (2) of the Enforcement Directive only qualify how the directive should be implemented by member states and do not extend to determining courts’ margins of discretion.178 While supporting the normative underpinnings inspired by eBay, Hilty interprets the Enforcement Directive narrowly, taking the view that the margin of discretion established on the basis of equity should be explicitly determined in the wording of the provision.179 Nevertheless, he views that pursuant to Arts. 11 and 3(1) of the Enforcement Directive could be interpreted as precluding “inequitable enforcement”.180 Finally, permanent injunctions may be also limited on the basis of conflict with other bodies of law. Art. 3 (2) of the Enforcement Directive qualifies that the remedies provided shall be applied in such manner so as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.181 The provision is deemed to refer both to “(i) the civil law abuse of law principle and (ii) the internal market principle”. The latter encompasses competition law rules, most importantly Arts. 101 and 102 TFEU.182 However, in practice, the civil law principles are unlikely to be adequate in terms of systematically and predictably addressing overprotection problems, especially in civil law jurisdictions.183 The suitability of competition law in terms of providing balance is discussed in Chap. 8. In addition, the remedies provided by the Enforcement Directive could be limited on the basis of the fundamental rights and principles recognized by the CFR,184 such as the protection of personal data (Art. 8 CFR) or respect for private and family life (Art. 7 CFR), which may conflict with Art. 17 (2) CFR. However, Art. 17 (2) CFR does not include any factor that would balance the protection of IP in favour of users’ interests.185 Hence, besides competition law, the external branches of law are

176

Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee. Setting out the EU approach to Standard Essential Patents. COM (2017) 712 final (29 November 2017), 10. 177 Hilty, “Legal Remedies,” 389. 178 Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181. 179 Hilty, Role of Enforcement in Delineating the Scope of IP Rights, 17. 180 Hilty, “Legal Remedies,” 391. 181 Art. 3(2) Enforcement Directive. 182 Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181. See also rec. 12 Enforcement Directive. 183 Hilty, “Legal Remedies,” 391-392. 184 Rec. 32 Enforcement Directive. 185 See Hilty, Role of Enforcement in Delineating the Scope of IP Rights, 7 and fn 24, 15.

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unlikely to allow for addressing the overprotection problems of patent law by means of limiting the availability of permanent injunctions.

7.5.2

Implementation in Civil Law Countries

After the implementation of the Enforcement Directive, many of the EU member states maintained the civil law tradition of granting permanent injunctions without providing the courts any margin of discretion pursuant to proportionality.186 For example, § 139 (1) PatG grants a patent holder a right to a permanent injunction, the granting of which is not subject to the discretion of a court. Hence, the standard of protection that the PatG provides is, in this respect, higher than that provided by the Enforcement Directive.187 The wording of § 139 (1) PatG also does not allow for a review on the basis of the principle of proportionality.188 Consequently, in many civil law countries, the right to injunctive relief can be limited only on the basis of an abuse-of-rights defence or competition law.189 An example of the former in Germany would be a defence on the basis of § 242 BGB.190 An example of the latter is the Orange Book Standard decision, discussed later in Sect. 8.6.4.2.191 See Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181-186 for an account of Germany, France, Italy, the Netherlands, and the UK. 187 Dietrich Kamlah, “Injunctive Relief,” in Patent Law: A Handbook on European and German Patent Law, ed. Maximilian W. Haedicke and Henrik Timmann (Munich: Nomos Verlagsgesellschaft mbH & Co KG, 2014), § 10 at 25. However, similarly to EU law, the right to an injunction can be subject to limitations upon conflict with legal principles of an equal or higher rank, for example those deriving from competition law. Ibid. 188 Ohly, “Patenttrolle” 795. However, Ohly suggests that the right to a permanent injunction could be limited on the basis of the unwritten general principle of proportionality and Art. 3(2) of the Enforcement Directive in particular situations, such as exploitative hold-ups or in the event that a patent is a smaller component of a cumulative innovation. Other factors to take into consideration would be whether a patent holder is an NPE, as well as the level of negligence of the infringer. Ibid, 796-798. For a more conservative view of the relevance of the principle of proportionality in German patent law, see Ralf Uhrich, “Entwaffnung der “Patenttrolle”? Zur Einschränkbarkeit des patentrechtlichen Unterlassungsanspruchs im anglo-amerikanischen und deutschen Recht,” Zeitschrift für Geistiges Eigentum / Intellectual Property Journal 1, no. 1 (2009): 87-93. On the possibility of seeking a temporary suspension of injunctive relief enforcement proceedings in Germany, see Alexander Harguth and Steven Carlson, Patents in Germany and Europe : Procurement, Enforcement and Defence : An International Handbook (Alphen aan den Rijn: Kluwer Law International, 2011), 150, 365. 189 For an overview of application of these defences in Germany, France, Italy, the Netherlands, and the UK, see Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181-186. For a review of different abuse of rights defences, see Ohly, “Patenttrolle,” 794-795. 190 § 242 BÜRGERLICHES GESETZBUCH [BGB] [Civil code], translation at https://www. gesetze-im-internet.de/englisch_bgb/ (Ger.) On the applicability of § 242 BGB, see Uhrich, “Entwaffnung der “Patenttrolle”?,” 82. 191 Orange Book Standard, BGH, 6 May 2009, IIC 2010, 369. 186

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Overall, civil law traditions are not receptive to the introduction of a margin of discretion to the granting of permanent injunctions.192 Beyond ex post compulsory liability rules based on competition law, the predominant instrument for addressing overprotection problems in these jurisdictions remains compulsory licenses.

7.5.3

Equitable Discretion in the UK

Traditionally, the granting of injunctions in the UK, as in the US, was subject to equitable discretion. The non-exhaustive working rule governing the exercise of discretion in the granting of permanent injunctions was established by Shelfer.193 In the UK, damages may be given in lieu of an injunction “(1) [i]f the injury to the plaintiff's legal rights is small, (2) And is one which is capable of being estimated in money, (3) And is one which can be adequately compensated by a small money payment, (4) And the case is one in which it would be oppressive to the defendant to grant an injunction”.194 The four factors identified in Shelfer are more narrowly constructed than those of eBay; in addition, the burden of proof against granting an injunction is allocated to the defendant.195 Finally, the threshold for denying an injunction against a patent holder in the UK is significantly higher than in the US.196 In Jaggard, it was emphasized that “the test is one of oppression, and the court should not slide into application of a general balance of convenience test.”197 In Navitaire, which dealt with copyright infringement, oppression was defined as follows: “that the effect of the grant of the injunction would be grossly disproportionate to the right protected. The word ‘grossly’ avoids any suggestion that all that has to be done is to strike a balance of convenience.”198 While Art. 3 and 12 of the Enforcement Directive were not implemented in the UK, HTC v. Nokia confirmed that the principles laid down by Art. 3 (2) of the Directive apply to the exercise of discretion in respect to denials of injunctive reliefs against infringements of IPRs.199 Justice Arnold confirmed that Art. 3 (2) of the Enforcement Directive permits the denial of an injunction “where it would be disproportionate to grant one even having regard to the requirements of

Hilty, “Legal Remedies,” 388. Shelfer v. City of London Electric Lighting Co. [1895] 1 Ch 287, 322-323; Jaggard v. Sawyer [1995] 1 WLR 269, 287; Navitaire Inc v. Easyjet Co Ltd (No 2), [2005] EWHC 282 (Ch) [2006] RPC (4) 213, para 101; HTC Corp. v. Nokia Corp. [2013] EWHC 3378 (Pat), para 8. 194 Shelfer v. City of London [1895] 1 Ch 287,322-323. 195 Lawrence and Another v. Coventry and Others [2014] UKSC 13 [2014] WLR 422, paras 121-122. 196 Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 186. 197 Jaggard v. Sawyer [1995] 1 WLR 269, 283B-C. 198 Navitaire Inc v. Easyjet Co Ltd (No 2), [2005] EWHC 282 (Ch) [2006] RPC (4) 213, para 104. 199 HTC Corp. v. Nokia Corp. [2013] EWHC 3378 (Pat), para 26. 192 193

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efficacy and dissuasiveness.”200 However, with respect to patents, he warned against “making an order which is tantamount to a compulsory license in circumstances where no compulsory license would be available. It follows that, where no other countervailing right is in play, the burden on the party seeking to show that the injunction would be disproportionate is a heavy one.”201 The narrow view of the margin of discretion expressed in HTC v. Nokia was based on an interpretation of TRIPS in light of its wording and purpose, as confirmed by CJEU case law.202 Justice Arnold took the view that Art. 3 (2) of the Enforcement Directive should be interpreted and applied in accordance with Art. 31 of TRIPS, under the presumption that the right to decide to whom, if at all, to a grant license belongs to the essence of the right to a patent, which may be compromised only by compulsory licensing.203 This interpretation is surprising, as Art. 31 TRIPS sets very limited qualifications on the grounds for granting compulsory licenses. In addition, the reasoning of this judgement ignores the relevance of Art. 5 A PC as a norm governing compulsory licensing. More importantly, the judgement does not refer to Art. 44 (1) TRIPS, which provides judicial authorities with a margin of discretion when granting injunctions. Instead, Justice Arnolds appears to have taken the view, against the wording of Art. 44 TRIPS, that the exercise of the discretion of the court in respect to the denial of an injunctive relief represents an authorisation by the government under the meaning of Art. 44 (2) TRIPS.204 Furthermore, he also unnecessarily subjected the exercise of discretion to the conditions of Art. 30 TRIPS.205 As a consequence, the scope of applying an ex post liability rule in the UK is wider than in many of EU member states; however, it is narrower than in the US and considerably more narrow than what the flexibility of TRIPS would allow for.

7.5.4

Discretion Under the Unitary Patent System

The wording of Art. 63 of the Unitary Patent Convention (UPCA) closely follows that of the sentence in Art. 11 of the Enforcement Directive. Hence, a court may issue an injunction against an infringer when an infringement has been found.206 200

Ibid, para 32. Ibid. 202 Ibid, para 30, with references, inter alia, to Case C-53/96, Hermès International (a partnership limited by shares) v. FTH Marketing Choice BV, 1998 E.C.R. I-3603, which discusses the interpretation of TRIPS at para 28. 203 HTC Corp. v. Nokia Corp. [2013] EWHC 3378 (Pat), paras 28-30. 204 See ibid, para 31. 205 Ibid. However, J Arnold found Art. 30 TRIPS as permitting “the recognition of a limited jurisdiction to withhold and injunction in special circumstances”, ibid. 206 In addition, Art. 118 (1) of the 18th Draft of the Rules of Procedure of the UPC makes a reference to the discretion of the court under Art. 63 UPCA. 201

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However, the provision does not refer to the principle of proportionality in the qualification of the margin of discretion. Furthermore, no provision equivalent to Art. 12 of the Enforcement Directive was incorporated into the UPCA.207 Nevertheless, Art. 42 of the UPCA rules on proportionality and fairness, specifying that “(1) [t]he Court shall deal with litigation in ways which are proportionate to the importance and complexity thereof” and “(2) [t]he Court shall ensure that the rules, procedures and remedies provided for in this Agreement and in the Statute are used in a fair and equitable manner and do not distort competition.” In contrast to Art. 3 of the Enforcement Directive, Art. 42 explicitly mandates the UPC to follow the principle of proportionality. Consequently, there appears to be the possibility that the UPC may deny a permanent injunction on the basis of disproportionality.208 This would be desirable, considering that the UPC has been criticized for a lack of balance with respect to stakeholders other than the patentee.209 However, some authors have expressed the view that such possible discretion would to remain within the confines of the case law of the UK, wherein the margin of discretion is considerably narrower than that of US law following eBay.210 Given that the UK’s is exiting from the EU, and possibly the UPC, the margin of discretion may perhaps be narrowed down even further.

7.5.5

Effect on Overprotection Problems

In principle, the Enforcement Directive could be interpreted in a manner, that would allow courts to deny an injunctive relief at least in the most blatant hold-up situations. However, in practice, limitations to injunctive relief in the EU are either very narrow or non-existent. Therefore, this form of ex post compulsory liability rule has little relevance when it comes to resolving overprotection problems in the EU. The Enforcement Directive does not feature sufficient balancing factors in favour of users, and the effect has been further reinforced with the recent confirmation from the CJEU that Art. 13 of the Enforcement Directive does not preclude the establishment of punitive damages.211 If the EU member states choose to enact punitive damages against patent infringements, they are likely to also face an increase in litigation driven by PAEs seeking to create hold-up situations. Whether the margin of discretion to deny permanent injunctions under the UPC will be as narrow as that resulting from the implementation of the Enforcement Directive is to be seen. However, in comparison to the Enforcement Directive, the

Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 188. Ibid, 187-188. 209 See, for example, Hilty et al., Unitary Patent Package, 3-4. 210 Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 188. 211 Case C-367/15, Stowarzyszenie ‘Oławska Telewizja Kablowa’ v. Stowarzyszenie Filmowców Polskich, 2017 O.J. (C78) 2, paras 23, 34. 207 208

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UPC explicitly precludes issuing punitive damages (Art. 68 (2) UPC); hence, the UPC system does pose the risk of aggravating hold-up situations by means of employing stricter remedies.

7.6

Interim Conclusions

As eBay shows, limitations to injunctive relief can be very effective in preventing a hold-up situation. However, in order to maintain the incentives to innovate in the presence of such an ex post liability rule, it is important that courts do not deny injunctions to companies whose competitive advantages justifiably depend on exclusivity and that claims for damages can be enforced effectively. In limited situations, punitive damages in cases of wilful infringement may ensure that the establishment of an ex post compulsory liability rule does not lead to hold-out situations. While limitations to injunctive relief are efficient in targeting hold-up situations, jurisdictions that do not combine them with ex ante liability rules cannot effectively address unjustified refusals to license. Another instrument based on equity, the misuse doctrine, has merely theoretical relevance to the resolution of overprotection problems. Furthermore, being a zerosum ex post liability rule, this instrument is too blunt to adequately balance the interests of a patent holder and a follow-on innovator. In Europe, the property rule is subject to only a few limitations, and the possibilities in terms of expanding the margin of discretion of national courts or the UPC appear to be very limited. Hence, in Europe, compulsory licenses and compulsory liability rules based on competition law remain the main instruments for interfering with market failures of overprotection.

Chapter 8

Compulsory Liability Rules in Competition Law

Under EU competition law, exclusionary and exploitative abuses involving patents may, in principle, be remedied with a compulsory license. The chapter reviews the applicability of the essential facilities doctrine to the refusals to license patents and the possibilities to remedy unfair licensing prices and hold-up problems, especially with a view of case law on standard-essential patents. Besides, the US doctrine of essential facilities and unilateral refusals is subject to review. Section 8.7 evaluates the effectiveness of competition law’s liability rules to sustain follow-on innovation for each market failure and vis-à-vis three types of patents: non-standard essential, de jure standard-essential, and de facto standard-essential. Apart from hold-up problems involving de jure SEPs covered by the Huawei judgment, EU competition law is toothless with regard to market failures involving other types of patents. CJEU, with its balancing of fundamental rights and focus on a pre-existing FRANDcommitment Huawei, may have unintentionally narrowed down the scope of application of essential facilities doctrine to patents unencumbered by a FRAND commitment, and left considerable legal uncertainty concerning abuses involving de facto standard essential patents. Nevertheless, in comparison to patent law’s liability rules, competition law is more flexible in addressing follow-on innovators’ interests.

8.1

Introduction

The following analysis of the adequacy of competition law’s compulsory liability rules in terms of resolving the overprotection problems that hinder follow-on innovation concentrates on EU competition law, but special attention is paid to the relevant instruments in US and German competition law. Art. 31 (k) TRIPS allows for granting of compulsory licenses to remedy a practice that has been is determined, after a judicial or administrative process, to be anti-competitive. In Europe, the issuing of a compulsory license may result from a number of different competition law procedures; such a remedy may also target non-SEPs, de facto SEPs, or de jure © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_8

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SEPs. Generally, compulsory liability rules intended to remedy anticompetitive practices oblige an IPR holder to provide a license to those parties who were affected by his abusive conduct. Particularly in the case of SEPs, a remedy may encompass involuntary licensing to a large number of licensees.1 The central focus is on the exercise of IPRs that amounts to the abuse of a dominant position pursuant to Art. 102 TFEU. Art. 102 TFEU can be applied to the exercise of the rights conferred by a patent upon the simultaneous fulfilment of three requirements: “the existence of a dominant position, the abuse of this position and the possibility that trade between Member States may be affected there”.2 The mere exercise of a patent right, however, does not imply that these three criteria are fulfilled.3 It is important to acknowledge that the criteria employed to define for abuse on the basis of the exercise of IPRs under Art. 102 TFEU derive from the norms of competition law and not patent law’s internal justifications for patent protection, such as the subject matter or the essential function of a patent.4 This Chapter focuses on two specific categories of abusive anticompetitive practices that may hinder follow-on innovation. The first category is exclusionary practices; the most important of these are refusals to license patents that limit production, markets, or technical development to the detriment of consumers (Art. 102 (b) TFEU), with the consequence of vertically foreclosing a follow-on innovator from entering a downstream market. The case law on exclusionary practices has established the essential facilities doctrine, which determines the abusiveness of refusals to license both non-standard essential and de jure standard essential IPRs.5 The second category is exploitative abuses, which refers to cases in which a patent holder directly or indirectly imposes unfair prices or other unfair trading conditions for patents on a party that seeks to use them (Art. 102 (a) TFEU). The case law on unfair pricing predominantly deals with charging supra-FRAND prices for SEPs in the context of de jure standard setting.6

1

See, for example Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17. Case 24/67, Parke, Davis & Co v. Probel, Reese, Beintema-Interpharm and Centrafarm, 1968 E.C.R. 55, para 72. 3 Ibid. 4 Anderman, "Competition Law Perspective II," 132-133. 5 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743; Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag Gmbh & Co. KG, and Others, 1998 E.C.R. I-7791; Case C-418/01, IMS Health, 2004 E.C.R. I-5039; Case T-201/04, Microsoft, 2007 E.C.R. II-3601. 6 Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17; European Commission Press Release MEMO/09/549, Antitrust: Commission Welcomes IPCom’s Public FRAND Declaration (10 December 2009); Case AT.39985, Motorola (29 April 2014), Samsung, 2014 O.J. (C 350) 8; Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015). Furthermore, a third type of abusive practice, discriminatory abuses, is sanctioned (Art. 102 (c) TFEU). The EC and the CJEU have not applied this provision in relation to IP. However, a refusal to license case was assessed as a form of discriminatory practice in Germany. Standard-Spundfass, BGH, 13 July 2004, IIC 2005, 741; Beatriz Conde Gallego, “Die Anwendung des kartellrechtlichen Missbrauchsverbots auf “unerlässliche” Immaterialgüterrechte im Lichte der IMS Health- und Standard-Spundfass-Urteile,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 55, no. 1 (2006): 27. 2

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Art. 102 TFEU may be applied in both administrative and judicial proceedings. At the EU level, the administrative procedure for the investigation of an infringement of Art. 102 TFEU is commenced by the EC.7 Upon finding an infringement of Art. 102 TFEU, the EC may make a decision requiring the undertaking or associations of the undertakings concerned to bring the infringement in question to an end;8 such decisions are binding (Art. 288 TFEU). The General Court has the jurisdiction to review the legality of the Commission’s decisions. Its decisions can be appealed to the CJ concerning points of law (Art. 263 and Art. 256 (1) TFEU).9 The application of Art. 102 TFEU is decentralized.10 Furthermore, the prohibition of the abuse of dominant positions pursuant to Art. 102 TFEU takes effect without any prior decision11 and has a direct effect.12 Hence, in addition to the EC, national competition authorities and courts also have the power to apply Art. 102 TFEU, with the former being entitled to do so in individual cases.13 When the competition authorities of the member states or national courts apply national competition law to any abuse prohibited by Art. 102 TFEU, they should also apply the article itself.14 Furthermore, national courts and competition authorities must follow the decisions of the EC in their application of Art. 102 TFEU.15 This Chapter is organized as follows: Sect. 8.2 introduces the three means by which competition law can establish a compulsory liability rule. Section 8.3 explores the particular questions related to the definition of the relevant market and the finding of dominance in the context of patents and follow-on innovation. Section 8.5 addresses the essential facilities doctrine in the EU, Germany, and the US, while

7

The investigative procedure is initiated either on the Commission’s own initiative or on the basis of a complaint, which may be lodged either by one of the member states or by natural or legal persons with a legitimate interest. (Arts. 7 (1) and (2) Regulation 1/2003, Art. 105 TFEU). For the admissibility of complaints, see Art. 5 Commission Regulation (EC) 773/2004 Relating to the Conduct of Proceedings by the Commission Pursuant to the Articles 81 and 82 of the EC Treaty. 2004 OJ (L123) 18. If a complaint has been made informally, any possible subsequent proceedings will commence ex officio. Damien Geradin, Anne Layne-Farrar, and Nicolas Petit, EU Competition Law and Economics (Oxford: Oxford University Press, 2012), 5.97. 8 Art. 7 Regulation 1/2003. 9 Renato Nazzini, Competition Enforcement and Procedure, 2nd ed. (Oxford: Oxford University Press, 2016), 22, 44–45. 10 Ibid, 8. 11 Art. 1 (3) Regulation 1/2003. 12 See Case 26/62, NV Algemene Transport en Expeditie Onderneming van Gend & Loos v. Netherlands Inland Revenue Administration [van Gend & Loos], 1963 E.C.R. 1. 13 Arts. 5 and 6 Regulation 1/2003. 14 Art. 3 (1) Regulation 1/2003. Before the national courts, it is possible to combine a claim under EU competition law with other claims under national law. Commission Notice on the Handling of Complaints by the Commission under Articles 81 and 82 of the EC Treaty, 2004 O.J. (C 101) 5, para 16. 15 Art. 16 (11) and (12) Regulation 1/2003. The courts should also refrain from decisions that would be in conflict with a decision contemplated by the EC in proceedings that it has initiated. Ibid, Art. 16 (11).

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the case law on unfair pricing and enforcement of de jure SEPs is reviewed in Sect. 8.6. Finally, the adequacy of the instruments discussed in terms of resolving market failures caused by the overprotection of patents is analysed in Sect. 8.7.

8.2 8.2.1

Compulsory License As an Antitrust Remedy Compulsory License As a Behavioural Remedy

A compulsory liability rule is one of the possible remedies for the abuse of a dominant position pursuant to Art. 102 TFEU. According to Art. 7 of the Regulation 1/2003, the EC or the CJEU may grant behavioural remedies to stop such abuse. While not explicitly stated in the Regulation, behavioural remedies may amount to compulsory licenses. For example, while “[Magill] did not mention compulsory licensing there was only one way in which the abuse could be remedied.”16 In cases that are characterized by urgency in terms of risk of serious and irreparable harm to competition and on the basis of a prima facie finding of infringement, the EC may also take interim measures.17 In principle, such interim measures could encompass the issuing of a compulsory license. It is not clear from the wording of Art. 31 (k) TRIPS whether it allows for compulsory licenses to also be granted as interim measures. The requirement “after judicial or administrative proceedings” may refer both to the final decision by a relevant authority or any decision of such an authority that it is subject to a judicial review (Art. 31 (h)– (j) TRIPS). However, an interim measure that is intended to prevent serious and irreparable harm is unlikely to contradict TRIPS, as Art. 40 (2) TRIPS allows member states to adopt appropriate measures to either prevent or control abusive licensing practices with regard to IPRs when such practices may in the particular conditions have adverse effects on competition in the relevant market.18

8.2.2

Commitments to Grant Access

When the EC intends to adopt a decision requiring an abuse to end, a patent holder who is being investigated for abusive conduct may offer a commitment to employing a liability rule as an alternative to a behavioural remedy.19 If such a commitment

16

Alison Jones and Brenda Sufrin, EU Competition Law : Text, Cases and Materials, 4th ed. (New York: Oxford University Press, 2011), 502 [cursive omitted]. 17 Art. 8 Regulation 1/2003. 18 Cf. UNCTAD-ICTSD, Resource Book on TRIPS and Development, 479, which interpreted Art. 31 (k) as requiring that “anticompetitive practices are evidenced.” 19 See Art. 9 Regulation 1/2003.

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satisfies the concerns expressed by the EC in its preliminary assessment, it may make the commitment in question binding on the undertaking in question by a commitment decision. Such a decision may be adopted for a specified period, and it shall conclude about the absence of further grounds for action by the EC.20 In situations in which the undertaking concerned acts in a manner that is contrary to its commitments, proceedings may be reopened either by request or on the initiative of the EC.21 Commitment decisions offer a swifter remedy in comparison to decisions and are therefore viewed as being better suited to nascent and dynamic markets.22 An early intervention can prevent a market affected by network effects from tipping;23 however, commitments are undesirable in situations in which the infringement occurred in the past or in which there is also an interest in discouraging the anticompetitive behaviour in question in the future by means of imposing a fine.24

8.2.3

Compulsory License As a Defence in Patent Infringement Proceedings

Standard-Spundfass was the first case in Germany in which a compulsory license was granted in response to an undertaking’s abuse of a dominant position.25 In Standard-Spundfass, the BGH also confirmed that a defendant to an infringement action is entitled to a counterclaim for a royalty-free license in an action for compensation of damages.26 An antitrust compulsory licensing defence became further accepted as a counterclaim in infringement proceedings in the Orange Book Standard case.27 Based on these decisions, an antitrust compulsory licensing 20 Art. 9 Regulation 1/2003. Commitments to grant access to essential facilities are among the merger control remedies. Commission Notice on Remedies Acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, paras 63 and 65. However, unlike behavioural remedies and commitment decisions, which are granted ex post (i.e. after an exclusionary behaviour has already taken place and after a procedure has been initiated by the EC), in merger control commitments to license are given ex ante. 21 Art. 9 (b) Regulation 1/2003. 22 Almunia, Joaquín, “Remedies, Commitments and Settlements in Antitrust.” Speech at SV Kartellrecht, Brussels 8 March 2013. European Commission. Last modified 8 March 2013. Accessed 31 December 2018 http://europa.eu/rapid/press-release_SPEECH-13-210_en.htm. 23 Nazzini, Competition Enforcement and Procedure, 40. 24 Almunia, “Remedies, Commitments and Settlements in Antitrust”. 25 Previously, § 24 PatG was seen as the only option for granting a compulsory license in Germany. See, for example Beier, "Patent and Utility Model Law," 273-274; Käseberg, Intellectual Property, 209-2011. 26 Standard-Spundfass, IIC 2005, 741, 748. The claim was not precluded on the basis of the court’s authority to grant compulsory licenses under § 24 PatG. Therefore, the claim did not need to be raised by a competition authority or a court. Ibid, 742-743, 749-749. 27 Orange Book Standard, IIC 2010, 369.

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defence was recognized in German law.28 However, as is discussed in more detail later, the conditions established by the Orange Book Standard for invoking this defence in infringement proceedings are extremely limited.29 It is doubtful that a finding of an anticompetitive practice and the compulsory license invoked as a counterclaim is binding on parties others than those involved in a particular set of proceedings.30 However, as Picht points out, even if the decision would not qualify as grounds to grant a compulsory license for example to another standard implementer, it may have an indirect effect on the SEP holder incentivising him to license voluntarily to avoid further litigation.31

8.3 8.3.1

Market Definition General

Before it is possible to assess whether an undertaking holds a dominant position on an internal market or in a substantial part thereof and is abusing this market power (Art. 102 TFEU), it is necessary to define the relevant market(s) on which the suspected abuse has occurred. “Relevant market” is an independent concept in EU competition law, distinct from the meaning of this term in the field of economics.32 The relevant market “comprises all those products (and their geographic locations) that impose an effective competitive constraint on the products(s) of the firm whose

28

Käseberg, Intellectual Property, 211. For a more detailed discussion on Orange Book Standard, see Sects. 8.6.4.2. and 8.7.3.2. 30 On the one hand, the BGH has stated that “[t]he licensing claim in competition law, by contrast [to a compulsory license based on patent law], serves to enforce the prohibition on abuse of a market-dominating position that applies to every market participant”. Standard-Spundfass, IIC 2005, 741, 741. On the other hand, Picht has questioned whether a compulsory license granted pursuant to a counterclaim in infringement proceedings satisfies the requirement of Art. 31 (k) TRIPS to “determine” whether a practice is anticompetitive in administrative or judicial proceedings when “court rulings bind only the parties to the particular procedure”. He further calls into question whether, pursuant to the principles of procedural law, such a decision can be invoked in favour of granting a compulsory license to an SEP to another implementer and possibly in another jurisdiction within the EU. Picht, "From Transfer of Technology," 520. I concur with his doubts: Generally, Art. 31 TRIPS does not allow for such effects—the procedural requirements for a compulsory license seek to ensure that such a license is granted on a case-specific basis and that a patent holder has had an opportunity to subject all of the relevant decisions made by an administrative or judicial authority to a judicial or independent review (Art. 31 (a), (i)-(j) TRIPS). To qualify as an exception to this rule, a judicial or administrative authority that finds an exercise of a patent to be anticompetitive should have the authority to impose a compulsory license as a remedy that also binds third parties. 31 See Picht, "From Transfer of Technology," 520. 32 See Commission Notice on the Definition of Relevant Market for the Purposes of Community Competition Law, 1997 O.J. (C 372) 3, para 3. 29

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unilateral practices are under scrutiny”.33 “Market definition is a tool [used] to identify and define the boundaries of competition between firms”, with the objective of “identify[ing] in a systematic way the competitive constraints that the undertakings involved face”.34 The relevant market is comprised of the relevant product and geographical markets, which are to be defined separately.35 When assessing the relevant market, it is necessary to determine the competitive constraints posed by demand-side substitutability and supply-side substitutability.36 Substitutability on the relevant market requires “a sufficient degree of interchangeability between all the products forming part of the same market in so far as a specific use of such products is concerned.”37 When evaluating demand-side substitutability, the EC must assess the readiness of consumers to switch to substitute products in the event of price increases or other independent behaviour on the part of the undertaking in question.38 The EC uses openly heterogeneous sources of qualitative and quantitative empirical evidence for the purpose of market definition.39 The most important test used in market definition is the hypothetical monopolist test, which is intended to determine the portion of customers who are likely to switch to another product in response to a “small but significant and non-transitory increase in price” (SSNIP).40 If, later during the administrative proceedings, an undertaking is identified as holding a dominant position and concerns are raised regarding its abusive behaviour, the constraining effect of potential competition will also be reviewed.41 Whereas, in supply-side substitution, it is essential that suppliers are able to react to a competitor’s price increase rapidly by producing substitutes, substitution via potential

33

Robert O’Donoghue and A. Jorge Padilla, Law and Economics of Article 82 EC (Portland: Hart Publishing, 2006), 63. 34 Commission Notice on the Definition of Relevant Market, para 2, [ft omitted]. 35 See ibid, para 9. “A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reasons of the products’ characteristics, their prices and their intended use”. Ibid, para 7. “The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area.” Ibid, para 8. 36 See ibid, paras 13-23. 37 Case 85/76, Hoffmann-La Roche & Co. AG v. Commission, 1979 E.C.R. 461, para 28. 38 Commission Notice on the Definition of Relevant Market, para 13. 39 Ibid, para 23. See also ibid, paras 36-52 for the types evidence deemed relevant for the definition of a product and its geographical markets. 40 See O’Donoghue and Padilla, Law and Economics of Article 82 EC, 76-91; Geradin, LayneFarrar, and Petit, EU Competition Law and Economics, 4.31-4.34. For other methods used to define a market, the critical loss test, and statistical analysis, see ibid, 4.35-4.38. 41 Commission Notice on the Definition of Relevant Market, para 24; O’Donoghue and Padilla, Law and Economics of Article 82 EC, 69.

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competition assumes a longer time horizon, as competitors’ entries or the investments sunk into the production of substitutes take more time.42

8.3.2

Market Definition and Follow-on Innovation

Any type of patented product may be subjected to a market definition analysis when a patent holder is investigated on the basis of a suspicion of abusing a dominant position.43 However, a single patent rarely defines the relevant downstream product market. While, in the pharmaceutical and chemical industries, a product on the market may be covered by a single patent, in more complex industries, a single patent may cover only a small fraction of a downstream product that incorporates thousands of patents.44 In the majority of high-technology industries, at least part of the technology incorporated in a product or used in its production will be acquired on the upstream market for technology. Consequently, refusals to license that breach Art. 102 TFEU presuppose the existence of two separate markets.45 A refusal to license typically takes place on upstream market with an effect on another market where the follow-on innovator operates, both of which need to be defined.46 In the majority of cases, a follow-on innovator will operate in the downstream market “for which the refused input is needed in order to manufacture a product or provide a service.”47 A patent holder may occupy various market positions in relation to a follow-on innovator: For example, a patent holder may be a vertically integrated undertaking that operates both on the upstream market for technology as well as on the downstream market in which a follow-on innovator operates. The undertaking in question may not yet be present in the downstream market but may be planning to enter it. If the product offered on the primary market is a technology platform, follow-on innovation may also occur in the neighbouring markets that interoperate with it.48 Finally, a patent holder may only operate on the upstream market and have no intentions of entering the downstream market in the near future. An example of such an undertaking would be an NPE that focuses exclusively on R&D and technology 42 O’Donoghue and Padilla, Law and Economics of Article 82 EC, 76-91; Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.21. It is also noteworthy that products may also be substitutable indirectly, through chains of substitution. Commission Notice on the Definition of Relevant Market, paras 57-58. See also EU Competition Law and Economics, at 4.28-24.30. 43 Anderman, "Competition Law Perspective II," 135. 44 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.72. 45 Jones and Sufrin, EU Competition Law 2016, 306-307. 46 See Joined cases 6/73 and 7/73, Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v. Commission [Commercial Solvents], 1974 E.C.R. 223. 47 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 76. 48 See Case T-201/04, Microsoft, 2007 E.C.R. II-3601.

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licensing;49 however, PAEs also fall into this category. A patent holder may also be a vertically integrated company that engages in downstream operations on a market that is distinct from that of follow-on innovators. Finally, a follow-on innovation may in itself be an input for another, even more complex, product with its own market (for example, a component). Therefore, it may also be necessary to define the market for such a final product.50 Hence, in some situations, a review of a potential instance of abuse of dominance in the context of follow-on innovation may involve defining three different markets: that for upstream technology, that for components, and that for the final products.

8.3.3

Definition of the Market for Technology

Technology markets consist of IPRs that are marketed separately from the products to which they relate.51 A licensed IPR and the technologies that consumers could employ as close substitutes thereof constitute the relevant market for a technology.52 Technologies are substitutable “when either technology allows the holder to produce the product or carry out the process to which the technologies relate”.53 Close substitutes have the capacity “to constrain significantly the exercise of market power in respect to the intellectual property that is licensed.”54 The degree of substitutability can be determined based on the characteristics and intended use of the IPRs in question, as well as the royalty rates paid for them.55 The general principles of product market definition, most importantly the SSNIP test, are applied in the process of defining the market for a particular technology.56 In addition, it is also important to assess the potential competition on the market for technology represented by companies that have not yet licensed their technologies.57 When defining markets, the EC has a tendency to focus on actual substitutes, with the consequence being that the markets for upstream inputs are construed narrowly,

49 See also Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 267. 50 Ibid, para 251. 51 Ibid, para 116. 52 Ibid. See also ibid, para 317 fn 313. For a more extensive discussion of determining substitutability with respect to IPRs, see Früh, Immaterialgüterrechte und der relevante Markt, 208-214. 53 TTBER Guidelines (2014), para 251. 54 DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 3.2.2; See also ibid fn 32. 55 Art. 1 (k) TTBER. 56 Notice on the Definition of Relevant Market, para 22; Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 117. 57 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements; Commission Notice on the Definition of Relevant Market, para 118.

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sometimes as covering only the patented product;58 this consequently contributes to the finding of a dominant position.59 However, in principle, a disruptive patented innovation could also form a market, which it dominates on its own.60 The geographic scope of a technology market is defined by the identification of “sufficiently homogenous conditions and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas”.61 When determining the relevant market for a patent, the geographical area in which that patent is in force plays a role in the assessment of licensees’ behaviours with respect to the patent.62 Other relevant factors in the assessment of geographic area include, inter alia, the distribution of market shares between the undertaking and its competitors and any geographical price differences that may exist.63 In practice, the geographic market for technology often covers the entire EU or can even be worldwide,64 as is often the case for de jure SEPs. Nevertheless, scholars have warned against overly broad definitions of the geographic markets of unitary patents, as they could lead to insufficient interference on the part of competition authorities with regard to abusive practices.65 In situations in which a downstream innovator has been refused access to the upstream input, it is not necessary that the technology on the upstream market has been traded separately:66 “[I]t is sufficient that there is demand from potential purchasers and that a potential market for the input at stake can be identified”.67 In IMS Health, the CJEU went so far as to conclude that the identification of a “hypothetical market” would suffice.68 However, the CJEU did not provide guidance concerning the content and application of the relevant concepts. A wide

58 Steven Anderman and Hedvig Schmidt, EU Competition Law and Intellectual Property Rights : Regulation of Innovation 2nd ed. (New York: Oxford University Press, 2011), 47-48 with references to Case T-321/05, AstraZeneca AB & AstraZeneca plc v. Commission, 2010 E.C.R. II 2805; Astrazeneca, Case COMP/A.37.507/F3, AstraZeneca, Commission Decision of 15 June 2005, 2006 O.J (L 332) 24; Case COMP/38.636 Rambus, Commission Decision of 9 December 2009, C(2009) 7610, http://ec.europa.eu/competition/antitrust/cases/dec_docs/38636/38636_1203_1.pdf. 59 Anderman, "Competition Law Perspective II," 135, who provides the example of Case C-457/ 10 P, AstraZeneca, 4 C.M.L.R. 7 (2013). 60 Anderman, "Competition Law Perspective II," 135-136. 61 Art. 1 (l) TTBER. 62 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.27. 63 Commission Notice on the Definition of Relevant Market, paras 28-31; O´Donoghue and Padilla, Law and Economics of Article 82 EE, 91-95. 64 Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, at 6.65. 65 Miłosz Malaga, "European Patent with Unitary Effect : Incentive to Dominate?," IIC - International Review of Intellectual Property and Competition Law 45, no. 6 (2014): 439-441. 66 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 79; Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 43. 67 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 79 (and the following references to case-law). 68 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 44.

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interpretation would presuppose that any IP rights, being alienable, could always be placed on the market individually.69

8.3.4

Defining the Markets for Follow-on Innovation

A follow-on innovator’s market is defined with reference to the stage and level of her innovative activity, as well as the market’s interrelationship with the relevant upstream market for technology. Follow-on innovation fosters dynamic competition by introducing something novel in relation to an existing technology. A follow-on innovator may be conducting R&D on a new product and would thus be competing in innovation. The end result of his R&D efforts may be a new product market, but, at the point of time that the relavant markets are defined, it does not yet exist; it would therefore be beyond the scope of market definition efforts.70 In such situations, the market can be assessed indirectly by means of an analysis of competition in innovation that exists between different R&D poles in the field in question.71 In industries in which the R&D poles are less readily identifiable, an assessment of competition in terms of innovation will likely also be much more difficult. Upon the application of Art. 101 TFEU on horizontal agreements to such a context, “the Commission would not try to assess the impact of a given R&D co-operation on innovation, but would limit its assessment to existing product and/or technology markets which are related to the R&D co-operation in question.”72 The lack of tools for defining the markets for follow-on innovations makes it almost impossible to interfere with unjustified refusals to license and excessive licensing fees on the grounds of competition law during the early stages of R&D efforts aimed at follow-on innovation. During such early stages of innovation effort, exceptions or compulsory licenses that favour research activity are more fitting than competition law as instruments for ensuring a follow-on innovator’s access to a patented technology.73 When a follow-on innovator has already innovated a new product, the level of its innovativeness affects the market definition process. The level of innovative activity

69 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.325. Hence, a followon innovator can be viewed as dealing with as many upstream markets as there are technologies incorporated in her product. 70 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 121. In the Antitrust Guidelines for the Licensing of Intellectual Property (2017), § 3.2.3, the DOJ and the FTC refer to competition in innovation as a “research and development market”, replacing the previous concept of an “innovation market”. Cf. DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), § 3.2.3. 71 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 120-121. 72 See ibid, para 122. 73 Käseberg, Intellectual Property, 116-117, 135.

