Guest Post on Patent Pools and Competition

Editorial by David A. Balto and Brendan Coffman.  Mr. Balto and Mr. Coffman are antitrust attorneys in Washington D.C. whose representations include high technology firms.  In addition to his practice, Mr. Balto was formerly a policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and an antitrust lawyer at the U.S. Department of Justice.   

When Patent Pools Attack:  Competitive Concerns from the Devolution of MPEG LA

By David A. Balto and Brendan Coffman
 
Patent pools pose a unique challenge to antitrust enforcement.  On the one hand they solve collective action problems and allow participants to achieve economies of scale that would otherwise be impossible.  Patent pools enable market participants to join complementary intellectual property to better manage those IP rights.  As the Department of Justice noted, patent pools may “provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.” 
 
On the other hand, patent pools can create competitive problems by conferring market power on a group (in the case of member-owned patent pools) or entity (in the case of stand-alone patent pools).  Thus, the antitrust enforcement agencies have always been concerned if the pools are over-inclusive and include competing technologies.  Where this is the case patent pools may leverage their position to interfere with competition in at least two ways.  First, a pool may interfere with the relationships and convergent intellectual property rights of pool members.  This result may be particularly pernicious if one of the patent pool participants seeks to introduce a new business model that may compete head-to-head with the pool’s customers.  Second, pools may leverage their market power within the supply chain to extract higher or duplicative royalties on downstream purchasers of the pool’s licensed technology.  These concerns are typical in the high-tech/intellectual property field, and come up very often in discussions of patent assertion entities, or PAEs. 
 
The key for regulators and policy-makers alike is to ensure that patent pools remain committed to the procompetitive collaborative efforts that justify their creation, and do not change their business model to exploit or create market power.  In theory this sounds simple.  In practice, it is anything but.
 
History of MPEG LA
 
MPEG LA is an interesting case study in the trade-off between the efficiencies of pooling arrangements and the potential competitive risks.  MPEG LA has been a personification of the debate since the group’s incipiency.  Formed in 1996 to administer the pooling of 27 digital video patents deemed essential to the MPEG 2 video compression technology into a single portfolio, MPEG LA aggregated and offered a collective license to 27 patents from eight companies and Columbia University.  MPEG LA presented its idea to the Department of Justice, seeking ex ante approval through the DOJ’s Business Review Procedure [pdf]. 
 
The DOJ responded in an oft-cited 14-page letter containing 49 footnotes.  The DOJ concluded that the joint licensing of the MPEG 2 essential patents is likely to provide significant cost savings to licensors and licensees alike because “the licensing arrangement have features designed to enhance the usual procompetitive effects and mitigate potential anticompetitive dangers.”  The DOJ also emphasized that the structure of the patent pool appeared well-suited to ensure that only truly essential patents become included in the pool, and that the patents in the pool remain complements, not substitutes.  Finally, the DOJ opined “there does not appear to be any potential for use of the Portfolio license to disadvantage particular licensees” because the pool’s most-favored-nations clause ensures equivalent rates to all takers on non-discriminatory terms.  In approving the arrangement, the DOJ laid forth the following four guidelines for when a patent pool may gain approval:
 
1.     The patents must be valid and enforceable;
2.     The pool must not aggregate competitive technologies and set a single price for them;
3.     An independent expert should determine whether the patents are essential; and
4.     The pool must not disadvantage competitors or facilitate collusion
 
The DOJ’s approval of MPEG LA’s turned in large part on one fundamental and pivotal fact:  MPEG LA’s operating procedure called for the participation of an independent expert at every turn.  In fact, the Business Review Letter mentions the independent expert sixteen times. 
 
There was significant concern raise about the MPEG LA pool.  As one antitrust scholar exclaimed “the anticompetitive potential of the MPEG LA patent pool is enormous.  The DOJ’s approval of the pool validates a collectively enforced monopoly over a fundamental communications standard.”1  Despite this and public criticism, the DOJ approved the behavior. MPEG LA stated publically that the company’s mission was to “provide a service that brings all parties together so that technical innovations can be made widely available at a reasonable price.”  As history shows, it is not long before a company with this model succumbs to the pressure of exercising and extending its monopoly power.
 
