Competitive Implications of the Pending Patent Backlog WIPO Roundtable June 6-7, 2011 New York City Jeremy West OECD Competition Division

Key Points from OECD Roundtable During the past 20 years, the number of patent applications filed grew very significantly. Until 2008, when the growth began to level off, it was causing bigger backlogs at patent offices and substantially longer pendency periods. More applications pending for more time lead to greater uncertainty about the inventions that are, and will be, protected by patent rights. 2

Key Points A number of strategies that are potentially harmful to competition can be adopted to take advantage of the uncertainty created by growing backlogs and longer pendency periods. Those strategies can be enabled or enhanced by using divisionals/continuations. 3

Key Points Standard setting organisations (SSOs) can be ambushed when a company conceals relevant granted or pending patents until a standard has been implemented. Competition agencies can help to deter patent ambushes by permitting and encouraging SSOs to take certain ex ante measures, such as requiring IP disclosures and negotiating license terms, and by taking enforcement action against ambushers. 4

Key Points Cross-licensing agreements are not usually anticompetitive, but the uncertainty associated with pending patents can be used strategically in cross-licensing contexts in ways that harm competition. 5

1. Pending Patent Trends 6

7 Source: European Patent Office.

1. Pending Patent Trends Even if the average pendency period remains constant, the backlog will grow if patent applications grow. If pendency periods grow, too, then the backlog grows even more. Increasing complexity of technology makes the job harder for patent offices. 8

1. Pending Patent Trends 9 Source: European Patent Office.

1. Pending Patent Trends 10 Source: European Patent Office.

1. Pending Patent Trends Director of USPTO in 2006: [T]he volume of patent applications continues to outpace our capacity to examine them and the PTO has a pending application backlog of historic proportions. In 2008: USPTOs biggest challenge is to address the growth of pendency and the backlog of patent applications waiting to be examined while maintaining high quality. Well done, but will it last now that applications growth has resumed? Budget constraints may be a bigger factor now. 11

1. Pending Patent Trends Director in 2010: USPTO continues to face operational challenges including... an increasing flow of applications and a large backlog EPO concluded that the volume of pending patents has probably become greater than the volume of granted patents that are still valid. 12

1. Pending Patent Trends Pending patents cant be enforced (yet), but they still have value. Provisional protection + possibility of grant means theyre potent even during the pendency period. In some ways they are even more potent than issued patents because so much is unknown about them: –whether they will be granted –when they will be granted –their scope –sometimes, whether they even exist 13

2. Using Divisionals Strategically 14

2.1 Basics of Divisional Applications Divisionals are a major exception to the usual rule that patent applications have to be published within 18 months after the filing date. Mandatory divisionals – when examiner finds more than one invention described in the application. Voluntary divisionals – cant add to the content of the parent application. But content means claims + description of the invention, so claims in the divisional can differ substantially from claims in the parent. Same priority and filing dates as parent, but 18 month clock is reset for the purpose of publication. 15

2.1 Basics of Divisional Applications Even if parent is refused or withdrawn, divisional continues to exist. It has a life of its own. If granted, the divisional expires when parent would expire. Parent must still be pending when divisional is filed. Exception: Divisionals can be filed in US even after parent is granted or rejected. One of the oddest things to an outsider about the United States patent system is that it is impossible for the [USPTO] ever to finally reject a patent application... Even stranger, perhaps, is that the PTO cant even finally grant a patent. Lemley & Moore (2003). 16

2.2 How Divisionals Can Be Abused Possibility to file divisionals repeatedly + delay in publication creates the potential for abuse Cascading divisionals – applicants need only narrow, alter, or even simply reproduce the claims and pay new filing fees –EPO: Filing a divisional that is identical to its parent application is permissible. (Enlarged Board of Appeal decisions G1/05 and G1/06, June 28, 2007) Because the publication clock restarts every time, the real invention can be kept secret for up to 20 years by filing new divisionals and withdrawing the previous one 17

