Intellectual Property Rights and Competition Policy - OECD · Intellectual Property Rights and Competition Policy ... A clause in a licensing contract whereby ... • Does it extend

IPRs and Competition Policy Pierre Regibeau May 11, 2012

Intellectual Property Rights and Competition Policy

Pierre Regibeau, CRA and Imperial College


Outline • A Few Principles • A Map • Patent “Tickets” • Revising the TTBER and the TT Guidelines • Cross-Licensing • Patent Pools • Grant-Back Clauses • Recent Themes • Pay to Delay • Patent Wars • Some Common Themes


A FEW PRINCIPLES

• Not all IPRs confer significant market power • IPRs should be treated like any other source of market

power → what matters is abusive conduct • with some additional “efficiency” defences due to the

public good nature of IPRS • IP law already strikes a balance between reward, static

efficiency and diffusion of information • → Should competition policy explicitly care about

innovation (as it does)?


IP and Antitrust Policy

Patent Abuse Licensing

Regulatory Abuse (Astra-Zeneca)

Litigation Abuse

Pay for Delay Settlements

Patent “Wars”

Patent Thickets No Thickets

Patent Pools

Cross- Licensing

Grant-Back

Pass-Through


Patent “Thickets”


What Are Patent “Thickets”

• For economists, there is a patent thicket if many IP rights are required to produce a given item and these rights are own by a large number of different economic entities. This “requirement” can be technological or legal (litigation avoidance)

• This differs from the use of “thickets” in some other

documents (eg the pharma review), where it refers to a concentration of IPRs in the hands of a single entity.


Why Are Thickets a Problem?

• Royalty-Stacking: independent pricing of complementarity goods lead to high prices that hurt both profits and consumers.

• Increase both the time (and cost) of reaching

agreements and the probability that negotiations break down and no agreement is reached.


How Big A Problem?

•Thickets tend to arise in “complex” industries – where value is derived from assembling complementary components (e.g. electronics, telecom equipment) but not in “discrete” industries where there is a strong link between single patents (or patent families) and commercilised products (e.g. pharma).

• There is evidence of patent “hoarding” in complex industries.

• There is no systematic evidence of the magnitude of the private and social harm resulting from patent thickets.


Why Is it an Antitrust Issue?

• Possible solutions to the thicket issue include • Patent Law Reform • Cross-Licensing • Patent Pools • The last two raise antitrust issues of their own • So, how lenient should one be with cross-licensing and

patent pools given that they might help resolve thicket-related inefficiencies?


Revising the TTBER and the TT Guidelines


Cross-Licensing in the TT Guidelines

“Article 81 (1) may be applicable where competitors cross license and impose running royalties that are clearly disproportionate compared to the market value of the licence”


Patent Pools: Antitrust Concerns

• Increase in the level of royalties • Exclusion of rival firms • Exclusion of rival technologies • Exclusion of rival standards


Patent Pools in the US and EU

• DOJ/FTC 2007 IP Report: no antitrust concern if the pool is limited to essential patents for a standard, it grants non-exclusive licenses that do not prevent licensees from contributing to alternative standards and IPR owners retain the right to license outside the pool

• TT Guidelines: Exemption limited to pools of essential patents. Preference for open pools and an independent licensing clause.


Patent Pools: Substitutes and Complements

The fundamental economic reference is Lerner and Tirole (2004):

• Industry-wide pool • Jointly set terms fro access • All or nothing Access • Pure research firms


An Important Insight

• While the degree of subsitutability/complementarity between IPRs in the pool matters, it cannot be determined from objective technical or legal considerations. The degree of subst/comp actually depends on the pricing policy of the pool.

• Except for the extreme case of essential patents, this

make any kind of “objective” antitrust enforcement based on the notion of substitutability/complementarity hard to apply effectively.


Patent Pools: The Importance of Licensing Outside the Pool

• Lerner and Tirole (2004), Main results • Pools are socially desirable only if the patents that are included

are not too closely substitutable in the L-T sense. • Roughly, including a clause that allows IPR owners to continue

to license their own IP outside the pool if they wish is sufficient to ensure that all of the patent pools that the firms freely decide to form are actually socially desirable.

• So, require such a clause and then relax and enjoy?


Patent Pools: is Outside Licensing Sufficient?