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may span from the incremental improvement of an existing, already marketed product to a completely novel product based on very radical innovation that creates a new market for itself.74 For incremental innovations, the relevant market will be comprised of that for the existing products and their close substitutes.75 Beyond these extremes, products that result from follow-on innovation efforts may gradually replace existing technologies. In such situations, the resulting products may no longer be comparable with the older technologies that they improve upon and will therefore not be a part of the same market.76

8.4 8.4.1

The Finding of Dominance Substantial Market Power

A second prerequisite for applying Art. 102 TFEU requires a finding of dominance within the internal market or in a substantial part of it.77 The concept of dominance in EU competition law is not entirely economic:78 It was defined in United Brands as “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”79 In Hoffmann-La Roche, it was specified that “[s]uch a position does not preclude some competition, which it does where there is a monopoly or a quasi-monopoly, but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.”80 Several factors, which,

74

See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 112 and 119. 75 See ibid, paras 113 and 119. 76 See ibid, paras 112 and 114. 77 The requirement of finding dominance on a substantial part of the market is akin to the de minimis rule, pursuant to Art. 101 TFEU, which defines the scope of the jurisdiction of the Commission and the Court of Justice. While “substantial part” is a concept that is independent of the geographic scope of the relevant market, “global or EU-wide markets” generally qualify as “substantial”. O´Donoghue and Padilla, Law and Economics of Article 82 EC, 173. 78 Ibid, 108. 79 Case 27/76, United Brands Company and United Brands Continentaal BV v. Commission, 1978 E.C.R. 207, para 65. See also Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 38. Cf. the definition offered by the US Supreme Court: “the power to control prices and exclude competition”. United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). 80 Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 39. Hence, not all opportunities for competition need to be eliminated by an undertaking for it to hold a dominant position; even in the case of dominance, some degree of actual or potential competition may persist. Case 27/76, United

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independently, do not imply dominance, may, when considered together, indicate the existence of a dominant position.81 An undertaking is dominant and acts independently when is subject to insufficient degree of competitive constraints, with the consequence that it holds “substantial market power over a period of time”.82 The EC defines the concept of substantial market power as the insensitivity of an undertaking’s decisions with regard to the actions and reactions of other market players.83 Substantial market power is a matter of degree. One proxy for dominance is an undertaking’s capacity for “profitably increasing prices above the competitive level for a significant period of time”, as well as the ability to keep prices at such a level.84 Market power can also entail forms of independence beyond “power over price”:85 Other means of influencing the parameter of competition, including innovation for the benefit of the dominant undertaking and to the detriment of consumers, are deemed indicative of the existence of substantial market power.86 While lowering the quality or hindering the pace of innovation is viewed to be necessary to include in the definition of the substantial market power, it is impossible to determine the competitive price level for such effects.87 As a general rule, the “mere ownership of an intellectual property right cannot confer” a dominant position.88 Consequently, patents do not hold a special role when it comes to the process of determining whether a dominant position exists. An assessment of market power will be based on a review of the empirical findings, during which process the possible entry barriers posed by IPRs will be taken into account.89

8.4.2

Market Position

For the purposes of determining dominance on the relevant market, the EC must review the structure of the market in question and the situation within it with regard Brands, 1978 E.C.R. 207, para 113; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 10. 81 Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 39; Case 27/76, United Brands, 1978 E.C.R. 207, para 66. 82 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 10. 83 Ibid. 84 Ibid, para 11. 85 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.56. 86 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 11. 87 Gerdin, Layne-Farrar and Petit, EU Competition Law and Economics, 4.56. 88 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 46. 89 Anderman, "Competition Law Perspective II," 136.

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to competition.90 Three factors play a role in evaluation: the market position of the undertaking and its competitors, the constraints posed by expansion or entry, and, finally, the countervailing market power.91 Among the various factors that contribute to the finding of dominance, very high market shares are of great importance:92 They offer “a useful first indication for the Commission of the market structure and of the relative importance of various undertakings on the market”.93 The market shares on the market for technology are calculated on the basis of the total licencing incomes of all licensors.94 Market shares of under 40% are deemed to represent a good preliminary proxy for a lack of market power;95 however, this threshold is not a safe harbour and is subject to exceptions.96 Yet, the higher a market share and the longer it has been maintained, the more strongly it is considered to provide a preliminary indication of the presence of dominance.97 However, market shares alone do not determine the conclusion with regard to finding dominance, as an assessment must address all of the factors that may constrain the undertaking in question.98 This is particularly important with respect to the markets for technology when one considers that a narrow market definition may affect the likelihood of a finding of dominance.99 Nevertheless, market shares will be given evidentiary weight, taking into account the conditions on the markets in 90

Case 27/76, United Brands, 1978 E.C.R. 207, para 67. Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 13. 92 Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 39; Case T-342/07, Ryanair Holdings plc v. Commission, 2010 E.C.R. II-3457, para 41. 93 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 12. 94 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 117; Commission Notice on the Definition of Relevant Market. Alternatively, market shares may be determined on the basis of the sales of downstream products. TTBER Guidelines (2014), paras 22 and 25. 95 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 14-15. 96 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.65; See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 14. 97 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 14-15. For example, Microsoft, with an over 90 percent market share in PC operating systems, was said to hold an overwhelmingly dominant position that approached a complete monopoly. Case COMP/C-3/37.792, Microsoft, Commission Decision of 24 March 2004. C(2004)900 final. http:// ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf. para 435. Furthermore, holding a very large market share “for some time”, with the effect of becoming an “unavoidable trading partner”, can lead to a finding of independence that is indicative of market dominance. Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 41. Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 10-13. 98 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 14-15. 99 See Anderman and Schmidt, EU Competition Law and Intellectual Property Rights, 59, 63. 91

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question and their dynamics, as well as the degree of product differentiation that may exist on those markets. When it comes to volatile markets, the EC also addresses the inter-temporal development of market shares.100 This precaution with regard to the assessment of market shares is justified, as shares may otherwise only indicate an undertaking’s static position on the market in question.101

8.4.3

Barriers to Entry and Expansion

An important factor to consider is prospective changes on the relevant market that may arise as a result of a “likely, timely and efficient” expansion on the part of an existing competitor or by a potential competitor, in addition to the threat of such actions. Barriers to entry and expansion reflect the nature of competition as a dynamic process. The likelihood of expansion or entry depends on the profitability thereof, taking into consideration barriers to entry, the reactions of other undertakings operating within the markets in question, and the risks involved. An entry or expansion will not be deemed as being timely unless it occurs rapidly enough to “deter or defeat the exercise of substantial market power”. Niche entry is not considered to be sufficient, but it should occur on a scale that adequately deters the independent behaviour of the undertaking under investigation.102 Expansion or entry may be prevented by heterogeneous barriers.103 IPRs may contribute to the existence of barriers of entry and expansion in several different ways. First, the mere technological lead created by the virtue of holding superior, IP-protected technology may pose a barrier to entry, even if the technology is not essential for downstream companies.104 Second, SEPs may create an entry barrier for a competing technology when they are included included in a de jure standard105 or become part of a de facto standard. Entry or expansion may be further forestalled as a result of network effects or consumers experiencing high switching costs.106 Consequently, an industry may be considered as being locked in to a

100

Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 13. 101 Geradin, Layne-Farrar and Petit, EU Competition Law and Economics, 4.61-4.63. 102 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 16. 103 For the distinction between barriers to entry and barriers to expansion, see Geradin, Layne-Farrar and Petit, EU Competition Law and Economics, 4.69; Motta, Competition Policy, 75-89. 104 Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 48; Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.68. 105 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 266. 106 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 17.

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particular de jure107 or de facto standard. The ownership of SEPs in the context of de jure standardisation may lead to a dominant position when a standard poses a barrier to entry on the downstream market.108 “SEPs-protected technology can, by definition, not be designed around. SEP holders are therefore unavoidable trading partners for any manufacturer of standard-compliant products.109 A market-dominant SEP holder may hold-up standard implementers; however, the EC is cautious to not assume that the holder of an SEP automatically holds a dominant position, but instead instructs that the question should be addressed on a case-by-case basis.110 Indeed, some standards may be subject to competition, which will diminish an SEP holder’s market power. Third, a barrier to entry may arise when a vertically integrated company that is dominant on the upstream market controls an input that is essential to downstream firms.111 Beyond natural resources, an important technology may also constitute an essential facility.112 As Anderman and Schmidt observed,113 the finding of market power with respect to an essential facility is subject to two specific criteria: First, the undertaking under investigation must have a de facto monopoly on the upstream market,114 and, second, the input from that market must be indispensable for companies that seek to operate downstream.115

107

Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 22. 108 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 269. 109 Case AT.39985, Motorola (29 April 2014), para 323. 110 Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 269. 111 See Geradin, Layne-Farrar and Petit, EU Competition Law and Economics, 4.68. 112 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 17; Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743; Case C-418/01, IMS Health, 2004 E.C.R. I-5039; Case T-201/04, Microsoft, 2007 E.C.R. II-3601. 113 Anderman and Schmidt, EU Competition Law and Intellectual Property Rights, 64. 114 Case C-7/97, Oscar Bronner, 1998 E.C.R. I-7791, para 35; Case C-418/01, IMS Health, 2004 E.C.R. I-5039, paras 3-6; Opinion of AG Tizzano, Case C-418/01 IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2003 E.C.R. I-05039, paras 6-7; Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 47. 115 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 53. Hence, in refusal to license cases, the assessment of market dominance is intertwined with the criterion of finding abuse; see the discussion on the criterion of indispensability Sect. 8.5.2. This approach can be seen as reflecting the need to define dominance when a company that is subject to investigation engages in vertical leveraging. On leveraging abuses, see O´Donoghue and Padilla, Law and Economics of Article 82 EC, 207-210.

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Delineation of the second and third situations is not always possible,116 as the EC considers all of the relevant barriers to entry in a particular case.117 In addition to entry barriers, the EC must consider constraints on market dominance that may stem, for example, from potential competition118 or customers’ countervailing market power.119 The precense of countervailing buying power is assessed in the same manner as dominance.120 Countervailing buying power has unsuccessfully been used as a defence by undertakings accused of abuse of dominance through assertion of SEPs.121 Nevertheless, in principle, a market-dominant licensee could abuse its market power by subjecting a patent holder to a hold-out.

8.4.4

Special Responsibility

Defining the markets for patented technology and assessing dominance in a market are complex endeavours. Furthermore, the further a follow-on innovator is from commercializing his product, the more difficult it will be to define the market for it. In addition, refusals to license typically entail heightened standards for determining a dominant position. Ultimately, few patents will be found to confer a monopolistic position on their holders or to sufficiently contribute to obtaining such a position, particularly if they are not SEPs.

For example, in Motorola, the EC found that Motorola held “a 100% market share of the licensing of the technology, as specified in the GPRS standard technical specifications, on which Motorola’s Cudak GPRS SEP reads.” Case AT.39985, Motorola (29 April 2014), para 225. The commission further noted that this market share and the ownership or exercise of a SEP patent did not confer dominance on their own, as the assessment of two additional factors was required: the first was the degree to which manufacturers of mobile devices had to comply with the standard, in which the wide market coverage and unsubstitutability of the standard were considered to be of importance. Second, the Commission assessed the lock-in of the industry to that standard, taking into consideration, inter alia, requirements in terms of backward compatibility. Ibid, paras 226-236. See also paras 195-206. 117 See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 17; Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.68. 118 Commission Notice on the Definition of Relevant Market, para 7. 119 Customers’ market power may derive from their size or “the ability to switch quickly to competing suppliers, to promote new entry or to vertically integrate, and to credibly threaten to do so.”Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 18. 120 See Geradin, Layne-Farrar and Petit, EU Competition Law and Economics, 4.75. In some situations, a customer may found to hold a dominant position and thus be subject to proceedings under Art. 102 TFEU. O´Donoghue and Padilla, Law and Economics of Article 82 EC, 167-168. 121 See Case AT.39985, Motorola (29 April 2014), paras 237-238. For the Commission’s counterarguments, see ibid, paras 228-267. 116

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Nevertheless, holding a dominant position is, in itself, not illegal:122 Dominance resulting from an undertaking’s success in competition is lawful.123 Furthermore, a dominant undertaking has the right “to compete on the merits”,124 which includes engaging in dynamic competition.125 Market dominance that stems from investments made in internal innovation and the success of the resulting patented products on the market is completely legitimate.126 Hence, the fact that a patent holder is in a dominant position does not amount to antitrust violation. The finding of a dominant position “simply means that, irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market.”127 It is only if an undertaking has breached this special responsibility that it can be deemed as having abused its market power. The following Sects. 8.3 and 8.4 review what this special responsibility entails with respect to exclusionary and exploitative abuses that involve patents.

8.5 8.5.1

Exclusionary Abuses The Essential Facilities Doctrine

The exclusionary conduct of an undertaking is sanctioned under Art. 102 TFEU when it leads to an anticompetitive foreclosure, which refers to “a situation where effective access of actual or potential competitors to supplies or markets is hampered or eliminated as a result of the conduct of the dominant undertaking whereby the dominant undertaking is likely to be in a position to profitably increase prices to the detriment of consumers”.128 Consequently, an assessment of an abusive practice will be divided into the process of finding that a foreclosure has occurred and, thereafter, determining whether the foreclosure has the effect of harming consumer welfare.129

122

Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 1. 123 Anderman, "Competition Law Perspective II," 134. 124 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 1; Case C-457/10 P, AstraZeneca, 4 C.M.L.R. 7 (2013), para 129. 125 Anderman "Competition Law Perspective II," 136. 126 Ibid, 134. 127 Case 322/81, NV Nederlandsche Banden Industrie Michelin v. Commission [Michelin], 1983 E.C.R. 3461., para 57 (1983); Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 9, fn 9 on the respective case-law following the Michelin I decision. 128 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 19. 129 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.143.

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A refusal to grant access to an essential facility, or, in other words, a refusal to supply, is a specific type of abusive practice that can lead to a vertical foreclosure.130 In the context of IP law, this type of foreclosure is also referred to as a refusal to license:131 “The definition of an ‘essential facility’ is fraught with difficulty. However, the basic idea is that it is something owned or controlled by a vertically integrated dominant undertaking to which other undertakings need access in order to provide products or services to customers. This is sometimes called ‘bottleneck monopoly’. A refusal to grant access to essential facility is a breach of the special responsibility that the holder of the facility has as a dominant undertaking.”132 The EC’s Guidance qualifies refusals to supply in an expansive manner.133 The essential facilities doctrine interferes with an undertaking’s “right to choose its trading partners and dispose freely of its property”.134 In the context of IPRs, it conflicts with the right to exclude. In both cases, the EC’s guidance calls for careful consideration of the impact of an antitrust intervention on the incentives of the undertaking under investigation to continue investing in the activity in question.135 In Volvo v. Veng, in which the separation doctrine of competition and IP law still applied, the CJEU found no justification for intervening in cases involving refusals to license on the basis of competition law, as the “refusal to grant such a license cannot in itself constitute abuse of a dominant position”. The right of the proprietor of an IPR to refuse a license was seen as “the substance of his exclusive right”, which the imposition of a compulsory license would deprive him of.136 However, the CJEU noted that a market-dominant undertaking nevertheless has “certain responsibilities” in terms of refraining from conduct that may constitute a violation of Art. 102 TFEU, such as “refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation”.137 The responsibility did not arise with respect to the first market for spare parts but rather in relation to their indispensability to the second market for

130

See ibid, 4.303. Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 78. 132 Jones and Sufrin, EU Competition Law 2011, 486. 133 See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 78-80. For example, a refusal may concern an upstream input that has not previously been traded. A foreclosure may also be “constructive” in situations in which the supply of an input is delayed or degraded or is subject to unreasonable conditions “in return for supply”. Ibid, para 79. In addition, instead of a refusal, a competitor may be subjected to a “margin squeeze”, a situation in which a vertically integrated company sells input to the downstream product at a price which makes it unprofitable for a competitor to continue selling products on that market. Ibid, para 80. 134 Ibid, para 75. 135 Ibid. 136 Case C-238/87, AB Volvo v. Erik Veng (UK) Ltd., 1988 E.C.R. 6211, para 8. 137 Ibid, para 9. Similarly, see Case 53/87, CICRA and Others v. Renault, 1988 E.C.R, 6039, para 16. 131

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maintenance activities.138 Hence, in order to comply with Art. 102 TFEU, a car manufacturer could either grant a license to other manufacturers of spare parts or refrain from engaging in the abovementioned abusive conduct.139 The CJEU changed its approach to refusal to license in Magill, in which it took the view that “the exercise of an exclusive right by a proprietor may, in exceptional circumstances, involve abusive conduct.”140 In Magill, the CJEU, for the first time, found a refusal to license IPRs to constitute an abuse of a dominant position (Art. 102 TFEU).141 Magill defined the three criteria for finding abuse in cases involving refusals to license.142 These criteria for “exceptional circumstances” were further elaborated on in Oscar Bronner, a landmark case for the essential facilities doctrine of the CJEU, which implicitly—and controversially—linked cases involving refusals to license to the doctrine.143 Together, Magill and Oscar Bronner represented a shift on the CJEU’s part from the doctrine of separation to the doctrine of complementarity between IP and competition law. The criteria for finding abuse were confirmed as being cumulative in IMS Health.144 The identification of criteria for finding abuse in refusal to license cases culminated in Microsoft, in which the test was applied to interoperability information.145 According to the CFI, the “following circumstances, in particular, must be considered to be exceptional:

138

Anderman, "Competition Law Perspective II," 133. Jones and Sufrin, EU Competition Law 2016, 499. 140 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, paras 50. 141 The decision did not distinguish between refusal to licence and refusal to supply situations in its narrow argumentation. However, unlike Volvo v. Veng and Mexicar v. Renault, in Magill, the downstream market of television listings was less connected to the rightholder’s main business of broadcasting. In addition, the statutory monopolies of broadcasting companies may have played a role in finding abuse. Jones and Sufrin, EU Competition Law 2016, 500, 503. However, the finding of the abuse of a dominant position in Magill has been viewed as being implicitly motivated by the fact that the essential facility in the case, television program listings, represented banal information that, in most jurisdictions, would not be subject to copyright protection. Richard Whish and Bailey David, Competition Law, 8th ed. (Oxford: Oxford University Press, 2015), 842. See also Ariel Ezrachi, EU Competition Law : An Analytical Guide to the Leading Cases, 5th ed. (Oxford: Hart Publishing, 2016), 283. 142 1) The undertaking is the sole source of raw material that is indispensable for producing the downstream product, 2) the refusal prevented the appearance of a new product for which there was potential demand, and 3) the undertaking excluded all competition on the secondary market Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, paras 52-56. 143 Case C-7/97, Oscar Bronner, 1998 E.C.R. I-7791. See especially ibid, para 40 for a summary of the Magill case, and the subsequent analysis at ibid, paras 41-47. The essential facilities doctrine, as established in Oscar Bronner, was viewed as expressing a moderate approach on the part of the CJEU to finding abusive conduct. Jones and Sufrin, EU Competition Law 2016, 494, 497. 144 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, paras 38, 52. 145 Whether the interoperability information was subject to protection as intellectual property was left undecided, and the court simply concluded that the essential facilities test, being the strictest, was most favourable to apply to Microsoft, considering the firm’s interests. Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 283-284. 139

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• in the first place, the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighbouring market; • in the second place, the refusal is of such a kind as to exclude any effective competition on that neighbouring market; • in the third place, the refusal prevents the appearance of a new product for which there is potential consumer demand.”146 “Once it is established that such circumstances are present, the refusal by the holder of a dominant position to grant a licence may infringe Article 82 EC unless the refusal is objectively justified.”147 The listed criteria, however, do not represent an exhaustive checklist for reviewing cases involving refusals to supply.148 Indeed, in Microsoft, the CFI developed the criterion of prejudice to technological development as an alternative to the new product requirement.149 In the following Sects. 8.5.1, 8.5.2, 8.5.3, 8.5.4 and 8.5.5, each of the criteria is reviewed in the light of existing case law and legal research with respect to their relevance in terms of resolving the overprotection problems associated with patent law that may hinder follow-on innovation. It is important to note that, although the case law on “exceptional circumstances” prior to Huawei nominally dealt with refusals to license, the concept does not have the same meaning in competition law as it has in patent law with regard to the prior effort requirement (Art. 31 (b) TRIPS). The essential facilities doctrine did not distinguish between situations (a) in which a follow-on innovator requests a license ex ante and, upon refusal, never infringes the IPR in question, (b) cases in which a license is refused and the IPR is infringed thereafter, and (c) and situations in which prior efforts to obtain the license were not made (Art. 31 (k) TRIPS), the IPR has been infringed, and a follow-on innovator is subject to enforcement proceedings.150 Hence, the doctrine, in principle, was applicable both to the market failures of unjustified refusals to license and exclusionary hold-ups.151 The essential facilities doctrine distinguishes between de novo refusals, which refer to when a right holder has not previously licensed her patent, and terminations of supply, which refer to when a right holder has previously licensed her patents but

146

Ibid, para 332,[italics added]. See also Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 81 on when a refusal to supply is deemed to be an enforcement priority. 147 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 333. 148 Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 550. 149 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 647. 150 See Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 10; Case C-418/01, IMS Health, 2004 E.C.R. I-5039, paras 9-11; Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 2-4. 151 Cf. Sects. 8.6.4.5 and 8.7.3.1 discussing the more narrow scope of application of the essential facilities doctrine following the Huawei decision.

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thereafter ceases to do so with respect to an entire field or on a discriminatory basis against specific undertakings operating downstream.152

8.5.2

Indispensability

For a refusal to be abusive, it must be related to a “product or service that is objectively necessary to be able to complete effectively on a downstream market”.153 The terms “essential facility and “objectively necessary” are synonymous with indispensability, but the latter has been most frequently adopted by the courts of the EU.154 The term “indispensability of input” means that there is no actual or potential substitute for a product on the upstream market.155 The process of finding dominance on an upstream market and determining the first criterion under the essential facilities doctrine are highly interlinked. Therefore, the requirement of indispensability has also been viewed as an additional, stricter, qualification for finding dominance in cases concerning refusals to license.156 The physical, legal, or economic unviability of duplicating a resource determines its indispensability.157 The fact that the alternative services “may be less advantageous” plays no role in the finding of substitutes.158 An input is not indispensable when there are no technical, legal, or economic obstacles to an undertaking that seeks to operate downstream to produce an alternative input, whether alone or in cooperation with other undertakings.159 It is not sufficient that the creation of a realistic potential alternative is economically unviable for the undertaking in question, for example due to its smaller market share. Instead, it must be economically unviable in general to create an alternative solution on a comparable scale, such as a

152

See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 84. 153 Ibid, para 81. 154 Whish and David, Competition Law, 742. 155 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 52; Case C-7/97, Oscar Bronner, 1998 E.C.R. I-7791, para 41. In other words, the inputs in question should be “essential (since they cannot be substituted or duplicated).” Ibid, para 59. 156 Steven Anderman, "Epithet That Dares Not Speak Its Name : The Essential Facilities Concept in Article 82 EC and IPRs after the Microsoft Case," in Article 82 EC: Reflections on Its Recent Evolution, ed. Ariel Ezrachi (Portland: Hart Publishing, 2009), 88, 92. 157 Whish and David, Competition Law, 743-744. In Oscar Bronner, the existence of only one nationwide home-delivery scheme for daily newspapers, operated by an undertaking that held a dominant position, was not considered sufficient for a finding of indispensability. Case C-7/97, Oscar Bronner, 1998 E.C.R. I-7791, para 42. 158 Case C-7/97, Oscar Bronner, 1998 E.C.R. I-7791, para 43. 159 Ibid, para 44.

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second home delivery scheme of the same scale as that used for daily newspapers by a dominant undertaking.160 The existence of an exclusive right does not automatically indicate indispensability. In IMS Health, the objectively necessary input was a copyright-protected brick structure that was used to present data concerning the regional sales of pharmaceutical products in Germany.161 In its review of the economic viability of creating an alternative solution, the national court was instructed to consider the participation of users in the development of the brick structure and their dependency, particularly on a technical level, on it. Therefore, the switching costs that users would incur in adapting to the use of data presented in an alternative brick structure were taken into account in evaluating whether it was economically viable for the downstream competitor to create an alternative solution.162 Natural monopolies’ strong network effects favour a court finding that the duplication of an input would be unviable in the foreseeable future. However, the dynamics of the market in question and the likelihood of a company’s strong market power persisting longterm within a particular industry are relevant when assessing indispensability.163 The criterion of objective necessity is not absolute: An input may be considered as being objectively necessary even if, in the absence of access to it, competition would gradually disappear or competitors would be confined to operating in certain market niches.164 Should a refusal to supply concern an input that an undertaking has previously supplied to downstream companies, the court’s likelihood of finding the input in question indispensable will increase. This would be the case when an undertaking that relies on a licensing agreement has made investments specific to the business relationship and the IP in question. In comparison, in situations in which an undertaking has never licensed its IPRs, the likelihood of them being found indispensable to downstream companies is reduced.165 Consequently, satisfying the criterion of indispensability is more difficult in cases that involve de novo refusals. The assessment of the criterion of indispensability is contingent on distinguishing an upstream market from a downstream market which uses upstream product or a service an input for the production of yet another product or the supply of another service.166 For determining objective necessity, “it is determinative that two Ibid, para 45-46. See also Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 28. “Economically unviable in general” has been interpreted as referring the unviability of replicate a resource “with the resources of the incumbent”. Anderman, "Epithet That Dares Not Speak Its Name," 90-91. 161 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 4. 162 Ibid, paras 29-30; AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, paras 83-84. 163 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 83 and fn 83. 164 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 428, 560-563; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 83. 165 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 84. 166 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 42. 160

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different stages of production may be identified and that they are interconnected, inasmuch as the upstream product is indispensable for the supply of the downstream product.”167 In IMS Health, the CJEU confirmed that the identification of a potential or even hypothetical market for an input is enough to satisfy this criterion:168 It suffices that there is an actual demand on the part of those undertakings that aim to operate on the downstream market for the indispensable input in question.169 In addition, there should be no technical obstacles to marketing the upstream product.170 Thus, a potential market for inputs can be identified as existing when an undertaking that holds a monopoly over an upstream market makes a decision “not to market independently the inputs in question (notwithstanding that there is an actual demand for them) but to assert exclusive rights over a downstream market by restricting or eliminating all competition on that market”.171 The adoption of the concept of a hypothetical market was subject to considerable controversy.172 As suggested previously, the ambiguity of the term “hypothetical market” could allow for any IP right to be considered to be tradable on an upstream market.173 Such an interpretation has been criticized as being excessively wide and raising the possibility of granting a compulsory license to any type of IP.174 In addition, the construction of the potential or hypothetical market in IMS Health has been criticized for blurring the boundaries between upstream and downstream markets and leading to situations in which a right holder is obliged to license to his competitors, which may have the effect of undermining incentives to innovate.175 This criticism, however, is exaggerated: Even if the criterion was to be interpreted in an expansive manner, it represents only the first requirement of the essential facilities test and does not alone lead to further compulsory licensing. Without identification of a hypothetical market, it would be impossible for competition law to address the abusive practices of vertically integrated companies that choose not to market their essential facilities.176 In addition, the contrary solution would likely have incentivised further vertical integration in order to avoid licensing.177 Furthermore, from the perspective of IP law, the conclusion that any IPR can lead to the formation of a hypothetical market is not unexpected

167

Ibid, para 45. Ibid, para 44. 169 Ibid, para 45; AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, para 59. 170 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 45; AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, para 58. 171 AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, para 57. 172 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 44. 173 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.325. 174 Ibid. 175 Ezrachi, EU Competition Law, 287, 388-389. 176 Drexl, "Antitrust Placebo," 798-799. 177 Beatriz Conde Gallego and Dimitrios Riziotis, "Comments on the IMS Health Judgement," IIC International Review of Intellectual Property and Competition Law 35 (2004): 572. 168

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or unfavourable with respect to a right holder, because among the most important functions of industrial property rights are making knowledge alienable and therefore tradable on the market and fostering its dissemination. However, the application of the criterion of the indispensability in the context of IPRs has been criticized as being uneconomical and equating the identification of the hypothetical market for an IP with dominance on that market.178 Indeed, the identification of a hypothetical upstream market should be treated only as a precondition for determining indispensability, which essentially depends on the unviability of developing an alternative solution. Such an interpretation would also be consistent with competition law’s objective of guaranteeing competition by substitution.179

8.5.3

Exclusion of Any Effective Competition

The second criterion for finding abuse of dominance in cases concerning refusals to license involves the evaluation of whether a refusal would eliminate effective competition on the downstream market in question. This effect may manifest immediately or more gradually.180 The EC’s Guidance on the enforcement priorities of the Art. 102 TFEU identifies several factors that are deemed to increase the probability of the elimination of effective competition when competitors are foreclosed from a downstream market to the benefit of a dominant undertaking.181 In Magill, a refusal to provide access to information used as an input for compiling a programme listing was deemed to forestall effective competition, on the ground that the undertaking in question held a de facto monopoly over the input and, through its conduct, reserved the downstream market for itself.182 Given that the objective of Art. 102 TFEU is to maintain undistorted competition and safeguard the competition that may still exist on the common market, this criterion does not require that all competition be eliminated at the time of application of the provision. A contrary interpretation could lead to situations in which the harm

178

Josef Drexl et al., "Comments of the MPI on the Application of Art 82 EC," 564-566. Beatriz Conde Gallego, "Unilateral Refusal to License Indispensable Intellectual Property Rights - US and EU Approaches," in Research Handbook on Intellectual Property and Competition Law, ed. Josef Drexl (Cheltenham: Edward Elgar Publiching, 2010), 216. 180 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 85. 181 “The likelihood of effective competition being eliminated is generally greater the higher the market share of the dominant undertaking in the downstream market. The less capacity-constrained the dominant undertaking is relative to competitors in the downstream market, the closer the substitutability between the dominant undertaking's output and that of its competitors in the down- stream market, the greater the proportion of competitors in the downstream market that are affected, and the more likely it is that the demand that could be served by the foreclosed competitors would be diverted away from them to the advantage of the dominant undertaking.” Ibid. 182 Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, paras 47, 56. 179

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to competitors would be irreversible if a refusal concerns a market that is prone to tipping.183 Contrary to Microsoft’s arguments in favour of a stricter test for liability, the CFI decided that it is sufficient that “the refusal at issue is liable to, or is likely to, eliminate all effective competition on the market.”184 However, this seemingly lowered threshold for the exclusion or elimination of efficient competition can also be viewed against the backdrop of a higher threshold for finding dominance under the essential facilities doctrine. Once it has been established that a resource is indispensible, there is already strong proof that a refusal to license would be likely to eliminate competition.185 This approach, in principle, empowers the EC to intervene in abusive terminations of licenses before all of the damage arising from the conduct in question has materialized. However, de novo refusals, of themselves, eliminate competition, assuming that downstream companies do not stay on the market by means of infringing the refused IPRs. Art. 31 (k) TRIPS also allows for the issuing of compulsory licenses in situations in which a follow-on innovator has not made prior efforts to obtain a license. The fact that the likelihood of eliminating downstream competition also suffices as the third criterion of the essential facilities test suggests that the EC can also intervene in attempts to enforce IPRs, provided that the conduct of the IP holder in question has fulfilled the other requirements of the essential facilities test, irrespective whether the user of the IPR has sought to gain a license prior to such use.186

8.5.4

New Product Requirement

8.5.4.1

IMS Health

The third criterion of the exceptional circumstances test is that the refusal will have the effect of (a) preventing the introduction of new or improved products to the market for which there is either potential consumer demand (the narrow definition) or (b) limiting technological development (the wide definition).187 The new product requirement is specific to cases involving refusals to license; it recognises that a refusal may stifle follow-on innovation, with the consequence of harming consumers.188 The wide criterion reflects the wording of Art. 102 (b) TFEU, which qualifies “limiting production, markets or technical development to the prejudice of 183

Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 560-563. Ibid, paras 563. 185 Anderman, "Epithet That Dares Not Speak Its Name," 97. 186 de Carvalho, TRIPS Regime of Patent Rights, 504. 187 See Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 49; Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 332, 658, 665; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 87. 188 See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 86-87. 184

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consumer” as abuse.189 Despite the fact that both definitions take follow-on innovation into account, both alternatives are subject to controversy and do not seem wholly in accordance with the theory of complementarity. The case law on the exceptional circumstances initially deemed as abusive only situations in which a refusal prevented the appearance of a new product for which there was potential consumer demand.190 In IMS Health, the CJEU specified that an undertaking can be subject to abusive conduct only when it “intends to produce new goods or services not offered by the owner of the [IP] right” and not “limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the intellectual property right.”191 Nevertheless, IMS Health did not specify how different a new product should be from those that already exist on the relevant downstream market.192 The qualifications for assessing abusiveness are anchored in consumer interest. In Magill and IMS Health, abuse was considered to include “limiting production or markets”, to the detriment of consumers under the meaning of Art. 102 (b) TFEU.193 In Magill, due to the copyright holders’ refusal, consumers were denied access to a television guide that, at the time, did not exist on the market.194 In Magill, the refusal to license indeed precluded the introduction of a new product. However, the application of this criterion to IMS Health, in which the copyright protection was part of a de facto standard and the undertaking that sought access to it did not intend to introduce a new product but rather to compete with the incumbent on the downstream market, was heavily criticized.195 In IMS Health, the CJEU recognized that “in the balancing of the interest in protection of the intellectual property right and the economic freedom of its owner against the interest in protection of free competition, the latter can prevail only where

189

Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 643-644. Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 54; Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 37. 191 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 49. The decision shed new light on Volvo v. Veng; according to the Advocate General’s opinion, the court was consistent in failing to find the refusal to license spare parts, which were essentially duplications, abusive. AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, para 65. 192 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.327. The capacity of the competition authority to differentiate new products from imitations has also been questioned. Alexandros Stratakis, "Comparative Analysis of the US and EU Approach and Enforcement of the Essential Facilities Doctrine " European Competition Law Review 27, no. 8 (2006): 440. 193 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 645. 194 Ibid. 195 See generally Conde Gallego and Riziotis, "Comments."; Heinemann, "Antitrust Law of Intellectual Property."; Conde Gallego, "Unilateral Refusal."; Drexl et al., ""Comments of the MPI on the Application of Art 82 EC,"; Josef Drexl, "Intellectual Property and Antitrust Law - IMS Health and Trinko - Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases,". Cf. Damien Geradin, "Limiting the Scope of Article 82 EC : What Can the EU Learn from the U.S. Supreme Court's Judgement in Trinko in the Wake of Microsoft, IMS and Deutsche Telecom?," Common Market Law Review 41 (2005). 190

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refusal to grant a licence prevents the development of the secondary market to the detriment of consumers.”196 This rationale behind the new product requirement was deemed to represent a normative balancing test that both lacked an economic justification and was not aligned with the theory of complementarity.197 In situations in which access to downstream markets was foreclosed due to the presence of a de facto monopoly, the new product requirement, together with the condition of direct consumer harm, was deemed to be unnecessarily strict; the rationale behind this view was that this requirement prevented interference in monopoly leveraging when cases involved IPRs,198 even when competition by substitution was rendered impossible due to conditions on the market and not the existence of an IPR itself.199 Instead, scholars called for the development of a more effects-based approach200 that distinguished between allocative and dynamic efficiencies as justifications for deeming certain conduct abusive.201

8.5.4.2

Microsoft

The redefinition of new product requirement in Microsoft, which also dealt with a de facto standard, addressed a number of the shortcomings of IMS Health. The CFI ruled that “[a]s [Art. 102 (b) TFEU] states, such prejudice [to consumers] may arise where there is a limitation of not only production or markets, but also of technical development.”202 Under this specification, it was unnecessary to identify the new product that a refusal to license would prevent from appearing on the market.203 Instead, in Microsoft, the harm to consumers was deemed to be indirect, as it resulted from the impairment of an effective competitive structure.204 196 Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 48. See also AG Tizzano, Case C-418/01, IMS Health, 2003 E.C.R. I-05039, para 62. This approach echoes the balancing of basic rights later employed in Huawei, but, at this point, a reference to the right to access courts was absent. Cf. Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 57. 197 Drexl, "Antitrust Placebo," 800-801. 198 Heinemann, "Antitrust Law of Intellectual Property," 71-73. See also Conde Gallego, "Unilateral Refusal," 229-230. 199 Conde Gallego, "Unilateral Refusal," 229, 234-237. 200 Ibid, 238. 201 Drexl, "Antitrust Placebo," 804-805; Josef Drexl et al., "Comments of the MPI on the Application of Art 82 EC," 565, 569. 202 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 647. 203 Whish and David, Competition Law, 884-885. 204 Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 125; Case T-228/97, Irish Sugar plc v. Commission, 1999 E.C.R. II-2969, para 232 (1999); Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 664. The consumers were unaware that the problem with regard to interoperability of non-Microsoft workgroup servers resulted from Microsoft’s refusal to license interoperability information to its competitors. The problems and costs that resulted from the lack of interoperability made consumers prefer Microsoft’s products, even when they found certain functionalities in competitors’ products important. Consequently, this preference resulted in the rise of

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The expansion of the new product requirement enabled interventions in behaviour that stifled follow-on innovation.205 Microsoft’s “artificial advantage”, which arose from a refusal to license, hindered technical development, as it “discouraged its competitors from developing and marketing workgroup server operating systems with innovative features, to the prejudice, notably, of consumers”.206 This was detrimental to competitors’ ability to compete on merits with respect to several critical parameters of working group servers.207 The EC and CFI emphasized that the work group server operator’s access to interoperability information would not have led to mere duplicative activity, hence, indirectly, gave account for Microsoft’s innovation incentives.208 Furthermore, the CFI also stressed the proportionality of the requirement to disclose: The information regarding interoperability was not, alone, sufficient to reproduce Microsoft’s products, as the disclosure concerned “only a minimum part of the entire set of protocols implemented in Windows workgroup server operating systems”, and did not “extend to implementation details or to other features of Microsoft’s source code”.209

Microsoft as a standard for workgroup servers. Ibid, paras 661-662; Case COMP/C-3/37.792, Microsoft, (24 March 2004), paras 699, 705-706. As a result of the refusal to license interoperability information, consumers were locked-in to Microsoft’s products and were precluded from benefiting from the innovative features of competing products. Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 650-652; Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 694. 205 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 87. CFI also explained that the rationale behind the Commission’s reference to Art. 102 (b) TFEU was to ascertain whether Microsoft had refused to “allow follow-on innovation”, i.e. the development of new products, instead of only permitting the imitation of existing ones. Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 632. 206 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 653; Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 694. 207 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 653; Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 699. Access to interoperability information would have allowed competitors to develop more innovative interoperable products, which was proven by the product development by the producers of workgroup servers that occurred during a period in which Microsoft granted access to interoperability information and the competitors’ success among consumers during that period. Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 654; Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 695-696. 208 The European Commission has stated that there is “ample scope for differentiation and innovation beyond the design of interface specifications.” Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 698. See also Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 655. Hence, access to interface information would have allowed competitors to bring onto the market products with features that are important to customers and which would have distinguished them from those offered by Microsoft. Ibid, para 656. Differentiation would also be necessary in order to be able to compete on the same market as Microsoft. Ibid, para 658. 209 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 657. In addition to having access to interoperability information, competitors would still be required to make “significant investment [s] of money and time” ibid, para 658. The Commission also noted that the resulting lag in time and disadvantages in terms of the quality of competitors’ implementation of interoperability specifications worked to the benefit of Microsoft. Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 72.1.