2.2 How Divisionals Can Be Abused Filing divisional applications enables the originators to maintain the uncertainty generated by parent patent applications. Or companies may discover that their real invention is a totally different set of claims, based on another part of the parents description So companies can make it very hard to figure out what theyre ultimately going to try to patent (moving target) Divisionals can also keep a weak pending patent alive. The uncertainty and longevity can be useful against rivals and entrants, or in patent ambushes. 18

2.2 How Divisionals Can Be Abused Tailor-made infringement – using divisionals to keep applications pending and secret until competitor develops and implements its own related technology, then custom-fitting them for infringement Is this legitimate? Yes, some say, as long as the divisionals have enough support in parent applications Even if the ideas in a rivals technology never occurred to the applicant, it can obtain patent rights over them if its own pending patent descriptions are written broadly enough. Kingsdown Medical Consultants v. Hollister, 863 F.2d 867 (Fed. Cir. 1988). 19

2.2 How Divisionals Can Be Abused Permitting patentees to change claims to track competitors products invites abuse of the system. It seems fundamentally unfair, since even a competitor who was legitimately the first to invent a particular device or process may be held to have infringed on a patent claim written after (and indeed because of) that invention. It also seems inconsistent with the fundamental economic justification for the patent system, which is to encourage new inventions. (Lemley & Moore 2003) 20

2.2 How Divisionals Can Be Abused Share of divisionals is growing. Harhoff, et al: a sign of strategic use. Applicants are manipulating divisionals to create and maintain uncertainty about their pending patents. Competition and innovation can suffer. Key points: –Divisionals make it possible to keep an application pending and unpublished longer –Creates opportunities for potentially anti-competitive behaviour –Not all divisionals are illegitimate, but there are opportunities for abuse 21

2.3 Fixing the Divisionals Problem Competition policy perspective: hard to see why cascading divisionals are tolerated; POs should be able to set limits But in 2009, neither EPO nor USPTO had effective tools Both tried to implement rule changes; only EPO succeeded: 24 month limit Tafas v. Doll strengthened argument that competition law intervention is needed in US 22

3. Using Pending Patents to Ambush Standard-Setting 23

3.1 Standard Setting Organizations Issue technical standards like MP3, DVD Facilitates interoperability Pro-competitive effects –more suppliers to choose from (no need to single-source) –scale economies / lower development costs Industry players typically participate, collaborating on interfaces and inter- operability, then competing on implementation 24

3.2 Pending Patent Ambushes Being in SSO keeps company informed about how a standard is developing Keep relevant pending patents secret Meanwhile, use patent process to optimise timing and nature of modifications to those pending patents Mould the claims to fit the standard, and influence the standard to fit the claims 25

3.2 Pending Patent Ambushes SSO issues standard covered by the undisclosed pending patents PO grants patents Other companies implement standard, customers buy products Sunk costs increase until switching is prohibitively expensive Company reveals IP, threatens lawsuits unless high licensing fees are paid 26

3.2 Pending Patent Ambushes Had it known about the pending patents, SSO would have had other options If no competing standards, the ambush gives company a dominant position it otherwise might not have had Results: royalties >> true ex ante value of technology consumers pay more; standard setting may decline inefficient fragmentation/lack of interoperability; implementation delays; follow-ons decline 27

3.3 Fighting Pending Patent Ambushes 28

3.3.1 Advocate Preventive Policies to SSOs Four policies that could be advocated: 1.Require ex ante disclosures 2.Use FRAND/RAND terms 3.Joint ex ante negotiations 4.Improve info sharing between SSOs and POs (no time for this today) 29

3.3.1 Advocate Preventive Policies to SSOs 1. Ex ante disclosures Require members to disclose all patents and pending patents that could overlap with standard under development Require members to disclose maximum fees and most restrictive terms they would demand if their technology is selected 30