• If pool members are asymmetric, then voluntary pools with an independent licensing clause are socially desirable provided that the internal payment ownership structure reflects the variable value of its patents: uniform royalty rates do NOT satisfy this condition. Allowing some discrimination within the pool seems therefore important

• If pool members are vertically integrated, then they still tend to charge to each others royalty rates that are too high (as in cross-licensing) and there is a possibility of vertical foreclosure.

• L-T show that the independent licensing clause alleviates the foreclosure concerns but not the “horizontal” concern linked to high royalties


Patent Pools: is Outside Licensing Sufficient

• If the issue of patent participation is considered then the “independent licensing” clause is no longer sufficient to ensure that all voluntarily formed pools are welfare enhancing (Brenner 2009).

• …unless membership in the pool is decided by unanimous decision of existing members → maybe requiring that pools are “open” is not such a good idea?

• This is quite relevant as pools typically include between 30 and 60% of industry participants (Layne-Farrar and Lerner, 2008).

• The US IP guidelines do not require pools to be opened to all to be judged pro-competitive.

• The TT Guidelines have a strong preference for open pools


Patent Pools: Remarks

• The previous analysis applies only to the voluntary formation of pools not to pools that are mandated, eg as a merger remedy.

• Imposing binding ceilings on the royalties that can be charged within the pool could prevent the formation of efficient pools.

• We still do not know much about he interaction between internal pool payment rules and the social desirability of patent pools.


What Are Grant-Backs?

A clause in a licensing contract whereby at least one of

the two parties agrees to give the other party access to future innovations relating to the object of the license.

This are prospective clauses. We do not discuss so

called “retroactive” grant-backs.


Types of Grant-Back Clauses

• Reciprocal or not? • granting a license or transferring assignment? • Exclusivity? • Free transfer or quid pro quo? • Does it extend beyond the duration of the licensing

agreement? • Severability: “An improvement is severable if it can be

exploited without infringing upon the licensed technology” (TT Guidelines)

• 43% of licensing agreements include such a clause.


Grant-Backs and Innovation

• Unless the licensee is explicitly rewarded for the grant-back, the clause decreases its incentives to innovate.

• Reciprocity only compounds the problem by also decreasing the innovation incentives of the licensor.

• Explicit ex ante compensation schemes for yet unidentified innovations are effectively impossible to set up.

• → the effective choice is simply between allowing grant-back clauses or not


Grant-Backs: The Argument in a Nutshell

Non-Severable Severable Decrease licensee’s incentives to innovate?

Yes Yes

Licensee’s innovation sparked by agreement?

More Likely Less Likely

Licensee Innovation hurts licensor’s ex post profits

No Maybe

No licensing without grant-back?

No Maybe

Grant-back leads to lower royalties

Ambiguous Ambiguous


Consistency

• Consistency with Patent Laws: • Disclosure requirements: if these are respected, how

likely is it that licensing actually increases the probability of related innovation?

• Know-how and smaller improvements: Higher • More drastic innovation: Lower • Experimental Exemption: If non-licensee can use the

technology for research purpose, then it is less likely that the licensing itself triggers greater innovation for by the licensee, except for practical production know-how.


Recent Themes


European Commission’s Recent “IP” Activity

Astra Zeneca • misrepresentation? • withdrawal of marketing authorisation Very little in terms of “TT Guidelines” cases Interest in “pay for delay” cases On-going “SEP Injunction” cases


“Pay to Delay”

Settlement between drug manufacturer and generic producer(s) that • delays generic entry, possibly till end of patent term • involves a payment from the drug manufacturer to the generic • may end the generic’s challenge of the patent’s validity in one or more

jurisdictions (infringement vs validity)


Injunctions

SEPs (→ FRAND commitments) or not? Preliminary vs permanent: • before/after substantive ruling on validity/infringement • SEPs: Before/after ruling on “FRAND” royalties National procedures: • how easily are injunctions obtained? • when must potential licensee give up on continuing validity challenges


Injunctions: Harm?