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The CFI concluded these findings with the controversial statement that Microsoft had “impaired the effective competitive structure on the work group server operating systems market by acquiring a significant market share on that market.”210 The statement was criticized for equating the abuse of a dominant position with merely holding such a position.211 Such a line of argumentation, as well as the general approach adopted by the CFI in Microsoft, has been criticized in the light of the effects-based approach adapted by the EC with regard to its enforcement priorities in applying Art. 102 TFEU.212 Critics of the CFI’s approach considered it to be too easy to claim that a refusal to license harms technical development.213 Furthermore, the “internal” expansion of the new product requirement that occurred as a result of relying on Art. 102 (b) TFEU in Microsoft was argued to lower the threshold of antitrust intervention in cases involving refusals to license by only requiring “economic indispensability” as the basis for determining harm to innovation. Microsoft adapted and widened the criteria for finding exceptional circumstances as determined in Magill, IMS Health and Oscar Bronner with regard to the specific facts of a case, with the consequence of diminishing legal certainty for right holders concerning situations in which exceptional circumstances may prevail.214 However, the concerns regarding legal uncertainty and the expansion of the exceptional circumstances criterion are likely to be excessive. Given the adoption of the effects-based approach, the fulfilment of the limiting of technological development criterion requires substantiating evidence. Microsoft dealt with a termination of supply in a sector that was proven to feature a number of innovative competitors who were already on the market.215 The limitation in terms of technological development and the potential demand were demonstrated with evidence that covered a long period of time.216 It would be difficult to present such evidence with regard to de novo refusals; consequently, in such situations, the new product requirement established in Magill and IMS Health would still apply.217 However, if a downstream product is extremely innovative, with the effect of creating a new market, it

210

Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 664. Jones and Sufrin, EU Competition Law 2016, 518. 212 Ezrachi, EU Competition Law, 291; "Commission's Guidance on Article 82 EC," in Article 82 EC: Reflections on Its Recent Evolution, ed. Ariel Ezrachi (Portland: Hart Publishing, 2009), 58. See also Whish and David, Competition Law, 845. Cf. Orit Dayagi-Epstein, "Evolution of the Notion of Consumer Interest," in Article 82 EC: Reflections on Its Recent Evolution, ed. Ariel Ezrachi (Portland: Hart Publishing, 2009), 85, in which the author argues that the test for exceptional circumstances developed in Magill and IMS Health foregoes evaluation of harm to consumer welfare, as it focuses instead on the competitive disadvantage that a refusal has on competitiors. 213 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.339. 214 Ezrachi, EU Competition Law, 389. 215 Anderman, "Epithet That Dares Not Speak Its Name," 95, which draws parallels between Microsoft and the refusal to supply in Commercial Solvents. 216 See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 638-639 and 654. 217 Anderman, "Epithet That Dares Not Speak Its Name," 95. 211

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may be difficult, particularly prior to its commercialization, to provide evidence of the potential demand for it. Despite its shortcomings, when compared to the compulsory licenses based on patent law, most importantly the compulsory license for dependent patents (Art. 31 (l) TRIPS), the new product requirement more astutely addresses the conflict of interests that may occur between a patent holder and a follow-on innovator in the contemporary patent landscape. The new product requirement, in both its forms, emphasizes dynamic competition, while indirectly also taking into account a patent holder’s incentives to innovate. The criterion is also flexible in terms of taking into account subsequent heterogeneous developments of a patent holder’s technology and different forms of follow-on innovation.218 While the criterion as defined in Magill is more appropriate when addressing refusals that concern an individual market participant, the requirement of limiting technological development allows interference with refusals that hinder innovation on a wider scale.

8.5.5

Objective Justification

While the new product requirement introduces a threshold for evaluating the interests of competitors who are subject to a refusal to license, it is not meant to function as a balancing test for the incentives of the initial and subsequent innovators. Instead, the incentives of the right holder are addressed upon evaluation of the existence of an objective justification for a refusal to license.219 A dominant undertaking may raise a claim that her abusive conduct is objectively justified.220 The conduct must be indispensable and proportionate to the objectives to that the dominant undertaking allegedly pursued.221 It is a claimant’s responsibility to provide all of the evidence necessary for the EC to find an objective justification.222 The conduct must be objectively necessary or produce “substantial efficiencies that outweigh any anticompetitive effects on consumers” without

218

However, it can still be questioned whether, from the perspective of the objectives of competition law, this criterion is necessary in cases in which a de facto upstream monopoly prevents competition by substitution on a downstream product market. A compulsory license in such a context would foster allocative efficiency. Drexl, "Antitrust Placebo," 804-806. 219 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 659. 220 Defence of abusive conduct through objective justification has been developed through case-law; the doctrine commenced with the decisions in Case 27/76, United Brands, 1978 E.C.R. 207, para 184; Case 311/84, Centre belge d'études de marché - TéléMarketing (CBEM) v. SA Compagnie luxembourgeoise de télédiffusion (CLT) and Information publicité Benelux (IPB), 1985 E.C.R 3261, para 27 (1985). 221 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 28. 222 Ibid, paras 26 and 31. See also Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 688; Case C-209/10, Post Danmark A/S v. Konkurrencerådet, 4 C.M.L.R. 23 (2012), para 41.

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eliminating effective competition.223 An undertaking may claim that a refusal to license is necessary to recoup its investments in innovation and to maintain its incentives to invest in innovation in the future. An undertaking may also argue that its innovation activity will be harmed by an obligation to license or as a result of the consequent structural changes of the relevant market, including the subsequent innovation of its competitors.224 In Microsoft, the CFI evaluated the existence of an objective justification for a refusal to license on Microsoft’s part.225 Microsoft’s first argument, that the object of refusal was protected as an IP, was rejected as being insufficient for finding an objective justification, as it contradicts the raison d’être of the case law on refusals to license.226 The criteria for “exceptional circumstances” are meant to qualify abusive refusals to license when “it is permissible, in the public interest in maintaining effective competition on the market, to encroach upon the exclusive right of the holder of the intellectual property right by requiring him to grant licences to third parties seeking to enter or remain on that market.”227 The burden of proof on “any negative impact which an obligation to supply is likely to have on its own level of innovation” falls on the undertaking alleged to be abusing its dominant position.228 It is not sufficient to present “vague, general and theoretical arguments” 229 that are not rooted in the facts present when the license was refused, such as speculation concerning the future.230 Some commentators have deemed the burden of proof on the dominant undertaking in such a context as being

223 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 28, 30. The burden of proof of an undertaking with respect to efficiency gains on the relevant markets is very high; see Case C-209/10, Post Danmark, 4 C.M.L.R. 23 (2012), para 42. Efficiencies may arise from, for example, technical improvements in the quality of a good or in cost reductions in a company’s production or distribution, Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty para 30. With respect to the evaluation of the claim, a review of the existence of an objective justification is not a holistic test that balances the level of innovation in an industry against the innovation incentives of a company; rather, it is a matter to be reviewed on the basis of individual claims. See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 669 and 710. 224 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 89. 225 In Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 55, the CJEU addressed the topic very briefly, stating that abusive conduct was not justifiable on the basis of an undertaking’s activity in television broadcasting or in the field of publishing television magazines. 226 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 689-690. The CFI also dismissed arguments that a refusal concerned secret and therefore valuable technology that contained innovations; see para 692-695. 227 Ibid, para 691. 228 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 90; Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 688. 229 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 698. 230 Anderman, "Competition Law Perspective II," 139.

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unjustifiably high.231 With respect to Microsoft’s claim that licensing interoperability information to its competitors lowered its incentives to invest in future innovations, the CFI found the evidence presented insufficient, especially considering that the licensed information would not enable product duplication.232 The fact that Microsoft had previously supplied the input and later refused to provide licenses works against the argument that obligation to supply liceses could diminish innovation incentives.233 Hence, such a claim is more likely to succeed in case of de novo refusals, which can make it very difficult to interfere with offensive patenting strategies on the grounds of exclusionary abuse. However, a claim of objective justification may provide a safeguard, similar to the new product criterion, in situations in which a downstream company produces imitative products. In contrast, when competitors do not intend to duplicate an undertaking’s products, the right holder’s innovation incentives are unlikely to be harmed, particularly when the anticompetitive remedy does not facilitate such copying.234 An objective justification may also be present in a situation in which a patent holder intends to enter the same market as a competitor that is already in advanced stage of R&D efforts and is closer to market entry. While such a scenario appears similar to that featured in Magill, in such a case, the difference between copyright and patent protection may play a role when it comes to finding a refusal to be justified, as, in many cases, the production of patentable technology requires larger investments and involves higher risk. Assuming that, in such a situation, a patent holder can prove that the granting of a compulsory license would lead to a reduction of its incentives to continue investing in R&D, a claim based on an objective justification would be likely to succeed. However, such a justification would likely not suffice when a dominant undertaking merely employs an offensive patenting strategy.

8.5.6

Standard-Spundfass

Soon after the CJEU made its decision on IMS Health, the BGH gave a landmark ruling on a refusal to license in the context of an industry standard for industrial drums.235 Unlike IMS Health, Standard-Spundfass dealt with the discriminative licensing of a de facto SEP (§ 20 (1) GWB), as the patent holder had previously

231

Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, at 4339. Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 697-701. The conclusion was reinforced by an observation that the sharing of interface information was previously a common practice which added value to the licensors’ products. Ibid, para 702. 233 See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, paras 84, 90. 234 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 700; Case COMP/C-3/37.792, Microsoft, (24 March 2004), paras 719-723. 235 Standard-Spundfass, IIC 2005, 741. 232

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given licenses to other undertakings.236 The case paralleled CJEU case law by affirming the contemporary economic doctrines of patent and competition law as complementary legal instruments, thus establishing that compulsory licenses in patent law could no be longer be “regarded as leges specialis in relation to competition law”, as was the case in the earlier doctrine.237 In this particular case, the defendant was an Italian company that produced industrial drums; its parent company had failed to obtain a license to a patent used in the drums from the plaintiff. The defendant had accepted an injunction as a final settlement of the infringement action in the Düsseldorf District Court. However, in the proceedings concerning the rendering of accounts and damages for the unlawful use of the patent, the defendant raised a counter-claim of a royalty-free license.238 The court confirmed that a claim for a compulsory license on the grounds of unfair restraint or the abuse of market-dominant position (§§ 20 (1) and 19 GWB) was not precluded by § 24 PatG. The BGH specified that “[t]he licensing claim in competition law, by contrast, serves to enforce the prohibition on abuse of a market dominating position that applies to every market participant. The mere ownership of a patent does not bring about such a position, but can be only one precondition of it. Conversely, the abuse of a market dominating position is neither a necessary precondition nor sufficient in and of itself for granting a compulsory license under patent law.”239 While the BGH employed economic reasoning in its ruling in StandardSpundfass, its test for market definition differed from that used in IMS Health.240 The court distinguished the upstream market for IP, which protected the standardised design that allowed suppliers to produce drums according to that standard from the downstream market for standardised drums. This market allocation was a result of the standard’s unsubstitutability in this particular industry, not the plaintiff’s right to exclude others from using its patent.241 Being the only supplier of the patent, which “formed a market on its own”, the plaintiff was considered to dominate the market pursuant to § 20 (1) GWB.242 According to the BGH, the objective of an exclusive right is to enable a “proprietor’s competitors to compete by substitution”, while preventing imitation.243 As a result of exclusivity, the rights conferred by a patent entail the possibility of

236

Ibid, 743-744, 745; Matthias Leistner, "Intellectual Property and Competition Law : European Development from Magill to IMS Health Compared to Recent German and US Case Law," Zeitschrift für Wettbewerbsrecht 3, no. 2 (2005): 158. 237 Leistner, "Comment : Standard-Spundfass,", 741, 749-750. On antecedent German doctrine, see, for example Friedrich-Karl Beier, "Exclusive Rights," 272-274. 238 Standard-Spundfass, IIC 2005, 741, 741-743. 239 Ibid, 744. 240 Leistner, "Comment : Standard-Spundfass," 751-752. 241 Standard-Spundfass, IIC 2005, 741, 744-745. 242 Ibid, 744. 243 Ibid, 746.

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obtaining an economic monopoly though competition by virtue of the “technical achievement” embodied in the patented invention. In view of this objective, a patent holder may license a patent to the third parties of his choice.244 The scope of objective justification for unequal treatment is narrower when “additional circumstances”, other than the technological achievements featured in an invention, contribute to a patent owner rising to a dominant market position. Such circumstances may arise, for example, when the achievement of a dominant position is at least partially attributable to the need for downstream products to adhere to a “standard or standard-like set of conditions provided by those requiring the product”.245 In Standard-Spundfass, the plaintiff provided a royalty-free license to three national incumbent companies, which aggravated the market entry of other undertakings. When market entry is not possible without complying to a standard, in the absence of an objective justification, unequal treatment of licensees or a refusal to license may amount to a violation of competition law through the abuse of a dominant market position.246 Similarly to IMS Health, Standard-Spundfass also featured the requirement of indispensability and the identification of two markets.247 However, it did not employ the new product requirement;248 in addition, the reasoning behind the identification of additional circumstances was deemed more economically sound than the CJEU’s in IMS Health, as it was consistent with the effects-based approach249 and applicable beyond cases involving discrimination.250 It has been proposed that a combination of a two-step test that considers “genuine indispensability for competition by substitution in a downstream market and (strictly interpreted) non-justifiability of the refusal to deal by objective economic reasons”251 should also be applied in EU law.252

244

Ibid, 745-746. Ibid, 746. 246 Ibid, 746-748. 247 Leistner, "Comment : Standard-Spundfass," 751. 248 Leistner, "Intellectual Property and Competition Law," 159. 249 Leistner, "Comment : Standard-Spundfass," 751-721 250 Conde Gallego, "Die Anwendung des Kartellrechtlichen Missbrauchsverbots," 27. 251 Leistner, "Comment : Standard-Spundfass," 751-752. 252 Leistner, "Intellectual Property and Competition Law," 160. 245

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8.5.7

Antitrust Interventions in Refusals to License in the US

8.5.7.1

The Essential Facilities Doctrine

In the US, as a general rule, a patent holder is not obliged to allow others to use his patent.253 However, a plaintiff to whom a license has been refused may claim that such a refusal constitutes a violation of section 2 of the Sherman Act. Pursuant to Grinnell, “[t]he offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”254 Under the U.S. antitust law, a refusal to license may be addressed on the basis of two different doctrines: The first is the essential facilities doctrine, which has also been adopted by the EC and the CJEU on the basis of Magill and the subsequent case law. The second option is to claim that a refusal to deal equals an act of monopolization pursuant to section 2 of the Sherman Act, which should be remedied by establishing a duty-to-deal with a competitor. The essential facilities doctrine evolved from the case law of the U.S. Supreme Court (however, the relevant landmark cases refrained from specifically mentioning this concept).255 Upon the success of a claim for an essential facility, a defendant is obliged to provide access to the facility in question on reasonable and non-discriminatory terms.256 In the earliest case, Terminal Railroad Association, the U.S. Supreme Court found that a concerted unification of the railroad terminal facilities in the city of St. Louis harmed interstate commerce by imposing an illegal restraint on it and represented an attempt to monopolize it; the Court ordered the joint venture to provide access to the facility to other railroad companies.257 In Otter Tail, the U.S. Supreme Court affirmed the District Court’s finding that the appellant, Otter Tail Power Co., breached section 2 of the Sherman when it refused to supply wholesale power to municipal systems or to transfer power from its facilities from other sources. The refusal was found to be motivated by the appellant’s intention of preventing downstream competition by local municipalities and hence maintaining its monopolistic position.258

253

Hartford-Empire, 323 U.S. 386, 432. United States v. Grinnell Corp., 384 U.S. 563, 570-571 (1966). 255 Phillip Areeda, "Essential Facilities : An Epithet in Need of Limiting Principles," Antitrust Law Journal 58, no. 3 (1989): 847. See United States v. Terminal Railroad Association of St. Louis, 224 U.S. 383 (1912); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); Aspen Skiing v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). 256 Hovenkamp et al., IP and Antitrust, 1, at § 13 03[c][11]. See Terminal Railroad Association, 224 U.S. 383, 410-411. 257 Terminal Railroad Association, 224 U.S. 383, 410-411. 258 Otter Tail, 410 U.S. 366, 377. 254

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In the US, the essential facilities doctrine had evolved through the case law of the lower courts:259 “The case law sets forth four elements necessary to establish liability under the essential facilities doctrine: (1) control of the essential facility by a monopolist; (2) a competitor’s inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility.”260 Furthermore, monopoly leveraging by means of precluding access to an essential facility with the consequence of excluding downstream competition is regarded as an additional, implicit element of the test.261 The essential facilities doctrine differs from other claims of monopolization under section 2 of the Sherman Act because it considers a monopolist’s liability primarily with reference to her position on the market, rather than to her conduct.262 The essential facilities doctrine in the US concerns de novo refusals to license. In the context of IPRs, a successful claim for an essential facility would be remedied by means of a compulsory liability rule that mandates the granting of access to anyone willing to participate on the downstream market.263 To date, a number of decisions have deemed IPRs as constituting an essential facility, typically in relation to the technologies that they cover. However, no essential facility claims regarding IPRs have succeeded, and no compulsory access to an IPR as an essential facility has been mandated in the US.264 However, after Trinko, the applicability of the doctrine to de novo refusals to licence IPRs has been virtually precluded.265

8.5.7.2

Unilateral Refusals to Deal

In addition the essential facilities doctrine, under the U.S competition law, a followon innovator may seek an intervention in a refusal to license by claiming that a patent holder has monopolized or sought to monopolize a downstream market pursuant to section 2 of the Sherman Act. The remedy to such refusals to deal, the requirement 259

Cotter, "Intellectual Property," 232. MCI Communications Corp. v. AT&T Co., 708 F.2d 1081, 1132-1133 (7th Cir. 1983). 261 Hovenkamp et al., IP and Antitrust, 1, § 13.03[c][1]. See Terminal Railroad Association, 224 U.S. 383, 410-411. 262 Hovenkamp et al., IP and Antitrust, 1, § 13.03[c][1]. 263 See David L. Aldridge v. Microsoft, 995 F. Supp. 728, 753: “A facility is essential under the antitrust laws only when it is vital to both the plaintiff's individual competitive viability and the viability of the market in general.” 264 For cases addressing the intellectual property as a potential essential facility, see Bellsouth Adv. & Pub. v. Donnelley Inf. Pub., 719 F.Supp. 1551, 1556 (S.D. Fla. 1988); Intergraph Corp. v. Intel Corp. 195 F.3d 1346, 1356-1358 (Fed. Cir. 1999); David L. Aldridge v. Microsoft, 995 F. Supp. 728, 751-756. 265 Trinko, 540 U.S. 398, See Sect. 8.5.7.3. While the case did not address IPRs, it is generally deemed to apply to refusal to license cases by virtue of its wording; see Drexl, "Antitrust Placebo." 788-789, 796-797; Daniel Kanter, "IP and Compulsory Licensing on Both Sides of Atlantic - an Appropriate Antitrust Remedy or a Cutback on Innovation?," European Competition Law Review 27, no. 7 (2006): 359-361. 260

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to provide access on reasonable terms, targets anticompetitive conduct. The requirement of access is arguably narrower than the remedy provided under the U.S. essential facilities doctrine.266 As a fundamental rule, there is no general duty to deal with competitors pursuant to section 2 of the Sherman Act: “In the absence of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business freely to exercise his own independent discretion as to parties with whom he will deal”.267 However, as was found in the landmark case Aspen Skiing, which concerned a termination of supply,268 the right to choose trading partners is not “unqualified.”269 The U.S. Supreme Court ruled that a monopolist’s duty to deal with a competitor can be established when the monopolist’s conduct is “‘exclusionary,’ ‘anticompetitive,’ or ‘predatory.’”270 The absence of valid business reasons for a refusal, a refusal’s impact on consumers, and possible harm to competition were factors that were found to be relevant for the purposes of such an assessment.271 In this particular case, the owner of a ski resort was found to have engaged in exclusionary conduct when it ceased to collaborate with a smaller competitor in the sales of all-Aspen ski passes; these passes entitled customers to ski in all of the ski resorts in the area, for which there was a longestablished demand. The refusal was not justifiable with regard to any business purpose, and the petitioner had also refused to engage in cooperation that would have proven profitable over the short term; it had calculated that damaging its competitor would prove more profitable in the long term.272 Scholars have been opposed to the establishment of a duty to license on the basis of exclusionary conduct.273 Yet, the case law of the U.S. courts on the establishment of a duty to deal in the context of unilateral refusals to license features three different approaches. Data General was decided by the First Circuit in 1994. The case dealt with a claim of an illegal monopoly on the aftermarket for services for Data General’s computers, on the basis of Data General refusing Grumman access to diagnostic software for its computers. The claims were raised in defence of Data General’s allegations of copyright infringement on the basis of Grumman’s unauthorized use of its diagnostic software.274 The court held that Data General had not engaged in

Hovenkamp et al., IP and Antitrust, 1, § 13.03[D]. United States v. Colgate & Co., 250 U.S. 300, 307 (1919), 307. 268 Some commentators classify the case as an implicit precedent for essential facilities; see Cotter, "Intellectual Property," 232. 269 Aspen Skiing, 472 U.S. 585, 601. 270 Ibid, 586. 271 Ibid, 604-605. 272 Ibid, 586, 605, 607-608. 273 Areeda, "Essential Facilities," 849. 274 Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147, 1153-1156 (1st Cir. 1994). 266 267

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anticompetitive conduct; it reached this finding on the basis of a presumption that, “while exclusionary conduct can include a monopolist's unilateral refusal to license a copyright,” a monopolist’s “desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers”.275 The court recognized that the presumption of the lawfulness of a refusal to license may be rebuttable in “rare cases in which imposing antitrust liability is unlikely to frustrate the objectives of the Copyright Act”.276 In the context of patents, this presumption may be rebutted if the patents were not acquired lawfully.277 In Image Technical Services, Kodak was subject to antitrust claims raised by its competitors on the market for spare parts for photocopying equipment after it had limited its supply of spare parts to them. In this particular case, the Ninth Circuit stated that “[t]wo principles have emerged regarding the interplay between these laws: (1) neither patent nor copyright holders are immune from antitrust liability, and (2) patent and copyright holders may refuse to sell or license protected work.”278 It recognized the test for rebuttable presumption established by Data General but expanded it to include pretext, because “[n]either the aims of intellectual property law, nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anticompetitive conduct.”279 The passage can be interpreted as defending the role of intent when reviewing a business’ justification for a refusal to license IP.280 In this particular case, Kodak raised a counterclaim of infringement of its IPRs only after years of litigation.281 In contrast to First and Ninth Circuits, the Federal Circuit has adopted a more conservative approach to refusals to license IPRs by ruling them to be per se legal in Independent Service Organizations Antitrust Litigation (later Xerox).282 The facts of the case were similar to those of Image Technical Services, with the exception that Xerox directly responded to the antitrust lawsuit with a patent and copyright infringement counterclaims. With respect to patents, the Federal Circuit admitted

275

Data General, 36 F.3d 1147, 1187. In its reasoning, the First Circuit relied, inter alia, on an earlier antitrust case involving a refusal to license patents, SCM Corporation, which held that exercise of lawfully acquired patents could not trigger antitrust liability. See Data General, 36 F.3d 1147, 1186; SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1206 (2nd Cir. 1981). 276 Data General, 36 F.3d 1147, 1188. 277 Ibid, 1187, fn 64. The First Circuit also deemed Aspen Skiing inapplicable to the case on the grounds that the aftermarket had never been a competitive market. See ibid, 1188. 278 Image Technical Services Inc v. Eastman Kodak Co., 125 F.3d 1195, 1215 (9th Cir. 1997). 279 Ibid, 1219, [citation omitted]. 280 Hovenkamp et al., IP and Antitrust, 1, at § 13.03[D][3]. See also In re Independent Service Organizations Antitrust Litigation Csu, L.l.c. v. Xerox [Xerox], 203 F.3d 1322, 1327 (Fed. Cir. 2000). 281 Hovenkamp et al., IP and Antitrust, 1, at § 13.03[D][3]. 282 Xerox, 203 F.3d 1322.

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that the patentee’s right to exclude is not limitless.283 However, it refused to follow Image Technical Services, which took into account the subjective motivation of the patent holder.284 Instead, it ruled that refusals to license patents amounted to antitrust violations only in situations in which there is an indication of “illegal tying, fraud in the Patent and Trademark Office, or sham litigation”.285 The intent of a right holder is relevant only when the potential anticompetitive effects of a refusal exceeds the scope of the patent in question.286 In the absence of such exceptional circumstances, “a patent may confer the right to exclude competition altogether in more than one antitrust market”.287 The opinions of the Federal, First, and Ninth Circuits established heterogeneous criteria for antitrust interventions in refusals to license, of which the Federal Circuit’s approach represents that which is most favourable to patent holders.288 In the absence of a precedent from the Supreme Court, some commentators have supported the approach adopted in Xerox on the basis of the legal certainty offered by a per se rule and have suggested a narrow reading of the concept of “pretext” found in Image Technical in order to reconcile the case law.289 In contrast, other authors have criticized the narrow leeway provided by Xerox in terms of interfering with refusals to license, irrespective of a patent holder’s licensing conditions. The Federal Circuit’s approach was viewed to disregard the competitive context and the effects of such conduct on dynamic efficiency and, ultimately, the balance between the objectives of IP and competition law;290 instead, scholars favour the more balanced approach adopted in Image Technical.291 What unites these three cases concerning refusals to license IPRs is their reliance on the formalistic inherency doctrine, under which the scope of a right determines the existence of anticompetitive conduct. The approach taken in case law, which is characterized by concerns with regard to interfering with the incentives of a right holder by imposing a compulsory licence, stands in contrast with the doctrine of complementarity.292

283

Atari Games v. Nintendo, 897 F.2d 1572, 1576; In re Independent Service Organizations Antitrust Litigation Csu, L.l.c. v. Xerox, 1327. 284 Xerox, 203 F.3d 1322, 1327. 285 Ibid, 1327. 286 Ibid, 1327-1328. 287 Ibid, 1327; B. Braun Medical, Inc. v. Abbott Laboratories and NP Medical, Inc., 124 F.3d 1419, 1427 (Fed. Cir. 1997). 288 See Hovenkamp et al., IP and Antitrust, 1, at 1303[D][1304], fn 1144. 289 See ibid, at 13.03[D][4]. 290 Robert Pitofsky, "Challenges of the New Economy : Issues at the Intersection of Antitrust and Intellectual Property," Antitrust Law Journal 68 (2001): 919, 921-924. 291 Joseph Bauer, "Refusals to Deal with Competitors by Owners of Patents and Copyrights : Reflections on the Image Technical and Xerox Decisions," DePaul Law Review 55 (2006): 12171218. 292 Conde Gallego, "Unilateral Refusal," 218-219. Cf. Kanter, who views Xerox as being more permissive of antitrust interventions than IMS Health. Kanter, "IP and Compulsory Licensing on Both Sides of Atlantic," 386.

8.5 Exclusionary Abuses

8.5.7.3

327

Trinko

Trinko was a landmark decision that both set limits to the reach of Aspen Skiing in cases involving refusals to deal and effectively blocked the applicability of the essential facilities doctrine to IP law. In Trinko, a competing local exchange carrier (LEC) sought access to operation support systems, a network element that was part of a bundle of teleconnecting services that Verizon, an incumbent LEC, was mandated to offer to competitors on the basis of the Telecommunications Act of 1996.293 First, in Trinko, the U.S. Supreme Court stated that it had “never recognized” the essential facility doctrine.294 Second, upon spelling out the justifications for not mandating access to the facility, Justice Scalia used language and arguments that could easily be adapted to refuse a compulsory license.295 After referring to Grinnell, he added that “[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.”296 This statement has been criticized as promoting the Chicago School’s unrealistic and outdated position on a monopolist’s capacity to innovate, with no regard for the effect of competitive pressure or its effects on consumer welfare. Considered in the context of IP law, Justice Scalia’s view on innovation precludes antitrust interventions in de novo refusals to license by monopolists, as it deems monopolistic power as the driver of innovation.297 Third, the U.S Supreme Court concluded that “insufficient assistance in the provision of service to rivals is not a recognized antitrust claim.”298 It arrived at this conclusion by observing that previous case law, such as Aspen Skiing and Otter Tail, dealt with situations in which the product to which access was sought was already available on the market.299 Instead, in Trinko, the access was mandated by the Telecommunications Act of 1996 and was offered “not to consumers but to 293

Trinko, 540 U.S. 398, Syllabus, Opinion of the Court 401-405. The Telecommunications Act of 1996, Pub. LA. No. 104-104, 110 Stat. 56 (1996), which required to provide access to bundles of teleconnecting services, implemented a policy intended to introduce competition to the telecommunications sector. After gaining access to network elements, competitors could sell these unbundled elements in new combinations. Ibid, Syllabus, 398. 294 Ibid, 411. The U.S. Supreme Court deemed the doctrine to be irrelevant in the case, as it presupposes the unavailability of access, which did not hold given the obligation established by the Telecommunications Act of 1996. 295 See also Kanter, "IP and Compulsory Licensing on Both Sides of Atlantic," 359-360. 296 Trinko, 540 U.S. 398, 407. 297 Drexl, "Antitrust Placebo," 796-797, 803. 298 Trinko, 540 U.S. 398, 410. 299 Ibid, 409-410.

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rivals, and at considerable expense and effort.” 300 Hence, unlike the EC and the CJEU, the U.S. Supreme Court did not adopt the concept of a “potential or hypothetical market”.301 Therefore, Trinko precludes an antitrust intervention in any unilateral refusal to provide access to a previously unlicensed IP. Fourth, the Court deemed Aspen Skiing, which considered a refusal to cooperate with rivals as representing anticompetitive conduct, as defining the outer limits for liability under section 2 of the Sherman Act. As Verizon had not previously supplied the product, the U.S Supreme Court deemed Aspen inapplicable, because it could not identify the intention of acquiring monopolistic power in Verizon’s earlier behaviour.302 Finally, relying on the arguments of Areeda, Justice Scalia concluded that the antitrust court was unfit to impose remedies that would require day-to-day enforcement, such as an obligation to provide access.303 The argument was given in light of the fact that the telecommunications industry was already regulated and offered sector-specific remedies intended to deter and remedy anticompetitive harm.304 However, the opinion of the court represents a very negative stance towards imposing a compulsory license. Pursuant to Trinko, the possibilities in terms of intervening with a refusal to license IPRs under U.S. antitrust law are even narrower than they were previously.305 Generally speaking, any de novo unilateral refusal to deal is unlikely to be deemed an antitrust violation because hypothetical markets cannot be identified. The Chicago School–based reasoning employed in the Trinko case further discourages antitrust interventions in refusals to license,306 both on the basis of monopolization and essential facilities tests. With regard to the termination of existing licensing relationships, the potential for antitrust intervention is marginally higher. In the context of IPRs, Xerox, Data General, and Image Technical remain the primary case law for determining antirust liability in the context of unilateral refusals to license, with Image Technical offering the widest leeway for an antitrust intervention.307 However, the reasoning of Trinko is likely to steer interpretations towards a more formalistic approach, as the status of

300

Ibid, 410. See Case C-418/01, IMS Health, 2004 E.C.R. I-5039, paras 43-44; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 79. 302 Trinko, 540 U.S. 398, 408-410. For a critique of court’s conclusions regarding the absence of monopolistic conduct, see Conde Gallego, "Unilateral Refusal," 220, fn 24. 303 Trinko, 540 U.S. 398, 412-415. See also Areeda, "Essential Facilities," 853. 304 Trinko, 540 U.S. 398, 412-415. 305 Conde Gallego, "Unilateral Refusal," 221. 306 See Drexl, "Antitrust Placebo," 796-797, 803. 307 However, of these three cases, the topic of continuation of the relationship was only addressed in Data General. See Hovenkamp et al., IP and Antitrust, 1, § 13.03[E]. 301

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Aspen Skiing with respect to the termination of licensing agreements post-Trinko is unclear.308 Despite the fact that the scope of the applicability of compulsory liability rules in U.S. antitrust law is extremely narrow post-Trinko, the ex post market failures of the patent system were addressed in eBay, which confirmed the possibility of denying an injunctive relief on the basis of equity.309 The doctrine may prevent anticompetitive harm in situations in which injunctions are denied to patentees who do not participate in the market in question.310

8.6

Exploitative Abuse

8.6.1

Unfair Prices for Licenses As a Form of Exploitative Conduct

8.6.1.1

The Controversy Concerning Price Control

Art. 102 (a) TFEU forbids the abuse of a dominant position by “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”. Section 8.6.1 explores the conditions under which the level of patent licensing fees demanded by a patent holder would qualify as exploitative abuse.311 The goal of the inquiry is to assess whether it is possible, on the basis of competition law, to interfere with market failures associated with excessive patent royalties or in the exploitative hold-up situations in which the threat of injunction is used to demand excessive licensing fees from a follow-on innovator. The price control of licensing fees is controversial for several reasons: First, the possibility of charging monopolist prices is often deemed to incentivise investments and innovation, and, for this reason, excessive prices not are subject to antitrust

See Hovenkamp et al., IP and Antitrust, 1 § 13.03[E]. eBay, 126 S. Ct. 1837, 1839, 1841; See also Josef Drexl, "Immaterialgüterrechte zwischen Innovationsförderung durch Monopole und Wettbewerbsbeschränkung," in Innovation und Wettbewerb, Referate des XLII. FIW-Symposions, ed. Forschungsinstitut für Wirtschaftsverfassung und Wettbewerb E.V. Köln (Cologne: Carl Haymanns-Verlag, 2009), 49, noting that eBay addresses cases with also anticompetitive relevance, because the US competition does not permit that. For an analysis of eBay from the competition law perspective, see ibid 44-49. 310 Hovenkamp and Hovenkamp, "Patent Pools and Related Technology Sharing," § 13.02.[B]. 311 The focus of Sect. 8.6.1 is excessive pricing on the market for technology. However, with regard to IPRs, a right holder may also engage in exploitative abuse on the product market by charging excessive prices for products; see Früh, Immaterialgüterrechte und der relevante Markt, 426. Furthermore, unfair pricing may also occur on an adjacent market for spare parts when an IPR holder refuses to grant licenses to competitors on that market. Case 53/87, Consorzio italiano della componentistica di ricambio per autoveicoli and Maxicar v. Régie nationale des usines Renault [Mexicar v. Renault], 1988 E.C.R. 6039, para 18 (ii); Jones and Sufrin, EU Competition Law 2011, 570-571. 308 309

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scrutiny in the U.S.312 Limiting patent holders’ opportunities to generate supracompetitive profits has been viewed as compromising their incentives to innovate.313 Similarly, charging supracompetitive prices is justified under Art. 102 TFEU on the basis of the incentivization of innovation.314 It has even been suggested that the application of Art. 102 (a) TFEU should exclude industries that focus on innovation.315 Second, monopolist prices are believed to attract new entrants, with the effect that prices may fall to competitive levels. Thus, markets are viewed as correcting themselves over time, without the need for price control, provided that monopolists do not engage in exclusionary behaviour.316 Third, determining what constitutes an unfair price is difficult, both analytically and in practice.317 Because there is no “workable definition of a competitive price”, price control is prone to errors.318 The antitrust interventions in exploitative abuses also involve the high transaction costs associated with obtaining evidence.319 Furthermore, the process of determining a suitable remedy may be complex, as it requires the EC to determine a competitive price.320 The EC is generally reluctant to assume the role of a price regulator, instead preferring to prioritize its enforcement actions against exclusionary abuses.321 The approach is considered to reflect the objectives of protecting competition and ensuring free entry to markets.322 However, the EC may nevertheless interfere with abusively excessive prices, particularly when there are no other means to ensure the protection of consumers and the functioning of

312

Trinko, 540 U.S. 398, 407. See also Michal S. Gal, "Monopoly Pricing as an Antitrust Offence in the US and the EC : Two Systems of Belief About Monopoly?," Antitrust Bulletin 49, no. SpringSummer (2004), 355-358. 313 O´Donoghue and Padilla, Law and Economics of Article 82 EC, 637; Jones and Sufrin, EU Competition Law 2016, 571. 314 Anderman, "Competition Law Perspective II," 141. 315 O’Donoghue and Padilla, Law and Economics of Article 82 EC, 638. Cf. Evans and Padilla, who propose a test akin to the “exceptional circumstances criteria” which includes a criterion that pricing “widely exceed[s] its average total costs”. However, this test would not be applied to firms that hold dominant positions by virtue of their innovativeness or past investments. David S. Evans and A. Jorge Padilla, "Excessive Prices : Using Economics to Define Administrable Legal Rules," Journal of Competition Law & Economics 1, no. 1 (2005): 119. 316 Whish and David, Competition Law, 760. Cf. Ariel Ezrachi and David Gilo, "Are Excessive Prices Really Self Correcting?," Journal of Competition Law & Economics 5, no. 2 (2009): 249, 268. 317 Whish and David, Competition Law, 760; Geradin and Rato, "Can Standard-Setting Lead to Exploitative Abuse?," 150-151. 318 O´Donoghue and Padilla, Law and Economics of Article 82 EC, 626. 319 Ibid, 638. 320 Ibid, 627, 638. 321 Directorate-General for Competition, European Commission, and Secretariat-General, XXIVth Report on Competition Policy 1994 (Luxembourg: Office for Official Publications of the European Communities, 1995), 207. 322 Drexl, "Antitrust Placebo," 807.