3.3.1 Advocate Preventive Policies to SSOs 2. FRAND/RAND terms Typically worded in a broad manner The ND part is considered useful – similarly situated licensees will be treated alike; some protection to horizontal competitors The FR part is controversial – is it naïve? Little real protection against gouging and constructive RTDs. Why? Fair and Reasonable are free-floating terms, not tied to any objective principles 31

3.3.1 Advocate Preventive Policies to SSOs FRAND (continued) They mean different things to different people, so no predictability [T]he expression FRAND terms is so indeterminate as to be devoid of any meaning in practice. (Ohana, Hansen & Shah 2003) Courts dont like determining what fair and reasonable mean, either 32

3.3.1 Advocate Preventive Policies to SSOs FRAND (continued) Germanys Federal Court of Justice in Orange- Book-Standard (2009): In most cases the clarification of the amount of a licence fee admissible under antitrust law proves to be very difficult. So Court says the infringer has to show it tried to get a license on reasonable terms, and failed. What qualifies as reasonable terms? Figure it out yourselves! 33

3.3.1 Advocate Preventive Policies to SSOs The infringer must offer a not-yet specified licence fee instead of a definite licence fee to the patent owner and leave it to his fair judgment to determine the fee and at the same time provide a security with a sum which matches an objectively reasonable license fee, and possibly even lies above such fee. This way, patent infringement proceedings do not have to deal with the dispute about the license fees amount. 34

3.3.1 Advocate Preventive Policies to SSOs 3. Joint ex ante negotiations SSO members who will use the standard negotiate collectively with the member who is a prospective licensor One aim is to get licensor to set royalty rates before the standard is selected, while competition (if any) still exists The other is countervailing buyer power Ex ante and buyer power effects may lead to lower costs, faster SS process, and less litigation 35

3.3.1 Advocate Preventive Policies to SSOs 3. Joint ex ante negotiations But monopoly vs. monopsony indeterminate outcome Output and consumer welfare may decline even more than they would under pure monopoly Prospective licensors wont always have monopoly power – so buyer power may not be countervailing, but abusive Could harm innovation 36

3.3.2 First, Do No Harm? A potential obstacle for ex ante disclosures, FRAND, and ex ante joint negotiation: competition law Competitors getting together and discussing prices sounds like collusion Ambush prevention could be an excuse for a buyers cartel Or discussions about licensing terms may lead to discussions about prices for downstream products 37

3.3.2 Do No Harm? Competition agencies dont want to deter legitimate SSO behaviour Challenge is to separate sham strategies from genuine ones suggests rule of reason approach is needed USDOJ and EC are already pretty much there My view: EC is right to single out ex ante joint negotiation and to be skeptical about it ROR is inappropriate because no good can come from allowing ex ante joint negotiations 38

3.3.2 Do No Harm? There are two kinds of situations, ex ante: –Either feasible substitutes for the IP owners technology exist; or –Feasible substitutes for the IP owners technology do not exist If substitutes exist, then theres no monopoly power to fight. Disclosures and bilateral negotiations should be good enough to motivate competitive outcome. Creating artificial buyer power may push royalties below competitive level. 39

3.3.2 Do No Harm? If substitutes dont exist, then IP owner already has monopoly power (if no competing standards) – not due to ambush, but due to peerless technology. Premium royalties are warranted. Artificial countervailing buyer power may push royalty down, but that would sour the reward for innovation. 40

3.3.3 Litigation and Its Limitations Another option is for competition agencies to investigate and bring cases against ambushers. Success = stop and deter the conduct. But are patent/pending patent ambushes off limits to competition law? –Patent law territory only? –Fraud, not competition law violation? No problem in US. Deceptive conduct involving patents can be basis of monopolization claim. Walker Process (1965). 41