Emerging Competitive Concerns
 
In recent years, MPEG LA has been accused of inhibiting the innovation that it was designed to foster. Notably, the company’s practice of charging high licensing fees for patents that are near or past expiration has led critics to assert that the firm has placed profit above its core mission of cheap and accessible licensing of digital video patents. Technology market players have also alleged that MPEG LA has violated the terms of its original agreement with DOJ by failing to invite oversight of its licensing practices by independent experts, and neglecting to adhere to FRAND guidelines.  A firm that was once a model (at least in theory) of the potential benefits from collaboration has morphed into one of the industry’s most notorious and most harmful players.  
 
Interestingly MPEG LA embodies both of the concerns with patent pools outlined above and by the DOJ in its approval of the patent pool’s licensing structure.  First, MPEG LA may overtly inhibit the ability of its members to develop any technology that may compete with customers of the MPEG LA pool.  Most notably, MPEG LA was involved in a dispute with pool-participant Google.  In 2010 Google introduced WebM, an open-source solution to uploading videos to the web.  Google designed WebM to serve as an alternative to H.264, the primary video compression technology in Microsoft and Apple devices that is covered by the MPEG LA patent pool.  All three are members of the MPEG LA patent pool, and pay royalties to the company (although Apple contributed only one patent to the pool).  MPEG LA asserted that Google’s WebM product practices on or infringes patents in the pool, and demanded that users of the WebM product pay royalties to the pool.  A license from Google would not be enough.  In fact, in early 2011 MPEG LA instructed patent owners to inform the pool of patents they believe the WebM product uses. The DOJ initiated an investigation into whether MPEG LA is acting anticompetitively by trying to quash the Google WebM product through assertion of patents as a patent pool.  The investigation appears to be on-going.
 
It is not only Google that MPEG LA has targeted – German software company Nero also filed complaints with the DOJ alleging that MPEG LA is illegally maintaining and enhancing its monopoly power by failing to adhere to the conditions of the DOJ Business Review Letter.  Nero points out that MPEG LA does not rely on independent experts as it said it would, but instead allows its membership to drive patent inclusion decisions.  Nero also argues that MPEG LA did not offer the patents in question on fair, reasonable, and non-discriminatory terms as required.
 
MPEG LA has also devolved into a PAE.  A PAE may accumulate and leverage patents as a business model by taking advantage of economies of scale and the high cost of patent litigation.  A common business model of PAEs is to divide patents among shell companies, thereby making it difficult for defendants to identify the original patent owner and impossible to assert a counterclaim.  MPEG LA’s President, Larry Horn, is also the president of MobileMedia Ideas, a known PAE jointly owned by MPEG LA, Sony, and Nokia. The firm controls patents for technologies used in mobile phones, computers, tablets, cameras, and videogame consoles, among other devices. MobileMedia Ideas has engaged in a significant amount of successful litigation, and continues a business model of leveraging these patents against numerous operating companies, including those that have business relationships with MPEG LA
 
What is the Lesson?
 
The lesson cannot be that patent pools are inherently bad.  Pooling complementary products displaces litigation in favor of innovation, and is absolutely a win-win for consumers and manufacturers alike.  Instead, the lesson must be that continued oversight is necessary in the case of patent pools, especially when there is so much incentive for a pool to step outside the confines of approved activity, and to begin leveraging its unique market position anticompetitively. 
 
With that in mind, there are some basic steps that can be taken to prevent the problems identified above from replicating.  First, the antitrust agencies should disapprove of patent pools that place a restriction on how a participant may deploy its own technology.  It is appropriate to require a patent owner to make technology available on certain terms and to as large an audience as possible, but it is inappropriate to restrict the patent owner from actually competing.  Second, the agencies should condition approval of a patent pool on the continued use of independent experts.  A neutral voice is essential to prevent a pool from devolving into a firm seeking to include as many substitute patents as possible.  Third, the agencies should condition approval of a patent pool on a commitment to maintain autonomy and to refrain from engaging in any other business activities outside of the pooling arrangement.  It is too easy for a patent pool to learn the business of its members and position itself in the market as another barrier to entry. 



1Steven C. Carlson, Patent Pools and Antitrust Dilemma, 16 Yale J. on Reg. 359, 372 (1999).