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the common market.323 The exercise of IPRs is not immune to exploitative practices. For example, in the context of copyright, the CJEU has approved interference with excessive pricing on the part of market-dominant collective management organizations.324

8.6.1.2

Applying United Brands to Patents

As a general rule, when excessive royalties are demanded ex ante, before a follow-on innovator has sunk investments and infringed a patent, a potential market failure is evaluated using the test for unfair prices established in United Brands.325 However, on some occasions, excessive licensing fees can be deemed to represent a constructive refusal and may be investigated as a form of exclusionary abuse.326 A particularly high price, which cannot be justified with reference to objective criteria, may be regarded as abusive under Art. 102 TFEU:327 “[C]harging a price which is excessive because it has no reasonable relation to the economic value of the product supplied” can be deemed as abusively unfair.328 United Brands introduced a two-step test for determining excessiveness;329 this test is cumulative.330 First, the price has to be objectively found to be excessive through calculation of the profit margin by deducting the cost of production of a product from its sales price.331 Price-cost comparisons are particularly difficult to apply when evaluating patent licensing rates, as technological development is inherently risky, and a patent holder may have engaged in multiple failed R&D projects before creating a patentable invention that succeeds on the market;332 the costs of such failed R&D projects 323 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 7. 324 See Joined cases 110/88, 241/88 and 242/88, Francois Lucazeau and others v. Sociéte des Auteurs, Compositeurs et Editeurs de Musique (SACEM) and others, 1989 E.C.R. 2811, paras 24-25; Case C-177/16, Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība v. Konkurences padome, 5 C.M.L.R. 19 (2017), para 51. 325 Case 27/76, United Brands, 1978 E.C.R. 207, para 252. 326 Under the United Brands doctrine, a high demand for a technology justifies a higher price for a product. See Case COMP/A.36.568/D3, Scandlines Sverige AB v. Port of Helsingborg, Commission decision of July 23, 2004. http://ec.europa.eu/competition/antitrust/cases/dec_docs/36568/ 36568_44_4.pdf, para 227. 327 Case 40/70, Sirena S.r.l. v. Eda S.r.l., 1971 E.C.R. 69., para 5. 328 Case 27/76, United Brands, 1978 E.C.R. 207, para 5. 329 Ibid, paras 251-252. 330 Ibid, para 252; Case COMP/A.36.568/D3, Port of Helsingborg, (23 July 2004), paras 149-152. 331 Case 27/76, United Brands, 1978 E.C.R. 207, paras 251-252. “If a price does not exceed costs by an unreasonable margin, the price cannot be unfair”, Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.16. 332 Determining the costs of production of a tangible product can prove very complicated. Such costs “may sometimes include a discretionary apportionment of indirect costs and general expenditure and which may vary significantly according to the size of the undertaking, its object, the

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should be taken into consideration when calculating cost.333 However, calculating the R&D expenditures associated with a particular patent license is a very complex, if not impossible, task, as it is necessary to divide the costs involved between the exploitation and the licensing of the patent in question.334 In many cases, an undertaking that operates upstream not only prices a license for an individual patent but for an entire portfolio, which makes the determination of production costs even more complicated. Hence, applying the first part of the United Brands test for abusive pricing to patent licenses is very difficult. According to the second part of the United Brands test, if a price has been found to be excessive, it must be determined “whether a price has been imposed which is either unfair in itself or when compared to competing products.”335 Thus, the second part of the test features two alternatives for determining unfairness of the price: considering the economic value of the product or price comparison between different markets.336 Even when a product is sold at an unreasonably high profit margin, its price will not necessarily be “unfair, provided that this price has a reasonable relation to the economic value of the product/service supplied.”337 “The economic value must be determined with regards to the particular circumstances of the case and take into account also non-cost related factors such as the demand for the product/service.”338 The downstream demand for the technology in question could also justify a higher

complex nature of its set up, its territorial area of operations, whether it manufactures one or several products, the number of its subsidiaries and their relationship with each other”. Case 27/76, United Brands, 1978 E.C.R. 207, para 254. See also O´Donoghue and Padilla, Law and Economics of Article 82 EC, 613-616 and 621. 333 Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.17; Jones and Sufrin, EU Competition Law 2016, 571. However, such a calculation would overreward inefficient innovators and not take into account “strokes of genius” as sources of innovation. In addition, in highly dynamic, competitive industries, the periods in which high returns can be obtained from innovations can be very brief. Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, 4.390. 334 Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.17. However, this benchmark could, in principle, be applied in situations in which a patent that is subject to excessive royalties was acquired from another company. In a situation, when a patent holder has not carried out its own R&D with regard to the patent in question, its costs of “production” could be calculated on the basis of the price at which the patent was acquired. 335 Case 27/76, United Brands, 1978 E.C.R. 207, para 252. The decision recognizes that there may be a number of different approaches to determining the unfairness of a price; see para 254. 336 See Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.16, who use the term “intrinsic value” for the first alternative. However, while the exact meaning of “economic value” in the context of unfair pricing in EU competition law remains vague, there is no reason to presume that value determination should be based on non-economic factors. A contrary interpretation would contradict the effects-based approach. 337 Case 27/76, United Brands, 1978 E.C.R. 207, para 252. 338 Case COMP/A.36.568/D3, Port of Helsingborg, (23 July 2004), para 228. The economic value of a product increases when a customer finds it valuable and is willing to pay for it. Ibid, para 227.

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333

royalty rate.339 Other factors that could be assessed in the determination of the economic value of a product are sunk costs, opportunity costs, and the intangible value of the unique location.340 Typically, the creation of patented technology involves high costs being sunk into potentially risky R&D, which affects the economic value of a licensed technology.341 European Union competition law appears to grant an IPR holder a right to charge prices that would allow it to receive returns on its investment while simultaneously maintaining the possibility of interfering with extremely high royalties.342 Price comparisons can be made between competitors or geographical markets; alternatively, price changes may be observed over time.”343 Comparison of licensing fees with competitors is an improbable benchmark in the context of patents, as dominance on a technology market presupposes unsubstitutability. Furthermore, in order for a patent to be included in a de jure standard or to be part of a de facto standard, it should also be essential and complementary.344 Geographic price comparison can be carried out in two ways: by comparing the prices charged by other undertakings that offer the same product in other regions345 or by comparing the prices that the undertaking subject to investigation by the EC has set for different geographical regions.346 With regard to patents, the former method of calculation may apply to situations in which different undertakings own and license a patent in various jurisdictions independently, whereas the latter would apply when a patent holder licenses a patent that protects the same invention on different terms in different countries.347 However, the market for patent licensing is

339

Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.17. Case COMP/A.36.568/D3, Port of Helsingborg, (23 July 2004), para 209. 341 See also Anderman and Schmidt, EU Competition Law and Intellectual Property Rights, 144. 342 Ibid, 150-154, 158. Charging a “higher price for the patented product as compared with the unpatented product does not necessarily constitute an abuse.” Case 24/67, Parke, Davis, 1968 E.C.R. 55, para 72. See also Case 53/87, Mexicar v. Renault, 1988 E.C.R. 6039, para 17. 343 O’Donoghue and Padilla, Law and Economics of Article 82 EC, 613. 344 Geradin and Rato, "Can Standard-Setting Lead to Exploitative Abuse?," 155. 345 Case 395/87, Ministère public v. Jean-Louis Tournier, 1989 E.C.R. 2521, para 38; Cases 110/88, 241-2/88, Lucazeau v. SACEM, 1989 E.C.R. 2811, para 25. In the context of collective management organizations, geographic comparisons with prices charged in both neighbouring and other member states adjusted on the basis of the purchasing power parity index, are appropriate, “provided that the reference Member States have been selected in accordance with objective, appropriate and verifiable criteria and that the comparisons are made on a consistent basis.” Case C-177/16, Autortiesību, 5 C.M.L.R. 19 (2017), para 51. 346 Case 27/76, United Brands, 1978 E.C.R. 207, para 209. 347 Due to the unsubstitutability of a patent being an important factor in finding dominance, a geographic comparison will be applied to a patent only when the same invention is protected by a number of patents across different jurisdictions. Using a substitute patent from another jurisdiction, offered on a different geographical market of technology, would represent an excessively far-fetched benchmark. See also Case COMP/A.36.568/D3, Port of Helsingborg, (23 July 2004), paras 152-157, concerning the EC’s rejection of comparison of different ports when establishing a benchmark. 340

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typically either the EU or worldwide. The further that the market used for comparison is from the market that is potentially affected by excessive pricing, the higher the likelihood that any differences will derive from distinct market conditions.348 Furthermore, the prices charged in particular geographic regions are not necessary competitive, which makes the establishment of a benchmark difficult.349 Finally, the excessiveness of royalties can be determined by observing the changes in the prices of royalties over time.350 In order to avoid errors in antitrust enforcement, a change in prices must be significant to be considered rendered abusive.351 This benchmark could be applicable in situations, for example, in which a patent holder licenses to follow-on innovator(s) on the downstream market, but over time, (for, example following the rise of the technology in question to a de facto standard), raises its prices substantially.352

8.6.1.3

Excessive Royalties for FRAND-Encumbered SEPs

In hold-up situations in which a follow-on innovator has already been using a patented invention, the distinction between exploitative and exclusionary abuse becomes fluid. In the context of de jure standard setting, patent ambushes are investigated as a form of exploitative abuse.353 However, in hold-up situations in which a SEP holder seeks to enforce a FRAND-encumbered patent, the CJEU referred to the case-law on “exceptional circumstances” that address exclusionary abuse.354 The anticompetitive assessment of hold-up situations involving de jure SEPs is reviewed in the following Sects. 8.6.2, 8.6.3, 8.6.4, 8.6.5 and 8.6.6. However, in principle, the act of charging supra-FRAND royalties for de jure SEPs without the creation of a hold-up situation by means of patent enforcement can, at least indirectly, become the subject of antitrust scrutiny.355 348

Anderman and Kallaugher, Technology Transfer and the New EU Competition Rules, 10.17. See also O’Donoghue and Padilla, Law and Economics of Article 82 EC, 617 and fn 22. 349 O’Donoghue and Padilla, Law and Economics of Article 82 EC, 618. 350 See C-226/84, British Leyland Public Limited Company v. Commission, 1986 E.C.R. 3263, paras 25 and 30. The price increase in this particular case was 600 percent. 351 O’Donoghue and Padilla, Law and Economics of Article 82 EC, 619-620. 352 In the event that a patent holder is vertically integrated and also operates on the downstream market, a gradual increase of the licensing fees that it charges its competitors could also be treated as margin squeezing, which is a form of exclusionary abuse. Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 79. 353 See Case COMP/38.636 Rambus, (9 December 2009). 354 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 47. See also Jones and Sufrin, EU Competition Law 2016, 549. However, in Huawei, the CJEU eventually came to rely on balancing the objectives of Art. 102 TFEU with the fundamental rights when determining under which circumstances a de jure SEP holder can enforce its patent against an implementer thereof without abusing its dominant position, see Sect. 8.6.4.3. 355 For example, the EC initiated, and eventually closed, proceedings against Qualcomm on the basis of allegations that it licensed SEPs on terms that did not correspond to FRAND conditions.

8.6 Exploitative Abuse

8.6.2

335

Patent Ambush

The term “patent ambush” describes a hold-up situation in which a patent holder, acting in bad faith, does not disclose his patents before a de jure standard is agreed upon.356 Consequently, when the standard represents an entry barrier, he may charge higher royalty rates for his technology than what licensees would have agreed to prior to the adoption of the standard or even interfere with the accessibility of the standard by refusing to license the standard essential technology.357 In the worstcase scenario, a patent holder could prevent the implementation of a standard.358 In Rambus, the EC raised concerns regarding a patent ambush instituted by Rambus Inc., a company that specialized in R&D and the licensing of highbandwidth chip technology, including interface technology for dynamic access memory (DRAM). The DRAM interface technology was subject to de jure standardisation by JEDEC, an industry-wide standard-setting organization, and the

European Commission Press Release MEMO/07/398, Antitrust : Commission Initiates Formal Proceedings against Qualcomm (1 October 2007); European Commission Press Release MEMO/ 09/516, Antitrust : Commission Closes Formal Proceedings against Qualcomm (24 November 2009). Typically, investigations also consider other licensing terms and practices that may harm competition, such as non-challenge clauses or the bundling of SEPs with non-SEPs. European Commission Press Release: Commission Initiates Formal Proceedings against Qualcomm. China’s National Development and Reform Commission issued fines against Qualcomm pursuant to licensing practices that, inter alia, involved excessive licensing fees due to a requirement for a royalty-free cross-license. Yan Bing Li, "Antitrust Correction for Qualcomm’s SEPs Package Licensing and Its Flexibility in China," IIC - International Review of Intellectual Property and Competition Law 47, no. 3 (2016): 343-344. However, it “did not examine whether the royalty rates imposed by the NDRC were excessively high per se, or comparatively high vis-à-vis competitors’ prices”. Liyang Hou, "Qualcomm : How China Has Invalidated Traditional Business Models on Standard Essential Patents," Journal of European Competition Law & Practice 7, no. 10 (2016): 687. Similarly, the Korean Fair Trade Commission also addressed the topic of coercion into royalty free cross-licenses in its decision against Qualcomm, deeming the practice to reduce standard implementers’ incentives to invest in R&D. Korea Fair Trade Commission, "Sanctions on Qualcomm". In the same vein, the FTC charged Qualcomm for employing anticompetitive tactics to maintain a monopoly over the semiconductors used for mobile phones on the basis of, inter alia, Qualcomm’s so-called “no license, no chips” policy of demanding elevated royalties for SEPs for manufacturers that employed competitors’ semiconductor chips. FTC, "FTC Charges Qualcomm with Monopolizing Key Seminconductor Device Used in Cell Phones," FTC, last modified 17 January 2017, accessed 10 July 2017 https://www.ftc.gov/news-events/press-releases/2017/01/ ftc-charges-qualcomm-monopolizing-key-semiconductor-device-used. For a comparison of the Korean and the US proceedings against Qualcomm, see Koren W. Wong-Ervin et al., Comparative and Economic Analysis of the U.S. FTC's Complaint and the Korea FTC's Decision against Qualcomm, Research Paper No. 17-17 (Arlington, VA: Law & Economics Center - George Mason University, 2017). 356 Communication from the Commission. Intellectual Property Rights and Standardisation. COM (92) 445 final (27 October 1992), para 4.4.1. 357 Ibid.; Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 269. 358 Communication from the Commission. IPRs and Standardisation 1992, para 4.4.1.

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standard enabling interoperability was adopted globally.359 The EC preliminarily alleged that Rambus Inc., had engaged in intentional deceptive conduct during the process of standard-setting by not disclosing its patents and patent applications, which it later claimed to be relevant for the standard. This behaviour was considered to constitute a business strategy.360 After the standard was adopted, Rambus Inc. asserted its patents against standard implementers and demanded royalty payments higher than what it could have charged without engaging in the patent ambush.361 The EC took the view that the deceptive behaviour had “resulted [in] a deliberate frustration of the legitimate expectations of the other participants in the standardsetting process”.362 Echoing the CFI’s opinion Microsoft, the EC also remarked on the effect of patent ambush on subsequent innovation. It noted that, by hindering confidence in standardisation, the alleged patent ambush compromised the effectiveness of the standard-setting process on which the “technical development and the development of the market in general to the benefit of consumers” depended upon.363 In light of these unique circumstances, the EC provisionally deemed Rambus Inc. as having abused its dominant market position pursuant to Art. 102 TFEU by claiming such high royalty rates.364 As a remedy to the concerns raised, the EC accepted the commitment offered by Rambus Inc. with regard to the relevant patents.365 The commitment decision in Rambus reflects the readiness of the EC to interfere with patent ambushes that may compromise follow-on innovation in the context of standard setting. In contrast, the threshold for interference in deceptive conduct during the standard-setting process is higher in the US than in the EU with regard to the evidence required. The behaviour of Rambus Inc. was not found to violate antitrust

359 Case COMP/38.636 Rambus (9 December 2009), paras 4, 16, 18-20; Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, paras 1-2; European Commission Press Release MEMO/07/330, Antitrust : Commission Confirms Sending a Statement of Objections to Rambus (23 August 2007). 360 Case COMP/38.636 Rambus, (9 December 2009), paras 26, 40-42. 361 Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, paras 1-2. 362 Case COMP/38.636 Rambus, (9 December 2009), para 28; Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, paras 1-2; European Commission Press Release MEMO/07/330, Antitrust : Commission Confirms Sending a Statement of Objections to Rambus (23 August 2007). 363 Case COMP/38.636 Rambus, (9 December 2009), para 29. 364 Ibid, para 28; Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, paras 1-2; European Commission Press Release “Commission Confirms Sending a Statement of Objections to Rambus”. 365 Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, para 4. Rambus Inc. committed not to charge royalties for the standards that were adopted by JEDEC during the period in which it had engaged in the allegedly intentional deceptive conduct and to charge a maximum of a 1.5 percent royalty rate for the later generation of JEDEC DRAM standards that were adopted following the company’s resignation from JEDEC, which it would offer to all market participants globally. Case COMP/38.636 Rambus, (9 December 2009), para 49; Case COMP/38.636 Rambus, Summary, 2010 O.J. (C 30) 17, paras 5-7; European Commission Press Release IP/09/1897, Antitrust : Commission Accepts Commitments from Rambus Lowering Memory Chip Royalty Rates (9 December 2009).

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rules in the U.S. Initially, the FTC found that Rambus Inc. had engaged in monopolistic conduct violating section 2 of the Sherman Act and breached the prohibition of unfair methods of competition and unfair or deceptive acts or practices established by section 5 of the FTC Act by deceptively and insufficiently disclosing patent applications during JEDEC’s standard-setting process.366 As a remedy, the FTC ordered, inter alia, the maximum royalties that Rambus Inc. could charge for the patents covering the relevant standards.367 However, the Court of Appeals found the required causal link between the deception and anticompetitive harm to be inconclusive, because, without the deception, JEDEC may, with equal probability, have selected either another technology or that of Rambus Inc. with RAND commitments to the standard. The court ruled that section 2 of the Sherman Act was not violated, as the intention to charge higher prices than that which could have been charged in the absence of such behaviour did not, alone, qualify as monopolization. On this basis, the Court set aside the FTC’s orders and remanded the case for further proceedings.368 The Supreme Court denied the FTC's petition for a writ of certiorari.369

366

See In re Rambus Inc, (File No. 11 0017) FTC Docket No 9392, (Complaint, 18 June 2002), paras 70-78, 121-123; In re Rambus Inc, (File No. 11 0017) FTC Docket No. 9302, (Opinion of the Commission, 2 August 2006), 5, 27-114, 118; Rambus Inc. v. FTC, 522 F.3d 456, 459, 461 (2008). 367 See In re Rambus Inc, (File No. 11 0017) FTC Docket No. 9392, (Final order, 5 February 2007). 368 Rambus v. FTC, 522 F.3d 456, 459, 463-464, 466. “Thus, if JEDEC, in the world that would have existed but for Rambus's deception, would have standardized the very same technologies, Rambus's alleged deception cannot be said to have had an effect on competition in violation of the antitrust laws; JEDEC's loss of an opportunity to seek favorable licensing terms is not as such an antitrust harm”; Rambus v. FTC, 522 F.3d 456, 446-447. 369 In re Rambus Inc. (File No. 11 0017), FTC Docket 9302 (Case summary, 14 May 2009). Accessed 10 July 2019. https://www.ftc.gov/enforcement/cases-proceedings/011-0017/rambusinc-matter. The outcome of Rambus in the US differs from that of the FTC’s earlier Dell case. Dell participated in the standard-setting process of the standard-setting organization VESA when the latter was deciding upon a standard computer bus design. By the time of the approval of the VESA local bus standard, Dell had not informed VESA that it held a patent that covered standardized technology and certified that the standard did not violate any of its patents. Following the success of the standard, Dell informed certain implementers that they had violated its exclusive rights. The FTC took the view that Dell’s conduct unreasonably constrained competition and was to the prejudice and injury of the public, violating section 5 of the FTC Act (codified at 15 U.S.C. § 45 (2012), on the grounds that the behaviour had hindered the adoption of the standard, raised the costs of its implementation, and reduced the attractiveness of industry participation in the standardsetting process. Dell consented to the FTC’s order, which prohibited the company from enforcing the patent against any implementer of the VESA local bus standard. The antitrust enforcement was found to be justified due to evidence that a non-proprietary standard would have been implemented had Dell identified and disclosed its patents in good faith. In Re In re Dell Computer Corp., 121 FTC 616 (20 May 1996), 617-621. The case differed from Rambus in that the FTC interfered with Dell’s conduct before the VESA local standard was widely adopted and subsequently brought Dell market power on the basis of patent ownership. The remedy was circumscribed on the basis of an equitable estoppel doctrine and was limited to the facts of the case. See ibid, 624-625, fns 2 and 5.

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Transferability of FRAND Obligations

A company that makes a commitment to license its SEPs on FRAND may eventually sell its patents to another undertaking due to bankruptcy or on other grounds. If the IPR policy adopted by a particular SSO does not require a FRAND commitment to follow the SEPs when another person acquires them, questions can arise as to whether the subsequent owner of the SEPs may enforce them against standard implementers. In the worst case scenario, standard implementers may become subject to a specific type of hold-up that is referred to as a “portfolio transfer case”.370 The issue caught the EC’s attention after IPCom acquired a mobile patent telephony patent portfolio from Bosch. The portfolio included a number of SEPs that Bosch had declared essential in ETSI’s the standard-setting processes and which it had committed to license under FRAND. IPCom responded to the EC’s attention by voluntarily providing a public FRAND declaration regarding said SEPs. The EC welcomed the declaration and stressed the importance of transferring FRAND commitments together with SEPs, as, otherwise, the pro-competitive effects of standard-setting could be eliminated if access to FRAND-encumbered SEPs were to become restricted following their transfer.371 The press release of the EC represents soft law that can, nevertheless, have an indirect effect, similarly to compulsory licenses.372 First, it signals that hold-ups of this type can become subject to antitrust scrutiny. Second, it stressed to SSOs the importance of requiring that declared SEPs be sustainably bound by FRAND commitments, irrespective of changes in their ownership.

8.6.4

Enforcement of FRAND-Encumbered SEPs

8.6.4.1

Motorola and Samsung

Motorola, Samsung, and Huawei sprung from antitrust scrutiny of the enforcement of FRAND-encumbered SEPs against downstream competitors. Essentially, these cases relate to the so-called “standard wars” or “smartphone wars” that occurred in the mobile telecommunications industry. The wars were characterized by intensified litigation over SEPs, which originated from the entry of new downstream operators into a market that was previously characterized by vertically integrated players and an increase in the number of SEPs held by NPEs, either through sales or due to

370

Picht, "ECJ Rules on Standard-Essential Patents," 366. European Commission Press Release, Antitrust : Commission Welcomes IPCom´s Public FRAND Declaration. 372 See Nicolas Petit, "'Stealth Licensing' - or Antitrust Law and Trade Regulation Squeezing Patent Rights," SSRN (2014), https://ssrn.com/abstract¼2426782, 20, 21. 371

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changes in the business models of the previously vertically integrated companies; these changes disrupted the earlier patterns of and motivations for cross-licensing SEPs.373 Motorola established a “safe harbour” for standard implementers who were willing to take a license on FRAND terms against the enforcement of the holder of a FRAND-encumbered SEP.374 The commitment decision, which was addressed to Samsung, qualified the concept of a “safe harbour” in practice.375 In its decision, the EC reaffirmed, with a reference to Volvo v. Veng, that the list of exceptional circumstances in which the exercise of a patent may constitute an abuse of a dominant position was not exhaustive;376 it proceeded to adopt a new approach to determining such exceptional circumstances. The EC emphasized that the wide adoption of a standard may lead to an industrylock in, which is a favourable context for the holding-up of SEPs.377 In such a situation, seeking an injunction for a FRAND-encumbered SEP may endanger the precompetitive efficiencies of standard-setting.378 On this basis, a patent holder’s FRAND commitment to license its SEP in a standard-setting context was deemed to constitute an exceptional circumstance in itself.379 The objective of a FRAND commitment is to ensure that a standard becomes effectively accessible.380 A FRAND commitment reflects a SEP holder’s intention to exploit a patent by means of a liability rule,381 which was considered to create reasonable expectations

373

Jones, "Standard-Essential Patents," 9. Both Motorola and Samsung were involved in strategic litigation against Apple, a new competitor. Prior to the infringement proceedings, Motorola had terminated its licencing agreements with Apple’s suppliers of chipsets, including Motorola’s SEPs, Chi Mei, and Qualcomm, at the advent of the release of the iPhone 4. Case AT.39985, Motorola (29 April 2014), paras 103-109. Samsung’s litigation was a response to Apple’s infringement proceedings against Samsung concerning non-SEPs. Case AT.39939, Samsung (29 April 2014), paras 54-55. 374 Case AT.39985, Motorola (29 April 2014); European Commission, Standard Essential Patents. Competition Policy Brief, 2004 no. 8, 5. 375 Case AT.39939, Samsung (29 April 2014); European Commission, Standard Essential Patents, 5. 376 Case AT.39985, Motorola (29 April 2014), para 278, fn 256; Case AT.39939, Samsung (29 April 2014), para 56 and fn 35, with references to the case law on the exceptional circumstances. 377 Case AT.39985, Motorola (29 April 2014), para 289; Case AT.39939, Samsung (29 April 2014), para 57-58; Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 269. However, the Commission did not explicitly refer to indispensability. 378 Case AT.39985, Motorola (29 April 2014), paras 284, 294. 379 Ibid, paras 283, 300. 380 Ibid, para 290; Case AT.39939, Samsung (29 April 2014), para 59; See also Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 269. 381 Case AT.39985, Motorola (29 April 2014), paras 294, 299; Case AT.39939, Samsung (29 April 2014), para 61.

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regarding the accessibility of the SEP to all standard implementers under the FRAND conditions.382 Motorola established that enforcing a FRAND-encumbered patent against a willing licensee was deemed to constitute an abuse of a dominant position.383 The fact that Motorola sought an injunctive relief against Apple was found to have a detrimental effect on trust in the standardisation process. It may also have deprived customers of the benefits of standardisation and technical development, which are dependent on interoperability between the complex products that such standards enable.384 Motorola’s attempt to seek an injunctive relief to pressure Apple to refrain from challenging its patents under the threat of termination of the licensing agreement was deemed anticompetitive.385 On this basis, Motorola established a compulsory liability rule that ascertained the sustainability of private liability rules in the context of jure SEPs in favour of standard implementers.386 The EC considered its ruling as striking a fair balance between the SEP holder’s interest in obtaining remuneration and implementers’ interest in accessing the standard in question.387 However, many commentators took the view that the unqualified “willing licensee” safe harbour empowered

382

Case AT.39985, Motorola (29 April 2014), paras 294, 417. The existence of a FRAND commitment sets these cases apart from the enforcement of non-SEPs that were not committed to be licensed on FRAND terms and in which the possibility of claiming for a permanent injunction protects a patent holder against free-riding. Ibid, para 300. 383 Ibid, paras 496. 384 Ibid, paras 416, 417. See also ibid, para 286 and Case AT.39939, Samsung (29 April 2014), para 69. 385 Case AT.39985, Motorola (29 April 2014), paras 311, 321, 322, 326-327. See also Case AT.39939, Samsung (29 April 2014), para 62. The termination clause may have had the anticompetitive effect of reducing Apple’s negotiation power over the royalties paid to Motorola. Furthermore, when a large competitor is prohibited from challenging invalid SEPs, other potential licensees, who may not have the resources required to institute invalidation proceedings, may have to pay for invalid SEPs. Case AT.39985, Motorola (29 April 2014), paras 336, 338, 362, 375, 383. Ultimately, this may have the anticompetitive effect of raising production costs and potentially also consumer prices. Ibid, para 377 with references to TTBER Guidelines (2004), para 80 and TTBER Guidelines (2014), para 100. 386 Motorola was ordered to refrain from the infringement, to eliminate any anti-competitive effects resulting from it, and to refrain from enforcement of FRAND-encumbered SEPs against willing licensees. However, it was not condemned to fines on the basis that there was no previous EU case law on the matter and the national case-law concerning the enforceability of FRAND-encumbered licenses was contradictory. Case AT.39985, Motorola (29 April 2014), paras 557, 561, Arts. 2-3. Samsung committed to not enforcing its SEPs reading on a standard for mobiles and tablets against any potential licensee who, within 30 days of the receipt of an invitation to negotiate, had accepted Samsung’s licensing framework for determination of FRAND terms and conditions. Case AT.39939, Samsung (29 April 2014), para 76. The licensing framework stipulates third-party determination of FRAND terms and conditions upon the event that an agreement is not reached within the prescribed maximum negotiation period of 12 months. Ibid, para 78. 387 Case AT.39985, Motorola (29 April 2014), paras 418, 495.

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standard implementers to behave opportunistically.388 In Motorola and Samsung the EC appeared to initiate a competition policy where the determination of FRAND rates shifted from the market to courts and arbitration.389

8.6.4.2

The Orange Book Standard

The EC’s approach in Motorola and Samsung is in stark contrast with the conditions established by the Orange Book Standard defence, which has also been applied to de jure SEPs.390 In 2009, the BGH gave its second landmark ruling regarding a refusal to license de facto SEPs. The dispute of the Orange Book Standard concerned a refusal to licence de facto SEPs reading to a standard for CD-R and CD-RW discs.391 The case established an antitrust defence against a claim for an injunctive relief on the grounds that the SEP holder had abused its dominant position by refusing to grant a license under “non-discriminatory and non-obstructive conditions”.392 Unlike Standard-Spundfass, which concerned a refusal to license to competitors, the defendant in the Orange Book Standard was not a competitor.393 This case dealt with the question of whether a defendant facing a claim for injunction pursuant to § 139 PatG could raise a defence on the basis of Standard-Spundfass.394 The BGH found that the enforcement of a de facto SEP by a market-dominant undertaking would violate antitrust law in the same manner as a refusal to license would when it forecloses another company’s access to a market and when the SEP holder acted against the principles of good faith.395 Consequently, a defendant who has sought a license for an SEP without success and has subsequently used it unlawfully may raise a defence against a plaintiff’s application for injunction on the basis of the principle of good faith (dolo agit, qui petit quod statim redditurus est), as codified in § 242 BGB.396 The BGH confirmed two conditions for raising the defence: First, the defendant is obliged to have made “an unconditional offer to conclude a licence contract, which the patent holder cannot refuse without inequitably impeding the

388

Hilty and Slowinski, "Standardessentielle Patente," 785; Picht, "ECJ Rules on StandardEssential Patents," 367; Haris Tsilikas, "Huawei v. ZTE in Context - EU Competition Policy and Collaborative Standardization in Wireless Telecommunications," IIC - International Review of Intellectual Property and Competition Law 48, no. 2 (2017): 167-168. 389 Tsilikas, "Huawei v. ZTE," 168, 175. 390 See LG Mannheim, 2 May 2012, 2 O 240/11, BeckRS 2012, 11804, C. I., para 3. 391 Orange Book Standard, IIC 2010, 369, 371, paras 20-21. 392 Ibid, 369. 393 Hanns Ullrich, "Patents and Standards - a Comment on the German Federal Supreme Court Decision Orange Book Standard," IIC - International Review of Intellectual Property and Competition Law 41, no. 3 (2010): 2. 394 Orange Book Standard, IIC 2010, 369, 271, para 23-aa. Such a claim would rely on § 33 (1) GWB, in conjunction with either §§ 19 and 20 GWB or with Art. 102 of the TFEU. 395 Orange Book Standard, IIC 2010, 369, 271–373, paras 27, 29-b. 396 Ibid, 371, para 24.

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party seeking a licence or infringing the prohibition on discrimination”.397 The refusal of an offer made on such “non-obstructive and non-discriminatory terms” would amount to the abuse of a dominant market position.398 Second, the dolo agit defence requires that the defendant using the patent in question “behaves as if the patent holder had already accepted his offer”399 before the patent holder accepted his offer for a license.400 Hence, the defendant must fulfil the obligations that would have arisen from the conclusion of a licensing agreement.401 In order to comply with his contractual obligations as a licensee, a defendant must render his accounts in accordance with the conditions of the offer and, on this basis, pay the appropriate licensing fees or make a sufficient deposit as their guarantees.402 Although the BGH relied on the flexibility of Art. 31 (k) TRIPS when creating an ex post liability rule, it maintained an approximation of the prior effort requirement of Art. 31 (b) TRIPS by requiring that defendant makes the first license offer. Consequently, the conditions under which an implementer may benefit from a compulsory liability rule are stricter than those required by Art. 31 (b) TRIPS.403 Orange Book Standard’s one-sided obligations in terms of licensing negotiations have been viewed as disadvantageous to the implementer.404 The dolo agit defence requires that the defendant “acts in full conformity with patent law and as if he were no victim of a violation of the competition rules.”405 The outer limit of the licence fee that a patent holder can accept is set by antitrust law.406 Consequently, Orange Book Standard presupposes that the defendant has to make an offer that is almost

397

Ibid, para 29-b. In a situation in which a patent holder refuses to specify the amount of a licensing fee or demands abusively excessive royalties, the requirement of an unconditional offer is satisfied by an offer to conclude the license contract, under which the licensor can specify the amount of the licence fee at his fair discretion. Ibid, para 39. 398 Ibid, para 30 - aa). The dolo agit defence “prescribes that a litigant cannot successfully obtain an item if the defendant would be entitled to demand the item back because of a counterclaim.” Philipp Maume, "Compulsory Licensing in Germany," in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung Liu (Heidelberg: Springer Verlag, 2015), 105. 399 Orange Book Standard, IIC 2010, 369, 372, para 30-bb. 400 Ibid, para 29-b. 401 Ibid, paras 29 - b), 33 - bb), 36, 40. 402 Ibid, paras 29 - b), 33 - bb), 36. 403 Picht, "From Transfer of Technology," 521-522. 404 Picht, "Standardsetzung und Patentmissbrauch - Schlagkraft und Entwicklungsbedarf des europäischen Kartellrechts," Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 63, no. 1 (2014): 14; Kristian Henningsson, "Injunctions for Standard Essential Patents under FRAND Commitment : A Balanced, Royalty-Oriented Approach," IIC - International Review of Intellectual Property and Competition Law 47, no. 4 (2016): 444. Cf. Maume, "Compulsory Licensing in Germany," 109. 405 Ullrich, "Patents and Standards," 342-343. 406 Orange Book Standard, IIC 2010, 369, 374, para 39.

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supra-FRAND.407 In addition, risk-averse defendants are likely to make excessive deposits.408 Given that standards typically contain large numbers of patents, relying on this defence presupposes making several offers that exceed the value of the patent,409 thus contributing to the royalty-stacking problem. Ultimately, the requirement of making an unconditional offer allows a patent holder to exploit her market power up to the limits of lawfulness, which will likely overreward her.410 This effect is reinforced by the fact that a defendant could not make the offer conditional on the finding of an infringement.411 The subsequent case law further heightened the criteria for an unconditional offer:412 For example, a standard implementer must agree to the condition that a patent validity challenge would terminate the licensing agreement in order for an offer to quality as unconditional.413 The case law on Orange Book Standard has further heightened the threshold for accepting this defence, with the effect of making the safe harbour unattainable in practice.414

8.6.4.3

Huawei

The preliminary ruling in Huawei was given in order to clarify which of the methods of determining the safe harbour for the enforcement of de jure SEP patents, Motorola, or Orange Book Standard was aligned with EU law. In Huawei, LG Düsseldorf stayed the infringement proceedings in which Huawei had sought an injunction, the rendering of accounts, the recall of products, and the award of damages pursuant to Art. 64 EPC and § 139 PatG et seq. against ZTE, which used its SEP belonging to ETSI’s Long-Term Evolution (LTE) standard without a licence. It requested a preliminary ruling to establish whether the enforcement of Huawei’s SEP amounted to the abuse of a dominant position pursuant to Art. 102 TFEU. In particular, it requested that the CJEU determines at what point and under which terms the actions of a SEP holder become anti-competitive: when an injunction is sought against a licensee who is “willing to negotiate” or when litigation is initiated against an infringer who has given an “unconditional offer to conclude a licensing agreement” on the basis of Orange Book Standard.415 Under the condition that the

407

Hilty and Slowinski, "Standardessentielle Patente," 784-785. Maume, "Compulsory Licensing in Germany," 112. 409 See ibid, in which the author makes a similar argument with regard to “patent wars”. 410 Ullrich, "Patents and Standards," 343-346. 411 Orange Book Standard, IIC 2009, 369, 373, para 32. 412 See Körber, Standardessentielle Patente, FRAND-Verpflichtungen und Kartellrecht, 283-297. 413 BeckRS 2012, 11804, C. I, para I. OLG Karlsruhe, 23 January 2012, 6 U 136/11, GRUR-RR 2012, 405, para 33. 414 Walz, "Patentverletzungsklagen im Lichte des Kartellrechts," 724. Similarly Jones, "StandardEssential Patents," 12. 415 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), paras 22, 27, 39 (1)-(4), 44. 408

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former criterion applied, it requested further qualitative and temporal qualification for determining the “willingness to negotiate” that would make it possible to avoid both hold-up and hold-out situations.416 In its reasoning, the CJEU employed four different tests: First, following Hoffmann-La Roche, it referred to the abuse of dominance as an objective concept.417 Second, it employed a new test for “particular circumstances”, which is distinct from the “exceptional circumstances” test of the essential facilities doctrine.418 Third, it engaged in an attempt to balance the fundamental rights relevant to the questions posed. Finally, the CJEU determined a framework of negotiation that posed obligations for both the patent holder and the implementer; this framework defined the contours of both antitrust liability as well as the safe harbour from an injunctive relief.419 The CJEU took the view that the previous case law on refusals to license420 was only partially applicable to the case, because Huawei had given a voluntary FRAND commitment to the patent in question.421 The particular circumstances were created the “by fact that the patent at issue is essential to a standard established by a standardisation body, rendering its use indispensable to all competitors which envisage manufacturing products that comply with the standard to which it is linked.”422 Hence, the CJEU applied a modification to the criterion of the indispensability of the essential facilities doctrine.423 The status of the SEP was conditional on its holder providing a FRAND commitment to the SSO,424 which “creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact

416

Ibid, paras 38, 39 (3). Ibid, 45. “The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.” Case 85/76, Hoffmann-La Roche, 1979 E.C.R. 461, para 91. 418 Rato and English, "Huawei/ZTE," 107. 419 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), paras 61-69. 420 Like the European Commission, the CJEU referred to Volvo v. Veng, but it did not list Bronner and Microsoft in its references to case law on “exceptional circumstances. Ibid, paras 46-47. Cf. Case AT.39985, Motorola (29 April 2014), para 278 and fn 255; Case AT.39939, Samsung (29 April 2014), paras 55-56, fn 34. 421 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 48; Opinion of AG Wathelet, Case C-170/ 23, Huawei Technologies Co. Ltd v. ZTE Corp., ZTE Deutschland Gmgh, (20 November 2014) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri¼CELEX:62013CC0170, para 70. 422 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 49. 423 AG Wathelet even assumes that the first criterion of the “particular circumstances test” is identical to the criterion of indispensability under the essential facilities doctrine. See AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 70. 424 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 51. 417

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grant licences on such terms.”425 Unlike the EC in Motorola,426 the CJEU did not equate the FRAND commitment directly with a private liability rule; instead, it acknowledged that a SEP holder had a right to enforce his patent with an injunctive relief, but stressed that, due to the SEP status of the patent, “its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question”.427 A refusal to license in such context “may, in principle, constitute abuse in the meaning of Article 102 TFEU.”428 As the case concerned a dispute over what constituted FRAND,429 after articulating the test for the “particular circumstances”, the CJEU proceeded to identify the conditions for non-abusive conduct of the SEP holder that “ensure a fair balance between the interests concerned”.430 The following legal reasoning relied on weighting the objective of maintaining free competition pursuant to Art. 102 TFEU against the objective of enforcing IPRs, which, according to the CJEU stem, from the fundamental right to an effective remedy (Art. 47 CFR), including the right to access a court and the protection of IP (Art 17 (2) CFR), which is also ensured at a high level by the Enforcement Directive, which qualifies the set of remedies for patent infringements.431 The CJEU ruled that, while the commitment of a SEP holder to grant licenses on FRAND terms “cannot negate the substance of the rights guaranteed to that proprietor by Article 17(2) and Article 47 of the Charter, it does, none the less, justify the imposition on that proprietor of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction or the recall of products.”432 On this basis, the CJEU determined a framework of negotiation that defined a standard implementer’s safe harbour: 1. In the particular circumstances described above, upon discovering that a standard implementer has used a SEP without a license, the holder of the SEP in question must alert the alleged infringer by designating the infringed SEP and specifying the manner in which it was infringed.433

425

Ibid, para 52. See Case AT.39985, Motorola (29 April 2014), paras 294, 299, 417. 427 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 52. 428 Ibid, para 53. 429 Ibid, para 55. 430 Ibid. 431 Ibid, para 57. Unlike AG Wathelet, the CJEU did not refer to the freedom to conduct business (Art. 16 of the CFR) as paralleling Art. 102 TFEU. See AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 12, 68-69. See also Case AT.39985, Motorola (29 April 2014), paras 500-526. 432 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 59. See also rec. 32 Enforcement Directive. 433 Ibid, paras 60-61. The court rightly abandoned AG Wathelet’s proposition to exempt “fully aware” infringers from the safe harbour; see AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 84. First, the need to establish full awareness would have likely led to an additional set 426

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2. In response to such an alert, the alleged infringer should express its willingness to conclude a licensing agreement on FRAND terms.434 3. After this expression of willingness to license, the SEP holder must present the alleged infringer with “a specific, written offer for a license on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the royalty and the way it is to be calculated.” 435 4. (a) The alleged infringer shall respond to this offer diligently, “in accordance with recognized commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.”436 (b) Alternatively, it may reject the offer, under the condition that it submits to the SEP holder, “promptly and in writing, a specific counter-offer that corresponds FRAND terms.”437 In the event that the alleged infringer has used the SEP before the licensing agreement has been concluded, he is obliged, at the point in time at which the counter-offer is rejected, to provide an appropriate security and to render an account of his past uses of the SEP for the purposes of calculating the security required.438 5. If the parties do not reach the agreement after a counter-offer has been made, they “may, by common agreement, request that the amount of the royalty be determined by an independent third party, by a decision without delay”.439 A SEP holder may seek an injunctive relief against an alleged infringer or recall its products without abusing a dominant position in situations in which the alleged infringer continues to use the patent and fails to diligently respond to the offer, attempts to hold-out the SEP holder through delaying tactics, or rejects the offer and fails to provide a counter-offer.440 Otherwise, seeking an injunctive relief would constitute “a method different from those governing normal competition”.441 However, Art. 102 TFEU poses no restrictions on “seeking the rendering of accounts in relation to past acts of use of that SEP or award damages in respect of those acts of

of litigation. Second, investigations into awareness would have been redundant in the context of standard setting, wherein a standard essential technology is indispensable for implementing a standard. 434 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 63. 435 Ibid. Cf. AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 84-85, in which being alerted of the infringement and the making of the offer occur simultaneously. 436 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 65. 437 Ibid, para 66. According to AG Wathelet, the timeframe for the alleged infringer’s reaction “must be assessed in the light of ‘commercial window opportunity’ available to the SEP-holder for securing a return on its patent in the sector in question”. AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 89. 438 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 67. 439 Ibid, para 68. 440 See ibid, para 66, 77. 441 AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 74.