Shift balance of power in favour of patent-holder…..is this bad? → potential misuses: Hold up • of specific design investments by licensee • increased market power from standardisation (SEPs) • inadvertent infringement (All) Force licensee to abandon validity challenge Force licensee to accept excessive royalties / royalties on too wide a “base” → expropriate comlementary investments


Commonalities

Patent “quality” Probabilistic patents Dominance: “before” vs “after” R&D/standardisation incentives US “imports”


Probabilistic Patents Three “levels” of the probabilistic view: • “positive”: a patent does not provide an absolute ability to exclude. Validity and

enforcement are both uncertain • “patent design” (Ayres and Klemperer, 1999): welfare can be increased by

making patent protection more uncertain on some dimension as long as the expected reward of innovators is maintained by reinforcing patent

protection along other dimensions • “Shapiro” view: (dominant) patent holders are obliged to accept the

“probabilistic” nature of protection and cannot act in a manner that would decrease consumer’s expected welfare under that benchmark


Probabilistic Patents

“Pay for delay”: can only settle if gives consumers at least the surplus they could expect from an ultimate court decision → • cannot settle on entry after expiry unless both parties are certain of the patent’s validity

• except for possible asymmetries in litigation costs, payment from the patent holder to the generic can only be there to move beyond the “consumer- neutral” benchmark

↔ probabilistic “view” # 3


Probabilistic Patents

Injunctions:

• Probabilistic patents → importance to preserve right to challenge SEPs. Injunctions help pressure licensee into giving up on such challenge

• No direct link to either hold-up issues or royalty level issues


Patent “Quality”

In this context, “quality” refers to probability of validity, not “economic importance” → hard to evaluate a priori If patent quality is high then testing patents in court is less useful and conversely What should matter is the relative quality of various processes of evaluation: PTOs, administrative review, courts Matters for pay to delay and for the role of injunctions in forcing the licensee to abandon legal challenges……..but does not matter for hold-up-based harm


Patent Quality

Explosion in patent numbers….for many reasons Some evidence of declining patent quality in some fields: systemic or

technology cycles? But approval rates have also decreased → suggests that screening is

somewhat effective Recent trend turning the other way


Sharply increasing patenting activity especially in the Information and communications technology sector

Source: Hall (2009)


But decreasing „quality“ of patents

1. A X-type reference refers to a particularly relevant document indicating that a invention is unlikely to be novel or to involve a sufficient inventive step 2. 2. Average of technology classes Source: Harhoff et al. (2007)

2

Share of patent references that cast doubt on patent novelty („X-type“ references)1


Dominance: Pay for Delay

Ex ante: regulation → ex ante substitutability between drugs affects regulated price level and hence dominance But, in some health systems, prescribers and patients are not price sensitive → traditional methods of market definition would often imply dominance ex post Which approach to dominance is correct in order to proceed under Art. 102?


Dominance: SEPs and Injunctions

→ standard-setting → some patents have considerably more market power ex post (once they are included into the standard) than ex ante → source of hold up Is any SEP dominant? (Google-MMI Decision)? ….. hard to square with probabilistic view of patents Still, should dominance be assessed within the confine of one litigation or within the confines of a greater “IP game” → look at balance of IP portfolio strength Does dominance or the change in “dominance” resulting from standardisation matter?


Investment Incentives: Injunctions

Restricting injunctions decreases incentives to innovate for the patent-holder But increases the incentives to invest in product design for the potential licensee Focus on SEPs reduce incentives to participate in SSOs: • participation involves significant resources in terms of time/expertise or even further technological developments • most standards are revised to produce improved version (eg 1000 fold increase in speed for 3G


Investment Incentives: Pay for Delay

Restricting settlement options hurt the generic firm involved in litigation….but benefit others → increase their investment incentives….but what investments? Restricting settlement options decrease the profits of the patent-holder given that a generic challenge arises ….but might decrease the likelihood of such a challenge →a priori, effect on innovation incentives is ambiguous


US Imports

US EUROPE QUALITY OF ISSUED PATENTS

Poor and Possibly Decreasing

Better but Possibly Decreasing

ADMIN. REVIEW Very Weak Credible Opposition Process

WILLFULL INFRINGEMENT

Very easily established

Considerably harder

OTHER REGULATIONS

Hatch-Waxman No Equivalent

SPECIFIC PATENT COURTS

Specialised Court

Mostly not

INCENTIVES TO LITIGATE

Possible Treble Damage

No


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Intellectual Property Rights and Competition Policy - OECD · Intellectual Property Rights and Competition Policy ... A clause in a licensing contract whereby ... • Does it extend