59 thoughts on “Guest Post on Patent Pools and Competition

  1. Wow. That was…extremely informative. Well written, thanks for the plethora of information. I think a lot of it is over my head…gonna have to read it over a couple more times, I think.

  2. By the way. If you want to make a product that uses Bluetooth, you buy the chipset from Bluetooth. Or at least, that’s how you did it in the early days. — so, problem solved….

  3. 1. You seem to think I’m against pooling. I have no idea what gave you that impression. I am not.

    2. Why not stick to pooling. Why do you have to add “standards” into the mix? They are not the same and one doesn’t require the other.

    3. Your assertion about USB, Bluetooth and Wifi, in as much as it is meant to be directed toward pooling is simply wrong. Either the patent owners would make products available or the patent owners would license patents to others without pooling.

  4. I don’t normally waste my time posting on this blog but… Les, based on your various posts you’ve missed the point entirely. Simple straightforward example: in a world without pooling and standards, you wouldn’t be able interconnect devices from different vendors – i.e. you wouldn’t have USB, Bluetooth, Wi-Fi, etc etc. Standards and pooling are usually a good thing, if the natural temptation to use for anti-competitive gain is kept in check.

  5. “Imagine a world in which you could only call manufacturers of the same phone or could only access web info from sites with same browser.”

    I grew up in that world. I was wonderful. Everybody loved it. If you wanted to make a call, you picked up the AT&T handset and dialed. The call went through OVER THE
    at&t network in an instant and the connection was crisp and clear.

    AND NO ONE CALLED YOU AT DINNER TIME TO ASK IF YOU WERE HAPPY WITH YOUR LONG DISTANCE CARRIER.

    And you didn’t have to lug a device with you everywhere on the off chance that you would need to make a call. If on some rare occasion that need arose you walked to the nearest corner and dropped a dime in a slot and made your call.

  6. The author concludes that pools are inherently bad based upon one pool? No digital communication could be effectively developed without a group standard for the comm protocol and the resulting patents. Imagine a world in which you could only call manufacturers of the same phone or could only access web info from sites with same browser. This thesis is nuts.

  7. Yes, but “people have written about it.” So we know what kind of “scholarship” appeals to at least one Supreme Court justice.

  8. Yes, but that is of course not a normal patent law issue, and I would presume the indeed “interesting exercise” would involve a mix of jury and judicial contract interpretation issues, and that the Fed. Cir. may not have appellate jurisdiction? [I.e., as roumored, the Apple patent ownership claim is NOT based on prior invention or an incorrect inventorship designation, but on a joint development agreement interpretation?
    Of course as long as Kodak is still in bankruptcy, starting any lawsuit would presumably require the approval of at least the bankruptcy judge.

  9. Proving the “ownership” assertion baseless would be an interesting exercise.

    Are you thinking tortuous interference as the legal basis Paul?

  10. It has been argued that the de facto [but not normal] patent pool formed to buy the Kodak digital patent portfolio in the big Kodak bankruptcy patent auction contributed to the surprising low winning bid by eliminating what would otherwise have been bidding competition between those who needed a license??
    [But another alleged factor in that low sales price was the alleged belated surprise Apple claim of ownership of some of those patents, putting an ownership cloud over the auction, which claims, if proven baseless, would seen to provide Kodak with other grounds for recourse??]

  11. I guess what bothers me about this post is that authoritarian voice that is used for the reforms.

    I also just buy their reforms. I do agree that companies shouldn’t be able to play games with setting up shell corporations to hide ownership and I do agree that it is a serious problem if the license puts any restraint on future product development. I also think that it is true there is a lot of market power with a patent pool that favors big players and collusion.

  12. Actually, reading this I think a lot of the problems they are stating are real. But, what I’d be interested in is some possible solutions from real practicing companies and real patent attorneys.

  13. What did I miss?

    MPEG-LA will license it patents for a royalty. I assume has preset royalties.

    Google has a competing product to a Microsoft product. Both infringe. Microsoft has a license. Google does not. It is not clear why Google does not have license, and I think the why has to be important.

    1. Google could believe that its product does not infringe.
    2. Google thinks the royalty offered is too high.
    3. MPEG-LA refuses to offer Google a license.
    3b. And if they refuse, why?