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use”. Unlike injunctive relief or the recall of products, these remedies have no direct effect on the availability of a competitor’s product on the market.442 Finally, in Huawei, the CJEU acknowledged that an alleged infringer’s challenges with regard to the validity, the standard essentiality, or the actual use of a SEP “cannot be criticized” on the basis of the right to effective judicial protection (Art. 47 of the CFR) and because the SSO did not check the validity or essentiality of the patents read into the standard.443

8.6.4.4

Interpretation of Huawei

Huawei spurred on the scholarly discussion concerning the enforcement of de jure SEPs as anticompetitive conduct. In particular, the scope of the applicability of the decision and its respective effects have been subject to debate, with the opinions of the commentators having been dividing into three different categories. According to the first, leveraging theory-driven interpretation, in Huawei, the CJEU relied on a monopoly leveraging theory and sanctioned only vertical foreclosures; consequently, Huawei does not apply to NPEs at all.444 Furthermore, the CJEU does not sanction exploitative hold-ups:445 Even if the negotiation framework applies to all of the relevant patent holders, doubts have been raised as to whether the enforcement of SEPs qualifies as abuse when it does not lead to monopoly leveraging.446 Pursuant to this view, leaving the safe harbour of Huawei does not automatically amount to antitrust liability, even with respect to a market-dominant SEP holder.447 In addition, commentators have criticized the decision for paying insufficient attention to the possibility of competition between standards.448 Pursuant to the second interpretation, Huawei dealt with the intersection of patent and competition law and represents the CJEU’s reaction to the EC’s stance in Motorola and Samsung. Following this perspective, Huawei defined a framework that can be used to determine when the hold-up of an FRAND-encumbered de jure

442

See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 74. Ibid, para 69. See also AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 94-96 which emphasize the importance of maintaining standard implementers’ incentives to challege the validity of patents. 444 Nicolas Petit, "Huawei v. ZTE : Judicial Conservativism at the Patent Antitrust Intersection," CPI Antitrust Chronicle 10, no. 2 (2015): 2, 8. Similarly, see Rato and English, "Huawei/ZTE," 110; Björn Lundqvist, "Interface between EU Competition Law and Standard Essential Patents from Orange-Book-Standard to the Huawei Case," European Competition Journal 11, no. 2-3 (2015): 388. 445 Petit, "Huawei v. ZTE," 5. 446 Tsilikas, "Huawei v. ZTE," 172-173. 447 Rato and English, "Huawei/ZTE," 111. 448 Ibid, 110. 443

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SEP amounts to an abuse of dominance449 and to balance the risk of hold-up against that of a hold-out.450 This interpretation also rejects the view that Huawei applies only to vertically integrated companies.451 I concur with this view, as the CJEU clearly states that “a refusal by the proprietor of the SEP to grant a license on those [FRAND] terms may, in principle, constitute an abuse within the meaning of Article 102 TFEU”,452 thus confirming that both exploitative and exclusionary hold-ups can become subject to an antitrust intervention. As Colangelo and Tonti have observed, this approach has been adopted in German case-law following Huawei.453 In its opinion, the EC confirmed that Huawei’s framework also applies to PAEs.454 The third interpretation of Huawei focuses on the CJEU’s unexpected recourse to contract law. The negotiation framework of Huawei is considered to represent a contractual approach, as opposed to one that is grounded in competition or patent law.455 Consequently, the decision is unlikely to address conflicts between the holders of non-FRAND-encumbered SEPs and standard implementers.456 Nevertheless, the Huawei framework seeks to determine how FRAND should be negotiated in light of the principle of good faith.457 The justification for the framework of “fair interaction” stems, first, from the balancing of fundamental rights458 and, second, from the civil law by virtue of the FRAND commitment having been made in the context of open standardisation.459 Consequently, the framework

449

Margarethe Vestager, "Intellectual Property Law and Competition." Speech at 19th IBA Competition Conference, Florence 11 September 2015, Version 01, European Commission, Last modified 11 September 2015. Accessed 31 December 2018 ,https://ec.europa.eu/commission/ commissioners/2014-2019/vestager/announcements/intellectual-property-and-competition_en. 450 Pedro Henrique D. Batista and Gustavo Cesar Mazutti, "Comment on “Huawei Technologies” (C-170/13) : Standard Essential Patents and Competition Law - How Far Does the CJEU Decision Go?," 247-249. IIC - International Review of Intellectual Property and Competition Law 47, no. 2 (2016); Angwenyi, "Quest for Balance," 105, 112-114. 451 Vestager, "Intellectual Property Law and Competition"; Batista and Mazutti, "Comment," 248, fn 217. 452 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 53. 453 Sisvel v. Haier, LG Düsseldorf, 3 November 2015, 4a O 144/114, GRUR-RS 2015, 19564; Sisvel v. Haier, LG Düsseldorf, 3 November 2015, 4a O 93/14, GRUR-RS 2016, 04073; LG Düsseldorf, 31 March 2016, 4a O 73/14, BeckRS 2016, 131550; OLG Düsseldorf, 13 January, 2016, Sisvel v. Haier, I-15 U 66/15, NZKart 2017, 665; Sisvel v. Haier, OLG Düsseldorf, 13 January, 2016, 15 U 65/15, WuW 2016, 188; Giuseppe Colangelo and Valerio Torti, "Filling Huawei's Gaps : The Recent German Case Law on Standard Essential Patents," European Competition Law Review 38, no. 12 (2017): 540-541. 454 European Commission, "EU approach to SEPs" para 3.5. 455 Picht, "ECJ Rules on Standard-Essential Patents," 371. Similarly Hanns Ullrich, FRAND Access to Open Standards and the Patent Exclusivity : Restating the Principles, Research Paper No. 17-04 (Munich: Max Planck Institute for Innovation & Competition, 2017), 38. 456 Picht, "ECJ Rules on Standard-Essential Patents," 371. 457 Ullrich, FRAND, 39. 458 Picht, "ECJ Rules on Standard-Essential Patents," 370. 459 Ullrich, FRAND, 39-40.

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binds all SEP holders who have made a FRAND commitment, irrespective of whether they hold a market-dominant position460 or engage in hold-ups.461 From this perspective, by making a FRAND commitment, the SEP had voluntarily restricted the use of its property rule;462 the EC implied a preference for this line of interpretation.463 This interpretation approximates Huawei’s effect more closely to that of the US approach in treating the FRAND declaration as a contract in favour of a third party, the standard implementer.464 From the perspective of competition law, the framework seeks to simulate how a SEP holder ought to behave in the presence of effective competition.465 Following this view, the prevention of exploitative hold-ups is deemed to be even more important than exclusionary abuses. 466

8.6.4.5

Huawei and TRIPS

The above-described interpretations of Huawei overlook the significance of the decision with regard to the interface of patent and competition law in light of TRIPS. While it never directly refers to TRIPS, the CJEU’s negotiation framework intelligently appropriated the flexibilities awarded by Art. 31(k) and Art. 40 TRIPS. Contrary to the “unconditional offer” requirement of Orange Book Standard and the prior effort requirement of Art. 31 (b) TRIPS, the CJEU ruled that it is the obligation of the holder of a FRAND-encumbered SEP to approach the alleged infringer for the purposes of negotiating a license and making an offer for a license on FRAND terms.467 Hence, the framework of Huawei can be described as a pre-emptive ex post compulsory liability rule. AG Wathelet justified the requirement for ex post negotiation of the license with reference to the swift development of the telecommunications sector, which requires undertakings to issue their products at rapid pace.468 Unlike most compulsory licenses that rely on the indirect effect of the instrument on licensing negotiations,469 Huawei established a concrete roadmap for agreeing a license under FRAND, where a SEP holder’s side-steps from from the framework can be regarded as abuse of dominance remediable with a compulsory license (Art. 31 (k) TRIPS). The framework achieves a balance by encouraging the holder of a

460

Picht, "ECJ Rules on Standard-Essential Patents," 370; Ullrich, FRAND, 39-40, fn 137. Picht, "ECJ Rules on Standard-Essential Patents," 370. 462 AG Wathelet even compares FRAND commitments to licenses of right. See AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 64-65. 463 European Commission, "EU approach to SEPs" paras 2.0, 3.5. 464 See Microsoft v. Motorola, 696 F.3d 872, 884. Cf. Ullrich, FRAND, 32. 465 Ullrich, FRAND, 40. 466 Ibid, 44. 467 Cf. Orange Book Standard, IIC 2010, 369, 371, para 29-b. 468 AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 82. 469 On indirect effect of compulsory licenses see Sect. 4.3.6. 461

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SEP and an implementer to negotiate a license privately,470 reinforcing the longevity of the openness created by virtue of the FRAND commitment, and sanctioning both exploitative and excluding hold-up situations. Provided that an implementer is also obliged to comply with the framework in order to avoid becoming subject to claims for an injunction, the framework also seeks to preclude hold-out situations. The negotiation framework appears to be motivated by an acknowledgement of the risks confronted by an implementer with regard to the standard essentiality and validity of a patent and his position when making a FRAND offer.471 The duty to alert an implementer is intended to resolve information asymmetry between the right holder and the alleged infringer, who, when considering the large numbers of patents declared essential for the LTE standard, may not have known that it was infringing an SEP.472 Advocate General Wathelet also implied that, due to overdeclaration, information concerning the validity and essentiality of the declared patents was imperfect, and the transaction costs that would be incurred in overcoming the problem would be excessive, even for a large competitor.473 By virtue of having made a FRAND commitment to the SSO, the SEP holder can also be expected to make a license offer on the basis of FRAND terms.474 Furthermore, the right holder was viewed as being more favourably positioned to comply with the FRAND’s requirement of non-discrimination on the basis of its existing, albeit typically undisclosed, licencing practices.475 Hence, the negotiation framework developed in Huawei was driven by concerns over the quality of SEPs, the problem of information asymmetry, and the increasing transaction costs associated with clearing IPRs ex ante in the context of patent thickets, all of which contribute to overprotection problems. The negotiation framework originally proposed by AG Wathelet was narrower than that of the CJEU, as it balanced fundamental rights on the basis of Art. 12 of the Enforcement Directive, which makes the establishment of an ex post liability rule contingent on the unintentionality of an infringement.476 In contrast, the CJEU’s justification for the compulsory liability rule stemmed from the interrelationship of rec. 12 of the Enforcement Directive and Art. 102 TFEU in light of fundamental rights.477 This approach allowed the CJEU to establish a liability rule without the reservations of Art. 12 Enforcement Directive. From a practical perspective, this was

470

Ullrich, FRAND, 39-40. Hilty and Slowinski, "Standardessentielle Patente," 785. 472 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 62; AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 81. 473 AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 81-82, fn 53. 474 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 64; AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 86. 475 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 64; AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 86. 476 See AG Wathelet, Case C-170/23, Huawei, (20 November 2014), paras 12-15, 19, 103 477 See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), paras 6, 57-60. 471

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certainly the correct solution in this particular case, as it concerned a de jure standard. However, the CJEU’s weighing of fundamental rights and inadequate analysis of the interrelationship of patent and competition law in Huawei possibly has unintended, but critical, implications for the resolution of the overprotection problems associated with patent law. Most importantly, with reference to Art. 47 of the CFR, the CJEU precluded the viability of antirust interventions in hold-ups involving patents unencumbered by FRAND declaration. Furthermore, Huawei may have more generally limited the possibilities in terms of employing an ex post liability rule in the EU. The consequences of this ruling on the scope of the applicability of competition law’s existing instruments, such as the essential facilities doctrine, are discussed further in Sects. 8.7.3 and 8.8.1.5 whereas its effect on enacting new instruments are analysed in Sect. 9.4.3.2.

8.6.5

Conclusions on Huawei

Generally, commentators have viewed Huawei as representing a more balanced approach with respect to the interests of SEP holders and implementers than those adopted in Samsung and Microsoft or the Orange Book Standard.478 The decision fosters private ordering479 and does not preclude a SEP holder from seeking an injunction. Huawei can be regarded as the EU’s counterpart to the US Supreme Court’s eBay decision, but with stricter conditions for injunctive relief.480 Given that Huawei dealt only with FRAND-encumbered SEPs, its scope of application is considerably more limited than that of eBay.481 Furthermore, Huawei’s competition law-driven approach to intervening in hold-ups contrasts with the US approach, in which, with the exception of the application of section 5 of the FTC Act to the enforcement of de jure SEPs,482 overprotection problems involving SEPs are addressed primarily through patent and contract law.483 478

Henningsson, "Injunctions for Standard Essential Patents under FRAND Commitment," 459; Tsilikas, "Huawei v. ZTE," 175. 479 Tsilikas, "Huawei v. ZTE," 175. 480 Angwenyi, "Quest for Balance," 110, 113, 114; Picht, "ECJ Rules on Standard-Essential Patents," 371. 481 See on the capacity of eBay to address the overprotection problems, see Sect. 7.3.3. 482 The FTC may intervene in cases involving hold-ups being used as an unfair method of competition pursuant to section 5 of the FTC Act. In re Motorola Mobility Llc and Google Inc, (File No. 1210120) FTC Docket C-4410 (Decision and Order, 24 July 2013); In re Robert Bosch Gmbh, (File No. 121 0081), FTC Docket No. C-4377. For an analysis, see Nikolic, "Who Needs Injunctions? Alternative Remedies in Standard Essential Patents Disputes," 130-131. 483 Picht, "ECJ Rules on Standard-Essential Patents," 371. In the US, a permanent injunction may be denied on the basis of equity, see eBay, 126 S. Ct. 1837, 1839. Furthermore, FRAND-commitments given in the context of de jure standard setting are deemed binding towards third parties, see Microsoft v. Motorola, 696 F.3d 872, 884; see also Microsoft v. Motorola, 904 F.Supp.2d 1109, 1115.

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However, as discussed previously, it remains unclear whether the application of the Huawei framework is triggered by the existence of market dominance or by virtue of a FRAND declaration. Furthermore, the concepts introduced in the negotiation framework are ambiguous and leave a wide array of questions open.484 In particular, the parameters for determining when a standard implementer has fulfilled his obligations under the Huawei framework are ambiguous.485 In addition, it is challenging to determine on the basis of the CJEU’s framework whose omission— that of a patent holder or an alleged infringer—will trigger the respective legal consequences.486 Most notably, who qualifies as a “willing licensee” also remains unclear post-Huawei.487 Furthermore, the judgement does not address the topics of cross-licensing or portfolio licensing,488 the negotiation of which may require more time than the determination of the royalty rate. The lack of guidance with regard to the appropriate amount of security has also raised concerns regarding forum shopping for the most favourable national interpretation.489 It is also unclear when a SEP holder may file a claim for an injunctive relief under the Huawei framework.490 Some commentators have expressed concerns that an exceedingly implementerfriendly interpretation of Huawei may leave excessive leeway in terms of allowing for hold-outs by implementers acting in bad faith491 and could also incentivize SEP holders to forego FRAND commitments and opt for de facto standardisation.492 Given its vagueness, only subsequent court practice can determine whether Huawei interferes with hold-ups in a balanced manner or creates hold-out situations. The existing case law is not analysed in detail in this context.493 However, it has, thus far, confirmed that the extent to which the framework’s requirements have been fulfilled will be evaluated one step at a time, with the implementer’s obligations

484

Batista and Mazutti, "Comment," 251. Ibid, 251. 486 See Picht, "ECJ Rules on Standard-Essential Patents," 372-374; Tsilikas, "Huawei v. ZTE," 172. 487 Kristian Henningsson, "Injunctions for Standard Essential Patents,” 449; Picht, "ECJ Rules on Standard-Essential Patents," 373-374. 488 Rato and English, "Huawei/ZTE," 110. 489 Batista and Mazutti, "Comment," 251. 490 While initiating infringement proceedings prior to notifying a patent holder of an infringement would weaken the central objective of the framework with regard to preventing hold-up situations, in transitional cases, the courts did not sanction SEP holders for notifying implementers only after initiating proceedings against them. See OLG Karlsruhe, 23 January 2012, 6 U 136/11 (2012), GRUR-RR 2012, 405; Sisvel v. Haier, GRUR-RS 2016, 04073; GRUR-RR 2012, 405. See Peter Picht, „FRAND wars 2.0“ - Rechtsprechung im Anschluss an die Huawei/ZTE-Entscheidung des EuGH, Discussion Paper No. 7 (Munich: Max Planck Institute for Innovation & Competition, 2017) 6-10. 491 Angwenyi, "Quest for Balance," 113. 492 Lundqvist, "Interface between EU Competition Law and Standard Essential Patents," 401. 493 For case law reviews, see Picht, FRAND ; Colangelo and Torti, "Filling Huawei's Gaps."; Eva Stanková, "'Huawei v. ZTE' Judgement and Follow-on Application of Article 102 TFEU in the Light of This Judgement by German Courts," SSRN (2016). 485

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arising upon receipt of a FRAND offer.494 Injunction claims filed before a patent holder has been notified in any manner have been deemed abusive.495 However, according to Judge Birrs, seeking an injunctive relief in the framework of Huawei is not abusive per se and account must be given to circumstances that diverge from those present in Huawei.496 In the author’s opinion, the divergence from the main rule of abusiveness of an early claim for injunction should be allowed only in narrow circumstances,497 and other means of precluding hold-outs should be preferred. Initial reviews of the case law suggest that the concerns regarding Huawei enabling hold-outs have, to some extent, been excessive:498 “Clearly, Huawei is not—and is not taken by Member States’ courts to be—an injunction blocker but merely an injunction brake—injunctions remain possible if the standard implementer does not behave appropriately.”499 Furthermore, the role of providing securities and other means to avoid hold-outs has received scholarly attention,500 suggesting that there are other means of preventing a hold-out than the use of a property rule. Hence, despite numerous open questions and a degree of legal uncertainty, postHuawei case law has demonstrated a trend towards a more balanced interpretation of the respective interests of a SEP holder and an implementer.

494

Sisvel v. Haier, NZKart 2017, 665; Sisvel v. Haier, WuW 2016, 188; GRUR-RR 2012, 405; Colangelo and Torti, "Filling Huawei's Gaps," 541; European Commission, "EU approach to SEPs," para 3.1. Cf. Unwired Planet v. Huawei [2017] EWHC 2988 (Pat) [2017] RPC 19, para 747; Unwired Planet International Ltd v. Huawei Technologies Ltd [2018] EWCA Civ 2344, paras 281, 284. 495 Unwired Planet v. Huawei [2017] EWHC 2988 (Pat) [2017] RPC 19, para 747 iii) - iv); Unwired Planet v. Huawei [2018] EWCA Civ 2344, para 676. 496 Unwired Planet v. Huawei [2017] EWHC 2988 (Pat) [2017] RPC 19, para 747, v) - vi). In this particular case, the previous contact between the parties and the motive behind the injunction claim, which was intended to facilitate the conclusion of FRAND negotiations, were taken into consideration. Ultimately, taking into consideration both parties’ conduct, the filing of a claim for an injunction before the offer of FRAND terms was not found to be abusive. Ibid, paras 747-748, 750, 755; Unwired Planet v. Huawei [2018] EWCA Civ 2344, paras 283-284. 497 While I acknowledge the need to avoid the Huawei criteria being manipulated for hold-out purposes, distinguishing an intent to conclude a FRAND agreement from a hold-up motivation is not possible in every case, and few defendants have a strong enough negotiation position to not be influenced by the threat of an injunction. 498 Picht, FRAND, 58-59. 499 Picht, "ECJ Rules on Standard-Essential Patents," 373. 500 Nikolic, "Who Needs Injunctions? Alternative Remedies in Standard Essential Patents Disputes," 133-134, in which the author discusses interim payments or interim injunctions sanctioning non-payment of security; European Commission, "EU approach to SEPs" para 3.1, which stresses the importance of setting the amount of security at a high enough level to repel hold-outs. See also Picht, "Unwired Planet v. Huawei," 579-579, in which the author discusses whether a new type of injunction, which is conditional on an implementer’s unwillingness to license, was introduced by Unwired Planet v. Huawei.

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Conclusions Concerning Hold-ups Involving de jure SEPs

Pursuant to Rambus, IPCom, Motorola, Samsung, and Huawei, one can conclude that the creation of exploitative or exclusionary hold-up situations by means of enforcing a FRAND-encumbered de jure SEP can be deemed as an abuse of dominant position. These cases emphasize the importance of a SEP holder’s commitment to license on the basis of FRAND terms in light of the welfare-enhancing benefits of the de jure standard setting. On this basis, compulsory liability rules resolve the problems associated with the enforceability and longevity of private liability rules with respect to de jure SEPs. Most importantly, Huawei established a safe harbour for negotiating a license under FRAND terms that deviates from the excessively narrow procedure required by the Orange Book Standard as well as the excessively implementer-friendly concept of the “willing licensee” established in Motorola. While, in theory, Huawei’s framework can be regarded as representing a balanced decision, its full scope will be determined and legal certainty will be achieved only through subsequent court practice.

8.7 8.7.1

Evaluation Structure

This part reviewed the conditions under which a patent holder’s behaviour with respect to a follow-on innovator can be deemed to constitute an abuse of a dominant position that should be remedied by means of a compulsory liability rule. This subpart analyses the extent to which these instruments of competition law may intervene with the overprotection problems associated with patent protection, namely unjustified refusals to license, excessive royalties, and excluding or exploitative hold-ups. Some authors claim that antitrust interventions in refusals to license are justified on those rare occasions when the design of an IP protection leads to inefficiencies. Following this view, the use of compulsory licenses that target more banal IPRs and require smaller investments would be more justified than those that interfere with the “subject matter located at the core of protection”.501 On this basis, the threshold for the application of the essential facilities doctrine should be higher with respect to patents. On the other hand, it is questionable whether the judges who apply competition law have the competence to evaluate the justifiability of the existence of IPRs,

501

Dan Eklöf, "The Microsoft Case - at the Heart of the IP/Antirust Intersection," in Article 82 EC: Reflections on Its Recent Evolution, ed. Ariel Ezrachi (Portland: Hart Publishing, 2009), 117-118.

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as such a policy would create legal uncertainty and disincentives to invest.502 Indeed, it has been has explicitly confirmed that, in the absence of EU harmonization, the conditions and procedures for the grant of IP protection are determined by national law.503 In addition, given that many patents are actually weak and may be overturned in invalidation proceedings, there is no justification for a more restrained application of the essential facilities doctrine to patents.504 The first condition for the imposition of antitrust remedies to the unilateral conduct of a patent holder is that the undertaking in question must hold a market dominant position. Therefore, any conduct that results in the market failures of overprotection that is instituted by a patent holder who does not hold a dominant position cannot be subject to an antitrust intervention, even if her exercise of the patent would not coincide with the objectives of patent protection and may have a detrimental effect on follow-on innovation. Provided that the majority of patents do not confer market dominance, competition law cannot interfere with their exercise, even if they are used to hold-up follow-on innovators. The dominant position of a patent holder may stem not only from the market power deriving from the technological lead provided by the patent in question but also from other circumstances on the market, such network effects or de facto or de jure standardisation. These elements play a role in the determination of the indispensability of a patent to downstream competition.505 As a consequence, the different instruments of competition law are applied to patents depending on whether they are standard essential or not and whether the SEP in question belongs to a de jure or de facto standard. In addition, whether or not a patent holder has previously licensed his patent affects the finding of an antitrust violation. Therefore, in the following analysis of the ability of competition law to intervene in market failures of overprotection with compulsory liability rules, the effects are evaluated with regard to patent type and to whether the conduct in question involves a de novo refusal or a termination of supply.

8.7.2

Refusals to License

8.7.2.1

Non-SEP

Unjustified Refusal to License: De Novo The essential facilities doctrine also applies to patents that have never been licensed to third parties because they can 502

Valentine Korah, Intellectual Property Rights and EC Competition Rules (Portland: Hart Publishing, 2006), 139. 503 See Case C-238/87, Volvo v. Veng, 1988 E.C.R. 6211, para 7. See also Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, at 4.321. 504 In fact, Huawei appears to take the problems of weak patents and overdeclaration into consideration, see Sect. 8.6.4.5. 505 See Sect. 8.5.2.

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be considered to constitute a hypothetical market.506 However, the type of refusal determines whether the new product requirement pursuant to Magill or the prejudice to technological development criterion of Microsoft will be applied as the third criterion of the essential facilities test. The former test would apply to de novo refusals concerning non-SEPs, while the latter applies to refusals involving SEPs. A refusal would have to prevent the appearance of a new product for which there is potential consumer demand; however, such situations are few and far between.507 The innovative contribution of the new innovation and the point in time at which the refusal occurred in relation to the development of the follow-up innovation are likely to play a significant role in determining the fulfilment of the new product criterion. On the basis of case law, it is unclear what qualifies as a new product when it comes to de novo refusals of non-SEPs: Does the new product requirement cover only innovations so radical that they create markets of their own? What of new products that only feature improvements to offerings that are already available on the downstream market? IMS Health suggests that the threshold for the fulfilment of the new product requirement is fairly low508 and would certainly also accommodate improved products that compete with a patent holder’s products on the downstream market. Leistner has suggested that “whenever a better (or even just a cheaper) product could theoretically be based upon a substitute of the IP-right, but only specific (‘exceptional’) market conditions hamper that development because they effectively eliminate competition by substitution, such product should be regarded as relevant as a ‘new’ product.”509 This qualification, however, was motivated by the failure of IMS Health to address problems related to de facto standards that involve network effects. Given that Microsoft offers a wider criterion510 that is better suited to addressing such situations, I hold the view that, with regard to de novo refusals of non-SEPs, the mere duplication of an upstream patent holder’s products that involves neither process or product innovation on the behalf of the downstream operator should not fulfil the new product requirement. The earlier that a refusal occurs during a follow-on innovation process, the more difficult it is to define the relevant downstream market and to determine whether it would yield a new product for which there is a consumer demand. From the perspective of the design of the patent system, it would be ideal that any likelihood of infringing an existing right would be discovered very early, before any investments have been made in the subsequent innovation, and when, upon a refusal to license, there may still be opportunities to design around the patent in question or to decide to use an alternative or substitute technology. However, in the event that a patent holder is indeed in a market-dominant position and there are no substitutes for the technology in question, an early de novo refusal may make it impossible to gather

506

See Case C-418/01, IMS Health, 2004 E.C.R. I-5039, para 43. Drexl, "Antitrust Placebo," 808. 508 See Sect. 8.5.4.1. 509 Leistner, "Intellectual Property and Competition Law," 152, [citation omitted.]. 510 Anderman, "Competition Law Perspective II," 140. 507

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sufficient evidence of abusive conduct. However, the later the point in the process of commercialization at which a refusal occurs, the greater the investments that a subsequent innovator may lose if access to the patent in question is precluded. Simultaneously, the closer a subsequent innovation is to market launch, the easier it would be to determine whether or not it fulfils the new product criterion. At the manufacturing stage, a subsequent innovation would already infringe the pre-existing patent. Therefore, the interference of a patent holder with the use of his patent would no longer be considered a refusal to license but instead as a potential hold-up situation, at least if the right holder seeks to enforce his patent.511 Due to the problems associated with gathering sufficient evidence in cases involving de novo refusals, the threshold for fulfilling the new product requirement should be reasonably low. It is important to note that a lenient definition of the new product requirement criterion does not risk undermining a patent holder’s interests, as she can still provide an objective justification of the effect that a compulsory license may have on her incentives. Furthermore, a de novo refusal is more readily viewed as justified than a termination of supply.512 However, it is not only new product requirement that makes the essential facilities doctrine so difficult to apply to unjustified refusals to license to follow-on innovators. Most importantly, competition law is unlikely to interfere with this market failure of patent law because it is very rare for a non-SEP holder to confer market dominance. It is even less likely that the non-SEP in question would be considered indispensable to downstream follow-on innovation. Nevertheless, situations could arise in which an undertaking holds an upstream patent to a product that is critical to cumulative downstream innovation and no substitutes for it are available on the market. In addition, it would need to be economically unviable to design around it. With regard to de novo refusals, a patent holder is most likely to be motivated by an interest in reserving the downstream market for himself. The fact that some patent holders may deliberately patent offensively in order to block competitors’ R&D efforts should be taken into account in the assessment of indispensability. It cannot be expected that, in addition to inventing around a patent holder’s technology, a follow-on innovator would also need to design around multiple patents of her own to ensure that her complex product innovation does not infringe an offensively patented invention, as this would increase the costs of R&D and the price of the product to the detriment of consumer welfare and hinder competition on the relevant downstream market.513 Unjustified Refusal to License: A Termination of Supply An unjustified refusal to license is more likely to be the subject of an antitrust intervention when a right

511

On the applicability of the competition law’s compulsory liability rules on hold-ups, see Sect. 8.7.3. 512 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 84. 513 In addition, the qualification of the new product requirement should not preclude interference with such offensive licensing practices.

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holder has previously licensed its patents, as it is easier to obtain evidence both of the upstream and downstream markets and possible technological developments on the downstream market; in addition, it is also more difficult to provide an objective justification for a refusal on the basis of securing incentives to innovate. However, a question arises as to whether a termination to supply licenses to a patent can prevent the introduction of a new product. The presence of a previous licensing agreement presupposes that a “new product” has already been introduced to the market. However, a patent holder may refuse to continue licensing a patent to a company operating downstream when the latter issues new technology or an improved technology other than that which the licensing agreement had previously covered. While Motorola concerned de jure SEPs, Motorola had ceased to license the SEPs in question to Apple’s suppliers in the advent of its release of the iPhone 4.514 Similar strategies could also be applied in the context of non-SEPs in the event that their holders are in market-dominant positions and the patents in question are regarded as objectively necessary to compete on the downstream market.515 Pursuant to the EC’s guidance, such situations would satisfy the new product requirement.516 Also here, a refusal to continue to license is likely to be more difficult to justify than a de novo refusal to license.

8.7.2.2

De facto SEPs

Unjustified Refusal to License: De Novo In situations in which a patent is a de facto SEP, it must be determined whether a refusal to license it would inhibit technological development to the detriment of consumers.517 While this criterion is very appropriate in terms of supporting the objective of dynamic efficiency, it may be very difficult to apply to de novo refusals due to the level of proof required. Microsoft was found to have abused its dominant position because it was possible to determine that its competitors had fostered technological development in the field of workgroup servers and the relevant evidence covered a time period of several years.518 However, it may be impossible to gather sufficient evidence concerning hindrances to technological development following a recent rise of a de facto standard and when a de novo refusal has only begun to have an effect on the development of an emerging market for technological products. However, it is also important not to make assumptions in such contexts, as a de facto standard may be subject to competition by other standards. In either case, the process of

514

Case AT.39985, Motorola (29 April 2014), paras 103-109. Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 81. 516 Ibid, para 87. 517 See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 647. 518 See ibid, paras 638-639 and 654; Case COMP/C-3/37.792, Microsoft, (24 March 2004), paras 211-213, 218 and fn 841. 515

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gathering sufficient evidence is very time consuming, and, on the occasion that an antitrust intervention is indeed necessary, the effect of a refusal on technological development may be irreversible, particularly if it concerns a market characterized by strong network effects and sensitivity to tipping. Consequently, despite all of the weaknesses of the IMS Health criteria, they may, in certain contexts, be easier to apply to the de novo refusals of de facto SEPs than those of Microsoft. Furthermore, in Germany, Standard-Spundfass offers a more lenient and appropriate set of requirements for interventions that address the de novo refusals of de facto SEPs than the criteria established in Microsoft and IMS Health. With regard to important upstream patents that have a wide array of applications across different fields of technology, it may be difficult to determine whether or not a patent is an SEP. The determination of the status of a patent would depend on the facts of a case. Nevertheless, the fulfilment of the criterion of indispensability requires the presence of a de facto monopoly. When a refusal concerns a pioneering upstream patent, it would be desirable to evaluate abusive conduct on the basis of suppression of technological development rather than the new product criterion; this is due to the fact that, in the absence of a research exception, the holder of the patent in question may be in a position to suppress research activity that could lead to the development of commercializable new products. However, the earlier subsequent innovative activity occurs and the closer the activity is to competition in innovation, rather than the downstream product market, the more prohibitively difficult it will become to define the market that a refusal to license will affect. Unjustified Refusal to License: Termination of Supply The termination of a de facto SEP licensing agreement is likely to be evaluated on the basis of the Microsoft criteria, particularly when a termination concerns several downstream operators simultaneously. In comparison to IMS Health, the Microsoft criteria are more appropriate when reviewing abuses of dominant positions for SEPs that belong to a de facto interoperability standard on markets that feature strong network effects. In principle, the essential facilities doctrine allows for antitrust interventions in situations in which a patent holder begins to license openly (with or without a FRAND commitment) with the objective of creating a de facto standard and later decides to terminate licensing agreements for the purposes of excluding competitors from the relevant downstream market.519 It is more difficult to objectively justify terminations of supply.520 Nevertheless, a refusal to continue licensing a de facto SEP will only rarely demonstrably inhibit technological development to the prejudice of consumers, with the consequence of eliminating effective competition in the field.521 In Germany, Standard-Spundfass

519

However, if a market-dominant de facto SEP holder refuses or terminates supply with respect to an individual standard implementer but continues licensing to others, the patent holder’s conduct may also be considered to be a form of discriminatory abuse. 520 See Sect. 8.5.5 discussing the Microsoft decision. 521 See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, para 647.

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may also be interpreted as applying to terminations to supply, without the high threshold of requiring all competition in the field in question to be eliminated.