3.3.3 Litigation and Its Limitations EC has pursued cases involving patents and deception in SSO context, but courts havent had to rule yet. EC faces interesting challenge due to Art. 102s requirement that defendants already have a dominant position at time of violation. In Rambus, it attacked the high post-ambush fees rather than the ambush. Drawbacks: –What does high mean? Little help from FRAND. –If high fees are anticompetitive, dominant IP owners that didnt ambush may still face liability –Doesnt tackle the root problem: defendants dominance 42

4. Using Pending Patents in Cross-Licensing Agreements 43

4. Pending Patents in Cross-Licensing Agreements may include pending patents May be grouped together to form licensing pools, which enable parties who compete downstream to share complementary technologies X-licensing is normally pro-competitive, but pending patents can be used anti-competitively in these agreements Some scenarios to consider: collusive and unilateral entry deterrence; patent flooding 44

4.1 Collusive Entry Deterrence One of EPOs concerns was that pool members could deter downstream entry by inflating their pending patent portfolios to justify high fees for joining the pool Pool members know many of their applications are junk, but they also know it would take a lot of time and money to analyze them all They demand prohibitively high fees, keeping others out of the pool 45

4.1 Collusive Entry Deterrence This isnt a very troubling hypo. –Competition analysis has nothing to do with pending patents. Turns on whether pool members actually agreed to raise prices they each charge (price fixing) or not to deal with others (concerted RTD). –If no agreement, then at least 1 member has to be dominant for there to be a violation. Stay tuned. Its also unrealistic. Why go to trouble/expense of amassing dubious patents when they could just raise fees, or refuse to deal with others at any price? 46

4.2 Unilateral Entry Deterrence 1-on-1 x-licensing negotiation between prospective entrant (Easy Co.) and dominant incumbent (Dog Co.) Dog has IP that is vital for any entrant; Easy has non-essential but complementary IP to offer Dog amasses junk pending patents and demands license to all of Easys patents + a fee so high that Easy cant/wont pay Easy cant afford to examine all the applications, so it gives up. Violation? 47

4.2 Unilateral Entry Deterrence What if we remove assumption that Dogs patents are absolutely necessary? Instead, Easy now has patents that may allow it to operate in the market without infringing on Dogs patents. Easy knows it still has some infringement risk but is confident that it can force Dog into a x- licensing agreement Dog refuses and loads up on weak applications to deter Easy from entering. Will it work? 48

4.2 Unilateral Entry Deterrence Maybe: –The more pending patents there are, the more time and money it takes to study and challenge them –Risk of infringing even weak pending patent can be extremely high; if upheld, infringer pays damages and/or is enjoined –Some of the pending patents may not be published yet, so theyre a black box 49

4.2 Unilateral Entry Deterrence Issues that would come up if a competition action were brought against Dog: –Need evidence that Dogs pending patents are poor quality, but what does that mean? –Just how poor are they? –What proportion of them have to be poor? If line is drawn too low it will catch good faith patenting and discourage dominant inventors from filing unless theyre sure patent will be granted If line is too high it will allow dominant firms to thwart competition Either way, both competition and innovation may suffer 50

4.3 Patent Flooding Company files loads of patent applications that claim minor or incremental variations on another companys patents Goal is to paralyze the target company Flooder then offers a x-license on terms very favorable to itself Strips away targets right to exploit its own technology exclusively So what? The flooding inventions deserve protection or they dont; either way, its not a competition law problem 51

4.3 Patent Flooding That argument assumes target can quickly and affordably determine whether flooders IP would or wouldnt be upheld If flooder is dominant, there could be a competition problem. Patent flooding not only neutralizes competitive threat posed by targets technology, but may deter others from innovating and entering. 52

Some Relevant OECD Materials OECD (2004), Intellectual Property Rights, (Best Practices Roundtable), OECD (2005), Competition, Patents and Innovation, (Best Practices Roundtable), OECD (2009), Competition, Patents and Innovation II, (Best Practices Roundtable), 53