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).