8.7.2.3

De jure SEPs

The EC has not yet investigated a refusal to license de jure SEPs. In Germany, pursuant to Standard Spundfaß, this practice could be deemed discriminatory.522 This case would apply both to de novo refusals and terminations of supply. Internationally, the Korean Fair Trade Commission ordered Qualcomm to pay fines for anticompetitive conduct that involved, in addition to other violations, refusals to license de jure SEPs to rivals.523 In addition, the FTC’s charges against Qualcomm also involved accusations of refusals to license FRAND-encumbered de jure SEPs to downstream competitors.524 However, de jure SEPs are more likely to be subject to the hold-up market failures than unjustified refusals to license, as, generally, de jure standards are adopted before implementers have sought licenses from all relevant SEP holders ex ante. However, it is not precluded that a refusal to license de jure SEPs could, in the future, also become subject to antitrust scrutiny in Europe on the grounds of compromising the pro-competitive effects of standard setting. The emphasis placed on the SEP holder’s FRAND commitment in Huawei supports this interpretation.525

8.7.3

Hold-ups

8.7.3.1

Non-SEPs

Prior to Huawei, the case law of the CJEU on refusals to license was applicable both to refusals that occurred before an infringement of an IPR and refusals that occurred after a right had been infringed and possibly become subject to litigation.526 Consequently, the essential facilities doctrine applied the same conditions to both unjustified refusals to license as well as exclusionary hold-ups. In practice, the latter can be presumed as being more readily subject to antitrust investigations, as the empirical evidence required to fulfil the criteria of the essential facilities doctrine is more readily available in cases in which a downstream product has been manufactured or possibly introduced to the market. 522

Standard-Spundfass, IIC 2005, 741, 746-748. Korea Fair Trade Commission, "Sanctions on Qualcomm" 2, 5-6. 524 FTC, "FTC Charges Qualcomm". 525 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), paras 51, 53-54, 59. 526 See Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743, para 10; Case C-418/01, IMS Health, 2004 E.C.R. I-5039, paras 9-11; Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 2-4 and Sect. 8.5.1. 523

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However, by engaging in the balancing of fundamental rights in Huawei, the CJEU deemed the IPR holder that sought to enforce its right to enjoy the protection of IP (Art. 17 (2) CFR) and the effective judicial protection guaranteed by the fundamental right to access to courts (Art. 47 CFR). In this case, these rights were weighted against the protection against abuse of a dominant position (Art. 102 TFEU).527 The court found it justifiable to interfere with the right to enforce IPRs on the basis of the indispensable status of the SEP in question, the gaining of which was subject to giving an irrevocable FRAND commitment, which, in turn, created legitimate expectations on the part of standard implementers.528 A contrario, when a patent is not standard essential and is not subject to a FRAND commitment, the exceptions to the right to enforce a patent appear to be, in most cases, unjustifiable on antitrust grounds. The CJEU argued that non-SEPs “normally allow third parties to manufacture competing products without recourse to the patent concerned and without compromising the essential functions of the product in question.”529 It further stated that the need for high level of protection for intellectual property rights means that, in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of his exclusive rights, and that, in principle, the user of those rights, if he is not the proprietor, is required to obtain a license prior to any use.530

On the basis of these statements, Huawei narrowed the applicability of the essential facilities doctrine to non-SEPs to genuine refusals to license that occurred before a downstream operator infringed the right in question. Ultimately, this means that a compulsory license can remedy an anticompetitive practice involving a non-SEP only when an undertaking that seeks to gain access to a patent complies with the prior effort requirement of Art. 31 (b) TRIPS. The approach adopted towards fundamental rights by the CJEU in Huawei represents one of the symptoms of the overprotection of patents, namely that IPRs are given the status of property and the level of their protection of exceeds the minimum standards guaranteed by TRIPS. Post-Huawei, the essential facilities doctrine is applicable to an extremely narrow set of cases involving refusals to license that have not been preceded or followed by an instance of patent infringement. Given that the contemporary patent landscape is characterized by patent proliferation, the likelihood of a follow-on innovator of a complex product unknowingly infringing a pre-existing patent is very high; thus, the essential facilities doctrine is inapplicable to the majority of market failures associated with overprotection. Consequently, it is very difficult to intervene in hold-up situations involving non-SEP created by PAEs or companies employing offensive patenting strategies on the basis of competition law, even on the rare occasion that an undertaking engaging in such conduct is found to hold a dominant position. 527

Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), paras 57, 60. Ibid, paras 49, 51, 53. 529 Ibid, paras 50. 530 Ibid, paras 58. 528

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De facto SEPs

Post-Huawei, the applicability of the essential facilities doctrine to de facto SEPs is unclear. In his opinion, AG Wathelet drew comparison between a FRAND commitment and a license of right.531 The emphasis on the patent holder’s voluntary commitment to open licensing suggests that, when holding a dominant position, an undertakings that has announced its intention to license its de facto SEPs under FRAND terms is obliged to comply with the negotiation framework established by Huawei prior to enforcing its patents against a standard implementer. The effect of Huawei on antitrust interventions in hold-ups involving nonFRAND-encumbered de facto SEPs is uncertain. The applicability of the doctrine depends on the weights that are assigned to the factors that contributed to the foreclosure of competition (Art. 102 TFEU) in relation to the rights to IP (Art. 17 CFR) and effective remedies (Art. 47 of the CFR). If, following Huawei, a patent holder’s voluntary FRAND-commitment is deemed to be decisive in tipping the balance in favour of its competition, the applicability of the essential facilities doctrine to hold-ups involving non-FRAND-encumbered de facto SEPs is precluded. In support of this interpretation, it must be noted that the CJEU did not mention Microsoft in their reference to the doctrine,532 which may imply that the CFI’s judgement regarding access to de facto interoperability standards does not reflect the CJEU’s interpretation of the essential facilities doctrine.533 Such an outcome would be at odds with competition law’s objective of protecting dynamic competition. Instead, when weighting fundamental rights, the effect of a foreclosure should be the deciding factor in justifying intervention in the enforcement of a patent on the grounds of antitrust. What is the post-Huawei status of the German competition law defences established by Standard Spundfaß and Orange Book Standard? Both cases created a compulsory liability rule against hold-ups involving de facto standards. In light of Art. 3 (1), recitals 8 and 9 of the Regulation 1/2003, and Art. 102 TFEU, when an abusive practice does not affect trade between EU member states, the menber state may apply national competition laws. When relying only on the norms of EU competition law, the German competition law defences would be applicable in those very few cases in which the enforcement of de facto SEP affects only the German market. However, Huawei involved a weighting of the fundamental rights of the EU, which have the status of primary legislation (Art. 6 TEU). While they are applicable only in relation to the interpretation of EU law (Art. 51 CFR), the fact that the enforcement of IPRs is harmonized by the Enforcement Directive requires that Arts. 17 (2) and 47 CFR must be taken into account in light of Huawei whenever

531

AG Wathelet, Case C-170/23, Huawei, (20 November 2014), para 65. Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 47. 533 The Court of Justice may reject Microsoft either due to the CFI’s replacement of IMS Health’s new product requirement with the criterion of hindering technological development or due to the high threshold of proving an objective justification for a refusal to license. 532

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national antitrust authorities seek to intervene in the enforcement of IPRs. Given the lack of clarity with regard to the CJEU’s view on the balance of Art. 17 and 47 of the CFR and Art. 102 TFEU, a preliminary ruling concerning the status of the competition law defences under EU law should be requested (Art. 267 TFEU).

8.7.3.3

De jure SEPs

Hold-up problems involving de jure SEPs have been relatively widely addressed in the context of competition law. Rambus interfered with patent ambushes as a specific type of exploitative hold-ups. Pursuant to Motorola, Samsung, and Huawei, creating a hold-up situation using a FRAND-encumbered patent against a willing licensee would constitute an abuse of a dominant position. However, the latter decisions focused on exploitative hold-ups wherein the threat of injunction was used to negotiate a royalty rate higher than that required by FRAND and other licensing conditions, thus having anticompetitive effects. An excluding hold-up created by enforcing a FRAND-encumbered patent should be even more objectionable from the perspective of competition law. Initially, Huawei was deemed balanced with respect to mitigating both hold-up and hold-out risks.534 However, the application of the framework still entails a number of uncertainties. Many of the problems relate to the lack of definitions of FRAND terms and the manner in which they should be calculated, as these terms support and define the entire framework. For example, it may be difficult for an implementer to respond with a counter-offer that would be qualified as FRAND, particularly if it has no expertise on the subject.535 The EC’s decisions and the CJEU’s case law concerning de jure SEPs address only situations in which a right holder has participated in the standard-setting process. However, a de jure standard can also be held up by a patent holder who did not participate in setting the standard in question.536 IPCom indicates that the assignee of de jure SEPs that were subject to a FRAND commitment given by their previous owner can become subject to antitrust scrutiny upon charging supraFRAND royalties. However, a complex technology standard could, in principle, accidentally incorporate a patent without the knowledge of the relevant patent holder or the participants in the standard-setting process. On the basis of the CJEU’s weighting of fundamental rights in Huawei, if the patent holder in such situations seeks to hold-up the standard implementers, the existing doctrines of EU competition law would not apply. In the absence of a FRAND commitment, the patent holder

534

See Henningsson, "Injunctions for Standard Essential Patents under FRAND Commitment," 459; Tsilikas, "Huawei v. ZTE," 175. 535 Picht, "ECJ Rules on Standard-Essential Patents," 372. 536 Geradin and Rato, "Can Standard-Setting Lead to Exploitative Abuse?," 126.

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would not be subject to the Huawei negotiation framework.537 However, given that implementers are likely to infringe upon the SEP in question, the essential facilities doctrine would also be inapplicable (unless the CJEU adopts a new approach to weighting fundamental rights in hold-up situations). Nevertheless, beyond the status of non-FRAND-encumbered de jure SEPs and open questions related to Huawei, the justifications and means for antitrust intervention in hold-ups that occur in the context of de jure standard setting can be deemed balanced and effective. They provide an adequate setting for addressing the interests of follow-on innovators while maintaining sufficient incentives for patent holders to continue engaging in R&D activity.

8.7.4

Excessive Royalties and Royalty Stacking

From the perspective of the dynamic incentive theory, a patent holder does not need to internalize all of the externalities of his invention in order to maintain his incentives to innovate. Dynamic efficiency does not presuppose that a patent holder must enjoy all of the possible supracompetitive profits generated by her invention. Nevertheless, competition law is highly unlikely to interfere in situations in which a patent holder chargers excessive royalties for non-SEP patents, even if doing so has the effect of reducing downstream operators’ incentives to develop subsequent innovations. Even if such a patent holder is found to be in a dominant position, it would be very difficult to establish a benchmark for finding his royalty rates excessive in practice. Furthermore, price control is not an enforcement priority of the EC,538 and the ad hoc nature of antitrust proceedings is not suited to addressing the market failure of excessive royalties.539 In general, a patent holder has very wide freedom when it comes to determining her licensing rate540 when she has not pledged to license on FRAND terms. Only clearly egregious conduct and situations in which a patent holder raises prices on the downstream market significantly over a period of time would be likely to provide the evidence required to satisfy requirements of the United Brands test.541 In the event that a licensing fee is completely disproportionate and has the effect of foreclosing downstream innovation, the conduct of the patent holder in question may be regarded as a constructive refusal and could be reviewed under the essential 537

See also Picht, "ECJ Rules on Standard-Essential Patents," 371, in which the author notes that, if the Huawei framework derived its legitimacy from contract law, it does not apply to de jure SEPs that are unencumbered by a FRAND commitment. 538 Directorate-General for Competition, European Commission, and Secretariat-General, XXIVth Report on Competition Policy 1994, 207. 539 For a discussion on the ad hoc nature of antitrust proceedings see also Anderman, "Competition Law Perspective II," 143; Früh, Immaterialgüterrechte und der relevante Markt, 456, 459. 540 See Anderman and Schmidt, EU Competition Law and Intellectual Property Rights, 153-154. 541 Ibid, 154.

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facilities doctrine, which considers dynamic efficiency to a greater extent than the United Brands test.542 However, there is no clear rule regarding when charging excessive licensing fees could be investigated as representing a constructive refusal, particularly given that, under the United Brands doctrine, a high level of demand for a technology justifies charging a higher price for that product.543 The exclusionary effect of unreasonable licensing fees would need to be evaluated on a case-specific basis. A refusal would be constructive, for example, when the unjustifiably high fees charged for an indispensable technology preclude follow-on innovator(s) from accessing downstream markets. However, considering that, in case that involve refusals to license, the mere unprofitability of investing in follow-on innovation in the face of licensing fees does not represent grounds for the application of the essential facilities doctrine,544 the threshold for identifying a constructive refusal is very high. However, if a vertically integrated patent holder raises his licensing rates to an excessive level over time, such conduct could also be evaluated as a margin squeeze if it prevents an “equally efficient competitor [from trading] profitably in the downstream market on a lasting basis”.545 As discussed in Sects. 8.6.2, 8.6.3, 8.6.4, 8.6.5 and 8.6.6, with respect to de jure SEPs, the interest in maintaining the pro-competitive benefits of standard setting has justified the EC’s interference in cases involving supra-FRAND royalty rates stemming from hold-up situations. Antitrust agencies may also intervene in cases involving supra-FRAND licensing that does not involve the threat of injunctive relief. For example, demanding royalty-free cross-licensing terms in return for licenses to de jure SEPs546 and making lower licencing fees conditional on purchasing chipsets have been subject to antitrust scrutiny.547 However, considering the overall high threshold for antitrust interference in cases involving excessive royalties in Europe, there is no direct instrument in antitrust law for addressing the problem of royalty stacking, multiparty hold-ups or double marginalization. In contrast, in the US, the FRAND commitment obliges the SEP holder to avoid the creation of an exploitative hold-up and royalty stacking problems in the light of the commitment’s objective to enable “widespread adoption of the

542

See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 79: “Constructive refusal could, for example, take the form of unduly delaying or otherwise degrading the supply of the product or involve the imposition of unreasonable conditions in return of supply”; International Competition Network. Paper presented at Report on the Analysis of Refusal to Deal with a Rival under Unilateral Conduct Laws. 9th Annual Conference of the ICN Istanbul, Turkey April 2010. Accessed 10 July, 2019 https://www.international competitionnetwork.org/wp-content/uploads/2018/07/UCWG_SR_ReftoDeal.pdf, 17-19. 543 See Case COMP/A.36.568/D3, Port of Helsingborg, (23 July 2004), para 227. 544 See Sect. 8.5.2. 545 See Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 80. 546 Korea Fair Trade Commission, "Sanctions on Qualcomm". 547 FTC, "FTC Charges Qualcomm".

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standard”.548 Cumulatively, the Huawei framework may also have the potential to keep the licensing fees for de jure SEPs at a level that would preclude royalty stacking. In contrast, applying the Orange Book Standard would entail royalties that are on or exceed the highest level of the FRAND spectrum.549 The cumulative effect of applying this defence to SEPs belonging to complex de facto standards may lead to royalty stacking, with the effect of raising both the implementation costs of the standard in question and, subsequently, the prices of the standard-compliant products for consumers. However, this concern may be theoretical, given the inconclusive evidence concerning the occurrence of royalty-stacking problems,550 the practical difficulty of meeting the criteria of the Orange Book Standard, and its questionable applicability following Huawei.551

8.7.5

Other Anti-commons Problems

While the case law concerning abuses of dominant position does not target the problems of patent thickets and anti-commons, in Motorola, Samsung, and Huawei, both the EC and the CJEU forbade licencing terms that limited a licensee’s right to challenge a licensor’s patents or their essentiality. These rulings reflect an interest in reducing the deadweight losses that derive from invalid patents as well as the overdeclaration of SEPs. Implicitly, they also suggest that invalidation proceedings should not be interpreted as indicating an implementer’s unwillingness to license. The majority of patents do not invoke market dominance; therefore, the problem of patent thickets is unlikely to be subject to antitrust intervention. Nevertheless, phenomena related to patent thickets may attract the attention of the antitrust authorities. For example, the EC paid attention to both offensive and defensive patenting strategies in its Pharmaceutical Sector Inquiry,552 concluding that the latter “will remain under scrutiny in particular in situations where innovation was effectively blocked”.553

548

Microsoft Corp. v. Motorola Inc. C10 1823 U.S. Dist. 2013 WL 2111217 (W.D. Wash. Aug. 5, 2013), para 110. See also Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014). 549 Hilty and Slowinski, "Standardessentielle Patente," 784-785. 550 See Sect. 2.3.2.8. 551 See Sect. 8.7.3.2, for a discussion on the status of Orange Book Standard post-Huawei. 552 European Commission, Pharmaceutical Sector Inquiry, Final Report (8 July 2009), 14, 192, 201, 380, 385-390, 393. However, the EC did not differentiate between defensive and offensive strategies at the conceptual level. 553 Ibid, 524.

8.8 Interim Conclusions

8.8

367

Interim Conclusions

8.8.1

The Weaknesses of the Compulsory Liability Rules in Competition Law

8.8.1.1

Narrow Scope of Application

The paramount constraints on competition law’s ability to address the market failures of the patent system are the requirements of market dominance and indispensability. Few patent holders hold dominant positions on the relevant upstream markets and even fewer patents can be deemed indispensable to operating on downstream markets. Hence, the compulsory liability rules of competition law are inapplicable to many of the overprotection problems that are nevertheless unjustifiable and dysfunctional from the perspective of the economic objectives of the patent system. For example, the hold-up of a follow-on innovation with a substitutable patent cannot be subject to an antitrust intervention.

8.8.1.2

The Length and Costs of the Proceedings

In principle, the essential facilities doctrine allows for antitrust interventions in unilateral conduct before the negative effects of a foreclosure have materialized:554 “The test of abuse under Article 82 is conduct to which objectively abusive intent could be attributed and which creates a plausible risk of the harm of elimination of effective competition.”555 However, in practice, an antitrust intervention that occurs through an administrative procedure typically occurs when the consequences of an abusive practice have already begun to materialize. In addition, the antitrust procedure is very time-consuming.556 The decision may come too late with regard to product markets with network effects557 or fields that are characterized by rapid technological development, unless competition authorities order interim measures.558 Furthermore, it must be noted that not all cases involving abusive practices are brought to the attention of the antitrust authorities. In this respect, the competition law defences are legal innovations that have effectively reduced the inefficiencies associated with the administrative procedure. However, competitors harmed by anticompetitive conduct may lack the resources to cover the transaction costs

554

See, for example Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 87. 555 Anderman, "Epithet That Dares Not Speak Its Name," 98. 556 Früh, Immaterialgüterrechte und der relevante Markt, 452. 557 Ibid. 558 See Art. 8 Regulation 1/2003.

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associated with antitrust assessment in civil proceedings.559 Furthermore, the compliance of the defences with the EU law is unclear post-Huawei.

8.8.1.3

The Lack of Legal Certainty

The compulsory liability rules of competition law that concern the market failures of overprotection are very heterogeneous: different rules and procedures apply depending on whether a patent is a non-SEP, a de facto SEP, or a de jure SEP, which creates substantial legal uncertainty. Even Huawei, the most widely applicable of the instruments, leaves substantial aspects of its negotiation framework open to interpretation. Previously, the harmonized EU competition law had been considered as more appropriate for addressing dysfunctional exercises of IPRs in comparison to the less harmonized EU IP law.560 In contrast, in the US, overprotection problems have been addressed through patent law. However, the UPC may reduce the differences between the EU and the US.561 Furthermore, Huawei’s “strong contractual flavour”562 may lead to heterogeneous national treatment of SEPs. While the antitrust interventions intended to address the exercise of IPRs remain exceptional, their decisions, and occasionally the mere initiation of investigations on the part of the competition authorities, when communicated with press releases, can create the indirect effects associated with compulsory licenses.563 Even though these soft-law mechanisms “do not mandate outright compulsory licenses reviewable by courts”,564 they may affect the licensing and enforcement practices of patent holders in a manner that could compromise the incentive and dissemination function of patent protection.565 However, the legal uncertainty with regard to the applicability of the compulsory liability rules to the market failures associated with overprotection affects both patent holders and follow-on innovators. Consequently, the codified compulsory licenses of the patent law are likely to be less prone to under- and overestimations with regard to their scope and the subsequent undesirable indirect effects than the compulsory liability rules of competition law. They also provide more legal certainty than the ad hoc antitrust interventions.566

559

Früh, Immaterialgüterrechte und der relevante Markt, 453. Ibid, 451-452. 561 Jorge L. Contreras and Peter Picht, Patent Assertion Entitites and Legal Exceptionalism in Europe and the United States, a Comparative View, Research Paper No. 17-11 (Munich: Max Planck Institute for Innovation & Competition, 2017), 6. 562 Picht, "Unwired Planet v. Huawei," 577. 563 Petit, "'Stealth Licensing' - or Antitrust Law and Trade Regulation Squeezing Patent Rights," 12-13. 564 Ibid, 6. 565 Ibid, 17, 19-21, 24. 566 Früh, Immaterialgüterrechte und der relevante Markt, 456, 459. 560

8.8 Interim Conclusions

8.8.1.4

369

The Paradox of the Effects-Based Approach

From the perspective of providing evidence, fulfilling a new product requirement or showing that a refusal to license limits technological development is particularly difficult in de novo refusals. In addition, the further a follow-on innovation occurs from the point in time in which a product is commercialized, the more difficult it is define the relevant downstream market. This reflects the larger paradox related to antitrust interventions against conduct that compromises dynamic competition. On the one hand, it has been argued that the test for essential facilities should be based on economic considerations regarding a refusal’s effects on dynamic competition,567 instead of a normative test such as the new product requirement of IMS Health.568 Indeed, the effects-based approach used in competition law is deemed likely to yield just results in individual cases.569 However, as a downside, such a fact-based approach to antitrust assessment is very complex.570 Even the tests that focus more on economic factors, such as that balancing the incentives of a patent holder against the effect of her conduct on the “level of innovation in the whole industry”, as proposed by the EC to qualify an objective justification in Microsoft,571 have been subject to criticism. The balancing act between “ex post and ex ante efficiencies in terms of innovation” is considered to be very complicated, unreliable, and unpredictable from the perspective of economics. As there are a number of methods for evaluating these efficiencies, any balancing act conducted by an authority is likely to be challenged, regardless of the approach chosen.572 Consequently, minimizing their significance in the assessment of unilateral conduct was preferred.573 The CFI abandoned the test in favour of a fact-based assessment of the objective justifications put forward by undertakings subject investigation for abuse of dominant position.574 However, the difficulties of providing evidence concerning both a follow-on innovator’s interests and the objective justification for a refusal to license call into question whether interference in refusals to license or other market failures associated with the overprotection of patents will unavoidably involve a normative standard of evaluation, as part of the effects are immeasurable.575

567

Drexl et al., "Comments of the MPI on the Application of Art 82 EC," 565-567; Conde Gallego, "Unilateral Refusal," 238. 568 Drexl, "Antitrust Placebo," 800-802, 807-808. 569 Früh, Immaterialgüterrechte und der relevante Markt, 451-452. 570 Ibid, 454. 571 Case COMP/C-3/37.792, Microsoft, (24 March 2004), para 783. 572 Geradin, Layne-Farrar, and Petit, EU Competition Law and Economics, at 4.312-4.313. 573 Geradin, Layne-Farrar, and Padilla, "Assessing the Evidence on Royalty Stacking," at 4.313. 574 Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 708-712. 575 It should also be acknowledged that the definitions employed, such as what qualifies as a relevant technological market or a new product, play an elemental role in whether the criteria of the “exceptional circumstances” test are fulfilled.

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8 Compulsory Liability Rules in Competition Law

The Implications of the Huawei Decision

If normative considerations are inescapable with regard to follow-on innovation, then the weighting of fundamental rights, as applied in Huawei, represents a cautionary example of employing a normative standard when resolving a conflict between the objectives of patent and competition law. Due to the reinforcement of the right to IP (Art. 17 CFR) with the right to efficient remedies (Art. 47 of the CFR), Huawei precludes antitrust interventions in hold-up situations that involve non-SEPs and possibly those involving de facto SEPs. As a consequence, with regard to its potential for intervening in the overprotection problems of the patent system, the essential facilities doctrine has shrivelled into a paper tiger: It only applies in those extremely rare cases where a refusal to license would verifiably foreclose the emergence of a new product or hinder technological development, yet the downstream operator in question has not infringed upon a patent. In addition, the reference to Art. 47 of the CFR leads to incongruous treatment of cases that feature the abuse of dominance involving IPRs with regard to their effects. In situations in which a follow-on innovator does not infringe upon a patent, de novo refusals and excessive royalties that amount to constructive refusal may be deemed as abusive with respect to both non-SEPs and, potentially, de facto SEPs. However, hold-ups concerning the same patents would be not subject to antitrust intervention, even though the harm to dynamic competition and deadweight loss would be the same or higher in the case of a hold-up and would also be easier to demonstrate. From the perspectives of both the theory of complementarity and the dynamic incentive theory, it is unjustifiable that, under competition law, an abuse on the part of a patent holder would be treated differently depending on whether or not a follow-on innovator has asked for a license before investing in follow-on innovation, especially considering that Art. 31 (k) TRIPS does not require such a distinction to be made. Limitations to fundamental rights must be provided by the law and respect their essence (Art. 52 CFR). By relying on the weighting of fundamental rights to justify the antitrust intervention in Huawei, the CJEU creates a risk of reintroducing the separation doctrine to antitrust law. Following this approach, the need for antitrust intervention in the exercise of IPRs would no longer be justified on the basis of the effects of an undertaking’s conduct on dynamic efficiency, but could be precluded on the basis of IPRs’ reinforced normative status as fundamental rights. In order to not to regress EU competition law back to the era of the separation doctrine, it is crucial that fundamental rights be weighed in a more balanced manner576 and that the flexibilities offered by Art. 31 (k) TRIPS be redeemed for competition law. 576

In this respect, Art. 47 of the CFR should not applied in conjunction with Art. 17 CFR when attempting to reinforce the objective of providing a high level of protection for IPRs. In cases concerning downstream competition from follow-on innovators, a patent holder’s right to intellectual property (Art. 17 CFR) and his right to conduct business (Art. 16 CFR) must be balanced against the follow-on innovators’ right to conduct business and freedom of competition (Art. 16 CFR and Art. 102 TFEU), as well as their right to property when the downstream product

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Furthermore, when it is not possible to conduct an empirical review of the effects of either a patent holder’s conduct or an antitrust remedy, it is imperative that antitrust interventions in the exercise of IPRs be grounded in economic reasoning.

8.8.2

The Strengths of Compulsory Liability Rules in Competition Law

8.8.2.1

Flexibility in Addressing Follow-on Innovators’ Interests

Despite their numerous drawbacks, the compulsory liability rules in competition law have certain clear advantages when compared to the compulsory licenses of patent law that enhance their effectiveness in addressing the market failures associated with overprotection. Their substantial criteria are not bound by the one-patent-per-product assumption and, as a consequence, they more appropriately address the need to protect dynamic competition and follow-on innovators’ interests than the patent law instruments. For example, despite all of the criticism from the perspective of the leveraging theory,577 the new product requirement of IMS Health, when viewed in its substance, independently of the other criteria of the doctrine, addresses the interest of follow-on innovators in the contemporary patent landscape far better than the prerequisites for the compulsory license based on dependency (Art. 31 (l) TRIPS). The new product criterion is very accommodating with regard to various types of economic and technical relationships that may exist between followon innovation and a patent holder’s technology on the upstream market technology and products on the downstream market, while maintaining the rationale of fostering dynamic competition.

8.8.2.2

The Wider Scope of the Compulsory Liability Rule

With regard to SEPs, instruments used the competition law take into account network effects and the fact that, in such a context. a refusal to license or a holdup may inhibit technological development on a larger scale. The fact that the compulsory liability rules in competition law apply in relation to all parties that are harmed by a foreclosure make them considerably more effective in resolving market failures involving SEPs than the compulsory licenses in patent law, which must be always applied individually.

features patented technology developed by the follow-on innovator. For further discussion on the status of a follow-on innovators in the light of fundamental rights, see Sect. 5.6. 577 See Sect. 8.5.4.1.

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8 Compulsory Liability Rules in Competition Law

Market Failures That Do Not Originate from the Design of the Patent System

Finally, competition law also addresses misuses of IP law that hinder follow-on innovation that do not originate from the internal imbalances of the patent system and do not represent overprotection from the perspective of the economic justifications for patent protection. An example of such anticompetitive conduct is the abuse of regulatory procedures related to IPRs by a dominant undertaking in a manner that forecloses competitors from the market.578 In the same vein, competition law may interfere with patent hold-up situations in which leverage is created by means other than the threat of an injunction. For example, the Korean Fair Trade Commission fined Qualcomm for making headset manufacturers’ access to the chipsets that are necessary for staying in the market conditional on agreeing to supra-FRAND terms for its SEPs and hence coercing these companies to agree to unfair licensing conditions.579

578 579

Case C-457/10 P, AstraZeneca, 4 C.M.L.R. 7 (2013), para 134. Korea Fair Trade Commission, "Sanctions on Qualcomm" 1-2, 6, 11-12.

Chapter 9

Normative Recommendation

The liability rules currently present in patent and competition law are too narrow and ineffective to address the patent system’s imbalances that hinder follow-on innovation. Also, open innovation models fail at resolving these market failures. The author argues that follow-on innovation can be best sustained by a compulsory liability rule designed to foster voluntary licensing through its indirect effect. The normative recommendation features three instruments. The first is a government-initiated clearing house that facilitates ex-ante licensing by offering patent clearance services to follow-on innovators. The second is a “reverse license of right,” a novel mechanism where a follow-on innovator commits to take licenses for patents that they failed to clear. Finally, these two instruments would be complemented by a compulsory license against the suppression of follow-on innovation that targets deliberate, abusive exercise of patents. Although vested in patent law, the instrument would qualify as a compulsory license against anti-competitive practices (Art. 31 (k) TRIPS), and benefit from the exception from the requirement of prior effort to obtain a license. This way, it could address a broader range of market failures, including hold-up problems.

9.1 9.1.1

Conclusions Regarding Compulsory Liability Rules Scope of Application

At their best, the existing compulsory liability rules have the capacity to resolve only some of the market failures that hinder follow-on innovation. The majority of overprotection problems cannot even be adequately addressed using the present instruments. In the context of patent law, compulsory licenses for dependent patents and non-working have a very narrow scope of application with regard to follow-on innovation that incorporates pre-existing, externally developed patents. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_9

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In principle, unjustified refusals to license, excessive licensing fees, and hold-ups can be qualified as abuse pursuant to Art. 5 PC. However, the requirement of prior effort makes the compulsory licenses of patent law inapplicable to ex post market failures. From the procedural perspective, compulsory licenses impose excessively high transaction costs for the applicant, while being time-consuming and leading to unpredictable results.1 The most important exceptions from the prior effort requirement are compulsory licenses intended to remedy anticompetitive practices. One can interpret Art. 31 (k) TRIPS as encompassing all individually occurring market failures, including excessive royalties, unjustified refusals to license, and patent hold-ups. However, the doctrines of competition law that address these market failures are heterogeneous, complex, and difficult to apply in practice. While the instruments of competition law accommodate the objective of promoting dynamic competition and the interests of follow-on innovators in the contemporary patent landscape in a manner that is superior to those of patent law, their practical scope of application is very narrow, with the exception of compulsory liability rules in favour of de jure patents. In the EU, a refusal to license a non-SEP or a de facto SEP can qualify as an abuse of a dominant position on the basis of the essential facilities doctrine. However, this instrument is difficult to apply to fast-moving or emerging downstream markets with precision due to the obstacles of deriving sufficient evidence concerning anticompetitive harm. Following the skewed weighting of fundamental rights in Huawei, the doctrine no longer applies to hold-ups that involve non-SEPs. Consequently, the threshold for applying the instrument to de novo refusals is very high. In addition, the decision showcased that the CJEU abandoned the flexibilities of TRIPS for competition law remedies in favour of supporting a high level of protection of IP. In comparison to non-SEPs, the instruments of competition law apply more broadly to market failures of overprotection that involve de facto SEPs. However, following Huawei, the applicability of these instruments to hold-ups situations became unclear. Market failures involving de jure SEPs are most comprehensively addressed by competition law. In addition, Huawei established a roadmap that qualified the criteria on the basis of which the enforcement of a FRAND-encumbered patent could amount to abuse of a dominant position, creating a quasi-compulsory liability rule. However, its application is currently subject to legal uncertainty, as the negotiation framework allows for numerous different interpretations, which are currently subject to a wave of litigation. In addition, while appearing balanced at the outset, Huawei may be interpreted in a manner that also allows for the emergence of hold-out situations. Ultimately, the primary reason for the inadequacy of competition law when it comes to resolving the market failures caused by overprotection is that very few patents confer market dominance. For example, the majority of hold-ups that involve an offensive patent strategy fall outside of the scope of competition law. Furthermore, as competition law deals only with a very limited number of cases, it is an

1

Hilty, “Legal Remedies,” 393.

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insufficient instrument for resolving the imbalances between an initial inventor and a follow-on innovator that derive from patent law itself.2 In comparison to Europe, antitrust law in the US post-Trinko does not intervene with refusals to license and is reluctant to address patent ambushes.3 In addition, US patent law does not allow for the use of compulsory liability rules against refusals to license. However, following the doctrine of equitable discretion as confirmed by eBay, it is possible to intervene with exclusionary and exploitative hold-ups by virtue of denying injunctive relief in an effective manner. Of the existing compulsory liability rules, a limitation to the right to injunctive relief established by eBay is the most efficient instrument for interfering with the ex post market failures of overprotection, including exploitative and excluding hold-ups. Despite the legal uncertainty associated with the application of this instrument, it has proven to be sufficiently flexible to address the specific circumstances of each case, taking into consideration the business models of the parties to a dispute. Its review of the necessity of the right to exclude for the maintenance of the incentives of a patent holder is aligned with the dynamic incentive theory. However, the weakness of this instrument is that it cannot interfere with ex ante market failures, most importantly refusals to license. The US misuse doctrine has very little relevance in terms of resolving the identified market failures. Furthermore, the misuse doctrine does not represent an actual liability rule, as finding of misuse entails the unenforceability of a patent. While conveying theoretical possibilities for balancing the overprotection problems of patent law, this judge-made doctrine, which exists at the intersection of patent and competition law, is encumbered by the absence of a consistent, unified theory concerning the interrelationship between the two fields of law. As a consequence, its application appears erratic and vulnerable to the competence of an individual judge in terms of engaging in economic thinking and drawing the line and seeing parallels between patent and competition law. In contrast to the US, in the EU, the limitations to injunctive relief are subject to the restrictive conditions of the Enforcement Directive. Furthermore, in the civil law jurisdictions, the tradition is to grant permanent injunction automatically. Under UPCA, the flexibilities for employing such an ex post liability rule are not much wider with regard to forthcoming unitary patents. Consequently, it is very difficult to enact an ex post compulsory liability rule in Europe that would interfere with the market failures of overprotection.4 The CJEU’s interpretation of fundamental rights in Huawei further confirms that an introduction of an ex post liability rule similar to that applied in eBay is unlikely in Europe.5

Anderman, “Competition Law Perspective II,” 139. For a more detailed discussion, see Sect. 8.5.7.3 and Sect. 8.6.2. 4 See Sect. 7.5. 5 For a more detailed discussion, see Sect. 9.4.3.2. Cf. European Commission, “EU approach to SEPs,” para 3.2. 2 3

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9 Normative Recommendation

The Ineffectiveness of the Existing Instruments

Overall, the existing compulsory liability rules, with the exception of eBay and Huawei, barely address the ex ante and ex post market failures that can hinder follow-on innovation and reduce the functional efficiency of the patent system. Furthermore, the landscape of compulsory liability rules and the respective procedures is very heterogeneous—the availability of compulsory liability rules also depends on whether the patent in question is a non-SEP, a de facto SEP, or a de jure SEP. For example, in Europe, there is essentially no compulsory liability rule available to remedy a hold-up situation created by a non-SEP that does not confer market power. In comparison to hold-up problems, refusals to license are of much lesser importance in the modern patent landscape, where clearing all patents ex ante can be impossible. It can be very difficult for an innovator of a complex product that includes non-SEPs, as well de jure and de facto standard essential technology, to predict the risks associated with accidental infringement of third-party patents, determine the scope of safe harbours, and to identify the likelihood of success in litigation. Instead of having a number of different criteria for compulsory liability rules depending on whether the patent is standard essential and to which type of standard it belongs to, it would considerably increase legal certainty if the compulsory liability rule would apply to all types of patents and such a rule could be redeemed from one instance. The current compulsory liability rules should be subjected to a revision, considering that future innovations are likely to become increasingly complex and incorporate an increasing number of standards, most importantly those associated with connectivity. Follow-on innovators may face multiple hold-up situations and other market failures, on the behalf of several patent holders, and with respect to all three types of patents. Under the current system, a follow-on innovator may need to engage in a number of different procedures to resolve the same market failure, because diverse compulsory liability rules govern non-SEPs, de facto SEPs, and de jure SEPs. Furthermore, in the majority of cases, the procedures must be carried out individually against each patent holder. Beside of the inability of the patent system to address multiparty hold-ups, there is no compulsory liability rule that could address royalty-stacking problems and other anti-commons problems directly. One can conclude that the patent system, in its current configuration under patent and competition law, is dysfunctional because it provides no adequate means for interfering with the market failures that inhibit follow-on innovation.

9.1.3

The Preference for Patent Law Over Competition Law

The compulsory licenses of patent law provide an instrument that could be used for the internal balancing of the patent system with regard to its incentive function. In

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contrast, the compulsory liability rules in competition law intervene with the unilateral conduct of a market-dominant patent holder when it compromises the patent system’s goal of fostering dynamic competition in competitive markets.6 There are several compelling reasons to advocate for resolving the market failures associated with overprotection in the context of patent law. First, the public procedure involved in finding abuse of dominance is very burdensome, slow, and inefficient in terms of resolving the problems of overprotection in rapidly moving or emerging downstream markets.7 In addition, competition law-based instruments are applied to overprotection problems in a piecemeal manner, highlighting the need to resolve them systematically under patent law.8 Consequently, frequently recurring overprotection problems should be addressed at their source, within patent law.9 Second, the lack of harmonization of IP law within the EU no longer makes competition law a more appropriate instrument for addressing overprotection problems.10 The harmonized aspects of the protection of IPRs, most importantly the Enforcement Directive, affect the application of competition law to the exercise of IPRs in the EU and may, as has become apparent from the weighting of fundamental rights in Huawei, foreclose antitrust interventions in overprotection problems.11 The introduction of a unitary patent system is not expected to alter the interrelationship of patent and competition law in Europe.12 Third, patents can be exercised in a manner that creates market failures that do not reach the thresholds of antitrust interventions, such as the requirement of a dominant position, but nevertheless create a deadweight loss and hinder follow-on innovation while overrewarding the patent holder. “Insofar as an imbalance exists between first inventor and follow on protection in the patent rules, the competition rules offer no substitute for realignment of the patent laws themselves.”13 Competition rules and their means of enforcement are inadequate to address the problems that arise as a result of patent proliferation;14 consequently, the exercise of patents in a manner that “might have harmful effects irrespective of market power” should be addressed in the context of patent law.15 These market failures stem from the design of the patent

Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 333–335, 369, 371–372. For a more detailed discussion, see Sect. 8.8.1.2. 8 Anderman, “Competition Law Perspective II,” 143. 9 Früh, Immaterialgüterrechte und der relevante Markt, 455–456, 459, 471. 10 See Sect. 8.8.1.3, on the lack of legal certainty surrounding the application of compulsory liability rules in competition law. 11 See Sect. 8.7.3.1, discussing the Huawei decision’s impact on competition law’s possibilities to address hold-ups involving non-SEPs. 12 Anderman, “Competition Law Perspective II,” 143. 13 Ibid. 14 Ibid. 15 Rahnasto, Intellectual Property Rights, External Effects and Anti-Trust Law, at 7.17. 6 7

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system, and their resolution should not be delegated to another field of law with its own objectives, even though they overlap with patent law. However, apart from limitations to injunctive relief, compulsory licenses are exempt from the prior effort requirement only on the grounds of public interest or remedying a practice that was found anticompetitive in administrative or judicial proceedings (Art. 31 (b) and (k) TRIPS).16 The prerequisites for establishing a compulsory license for functional efficiency that may intervene both in ex ante and ex post market failures within the constraints posed by the TRIPS Agreement and a proposition for a new compulsory licensing instrument are reviewed in the following Sects. 9.2–9.5.

9.2

A Compulsory Liability Rule That Fosters Open Innovation?

Neither private ordering on the basis of OAI nor the existing compulsory liability rules resolve overprotection problems that hinder follow-on innovation in their entirety.17 This leads to the conclusion that there is a necessity for a new compulsory liability rule targeting the remaining market failures. However, one should not “throw the baby out with the bathwater” when designing an instrument intended to target overprotection problems. Compulsory liability rules have indirect effects on private licensing negotiations:18 On the one hand, when tailored appropriately, a compulsory liability rule would foster more efficient and balanced private licensing negotiations between patent holders and follow-on innovators, who, ultimately, do not even need to resort to applying for a compulsory license. Such an outcome is also the most desirable from the perspective of controlling the administration costs associated with such an instrument. On the other hand, the instrument may fail to balance the respective interests in a manner that may result in inefficiencies in private licensing negotiations, such as hold-out situations. The existing private ordering practices that have already proven to be efficient should not be disrupted by the introduction of an ill-tailored compulsory liability rule. A solution to overprotection problems should target dysfunctional practices, but, overall, its design should seek to foster the alleviation of overprotection problems through private ordering. Beyond the indirect effects, there are several other arguments that support this approach: First, some market failures do not stem from deliberately dysfunctional behaviour on the part of a patent holder but instead arise as a result of inefficiencies on the markets of technology. Royalty-stacking

16

In addition, compulsory licenses for semi-conductor technology for public non-commercial use are exempted from the requirement of prior use (Art. 31 (b) and (c) TRIPS). 17 For findings confirming the ineffectiveness of private ordering to resolve overprotection problems, see Sect. 3.4.1. For summary of findings on compulsory liability rules, see Sect. 9.1. 18 For a more detailed discussion on the indirect effect, see Sect. 4.3.6.