    If anyone knows the answer to these three questions, please let us know.

  14. Fine, if you think there are 50 shades of collusion or competition, to the extent they are colluding, they are not competing.

  15. I’m on Comcast in Arlington VA and can’t get uspto.gov

    But I can reach the site through Verizon’s LTE network. Weird-o-rama.

  16. Not quite true Les. There are different levels of competition/collusion – it’s not an either/or thing like you are trying to define it to be. In this sense, Leopold has some worthwhile thoughts posted on this thread.

  17. single law firm that is trying to drive all the other law firms out of business

    Nice strawman – no one ever said that ONE firm (especially a law firm) is trying to drive ALL other firms out of business.

    For some odd reason you think that mischaracterizing what people post makes you smart.

    It only makes you an @_$$.

  18. By definition, if they are colluding, they are no longer competitors.

    This is your “trying to kill each other” definition, right? The one you found using a flashlight and a rubber glove?

    Ask Toyota and Subaru if they agree with your definition. Ford and Mazda. Kevin Bacon and any other actor.

  19. By definition, if they are colluding, they are no longer competitors.

    Yes, which is why that behavior is called “anti-competitive.” It’s illegal, you know.

  20. “More to the point, sometimes competitors are just trying to make as much money as they can, and have absolutely no specific desire to drive each other out of business.”

    Absolutely they are trying to drive each other out of business.

    Every hamburger Wendy’s sells is one McDonald’s doesn’t.

    McDonald’s wants Wendy’s out of business so they can sell that hamburger and so they can charge more for it because they are the only game in town.

    That’s what competition means.

  21. Somebody is comepletely out of touch with reality.

    Sure, whatever you say.

    I don’t suppose you can name me a single law firm that is trying to drive all the other law firms out of business. What do you suppose they’ll do when they finally succeed?

  22. My competitor is trying to drive me out of business and I he.

    What a strange world you live in.

    Somebody is comepletely out of touch with reality.

    (and it’s not Les)

  23. Where you live “competitors” collude?

    Sometimes. Patent pools, standard-setting bodies, secondary demand, joint ventures, supporting the same legislative/policy issues, cross-licensing, that sort of thing.

    More to the point, sometimes competitors are just trying to make as much money as they can, and have absolutely no specific desire to drive each other out of business.

    Is McDonald’s focused on driving KFC out of business, do you think? Is Britney trying to drive Beyonce out of business? What do you think they would gain if they did?

  24. Engaging in an argument with you is like fighting with a person at a bar who is half drunk and never graduated from high school.

  25. And, IANAE, your little shots on me are outrageous. You are clearly a troll that should be banned from this board.

    You regularly post misrepresentations of the law. You regularly follow me around and take cheap shots at me. And, IANAE, you do seeem to be lacking the intelligence to even understand most of the arguments on this board. I do not believe that you are lawyer from a first tier law school. Not possible with your obviously low I.Q.

  26. Hey! Anon! And, IANAE I will stack my posts up against any law review article. My posts have regularly accurately predicted the outcome of Fed. Cir. cases. And, my posts accurately reflect the law. But, the biggest difference is that I do not intentionally misrepresent the law like Lemley does, who should have to go through a public humiliation and removal from Stanford.

  27. unless there is a third competitor outside the pool. In that case, the enemy of my enemy becomes my friend.

  28. I am not in competition with the car dealer. My competitor is trying to drive me out of business and I he. If its not an even trade then no one will play.

  29. If I benefit more than the other pool member, then why does he join the pool? If he benefits more than me, then why do I join?

    Because not everybody has to benefit equally from every agreement.

    Would you buy a car if the dealer benefited from the transaction more than you? Would he sell it to you if you benefited more than him? If the manufacturer benefited more than him? Probably, because you still both benefit from the deal.

    If your competitor has patents, you can’t sell anything in that space without his permission. Any deal that allows you to operate your business is to your benefit, even if it’s not perfectly balanced.

  30. Well – If allowing my competitor to license my patents in exchange for him licensing his patents to me is a wash between us, there is not much point in me joining the pool unless it gives me an advantage over a third competitor. If I benefit more than the other pool member, then why does he join the pool? If he benefits more than me, then why do I join?