9.2 A Compulsory Liability Rule That Fosters Open Innovation?

379

problems and, more importantly, the underuse of the patents due to excessive transaction costs are difficult to address using compulsory liability rules. In order to resolve these market failures, it is crucial that one should employ an instrument that is capable of alleviating the problems of imperfect and asymmetrical information, high search costs, and the high transactions costs of licensing, which hinder the efficient ex ante licensing of technology. Currently, these problems have a negative effect on the dissemination of technology,19 as they preclude patent holders from obtaining licensing revenue and hinder follow-on innovation. In addition, they to expose follow-on innovators to the risk of hold-ups at the event of unwilful patent infringement. Second, fostering private licensing negotiations is also desirable from the normative perspective. While the current patent landscape is a far cry from a Coasean world that is unencumbered with transaction costs,20 it can nevertheless be presumed that patent holders and follow-on innovators are, in the majority of cases, better positioned to enter into licensing agreements that are efficient in terms of their operations.21 Compulsory liability rules, such as compulsory licenses, address only certain conditions of patent transfer and therefore should target only blatant abuses of rights conferred by a patent. Economic arguments aside, compulsory liability rules represent an exception to a patent holder’s contractual freedom and the right to exclude and choose licensing parties. The exceptional nature of this measure and the primacy of private ordering are expressed in the prior effort requirement of Art. 31 (b) TRIPS, which is subject to a narrow range of exceptions. Third, a patent system that features a compulsory liability rule but also aims to foster voluntary licensing at earlier, rather than later, periods in time may have a more positive effect on social welfare than a system that fosters a late determination of patent holder’s remuneration, such as an ex post liability rule22 in combination with the possibility to award treble damages on the ground of willful infringement.23 The system of late determination may prove efficient in interfering with hold-up problems, but it has the disadvantage of encouraging the determination of a patent holder’s remuneration through costly litigation and pushing it to a later stage in time. In contrast, a system that encourages patent clearance and early agreement on licensing conditions would enable a patent holder to secure a revenue flow, which would allow him to invest in R&D sooner than under a late determination system. A system of early determination would seek to foster genuine technology transfer, which could reduce follow-on innovators’ duplicative investments in innovating See Alfonso Gambardella, Paola Giuri and Alessandra Luzzi, “The Market for Patents in Europe” Research Policy 36, no. 8 (2007): 1180. 20 See Coase, “Problem of Social Cost,” 2, 5–6, 8, 12, 15. 21 The choice of licensing agreement or other, diverse contractual constellations that allows participation in OAI is determined by the competitive context companies operate in. Ullrich, “Open Innovation, the Patent Exclusivity and Knowhow Secrecy,” 307. 22 The most well known example of an ex post liability rule is a denial of a permanent injunction on the basis of equity. See eBay, 126 S. Ct. 1837, 1839–1841. 23 See 35 U.S. Code § 284. For a more detailed discussion see Sect. 7.3.3. 19

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Fig. 9.1 Normative recommendation for three instruments

technology which is already patented. Beyond addressing the market failures of overprotection, the advantages of an early determination system are both the allocative efficiency gained from the perspective of the patent holder, as well as the removal of obstacles to both the patent holder and follow-on innovator’s engagement in dynamic competition. Furthermore, a system of early determination supports the patent holder’s engagement in the most commonplace OAI, the provision of restricted or semi-open access by means of licensing, as explained by the OI model and therefore enables vertical disintegration.24 On this basis, my normative proposition for resolving the market failures of overprotection encompasses three different instruments (see Fig. 9.1): First, I propose the setting up of a government-initiated clearing house intended to facilitate ex ante licensing. Second, a new “reverse” license-of-right mechanism should be employed in order to allow follow-on innovators to signal their willingness to take licenses for patents that have escaped ex ante patent clearance. Both of these instruments, which are subject to voluntary participation, seek to alleviate the problems of underuse and royalty stacking, and, in addition, aim to prevent the emergence of hold-up situations, taking into consideration the possibility of hold-out risks. Finally, I propose the establishment of a new compulsory licensing mechanism which would target abusive exercise of the rights conferred by a patent that suppresses follow-on innovation. The instrument would target ex ante and post-market failures that involve deliberate dysfunctional conduct on the part of a patent holder, including demanding unjustifiably excessive royalties, unjustified refusals to license,

24 For a more detailed discussion on this type of OAI, see Sect. 3.1.2.1, on OI model, and Sects. 3. 2.3–3.2.4. on restricted use and semi-open access.

9.3 Private Ordering Revisited

381

and exploitative and excluding hold-ups. In this part, I first discuss the voluntary mechanisms and then proceed to describe the compulsory licensing mechanism, taking into consideration the freedom to enact it under TRIPS, human and fundamental rights.

9.3 9.3.1

Private Ordering Revisited A Government-Initiated Clearing House

The review of the private liability rules showed that patent holders do not have sufficient incentives to employ instruments such as licenses of right and clearing houses.25 Nevertheless, both OI and MCM stress the importance of private intermediaries such as clearing houses in resolving the problem of the transaction costs associated with patent licensing.26 Considering that the follow-on innovators are, as a general rule, still bound to clear all patents before investing in their innovations, clearing houses merit a second look. However, those initiatives that were perceived to represent MCM were often supported with public policy measures.27 It appears that such intermediaries do not arise or reach a sufficient magnitude without being subject to the influence of public policy. Furthermore, the clearing houses that support OI approaches suffer from the problem of two-sided markets, which can easily lead to a market of lemons and insufficient levels of participation.28 Given the insufficient incentives for patent holders to employ such instruments, initiatives that seek to reduce the transaction costs of licensing should focus on attracting the demand side of the market, namely follow-on innovators. While royalty-collection clearing houses were found to be unsuitable to address overprotection involving patents, clearing houses that support the provision of information and technology exchange and those that offer standardised licenses29 may have the ability to alleviate the problems stemming from insufficient patent clearance and bargaining breakdowns that occur before an investment has been made in a follow-on innovation.30

25

See Sect. 3.4.1 and Krauspenhaar, Liability Rules in Patent Law, 172. For an example from MCM literature, see Barnett, “Anti-Commons Revisited,” 130, 141; for an example from OI litarature, see Chesbrough and Ghafele, “Open Innovation and Intellectual Property,” 201–204; Roijakkers, Zynga, and Bishop, “Getting Help from Innomediaries,” 242–254. 27 See Mattioli, “Communities of Innovation,” 120–133, 151. 28 See Ghafele and O’Brien, “Open Innovation for Sustainability,” 6–9. 29 For a description of the types of clearing houses, see van Zimmeren et al., “Clearing House for Diagnostic Testing,” 353–355. 30 See van Zimmeren, “Clearinghouse Mechanisms in Genetic Diagnostics,” 71. For a description of the types of clearing houses, see van Zimmeren et al., “Clearing House for Diagnostic Testing,” 353–355. 26

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In order to foster ex ante licensing, I propose the establishment of a governmentinitiated technology transfer clearing house, which would offer both patent search services as well as assistance in locating patent holders and facilitating license negotiations. Such an institution may, for example, be founded in association with a patent office or a patent court,31 or it may be an independent organization whose activities are governmentally regulated to ensure its impartiality and integrity with regard to both patent holders and follow-on innovator’s interests, the treatment of confidential information, and the implementation of the reverse license-of-right instrument. However, its administrative norms should leave sufficient room for innovation and the further development of services. This clearing house’s activities should be supported with public funding, at least before it obtains a sufficient mass of users. Furthermore, the use of this instrument by SMEs should be subsidised. It would be desirable that such a government-initiated clearing house would offer services at the regional or international levels.32 This would allow the clearing house to better facilitate technology transfer on international markets of technology, as well as to collect a critical mass of participants on a two-sided market.

9.3.2

The Reverse License of Right

Art. 31 (b) TRIPS requires the applicant for a compulsory license to make prior efforts to obtain a license from the relevant patent holder on reasonable commercial terms. In the contemporary patent landscape, this requirement is problematic because it is often impossible to clear all of the patents that follow-on innovation incorporates in advance, making innovators vulnerable to ex post market failures.33 The “reverse” license of right, allows a follow-on innovator to express, in abstract, her willingness to take licenses in return for appropriate remuneration34 with regard to patent holders who were not identified following a patent search. This instrument would allow follow-on innovators to fulfil the prior effort requirement and simultaneously enable patent holders to self-select into a restrictedly open model of private ordering, while both parties would benefit from the decreased risk of litigation and the accelerated conclusions of licensing agreements. A follow-on innovator would give a declaration of his willingness to take licenses for patents that his product accidentally infringes after making the efforts to clear patents ex ante. The declaration would be administered and published by the

31

In Europe, the instrument could be administered in association with the EPO or UPC. See also van Zimmeren et al., “Clearing House for Diagnostic Testing,” 355 disucssing the benefit of establishing a “global checkpoint” for gene patents. 33 For a more detailed discussion on hold-up problems, see Sect. 2.3.2.7. 34 Under § 24 (1) no 1 PatG and Art. 31 (b) TRIPS, it suffices that a follow-on innovator expresses “its willingness in principle to [offer an appropriate remuneration]. It is not necessary that it specif [ies] the exact or appropriate amount”. Polyferon, IIC 1997, 242, 244. 32

9.3 Private Ordering Revisited

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government-initiated clearing house or other organization administering the instrument in a manner that is easily accessible to patent holders globally. In making a declaration, the follow-on innovator would lodge a reasonable security for the licensing fees for the involuntarily infringed pre-existing patents. The clearing house would determine the amount of the security on the basis of information exchanged with the follow-on innovator before she employs the reverse license of right. Alternatively, the clearing house could develop standardised scheme for security payments for reverse licenses of right.35 When a follow-on innovator has employed a reverse license of right, a patent holder who suspects that his patent has been infringed may, as an alternative to the initiation of voluntary licensing negotiations and/or the commencement of patent enforcement, take advantage of the services provided by the clearing house. The patent holder may initiate voluntary licensing negotiations within the framework of the clearing house, which would also offer mediation services.36 The parties may also agree that, in the event that an agreement is not reached within a specified amount of time, such as 6 months, the clearing house would determine the appropriate remuneration for the past use and the binding reasonable royalty rate for future uses. Alternatively, the patent holder may request that the clearing house determine the remuneration and the licensing rate immediately, without engaging in licencing negotiations. Part of the compensation for past infringing use would be paid immediately from the security in return for the patent holder’s commitment to not seek injunctive relief against the follow-on innovator. The remuneration and the royalty-rate should be determined on the basis of a reasonable, competitive price free of the price distortion that would be attributable to a hold-up. In practice, the price could be fixed, for example, using a procedure similar to that of the license-of-right instrument (Art. 23 (4) PatG). The patent holder may enforce his patent against the follow-on innovator if the latter were to stop paying the licensing fees or breach other terms of the license. Even upon the employment of the instrument, a follow-on innovator is free to challenge the essentiality and validity of the patent as well as the presence of patent infringement. Furthermore, in order to take advantage of the instrument, the patent holder must substantiate why she considers the follow-on innovator to be infringing her patents. The follow-on innovator may also contest this presumption, for example by presenting a statement of non-infringement (Art. 32 (1) (b) UPCA).

35

The standardised security could be determined, for example, on the basis of the type of the followon innovation and industry sector. 36 On mediation services offered by clearing houses, see Graff and Zilberman, “Clearinghouse for Agricultural Biotechnology,” 6; On dispute resolution services offered by clearing houses, see van Zimmeren et al., “Clearing House for Diagnostic Testing,” 353–354; van Zimmeren, “Clearinghouse Mechanisms in Genetic Diagnostics,” 80; van Zimmeren, “IP Coordination Models,” 139.

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The Combined Effects of the Voluntary Instruments

In addition to facilitating licensing transactions, the combination of the clearing house and the “reverse license of right” seek to implement the criteria of Art. 31 (b) TRIPS in the context of the contemporary patent landscape. The use of the clearing house’s services would fulfil the requirement of making an effort to obtain authorization for the use of a patented invention from the appropriate right holder, while the reverse license or right would facilitate the fulfilment of the condition that prospective user of a patent should seek to obtain a license under reasonable commercial terms and conditions. By means of these instruments, the process specified in Art. 31 (b) TRIPS would be “stretched” from the stage where the follow-on innovator does not use a patent to the period where he has invested into a follow-on innovation that employs the said patent and unwillingly infringes it. In addition, by considering the importance of the concept of a willing licensee to ex post competition law defences,37 the reverse license of rights could be also tailored to the needs of standard implementers, who could make a declaration of willingness to take a license on FRAND terms with respect to SEPs belonging to a specific standard.38 With the exception of the administration of the reverse license of right, the other services offered by the government-initiated clearing house would be, as they are today, open to competition by private actors, provided that they comply with the same regulations. Obviously, patent clearance could always be conducted independently.39 However, considering the different means of conducting patent clearance, the quality of the diligence required for the clearance that precedes a follow-on innovator’s use of a reverse license of right should be defined by law. Such statutory definition of diligence in connection of the reverse license of right echoes the “diligent search” requirement of the Orphan Works Directive 2012/28/EU, which introduced a copyright exception in favour of cultural heritage institutions.40 However, OWD offers limited guidance for the design of the reverse license or right,

37

See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 59. The clearing house could therefore support the licensing negotiations in accordance to the Huawei framework. See Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 77. 39 Many larger companies may have internal capacities that allow them to clear patents ex ante without the assistance of a clearing house. 40 Directive 2012/28/EU of the European Parliament and of the Council of 25 October 2012 on Certain Permitted Uses of Orphan Works. 2012, O.J. (L 299) 5 [hereinafter OWD]. The OWD sought to overcome the problem of obtaining prior consent from the copyright holders of orphan works for the purposes of digitization and making them available to the public (Rec. 6 OWD) Pursuant to the OWD, certain organizations, such as public libraries and museums (Art. 1 OWD), can obtain an entitlement to use orphan copyrighted works (Art. 6 OWD). Works are considered to be orphans if their right holders cannot be identified and located following a “diligent search” (Art. 2 and Art. 3 OWD). Right holders who put an end to the orphan status of their works (Art. 5 OWD) are entitled to fair remuneration (Art. 6 (5) OWD). 38

9.3 Private Ordering Revisited

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because the two instruments have distinct objectives.41 The level of diligence required in terms of a patent search should not be excessively burdensome,42 as reverse licenses of right seek to mitigate the risks that exist in the contemporary patent landscape, wherein it may be impossible or prohibitively expensive to identify pre-existing patents ex ante due to the excessive transaction costs involved in doing so.43 Conducting patent clearance in good faith, as in “mak[ing] an honest effort”,44 with regard to clearing patents that an individual follow-on innovation covers should suffice.45 In comparison to other means of clearing patents, the use of the governmentinitiated clearing house would have certain advantages, which, over time, may contribute to the alleviation of royalty-stacking problems.46 Such a clearing house could, in collaboration with a follow-on innovator, make estimates regarding the pre-existing technology that a new innovation covers, as well as the maximum amount of cumulative royalties that the follow-on innovator would be able to pay while still maintaining incentives to invest in follow-on innovation (an indicative royalty cap).47 The royalty cap could prove useful in the determination of the security that is required in connection with making a declaration of willingness to

41 The proposed solution cannot be equated with that of the OWD for a number of reasons: First, the OWD concerns the rights to reproduce and to make available; hence, it targets imitative use (Art. 6 OWD). In contrast to the OWD, the reverse license of right specifically targets innovations that build upon pre-existing patents. Second, the main sources of transaction costs in copyright law are very different from those under the patent system. In patent law, a right holder can be relatively easy to find because patent protection is conditional on application. However, it can be much more difficult to identify which patents a follow-on innovation infringes and which parts of them may potentially be invalid. In contrast, the identification of pre-existing works for an adaptation or collective work is not usually difficult. However, it can be considerably more burdensome to identify the right holders and to determine whether the copyright protection of an individual work has lapsed. Third, the proposed instrument represents a private ordering-based solution for a patent holder to obtain licensing fees to compensate for infringing use. However, it does not preclude a patent holder from exercising his exclusive rights. Fourth, whereas the OWD establishes an exception to copyright protection in favour of the public interest, the proposed instrument relies on private ordering, with the objective of fostering the functional efficiency of the patent system and enhancing dynamic competition. 42 The requirement of a diligent search balances legal certainty with the burden of research. Simone Schroff, Marcella Favale, and Aura Bertoni, “Impossible Quest - Problems with Diligent Search for Orphan Works," IIC - International Review of Intellectual Property and Competition Law 48, no. 3 (2017): 288. 43 For a more detailed discussion on the market failure of excessive transaction costs see Sect. 2.3. 2.3. 44 Schroff, Favale, and Bertoni, “Impossible Quest,” 289. 45 Cf. Art. 31 (1) OWD. 46 See van Zimmeren et al., “Clearing House for Diagnostic Testing,” 355. Provided that the market failure of royalty-stacking is empirically verifiable. For a critical discussion, see Sect. 2.3.2.8. 47 See van Zimmeren et al., “Clearing House for Diagnostic Testing,” 355–356. This royalty cap should be determined case-specifically, on the basis of estimates of the patents incorporated in a follow-on innovation and data on the licensing rates within the relevant sectors.

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take a license. In addition, it could mitigate royalty-stacking effects by informing the setting of appropriate remuneration and a royalty rate by the clearing house. Furthermore, the use of such a clearing house may instigate cumulative learning effects that could increase the accuracy of both the patent clearance process and the determination of appropriate remuneration and royalty fees for reverse licenses of right. These effects may be further accelerated following further development of artificial intelligence. During the process of facilitating patent clearance, the clearing house could reach a contractual agreement with the parties involved concerning the collection of anonymized data on licensing rates and other licensing conditions; this would make it possible to accumulate data that could be used for further facilitation of technology transfer and for making increasingly accurate calculations concerning adequate licensing rates upon utilization of the reverse license-of-right instrument. The clearing house and the reverse licence of right would seek to enhance the functional efficiency of the patent system by facilitating transactions and reducing the frequency and costs of patent litigation. They would also seek to prevent exploitative hold-ups, hold-outs, and royalty-stacking and to reduce the frequency of underuse stemming from high search and transaction costs, as well as the riskaverseness of patent holders. The market failures that may occur despite these preventive instruments would be addressed by the compulsory liability rule. For patent holders, the attractiveness of the reverse license of right would lie in the accelerated pace of licensing negotiations, in addition to the security offered by obtaining compensation for past infringements via a low-cost and rapid procedure, without the need to engage in patent litigation. This would be particularly attractive to patent holders whose R&D activity is primarily incentivised by the possibility of patent licensing, as opposed to excluding others from using their patents, but who have been bound to rely upon the threat of injunctive relief to preclude hold-out situations. It may also be attractive to SMEs who do not have the resources and expertise required to conduct complex licensing negotiations. Clearing houses operate on a two-sided market;48 therefore, to have a positive effect on the market failures, in particular royalty-stacking, that results from the behaviour of a number of patent holders, the instrument needs to be attractive to follow-on innovators. The use of the reverse license of right would offer follow-on innovators increased security against the possibility of permanent injunctions shutting down their business operations and reduce the likelihood of patent litigation. Furthermore, relying on the clearing house should save follow-on innovators the expenses associated with technology transfer; the clearing house would also provide impartial data and mediation services to support licensing negotiations.49 However, companies with large budgets for patent litigation may not have sufficient incentives to use these pre-emptive instruments, as they can clear patents, negotiate licenses and litigate on their own. The possible hold-out behaviour of such actors would require

See Aoki and Schiff, “Promoting Access to Intellectual Property,” 199–200. See Graff and Zilberman, “Clearinghouse for Agricultural Biotechnology,” 6 on mediation services offered by clearing houses.

48 49

9.4 What Qualifies as a Market Failure That Is Remediable with a Compulsory. . .

387

implementation other legislative measures, such as enhancement of the enforceability of damages and licensing fees or conditioning the availability of ex post compulsory licenses on genuine efforts to obtain a license following the discovery of an infringement.

9.4

What Qualifies as a Market Failure That Is Remediable with a Compulsory License?

In this thesis, the conclusion was reached that certain market failures that may potentially compromise follow-on innovation cannot be resolved through private ordering or with existing compulsory liability rules. Despite efforts to incentivise voluntary licensing, certain patent holders may demand excessive royalties, refuse licenses without justification, and/or subject follow-on innovators who infringe a patent to hold-up situations. In this Part, I propose a new instrument that is intended to resolve those overprotection problems that cannot be effectively addressed with the existing instruments or the government-initiated clearing house and the reverse license of right described in Sects. 9.3.1 and 9.3.2. For the purposes of proposing a de lege ferenda, I first identify the flexibility of international law and human and fundamental rights in terms of accommodating such a new instrument. The sufficiency of the existing compulsory liability rules was determined against the benchmark of the dynamic incentive theory.50 Therefore, it must be investigated whether the TRIPS framework qualify the same phenomena as dysfunctionalities of the patent system. If the answer is affirmative, the next question would be whether the European legal framework would allow for the establishment of a compulsory liability rule intended to target the identified market failures.

9.4.1

Interpretation of TRIPS in the Light of Dynamic Incentive Theory

The dynamic incentive theory stresses that the incentives to invest in R&D do not stem from the existence of a property right, but from the market conditions on which the innovator operates. On the basis of this theory, the balance between the initial inventor’s and a follow’ on innovator’s interests is determined in the light of the objective of fostering dynamic competition.51 This justification for intellectual property protection is reflected also in the Preamble as well as Arts. 7 and 8 TRIPS. 50

For a more detailed discussion on the dynamic incentive theory, see Sects. 2.1.6–2.1.7. For a more detailed discussion on dynamic incentive theory as a normative basis for justifying a compulsory liability rule, see Sects. 2.1.6 and 4.3.2. 51

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First, it is acknowledged in the first sentence of the Preamble that patent protection may, in some circumstances, lead to market failures that compromise the functional efficiency of the patent system. The first Recital of the Preamble of TRIPS balances the objective of “reducing distortions and impediments of international trade” and the promotion of “effective and adequate protection of intellectual property rights”, with the intention “to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade”. Furthermore, the first recital of the Preamble can also be interpreted as addressing the interconnection of exclusive IP rights and competition and the objective of balancing them. When read in conjunction with Arts 8(2) and 40 (1) TRIPS, the Preamble can be interpreted as acknowledging that the protection of IPRs needs to be balanced in a manner that does not distort trade.52 The quest for balance is made even more explicit in the objectives stated in Art. 7 TRIPS. This article identifies the public policy objectives behind IP protection, which should be pursued in a manner that takes into account the interests mentioned in the two last sentences of the article.53 The objectives stated in Art. 7 TRIPS should be treated as having equal importance, as no hierarchy can be derived from TRIPS or the Marrakesh Agreement.54 The objectives identified in Art. 7 TRIPS concern only the protection and enforcement of IP, predominantly patents, with an emphasis on technology policy.55 They “provide the overall criteria against which the adequacy and effectiveness of national legislation for the protection and enforcement of IPRS should be measured. As such, they are meant to inspire and furnish the basis upon which IPR legislation should be enacted at the national level. They also serve as a reminder that the TRIPS Agreement is not simply about the granting of rights to creators and innovators, but that such rights have to be balanced by measures conductive to social and economic welfare.”56 Art. 7 TRIPS states that the protection and enforcement of IP should “contribute to the promotion of technical innovation”. The drafters deliberately employed the term “innovation”, which is essentially wider in scope than “invention”. Hence, the first objective, “promotion of technological innovation”, can be interpreted as incorporating “every development of a technical nature which leads to the improvement of an existing product or service or the creation of a new product or service.”57 This technological improvement can be made at any stage of an innovation process and take place on the markets for innovation, technology, or products. Consequently, the promotion of dynamic competition can be seen as one of the key objectives of the protection and enforcement of IPRs under TRIPS.

Keßler, “Preamble,” 67. It is even possible to consider the Preamble’s term “impediment” as covering “trade restrictions by private restrictive practices” ibid. 53 Yusuf, “TRIPS,” 12. 54 Rodrigues Jr, The General Exception Clauses of the TRIPS Agreement, 43. 55 Keßler, “Article 7,” 181. 56 Yusuf, “TRIPS,” 13. 57 Keßler, “Article 7,” 182. 52

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In addition to the objective of promoting technological innovation, Art. 7 TRIPS also places significant emphasis on the objective of technology dissemination.58 This second objective refers both to dissemination via licensing and by making technical knowledge available for broader use in society by other means.59 This objective can also be considered as supporting engagement with open approaches to innovation, both via licensing and free revealing.60 Both of the objectives must be pursued “to the mutual advantage of producers and users of technological knowledge” (Art. 7 TRIPS). Obviously, patent holders represent producers of technological knowledge and have an interest in exploiting it, while it is in the interest of users to have access both to information on patented inventions and the inventions themselves and to have the freedom to engage in reuse of patented inventions when justifiable. Follow-on innovators add something to an initial invention and are therefore simultaneously both producers and users of technological information.61 The mutual advantage of patentees and follow-on innovators should be sought “in a manner conductive to social and economic welfare” (Art. 7 TRIPS). In addition, the enforcement and protection of IPRs, which should serve the objectives of fostering dynamic efficiency and promoting the dissemination of technology, should contribute “to a balance of rights and obligations” (Art. 7 TRIPS).62 Hence, TRIPS can be seen to express a general objective of balancing the incentivising effect of IPRs on innovation with the need to promote dynamic competition driven by followon innovation. Consequently, the patent system is functionally efficient when it equalizes these two interests in a manner that promotes social and economic welfare.63 However, beyond taking into consideration the balancing of interests and stressing the importance of technology dissemination, TRIPS’ objectives also address the competitive contexts in which right holders and users operate. When

Article 7 TRIPS states that “the protection and enforcement of intellectual property rights should contribute [. . .] to the transfer and dissemination of technology”. 59 Keßler, “Article 7”, 182–183. In addition, the passage also covers the objective of international technology transfer. Ibid, 182–183. 60 Käseberg appears to consider the term “dissemination” alone as sufficing to acknowledge cumulative innovation. Käseberg, Intellectual Property, 255, fn 234. 61 See Hilty, “Economic, Legal and Social Impacts of Counterfeiting.” 16. See also Sect. 1.1. 62 The words “to a balance of rights and obligations” have been viewed as representing the codification of an “intellectual property bargain”. Yusuf, “TRIPS,” 13. 63 See also Correa, who considers that the “mutual advantage”, “social and economic welfare”, and “balance of rights and obligations” of Art. 7 TRIPS “mean that the recognition and enforcement of intellectual property rights are subject to higher social values and, in particular, that a balance needs to be found with the users of technological knowledge.” Carlos M. Correa, “Patent Rights 2008,” 246. From a more competition-driven perspective, Ricolfi considers “users of technological knowledge” as referring both to “current users and future innovators”, arguing that their interests would need to be balanced with those of “incumbent’ IP holders” in “a manner conducive of social and economic welfare”. Marco Ricolfi, “Is There an Antitrust Antidote Againts IP Overprotection within TRIPS?,” Marquette The Intellectual Property Law Review 10, no. 2 (2006): 324, 326–328. 58

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interpreted in conjunction with the request to also consider the interests of both users and follow-on innovators, the second objective of Art. 7 TRIPS emphasizes the instrumental role of IP in the dissemination of technology and the underlying objective of TRIPS to maintain access to follow-on innovation in order to ensure long-term efficiency in the global economy. Such an interpretation emphasizes the role of functioning competition as one of the objectives of the TRIPS Agreement.64 The dynamic incentive theory is not a novelty introduced to narrow down a patent holder’s interests with respect to those of a follow-on innovator; rather, it is the most contemporary articulation of the economic objective of patent protection, which rests on an acknowledgement of the complementarity of patent and competition law.65 The key element of the dynamic incentive theory, namely the promotion of dynamic competition while taking into consideration both the interests of patent holders and follow-on innovators in a particular competitive context, is expressed also in the objectives of the TRIPS Agreement. Consequently, the dynamic incentive theory can be seen as providing an overarching economic justification for patents; it can thus be used to guide the interpretation of the more operative provisions of the TRIPS Agreement. For these reasons, the TRIPS Agreement may be interpreted teleologically for the purposes of establishing a compulsory liability rule that seeks to interfere with phenomena that qualify as market failures under the dynamic incentive theory.

9.4.2

Overprotection as a Ground for a Compulsory Liability Rule

A compulsory license intended to target the suppression of follow-on innovation would seek to enhance the functional efficiency of the patent system. The principles that justify interference with the protection or enforcement of patents on the grounds of functional efficiency are specified in Art. 8 (2) TRIPS.66 Compulsory liability rules or other instruments “may be needed to prevent abuse of intellectual property rights by right holders” (Art. 8 (2) TRIPS). The wording of TRIPS parallels that of Art. 5 A (2) PC.67 As assessed in the Sect. 6.4.3, from the perspective of patent law, the concept of abuse under Arts. 8 (2) TRIPS and Art. 5 A (2) PC can be interpreted as encompassing all market failures of overprotection that involve the deliberate

Ricolfi, “Is There an Antitrust Antidote Againts IP Overprotection within TRIPS,” 324, 326–328. Such a view also exceeds and expands traditional accounts of the developmental interests of developing countries under TRIPS, which typically addresses only the transfer of technology, and not the general “competitive openness in downstream innovation markets”. Ibid, 327–328. 65 For a detailed discussion on dynamic incentive theory, see Sects. 2.1.6–2.1.7. 66 See Lamping et al., “Declaration on Patent Protection,” 688. 67 Article 5 A (2) PC justifies the enactment of compulsory licenses “to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent”. 64

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abusive conduct of a patent holder, including excessive pricing, unjustified refusals, and hold-ups. However, Art. 8 (2) TRIPS also governs the conditions for interference in abuses that harm competition. First, the provision is relevant for the interpretation of Art. 40 TRIPS.68 When read in conjunction with Art. 7 TRIPS, “a use of the IP right directed at restricting or excluding the possibility of competing firms to offer substitute goods would also qualify as an abuse of the right”.69 Furthermore, Art. 8 (2) TRIPS also allows for measures that prevent “the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology”, which has been interpreted as referring to measures of competition law.70 Thus, when read in conjunction with Art. 40 TRIPS, Art. 8 (2) TRIPS can be viewed as providing member states with substantial flexibility when it comes to measures for intervening in abuses or anti-competitive practices that involve IPRs.71 However, the measures permitted by the second passage of Art. 8 (2) TRIPS do not need to be exclusively based on competition law,72 as they can also be enacted in the context of patent or other fields of law. Hence, TRIPS provides member states with the flexibility to choose whether to base measures taken on the basis of Art. 8 (2) on patent or competition law, provided that such measures are appropriate and consistent with the provisions of TRIPS. What further expands the flexibility of Art. 8 (2) TRIPS is that it does not require the finding of a dominant position.73 “[A]s long as the members do not eliminate the protection of IPRs as such, any additional measure” that corresponds the objectives of the Art. 7 and 8 TRIPS articles is consistent with the entire agreement. The necessity and type of measures is a matter of state sovereignty, as Art. 7 and 8 do not define commons standards for them. Moreover, the panel decisions of the DSB do not narrow down the scope of these articles via interpretation.74 On the basis of an analysis of the general provisions of TRIPS, it can be concluded that both its objectives and the principles accommodate the dynamic incentive theory and allow member states to take measures to interfere with overprotection problems that hinder follow-on innovation by

Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 548. Ibid, 551. 70 Keßler, “Preamble,” 67. 71 Ibid. 72 Gervais, TRIPS Agreement, 2.125. According to Yusuf, Art. 8 (2) TRIPS refers to a wider range of abuses than those considered anti-competitive, including failure to work. Yusuf, “TRIPS,” 15. Cf. Jerome H. Reichman, “Universal Minimum Standards of Intellectual Property Protection under the TRIPS Component of the WTO Agreement,” 34, who emphasizes that, in the US, the concept of abuse is traditionally understood to concern only antitrust issues. 73 Heinemann, “Antitrust Law of Intellectual Property,” 243; Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 553. 74 Andrés Moncayo von Hase, “Application and Interpretation of the Agreement on Trade-Related Aspects of Intellectual Property Rights,” in Intellectual Property and International Trade: The TRIPS Agreement, ed. Carlos M. Correa and Abdulqawi A. Yusuf (Alphen aan den Rijn: Kluwer Law International, 2008), 117, 119. 68 69

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means of compulsory liability rules, most importantly compulsory licenses (Art. 31 TRIPS) and by means of denying injunctive relief (Art. 44 TRIPS) as well as other measures, such as those specified by Art. 40 TRIPS and exceptions (Art. 30 TRIPS). Art. 27 (1) is interpreted as not applying to measures taken under Art. 30 and 31 TRIPS and, more generally, as allowing differentiation on the basis of the competitive context.75 While the primary means of addressing market failures of overprotection are measures taken under Art. 8 (2) TRIPS, compulsory licenses granted in the public interest may also have a balancing effect on certain market failures: First, they may interfere with restrictive licensing of important upstream patents, such as research tools, if the access is justified by other objectives than functional efficiency, such as public health.76 Second, they may, at least indirectly, target market failures that do not involve abusive conduct, such as the problems of royalty stacking or underuse in the anticommons context.77 When these market failures cannot be alleviated by means of introducing a government-initiated clearing house or a reverse license of right, they may, in certain situations, be addressed indirectly by public policy measures taken under Art. 8 (1) TRIPS.78

9.4.3

Conditions for an Ex Post Liability Rule

9.4.3.1

Overcoming the Prior Effort Requirement

In this thesis, overprotection problems that hinder follow-on innovation are divided into ex ante and ex post market failures. Excessive royalties and refusals to license occur ex ante, before a follow-on innovator invests in his innovation, while hold-ups take place ex post after investments have been made. Both ex ante and ex post market failures have the effect of hindering dynamic competition, although the latter are deemed to create higher deadweight losses when comparing the two types of

Lamping et al., “Declaration on Patent Protection,” 683. Cf. Canada Pharmaceuticals, para 6.93. However, even when following a wider interpretation of Art. 27 (1) TRIPS, a general compulsory license against suppression of innovation that does not target any specific technological field does not contradict the principle of non-discrimination. 76 For a more detailed discussion on the topic, see Sect. 6.4.5. 77 See Areeda and Hovenkamp, Antitrust Law, X, at 1782g and fn 204, discussing the problem of applying a misuse defence to royalty stacking. While royalty stacking, as a phenomenon, may fall into the category of a practice that unreasonably restrains trade (Art. 8 (2) TRIPS), the threshold for meeting the qualification of unreasonableness is rather high when taking into account that the empirical evidence for the phenomenon of royalty-stacking is controversial. For more detailed discussion on the empirical inconclusiveness of royalty-stacking, see Sect. 2.3.2.8. 78 For example, member states may seek to resolve problems of underuse or royalty stacking by means of compulsory licensing or an imposition of an exception in order to promote the public interest in sectors that are of vital importance to their technological development (Art. 8 (1) TRIPS). 75

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overprotection problems.79 Pursuant to Art. 7 and Art. 8 (2) TRIPS, market failures can be deemed abusive both on the grounds of patent law and competition law, irrespective of whether they take place ex ante or ex post. However, the leeway for enacting a compulsory license that targets ex ante market failures under TRIPS is considerably wider than that for interfering with hold-ups. The prior effort requirement of Art. 31 (b) TRIPS, which reflects patent holders’ freedom of contract, is the most important limitation to the enactment of a compulsory license intended to target ex post market failures. When emphasizing patent holders’ freedom of contract, the drafters of TRIPS failed to take into account problems related to patent proliferation and the costs and difficulties of negotiating licenses to all patents relevant for a complex cumulative innovation ex ante. Nor did the drafters envision the widespread adoption of patent strategies that contribute to and exploit the inefficiencies of the patent system. In a similar vein, the TRIPS Agreement does not explicitly address interest in accessing SEPs.80 A compulsory license targeting ex ante market failures would be subject to the general and procedural requirements of Art. 31 TRIPS.81 The primary leeway in terms of avoiding the prior effort requirement and establishing an ex post compulsory liability rule is provided either (a) on the basis of Art. 41 (1) and (2), as well as on that of the second sentence of Art. 44 (2) TRIPS, which allow for limitations of injunctive relief or (b) pursuant to Art. 31 (k) TRIPS, which concerns compulsory licenses that remedy anticompetitive practices.82 Next, I evaluate whether either of the approaches is viable for interfering with hold-up problems in the European context.

79

For a more detailed discussion on hold-up problems, see Sect. 2.3.2.7. Picht, “From Transfer of Technology,” 517. 81 Art. 31 (l) TRIPS seeks to limit compulsory licenses for dependent patents with overlapping claims to situations in which the second patent represents an important technical advance that is of considerable economic significance. The provision is motivated a desire to preclude compulsory licenses for purely imitative use in the one-patent-per-product context, not to bar compulsory liability rules for follow-on innovations, which, by default, are not imitative. 82 In principle, Art. 40 TRIPS may also allow member states to employ a compulsory liability rule against refusals to license. See Correa, “Patent Rights 2016,” 317; UNCTAD-ICTSD, Resource Book on TRIPS and Development, 556. Cf. de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 162; de Carvalho TRIPS Regime of Patent Rights, 436; Beatriz Conde Gallego, “Intellectual Property Rights and Competition Policy,” in Research Handbook on the Protection of Intellectual Property under WTO Rules, ed. Carlos M. Correa (Cheltenham: Edward Elgar Publishing, 2010), 240–241. Furthermore, Picht observes that Art. 28 (1) TRIPS can potentially be interpreted as serving as grounds for access to FRAND-encumbered SEPs. Picht, “From Transfer of Technology,” 525. 80

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Article 44 TRIPS: Constrained by Fundamental Rights

Both the Enforcement Directive and UPCA can be interpreted as providing a margin of discretion with respect to the grant of a permanent injunction,83 particularly when interpreting Art. 3 (2) Enforcement Directive in the light of the principle of proportionality.84 However, it is questionable whether the flexibility provided will suffice to deny injunctive relief in the presence of a hold-up problem: First, the presence of a margin of discretion under Art. 3 (2) Enforcement Directive is debated.85 Second, the scope of the discretion may be too narrow to accommodate such ex post market failures.86 Third, many member states have implemented the Directive without leaving any margin of discretion for the denial of permanent injunctions.87 Finally, as is discussed further in this Sect. 9.4.3.2, the CJEU’s interpretation of fundamental rights may further restrict the judiciary’s options when it comes to addressing holdup problems under the Enforcement Directive. As a general rule, compulsory licenses that seek to enhance functional efficiency qualify as proportionate limitations on Art. 1 Protocol 1 ECHR and are justifiable with reference to the general interest.88 Provided that the justifications for interventions that interfere with the protection of to IPRs of Art. 17 (2) CFR are based on “fair balance”,89 one could also expect the CFR to permit such compulsory liability rules. However, the CJEU has interpreted the fundamental right to property as having a considerably wider scope than that established by the ECtHR.90 In Huawei, 83 See Ohly, “Three Principles of European IP Enforcement Law,” 258, 266; Walz, “Patentverletzungsklagen im Lichte des Kartellrechts,” 727–728, 731; Hilty, “Legal Remedies,” 391; European Commission, “EU approach to SEPs,” para 3.2. 84 Ohly, “Three Principles of European IP Enforcement Law,” 258, 266; European Commission, “EU approach to SEPs,” para 3.2. On the principle of proportionality in the interpretation of UPCA, see Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 187–188. 85 See Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181; Hilty, Role of Enforcement in Delineating the Scope of IP Rights, 17. 86 See Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 188; see Sect. 7.5.5. 87 See Hilty, “Legal Remedies,” 388; Marfé et al., “Power of National Courts and the Unified Patent Court to Grant Injunctions,” 181. 88 See Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990); Helfer, “New Innovation Frontier?,” 73–74 and fn 219. 89 Case C-275/06, Productores de Música de España (Promusicae) v. Telefónica de España SAU, 2008 E.C.R. I-271, paras 62-68; Case C-70/10, Scarlet Extended SA v. Société belge des auteurs, compositeurs et éditeurs SCRL (SABAM), 2011 E.C.R. I-11959, paras 43–46. 90 Mylly considers CJEU’s case law to be significantly more expansive with respect to the protection of IP as a fundamental right than the ECHR’s line of interpretation, because it “fill[s] in gaps in European IP law [. . .] secure[s] the primacy of supranational IP norms in the legal order of member in question. [. . . ] It also purports to secure the primacy of its substantive IP interpretations at the Member State level”, Mylly, “Constitutionalization of the European Legal Order,” 119–120. Griffiths considers the CJEU’s readiness to refer to Art. 17(2) CFR in copyright cases as reflecting a desire for further harmonization, rather than an interest in securing fundamental rights. Jonathan

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the CJEU appears to have taken a new step towards creating a positive fundamental right to IP. It referred to the “need to enforce intellectual property rights”, which is protected by the remedies provided by the Enforcement Directive. The CJEU stated that the Directive, “in accordance with Article 17 (2) of the Charter[,] aimed at ensuring a high level of protection for intellectual-property rights in the internal market, and the right to an effective remedy and to a fair trial guaranteed by Article 47 of the Charter”.91 Against this background, it expressed the view that a patent holder cannot, in principle, be precluded from her right to raise a claim for an injunctive relief and stressed the importance of voluntary ex ante licensing “prior to any use” as a general rule.92 The relevance of Art. 47 CFR in connection to protection and enforcement of IPRs and the view that the patent holders’ right to access courts is subject to a narrow margin of exceptions stems from the EU courts’ earlier case law on vexatious litigation.93 However, the establishment of the new link between the right to IP and the right to access to courts through the Enforcement Directive’s maxim of a high level of protection is very problematic with regard to balance in terms of IPRs. References to Art. 47 CFR in connection abuses of valid IPRs are abundant, as, pursuant to ECtHR case law, the right to property in itself imposes an obligation on contracting states to ensure the possibility of enforcing the right.94 Yet, Huawei confirms that CJEU’s understanding of the sufficient level of protection of IP, as a fundamental right, surpasses the standard of protection guaranteed to IP by Art. 1 Protocol 1 ECHR and TRIPS.95 In Huawei, the CJEU appears to have foregone the flexibilities provided by Art. 31 (k) TRIPS for enacting a compulsory license to remedy practices that are deemed anti-competitive in a judicial or administrative process.96 In addition, given its argumentation on fundamental rights, the decision may be interpreted as extending the prior effort requirement to other forms of IP, most importantly copyright, that Griffiths, “Constitutionalising or Harmonizing? The Court of Justice, the Right to Property and European Copyright Law,” European Law Review 38, no. 1 (2013), 65, 75–78. 91 Case C-170/13, Huawei, 5 C.M.L.R. 14 (2015), para 57. 92 Ibid, paras 58–59. 93 See Case T-111/96, ITT Promedia NV v. Commission, 1998 E.C.R, II-2937, paras 55, 60; Case T-199/09, Protégé International Ltd v. Commission, 2012 O.J. (C319) 6, paras 48–49; Henningsson, “Injunctions for Standard Essential Patents under FRAND Commitment,” 441–442. 94 See Anheuser-Busch Inc. v. Portugal [GC], no. 73049/01 (11 January 2007), para 83; Helfer, ‘New Innovation Frontier?,” 61, 84. 95 The CJEU has stressed the primacy of primary and secondary legislation on IP over the flexibilities of international law, see Case C-277/10, Luksan v. Petrus Van Der Let, 2012 O.J. (C80) 4, paras 62-64. For criticism of this approach, see Henning Grosse Ruse-Khan, “Overlaps and Conflict Norms in Human Rights Law : Approaches of European Courts to Address Intersections with Intellectual Property Rights,” in Research Handbook on Human Rights and Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2015), 76–78, 88. 96 For a more detailed discussion on the implications of the CJEU’s interpretation see Sects. 8.7.3.1– 8.7.3.2.

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were not subject to this criterion under TRIPS.97 In addition, Huawei confirmed that Art. 17 of the CFR and the Enforcement Directive are inclined towards the prospect theory, while competition law in the EU has adopted the incentive theories as justifications for the protection of IPRs,98 with a consequence of creating inconsistency between two fields of law. Furthermore, in the past, the CJEU has adopted a selective and superficial approach towards balancing fundamental rights in cases involving IP, as it has, on the one hand, inflated some fundamental rights and, on the other hand, has failed to take into account other interests that the exceptions to IP law, such as the three-step test, neglect.99 The expansive interpretation of Art. 17 (2) CFR with respect to Art. 47 CFR caters to right holders’ interests100 and may make it extremely difficult to justify limitations to IPRs in situations in which the right to enforce does not conflict with another fundamental right that justifies a limitation. Furthermore, the CJEU’s unbalanced interpretation of IP as a fundamental right may hinder it from adopting an alternative perspective in subsequent case law and prevent legislators from making legislative changes that contradict the Court’s line of interpretation.101 On this basis, the establishment of a compulsory liability rule in the EU that would amount to a denial of injunctive relief within the flexibilities of Arts. 41 and 44 TRIPS would require the CJEU to reinterpret the Enforcement Directive in the light of the principle of proportionality and a more balanced weighting of fundamental rights. In the context of the EU, a more balanced view of the right to IP could stem from an interpretation of Art. 52 CFR, which concerns the scope of fundamental rights. The right conferred by Art. 17 (2) CFR is not “inviolable” or “absolutely protected”:102 First, fundamental rights can be proportionately limited on the basis of the necessary need to protect the rights and freedoms of others (Art. 52 (1) CFR), such as a follow-on innovator’s right to IP of his own (Art. 17 (2) CFR) and right to conduct business (Art. 16 CFR). Second, limitations to IPRs can be imposed on the basis of general interest (Art. 52 (1) CFR, Art. 17 (1) CFR). Under the ECHR, general interest encompasses the interest in preventing abuses of IPRs that may hinder technological development;103 both the wording of Art. 3 (2) Enforcement Directive and Art. 41 (1) TRIPS support this interpretation. The compulsory liability rules that can be enacted under TRIPS for the purposes of fostering functional See Art. 13 TRIPS. However, trademarks cannot be subject to compulsory licenses in the first place (Art. 21 TRIPS). 98 See TTBER Guidelines (2014), para 8; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 75. 99 Mylly, “Constitutionalization of the European Legal Order,” 126–130. 100 See Jonathan Griffiths, “Enforcement of Intellectual Property Rights and the Right to a Fair Trial,” Research Handbook on Human Rights and Intellectual Property, ed. Christophe Geiger (Cheltenham: Edward Elgar Publishing, 2015), 454. 101 Tuomas Mylly, “Constitutionalization of the European Legal Order,” 126–130. 102 Case C-70/10, Scarlet Extended, 2011 E.C.R. I-11959, para 43. 103 See Smith Kline and French Laboratories Ltd v. The Netherlands (dec.), no. 12633/87, (4 October 1990). 97

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efficiency should be deemed proportionate with regard to their degree of interference with a patent holder’s right to property. Finally, market failures of overprotection that stem from the abusive conduct of a patent holder may be countered on the basis of the prohibition of the abuse of rights (Art. 54 CFR). Generally speaking, the CJEU requires “a fair balance to be struck between the various fundamental rights protected by the Community legal order” in the implementation and interpretation of community law as well as respect its other general principles, such as the principle of proportionality.104 However, a closer examination of the CJEU’s application of the CFR reveals that a fundamental right to IP may in itself contribute to the overprotection problems that compromise third parties’ interests in accessing IP,105 including those of follow-on innovators. Ultimately, human and fundamental rights should not pose constraints on balancing the interests of a patent holder and a follow-on innovator in the light of the dynamic incentive theory by means of enacting a compulsory liability rule.106 However, the establishment of a compulsory liability rule intended to targets hold-ups would require the CJEU to adopt a more expansive interpretation of the Enforcement Directive in the light of fundamental rights. Presuming that the Enforcement Directive does not currently permit the judiciary to address hold-up problems by denying permanent injunctions, national compulsory licenses, which are not subject to harmonization, may offer a more viable option for targeting ex post market failures.107

9.4.3.3

Article 31 (k) TRIPS: A Reinterpretation of “Anticompetitive Practice”

The abuses and other practices addressed in Art. 8 (2) TRIPS feature an overlap; this gives national legislators a certain degree of flexibility in deciding whether to employ compulsory licenses on the basis of the abuse of rights in patent law or on the grounds of remedying anti-competitive practices.108 The question is to what extent can measures intended to prevent the abuses and practices identified in Art. 8 (2) TRIPS be implemented on the basis of Art. 31 (k) TRIPS? Furthermore, is it possible to qualify the overprotection problems that are nested in patent law also as anticompetitive practises under the meaning of Art. 31 (k) TRIPS?

104

Case C-275/06, Promusicae, 2008 E.C.R. I-271, para 70. See Mylly, “Constitutionalization of the European Legal Order,” 104, 128. 106 In the context of IP law, the human rights to property and the right to conduct business are not isolated sources of justice that enlighten economic analysis of the law but legal instruments, which may create overprotection problems in the same manner as subordinate norms. See Sect. 1.5 on methodology for further discussion. 107 See Art. 12 Biotechnology Directive; Regulation 816/2006; rec. 10 Regulation 1257/2012. 108 de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 110. 105

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Ullrich has stressed the need for a functional separation of compulsory licenses for competition law and patent law.109 However, while Ullrich’s analysis addresses the existing instruments, it does not directly discuss the need to establish novel instruments. When attempting to identify solutions to the market failures of overprotection that compromise follow-on innovation, it is impossible to ignore the overlap between the two fields of law. In this respect, De Carvalho notes that “all anti-competitive practices are always abusive. But there are abusive practices that are not necessarily anti-competitive.”110 However, emerging scholarship has advocated an enhanced role for competition law under the TRIPS Agreement as an innovation policy tool complementary to patent protection111 and its role in securing access to standard essential technology.112 Taking this development one step further, Hilty has highlighted that there are situations in which patents are exercised in a manner that is beyond the reach of competition law, yet harms competition.113 Indeed, as explained previously, the behaviour of patent holders may suppress follow-on innovation thus leading to market failures of overprotection, even when the patent holder in question does not hold a dominant position on the market.114 Such market failures also harm dynamic competition. However, the market failures involving patent holders and follow-on innovators do not occur en masse; rather, they arise in specific competitive circumstances.115 This aspect of overprotection problems is evident in the fourfactor test of eBay, which addresses the nature of the competitive relationship between a plaintiff and a defendant and also takes into account the possible standard essentiality of a patent.116 While the eBay test is not as sophisticated as the instruments of competition law, it is still sufficient to address the different factors at play in the maintenance of a patent holder and follow-on innovator’s incentives to innovate given their competitive relationship within the relevant markets and the conditions thereof. One may argue that ambiguous application of the concepts of competition in the context of patent law without employing the methodology of the effect based

Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 371–372. de Carvalho, TRIPS Regime of Antitrust and Undisclosed Information, 110. 111 See Ricolfi, “Is There an Antitrust Antidote Againts IP Overprotection within TRIPS?” 324, 326–328 337-340; Bakhoum and Conde Gallego, “TRIPS and Competition Rules,” 530, 537–539, 547–552, 556. 112 See Peter Picht, “From Transfer of Technology to Innovation through Access,” 518. 113 Hilty, Role of Enforcement in Delineating the Scope of IP Rights, 10. 114 See Sect. 9.1.3. 115 See Hilty, “Legal Remedies,” 381; Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 15. 116 The quality of a competitive relationship is addressed in the context of finding of irreparable harm, the first criterion of eBay. Takenaka et al., Patent Enforcement in the US, Germany and Japan, 13.08; Chisum, Chisum on Patents, 7, § 20.04[2][c][iv][A]. The standard essentiality of a patent is relevant in the finding of disproportionality of hardships, the third criterion of eBay, see Hynix v. Rambus, 609 F.Supp.2d 951, 984–985. 109 110

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approach could lead to legal uncertainty.117 However, as was evident from the review of the essential facilities doctrine, an effects-based approach may be very difficult to apply to abuses of dominance that harm follow-on innovation.118 The use of the more normative and vague criteria embedded in the patent law to balance the interests of a patent holder against those of a follow-on innovator is justified given the impossibility of gathering evidence on markets that have not yet been formed or are only emerging. In addition, the use of such criteria enables interference with emerging market failures before all of their effects have demonstrably materialized. While “an element of ‘rough justice’”119 is likely unavoidable in the application of an instrument nested in patent law, this effect can mitigated by providing adequate compensation and by grounding the conditions of a compulsory license in economic reasoning. The concept of anti-competitive practices under Art. 31(k) TRIPS is subject to wide degree of flexibility.120 The article can also accommodate interferences with anti-competitive practices on the basis of bodies of law other than competition law: Given the nature of patents as means of competition [. . .], any illegitimate exploitation of the exclusive rights conferred by the patent, whether specifically addressed by competition law (such as e.g. tying and bundling, discrimination, restrictions of output, excessive pricing or market leveraging) or condemned by some other law (such as patent law itself, civil law, tort law, administrative or procedural law), may be considered ‘anti-competitive’ within the meaning of Article 31(k) of the Agreement.121

On this basis, an anticompetitive practice must not be forbidden by antitrust law, but it can be determined within other relevant bodies of law, including patent law. Given the insufficiency of competition law instruments with regard to resolving market failures of overprotection, the common goal of patent law and competition law of fostering dynamic efficiency, and the common principles for the establishment of compulsory licenses (Art. 8 (2) TRIPS), it is justifiable to interfere with dysfunctional suppression of follow-on innovation as an anti-competitive practice under patent law pursuant to Art. 31 (k) TRIPS.122 Consequently, this interpretation Drexl, “Immaterialgüterrechte,” 49–50. See Sect. 8.8.1.4. 119 Kur and Schovsbo, Expropriation or Fair Game for All?, 6. 120 Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 178. 121 Lamping et al., “Declaration on Patent Protection” 689. Lin has identified the Patent Law of Israel as an example of legislation in which an anti-competitive practice was defined on the basis of patent law. Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 178–179, discussing Art. 119 of the Patent Law of Israel prior to its amendment in 1999. Article 119 of the Patents Law of Israel, which regulates compulsory licenses, combines the language of antirust with the concept of abusiveness nested in patent law. See Patents Law 5727-1967 Art 119, as consolidated 2014. (Isr.). https://www.wipo.int/edocs/lexdocs/laws/en/il/il040en.pdf; Lin, “Prior Negotiation and Remuneration for Patent Compulsory Licensing,” 179. 122 By enacting a compulsory license under patent law, the EU member states may also escape the CJEU’s restrictive interpretation on the possibilities to interfere with a patent holders right to IP (Art. 17 (2) CFR) and right to effective remedy and fair trial (Art. 47 CFR) on the grounds of competition law, see Sect. 9.4.3.2. 117 118

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would exempt the compulsory licenses targeting such dysfunctions from requirements of prior negotiation (Art. 31 (b) TRIPS) and domestic supply (Art. 31 (f) TRIPS.123 It also opens up the possibility of mitigating the shortcomings of applying the compulsory licenses of patent law on the basis of abuse (Art. 5 A (2) PC and Art. 8.2 TRIPS) to overprotection problems. Most importantly, it would allow for the creation of more efficient mechanisms for resolving ex post hold-up situations.

9.5 9.5.1

A Compulsory License Against the Suppression of Follow-On Innovation The Substantial Criteria

Those market failures of overprotection that the government-initiated clearing house or the reverse license of right fail to alleviate should be addressed with a new compulsory license, the justification for which can be derived from Art. 5 PC and Arts. 7, 8(2) and 31 (k) TRIPS. This instrument would target abusive exercises of the rights conferred by a patent in a manner that harms dynamic competition by means of suppressing follow-on innovation. Compulsory license would offer follow-on innovators a means of overcoming both ex ante and ex post market failures. It may also be applied to SEPs.124 The substantive crieria of a compulsory license against suppression of follow on innovation may be worded as follows: A follow-on innovator may obtain a right to use a patent when its holder abuses the rights conferred by that patent by suppressing follow-on innovation in a manner that harms dynamic competition. Such abusive practices encompass (a) unjustified refusals to license or the enforcement of patents (“excluding hold-ups”); and (b) charging unjustifiably excessive royalties or using patent enforcement as a disproportionate leverage in licensing negotiations (“exploitative hold-ups”). A follow-on innovator is an entity that engages in R&D and develops technology of its own. A follow-on innovator’s products that would rely or rely on a patent for which a compulsory license is requested should not imitate the patent holder’s products but should instead showcase novel technological advances.

Lamping et al., “Declaration on Patent Protection,” 689. However, legislators may also choose to enact the instrument in a manner that excludes FRANDencumbered SEPs, provided that they are subject to a distinct compulsory liability rule such as Huawei’s negotiation framework. Upon taking such decision, the legislators, however, should take into consideration the legal uncertainty faced by a follow-on innovator, who may have to rely on several compulsory liability rules if she faces multiple overprotection problems. For a more detailed discussion see Sects. 8.8.1.3 and 9.1.2.

123 124

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A compulsory license would only be available to follow-on innovators who engage in reuse of patents for which compulsory licenses are claimed. Persons who engage in purely imitative uses would not be eligible to apply for a compulsory license. A basic eligibility requirement would be that the applicant itself engages in R&D activity and has developed patented technology of its own. This means that participants in non-company-driven forms of UOCI, who typically do not patent, would not be eligible to employ the instrument. The most suitable instrument for protecting this type of follow-on innovator against overprotection problems would be to establish an exemption from patent protection in favour of UOCI.125 The patent for which a compulsory license is applied may be a research tool or a basic innovation. It may also be an input for a complex product, which may represent either cumulative or sequential innovation.126 Given that follow-on innovation can take a range of heterogeneous forms, the question of whether an applicant is entitled to a compulsory license should be decided on a case-specific basis, taking into consideration her competitive position with respect to the relevant patent holder and the market failure at hand.127 The need for a flexible qualification for follow-on innovations becomes most evident when compulsory licenses target unjustified refusals and unjustified enforcement in the form of excluding hold-ups. In accordance with the dynamic incentive theory, a compulsory license should not be granted if it would diminish the patent holder’s incentives to continue investing in R&D in order to compete on the market.128 In other words, a follow-on innovator should not be awarded a compulsory license when a patent holder derives his competitive advantage on the market from exclusivity, either by means of preventing competitors from free-riding on the patented invention in question129 or by licensing only to specific, carefully selected licensees. The competitive advantage ought to derive from the innovative quality of the patented invention in question, not its status as an SEP. Offensive anticompetitive practices130 that deliberately seek to suppress follow-on innovators’ R&D efforts do not qualify as a justified exercise of a patent. On this basis, a compulsory license is unlikely to be awarded on the grounds of an unjustified refusal or an excluding hold-up when the follow-on innovator is a patent holder’s competitor, the follow-on innovator’s product does not differ substantially

See Strandburg, “Users as Innovators,” 505–540; Lukaszewicz, “Patent Use Exception for UserGenerated Inventions,” 214–217. 126 For a more detailed discussion on different types of follow-on innovations, see Sect. 2.2.4. 127 However, in situations in which a follow-on innovator’s own patent claims overlap with those of the patent holder’s patent, the appropriate instrument would be the compulsory license for dependent patents (Art. 31 (l) TRIPS). See also Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339, 341–342. 128 See also Lamping et al., “Declaration on Patent Protection,” 683. 129 A patent holder may, for example, seek to enter the market for the follow-on innovation with the benefit of the patent. In such situations, the awarding of a compulsory license would amount to an underprotection problem. 130 For a more detailed discussion on offensive practices, see Sect. 2.3.1.1. 125

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from that of the patent holder, and/or the patent holder’s competitive advantage on the market derives from the patent in question. In contrast, a follow-on innovator is more likely to be found to be subject to an unjustified refusal or a excluding hold-up when she is subject to an offensive-anticompetitive patent strategy, when she operates on a market other than that of the patent holder, or when the patent holder is a PAE or the patent is standard essential. Patent holder’s request for royalties can be deemed abusively excessive, when it disproportionate to the market value of the patent technology. The benchmark market value should discount the effect of potential standard essentiality of the patent on its value.131 The threshold for an royalty rate to qualify as excessive should be high. For example, when a technology is unsubstitutable, a high price can possibly be justified by its technological merit and consequent market power.132 False positives in interference with excessive royalties are extremely undesirable, and they would amount to sanctioning patent holders who are actually willing to give licenses and undercompensating them. Consequently, interference with excessive pricing must be based on substantiated evidence. The royalty rate of a de facto SEP can be regarded as excessively high when it compromises the development of follow-on innovations. For example, a royalty rate for a FRAND-encumbered SEP that is obviously above the FRAND rate may be deemed to be unjustifiably excessive. A patent holder’s exercise of a patent may qualify as an exploitative hold-up when he uses the threat of a permanent injunction to seek royalties that are disproportionate in respect to the market value of the technology by exploiting the possible standard essentiality of this patent and the fact that the follow-on innovator in question cannot easily redesign the infringing product.

9.5.2

General and Procedural Considerations

Art. 31 TRIPS provides legislators with wide room to determine the procedures for applying a compulsory license. In order to render the instrument more attractive to use than the existing compulsory licenses, it is critical that the procedure be swift and inexpensive and that it allows for interim decisions. A compulsory license may be granted either by an administrative agency or by a court. In principle, a constellation in which the government-initiated clearing house, the reverse license of right, and the grant of compulsory licenses are all governed by same administrative agency would have the advantage of accumulating learning effects across the instruments, thus offering the possibilities of arriving at increasingly precise and well-informed assessments concerning adequate remuneration and coordinated management of administration costs, which could be used to strive

131 132

See Sect. 2.3.2.5. See for example: Farrell et al., “Standard Setting, Patents, and Hold-Up,” 615.

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towards self-sufficiency.133 However, some authors prefer that courts grant compulsory licenses on anticompetitive grounds because such institutions are better suited to resolving disputes between private parties, more appropriate for addressing questions at the interface between patent law and competition law, and less likely to become subject to lobbying.134 However, in contrast, specialized patent courts may be susceptible to a bias in favour of patentees.135 Which of the agencies should be preferred when it comes to the grant of a compulsory license also depends on jurisdiction. Ultimately, an application for a compulsory license should not unnecessarily complicate the possible proceedings related to a patent. For example, in Germany, it would be preferable that the instrument could be used as a defence in infringement proceedings with regard to ex post market failures, as the introduction of a separate procedure for applying a compulsory license could lead to the trifurcation of patent proceedings. It would be desirable that efforts to establish a compulsory license against the suppression of follow-on innovation would be coordinated across the EU nations. The instrument should allow for a compulsory license for several patents to be requested simultaneously, it they cover a specific component, standard, or a method crucial for a follow-on innovation. On such occasions, the degree of the applicant’s advances in terms of innovation, as well as the patent holder’s competitive advantage, may be evaluated with respect to the patent portfolio for which the license was applied for. Given the presumption that a follow-on innovator may become subject to number of market failures simultaneously, such as a multiparty hold-up, it should be possible to apply for a compulsory license against several patent holders simultaneously. Hence, the instruments could have a “cascading effect” that could allow an applicant to gain a non-exclusive licence to multiple patents simultaneously when facing hold-ups from several patent holders. Compulsory licenses against unjustified refusals to license and excessive royalties should be subject to a prior effort requirement. In addition, a follow-on innovator who already uses a patented invention could be expected to seek a voluntary license in cases in which the patent holder that seeks an injunctive relief is an NPE, the

133

The synergies of the instruments could be further enhanced via more systematic collection of anonymised data on licensing rates across different industries. The experience of personnel, in combination with clearing house data on voluntarily agreed-upon licenses and potential future machine-learning applications, would allow for increasingly precise determination of licensing rates, with decreased risk of both under- and overcompensation. The availability of points of comparison through analysis of licensing data would be particularly helpful for the purposes of determining FRAND rates for de jure SEPs. It is important that commercially valuable information, such as business secrets concerning innovations that are still under development and licensing rates, is protected during proceedings as confidential information. The level and quality of the protection of confidential information should foster parties’ trust in the instrument. 134 Kung-Chung Liu, “Need and Justification for a General Competition-Oriented Compulsory Licensing Regime,” IIC - International Review of Intellectual Property and Competition Law 43, no. 6 (2012): 699. 135 See Rochelle Cooper Dreyfuss, “Federal Circuit : Case Study in Specialized Courts,” New York University Law Review 64, no. 1 (1989), 26–30.

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business model of which is based on licensing technology that it has developed itself. Such companies are typically willing to license but may depend on the threat of an injunctive relief to bring an infringing user to the negotiation table. While, generally, compulsory licenses against hold-ups do not need to be conditional on a prior effort to obtain a license, maintaining this requirement with respect to R&Dintensive NPEs’136 would prevent misuse of the compulsory licensing instrument for the creation of hold-out situations. Overall, in line with all of the proposed instruments, the compulsory license should be designed with the intention of creating an indirect effect of incentivising right holders to negotiate licences voluntarily. In the best-case scenario, the threat of compulsory licensing would discourage patent holders from indulging in abusive exercise of their patents. In this respect, the most efficient compulsory licensing instrument may ultimately be the one that is very rarely employed. Hence, the key to transcending the shortcomings of open innovation may lie in the development of a well-tailored compulsory liability rule.

136

Or other patent holders which are empirically proved to be vulnerable to hold-outs.

Chapter 10

Conclusions

The patent system is based on one-patent-per-product presumption and makes little distinction between copying and improving on upon a patent. As a consequence, when evaluated in the light of dynamic incentive theory, the patent system features imbalances that may hinder follow-on innovation. The fragmentation of the modern patent landscape heightens the likelihood of follow-on innovation becoming subject to market failures such as excessive transaction costs of licensing and hold-up problems. One of the proposed approaches to resolve these market failures are open innovation models. There is a range of mechanisms to create involuntary access to patents with private ordering, such as patent pledges, but the incentives to employ them do not suffice to resolve the market failures hindering follow-on innovation. However, also compulsory liability rules in patent law and competition law fail to address the overprotection problems concerning follow-on innovation. As a solution, the author proposes a combination of three instruments: a governmentinitiated clearing house for patents, a “reverse license of right” to record follow-on innovator’s a commitment to license patents that they failed to clear, and a compulsory license against the suppression of open innovation.

10.1

Follow-on Innovation May Be Threatened by Market Failures

The starting point of this thesis was the observation that, due to the one-patent-perproduct presumption, the patent law does not distinguish between infringing users who merely copy a patent holder’s patent protected-innovation and follow-on innovators who, sometimes radically, improve upon the patent.1 Relying on the most contemporary rendition of the economic rationale for patent protection, the 1

See Sect. 1.1; Sect. 2.2.4.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Wernick, Mechanisms to Enable Follow-On Innovation, Munich Studies on Innovation and Competition 15, https://doi.org/10.1007/978-3-030-72257-9_10

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so-called dynamic incentive theory,2 it was noted that, in certain circumstances, patent holders may be overprotected in a manner that hinders follow-on innovation and hence also dynamic competition.3 These imbalances are exacerbated in the contemporary patent landscape characterized by patent proliferation and the fact follow-on innovations have become increasingly complex due to the trend towards technological convergence and the increasing requirements in terms of interoperability in digital environments. In addition, follow-on innovators are increasingly likely to fail to clear all pre-existing patents in advance and infringe them due to the employment of defensive and offensive patent strategies that strengthen the trend of patent proliferation.4 In such context, a follow-on innovation may become subject to a number of market failures. Two overprotection problems are circumstantial: A follow-on innovation may become subject to a tragedy of the anticommons, in which the technology transfer fails due to excessive transaction costs. A patent holder’s attempts to maximize profit and lack of consideration concerning a follow-on innovator’s accumulated licensing costs may lead to a royalty-stacking problem, which will likely hinder follow-on innovation. Other market failures that may result from the conduct of a patent holder that is unjustifiable from the perspective of the economic objective of patent protection include excessive royalties, unjustified refusals to license, and exploitative, excluding, and multiparty hold-ups.5 The frequency of the occurrence of these market failures and their theoretical background has been subject to scholarly debate. The limited empirical occurrence of these market failures has been attributed to the presumption that patent holders have sufficient incentives to resolve them voluntarily through private ordering.6

10.2

Open Approaches to Innovation Do Not Resolve the Market Failures

Chapter 3 reviewed the explanations that the three OAI theories provide concerning a patent holder’s incentives to allow reuse. The MCM is most appropriate when attempting to explain the interests behind patent pooling, collective rights management, and the role of intermediaries in reducing transaction costs on the markets of technology.7 Open innovation theory, at first glance, offers little in addition to that

See Sects. 2.1.6–2.1.7; Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14, 16; Lamping et al., “Declaration on Patent Protection,” 682; Similarly, see Hilty and Slowinski, “Patenting Coffee–IP Protection”, 494-495. 3 See Sect. 2.2.4. 4 See Sect. 2.3.1. 5 See Sect. 2.3.1. 6 See Sects. 2.3.2.8–2.3.2.9. 7 See Sect. 3.1.1. 2

10.2

Open Approaches to Innovation Do Not Resolve the Market Failures

407

which the economic theories that underlie patent protection have presumed concerning the role of patents in technology transfer. However, its value lies in explaining the emergence of technology markets and the process by which companies come to specialize in R&D, as well as the managerial decisions behind the open licensing of patents.8 User and open collaborative innovation explores the motivations to innovate in the absence of the incentivizing effect of IP law. In the light of the dynamic incentive theory, research into UOCI is relevant in terms of deepening understanding of situations in which competitive advantages other than IP have driven innovation.9 The open exercise of patents falls on a continuum and takes heterogeneous forms.10 The general incentives to license openly include revenue generation, cross-licensing between holders of complementary patents, sources of revenue complementary to patented products, non-monetary benefits (such as goodwill), interest in the creation of a standard, and, finally, altruistic reasons. Non-rivalry, the need for repeated interactions, patent holders’ capacities to manage patents in an OAI environment, and reasonable transaction costs may foster engagement in OAI.11 The most open forms of patent licensing, private liability rules, have marginal relevance in the resolution of the market failures. A patent pledge does not ensure longevity of access unless a unilateral commitment is considered to be binding and enforceable in favour of an unidentified group of licensees.12 Patent pools are welfare enhancing only under the specific conditions defined by competition law.13 The incentives for patent holders to employ a license of right, make a patent pledge, or join a patent pool are insufficient with regard to preventing the occurrence of market failures of overprotection.14 Furthermore, certain instruments that originated from the realm of copyright protection, such as royalty-collection clearing houses or open-source licenses, are not suitable to ensure the openness of patents, and therefore remain theoretical options.15 The forms engagement in OAI that are less indiscriminate than private liability rules,16 such as bilateral licensing, are, in most cases, very efficient with regard to fostering dynamic competition. However, these forms of openness always pose the risk that a follow-on innovator may become subject to a market failure. A patent may be exercised in a completely justifiable manner with regard to a number of follow-on innovators at a given point in time yet subject one or more follow-on innovators to a

8

See Sect. 3.1.2.3. See Sects. 3.1.3–3.1.4. 10 See Sect. 3.2. 11 See Sect. 3.4.2. 12 See Sect. 3.3.1.2. 13 See Sect. 3.3.3.2. 14 See Sect. 3.4.1. 15 See Sects. 3.3.4–3.3.5; Sect. 3.4.1. 16 See Sects. 3.2.2–3.2.4. 9

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Conclusions

market failure. In addition, the same patent may, over its lifetime, first be exercised in a completely justifiable manner and later be employed to create a market failure, such as an excluding hold-up.17 Ultimately, patent holders do not have incentives to engage in the various forms of OAI at a level that would preclude the emergence of market failures. They are unlikely to license when their competitive advantage derives, justifiably or unjustifiably, from exclusivity. A patent holder is also often reluctant to license to a competitor. The incentives may also be low when a patent is unsubstitutable, when transaction costs are excessive, or the likelihood of repeated technology transfer with a follow-on innovator is low. Insufficient capacity to manage open licensing on the part of a patent holder may also contribute to overprotection problems.18 Considering the limits of patent holders’ incentives to resolve market failures of overprotection through private ordering, it can be concluded that the current design of the patent system may lead to situations in which patent holders are overrewarded vis-à-vis follow-on innovators. One of the most flexible means of interfering with such market failures on a case-specific basis, without unnecessarily diminishing patent holders’ incentives to innovate, is to grant a compulsory license in favour of a follow-on innovator.19

10.3

The Existing Compulsory Liability Rules Do Not Resolve the Market Failures

The existing compulsory liability rules permitted under patent law do not accommodate the interests of contemporary follow-on innovators: First, the procedural criteria of Art. 31 TRIPS for the granting of a compulsory license often translate into lengthy and complicated procedures.20 Second, the requirement of prior effort to obtain a license (Art. 31 (b) TRIPS) precludes interference in ex post market failures unless a compulsory license is granted on the grounds of public interest (Art. 31 (b) TRIPS) or to remedy an anti-competitive practice (Art. 31 (k) TRIPS).21 Third, the material criteria for a compulsory license to a dependent patent apply only to a narrow range of situations in which two patents have overlapping claims.22 In principle, market failures of overprotection that involve deliberate misconduct on the part of a patent holder could be addressed by the grant of a compulsory license against abuse of the rights conferred by a patent (Art. 5 A (2) PC, Art. 8 (2) TRIPS)

17

See Sect. 2.3.1.3; Sect. 3.2.2; Sect. 3.2.9; Sect. 4.2. See Sect. 3.4.2. 19 See Sect. 2.3.2.9; Sect. 4.2. 20 See Sect. 6.3.8; Sect. 6.5; Sect. 9.1.2. 21 See Sect. 6.3.1.3. 22 See Sect. 6.4.1.3. 18

10.3

The Existing Compulsory Liability Rules Do Not Resolve the Market Failures

409

or one that is intended to remedy an anti-competitive practice (Art. 31 (k) TRIPS).23 The tragedy of anti-commons may be addressed with a compulsory license intended to promote public interest.24 Compulsory licensing may target the problem of royalty stacking only indirectly, as compulsory licenses in patent law are granted on a casespecific basis and the market failure does not involve abusive conduct.25 The judiciary may have the power to deny a permanent injunction on the grounds of Art. 44 TRIPS. In the US, the denial of an injunction on the basis of equity has proven to be an effective measure for interfering with ex post market failures,26 whereas the misuse doctrine is toothless when it comes to addressing the overprotection problems discussed in this thesis.27 Generally speaking, a refusal to license does not qualify as grounds for the grant of a compulsory license in the US.28 Despite the advantages that doing so would offer, the establishment of an effective ex post liability rule in Europe is unlikely due to the absence of a margin of discretion in granting permanent injunctions in civil law traditions. In addition, in the absence of a CJEU or UPC ruling to the contrary, the room for discretion to deny permanent injunctions under the Enforcement Directive or the UPCA is likely to continue to be interpreted narrowly, thus precluding the establishment of an effective patent law-driven ex post liability rule in Europe.29 The compulsory liability rules in competition law are complex and may apply only when a patent holder is in a market-dominant position.30 The possibilities in terms of interfering with market failures of overprotection using competition law remedies vary depending on (a) whether the patent in question is a non-SEP, a de facto SEP, or a de jure SEP, (b) the patent holder has given a previous commitment license on FRAND terms, and (c) whether the patent holder has previously licensed the patent in question. This subjects follow-on innovators to considerable legal uncertainty.31 In principle, the EU competition law allows for interference with unjustified refusals to license on the basis of the essential facilities doctrine.32 The threshold of qualifying excessive royalties as abuse of dominance is very high.33 While the Huawei framework appears to offer a balanced solution to hold-up and hold-out problems in the context of de jure SEPs, the importance that the CJEU assigns to a patent holder’s previous commitment to license under FRAND and its

23

See Sect. 6.5. See Sect. 6.5.5. 25 See Sect. 6.5. 26 See Sect. 7.3.3. 27 See Sect. 7.4.3. 28 See Sect. 7.3.3; Sects. 7.5.4–7.6; see also Sect. 8.5.7.3. 29 See Sects. 7.5–7.6; Sect. 9.4.3.2. 30 On market definition and the finding of dominance, see Sects. 8.3–8.4. 31 See Sect. 8.8.1.3. 32 See Sect. 8.7.2. 33 See Sect. 8.7.4. 24

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Conclusions

balancing of fundamental rights may have disallowed the application of essential facilities doctrine to hold-ups that involve non-SEPs.34

10.4

A Compulsory License Against Abuse and in Favour of Voluntary Licensing

An analysis of de lege lata leads to the conclusion that the existing compulsory liability rules do not adequately resolve overprotection problems.35 As a solution to overprotection problems, the author proposes a compulsory liability rule that seeks to foster the most commonplace form of engagement in OAI: voluntary licensing to a limited number of follow-on innovators. The solution features three instruments: a government-initiated clearing house, a reverse license of right, and a compulsory license against the suppression of innovation. The first two seek to alleviate the problems of royalty stacking and the tragedy of the commons, while the compulsory license would address ex ante and ex post market failures, which result from the deliberate misconduct of a patent holder.36 The government-initiated clearing house is intended to facilitate patent clearance for follow-on innovators and technology transfer between patent holders and followon innovators.37 The reverse license-of-right system would allow follow-on innovators to declare their willingness to take licenses for technologies that they infringe despite their efforts to clear the necessary patents ex ante.38 The purpose of the instruments is fulfil, in abstract, the prior effort requirement of Art. 31(b) TRIPS to the extent to which is possible in the contemporary patent landscape, while also fostering voluntary licensing and reducing the instrumentalization of claims for injunctive relief as a means of creating hold-ups or avoiding hold-outs and the expenses and delays associated with litigation.39 Under this system, the compulsory licensing mechanism would target only the least non-cooperative patent holders, such as PAEs or companies who engage in offensive patent strategies. The compulsory license against the suppression of follow-on innovation would interfere with unjustified refusals to license and excessive royalties, as well as exploitative, excluding, and multiparty hold-ups.40 The instrument would derive its justification from the interests in preventing the abuse of the rights conferred by a patent (Art. 5 A (2) PC, Art. 8 (2) TRIPS) and in remedying

34

See Sect. 8.7.3; Sect. 8.8.1.5. See Sect. 9.1.2. 36 See Sect. 9.2. 37 See Sect. 9.3.1. 38 See Sect. 9.3.2. 39 See Sect. 9.3.3. 40 See Sect. 9.2. 35

10.4

A Compulsory License Against Abuse and in Favour of Voluntary Licensing

411

anticompetitive practices (Art. 31 (k) TRIPS).41 The procedure should be swift and allow for interim effects, yet it should be ensured that it is not employed in situations in which the right to exclude is necessary for the maintenance of a patent holder’s incentives to innovate or used to create hold-out situations.42

41 42

See Sect. 9.5.1. See Sect. 9.5.2.

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