  31. Um, then why do they call them competitive benefits and not consumer benefits?

    They probably should have said “benefits to competition,” or simply “pro-competition.” Go read the DOJ’s business review letter to MPEG-LA – there’s a link in the article above. They contrast the terms “anti-competitive” and “competitive” – features of a patent pool that increase competition are “competitive benefits”; features that do the opposite raise “competitive concerns,” or are “anti-competitive.”

  32. As I read the posting, Item 4, upon which I commented, was a DOJ rule, which made no sense given the advantage the DOJ itself identified for forming pools earlier in the article:

    “As the Department of Justice noted, patent pools may “provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.” ”

    So, they are good because they can provide competitive benefits, but its against the rules for them to provide competitive disadvantage.

    Quick: are we through the looking glass or caught in a catch 22?

  33. I agree Les. I haven’t read the vanity publication yet, but No. 4 leads me to believe that these “scholars” should be telling where they get their money.

    These “scholars” are antitrust attorneys, not professors. And they did tell us where they get their money – from representing high-technology firms.

  34. Uh, that’s not what the DOJ means. They mean benefits flowing to consumers from increased competition, not benefits flowing to oligopolists from reduced competition.

  35. What would the point of a patent pool be if not to advantage pool members over non pool members?

    You’re forgetting the baseline premise of our antitrust laws – we don’t normally allow companies that are supposedly competing with one another to work together to gain a competitive advantage over others.

    If the purpose of the pool is simply to reduce transaction costs for any one who wishes to play, then fine. But if its purpose is to set up artificial entry barriers or to set up artificial limits on how technologies may be used or adapted, then not so fine. You can do some of that as an individual patent owner, if you wish, but you can’t collude with others to do it.

  36. Yale law review should have less credibility than a blog post.

    Why do you work so hard to ensure that’s not the case?

  37. Vanity press. No review. Professors take money from whomever they can get it from.

    Yale law review should have less credibility than a blog post.

  38. Yes, what’s the point of living if you can’t make life unpleasant for others?

    This says WAY more about you IANAE than you might care to think – on several different levels.

    Still lacking any sense of smart, I see.

  39. I agree Les. I haven’t read the vanity publication yet, but No. 4 leads me to believe that these “scholars” should be telling where they get their money.

    Let’s all face it: there is NO scholarship from law journals. We should presume the law professor is out to make money or push an agenda for money and profit in their pocket.

  40. Yes, what’s the point of living if you can’t make life unpleasant for others?

    The vast majority of businesses are in business to make money. Some do it for fun, but not many. In a competitive environment, success requires that you have some advantages. As we all know, patents provide competitive advantages to their holders.

    A point lost of many patent critics is that the patent system has, from its very beginning, acknowledged that it involves tradeoffs (i.e., a balancing act between the plusses and minuses). Any competitive advantage you provide to someone is someone else’s competitive disadvantage. You cannot have one without the other. Patent critics whine about the competitive disadvantages as a result of patents all the time without recognizing that patents provide a competitive advantage. Moreover, as a society, we have decide that a competitive advantage should be conferred to innovators (i.e., inventors) and that this competitive advantage should be alienable property.

    When talking about patent pools, we have to recognize that certain parties are going to be put at a competitive disadvantage … that is the way the system is set up – whenever you get a patent, you have the ability to make life unpleasant for somebody else.

    Patent pools have survived scrutiny (despite their potential for providing even greater competitive advantage) because they also reduce transaction costs (e.g., dealing with a single entity rather than multiple entities). I agree with the conclusion of the article that oversight of patent pools is still needed. There is a balancing act between the pluses and the minuses that must be maintained.

  41. What would the point of a patent pool be if not to advantage pool members over non pool members?

    Yes, what’s the point of living if you can’t make life unpleasant for others?

    Don’t suppose you read the first paragraph of the article?

    “Patent pools enable market participants to join complementary intellectual property to better manage those IP rights. As the Department of Justice noted, patent pools may “provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.””

  42. “4. The pool must not disadvantage competitors or facilitate collusion”

    Say what now? Isn’t that why inventors apply for patents? To disadvantage competitors for a time?

    What would the point of a patent pool be if not to advantage pool members over non pool members?

Comments are closed.