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Transparency and Predictability of Licensing in ICT through Patent Pools?

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Renginio data: 18/04 > 18/04/2012
Vieta: Bedford Hotel & Congress Centre
135-137 Rue du Midi - 1000 Bruxelles - (Belgium)
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Žemėlapis

Information and communication technology (ICT) standardisation is facing an increasing impact from the inclusion of "patented" technologies in ICT standards and specifications, which raises a number of questions that need to be addressed.

For ICT standardisation to continue its role as a major instrument supporting competitiveness, as well as increasing interoperability and responding to industry expectations and societal needs, an adequate balance has to be found.

In particular, IPR policies, rules and practice implemented by standards developing organisations should not only reflect a proper balance between the interests of IPR owners and users/implementors of standards. They should also actively promote transparency and predictability in the marketplace.

Moreover, standards developing organisations should be able to effectively implement such IPR policies while responding to the requirements set by competition law.

In the White Paper proposing measures to improve the European ICT standardisation policy, the Commission included actions to further increase transparency and predictability of IPR treatments in ICT standardisation.

To that end various events were organised, also in cooperation with the European Patent Office, aimed to further analyse and propose improvements on many aspects related to IPR treatment in ICT standardisation.

Following the previous events, the Commission, in cooperation with the European Patent Office, is now organising a workshop that aims at evaluating whether and how patent pools could contribute to further increasing transparency and predictability in IPR treatments in ICT standardisation.

In particular, the workshop will help to identify advantages and disadvantages of patent pools in relation to ICT standardisation and to subsequently identify how patent pools could best function in order to avoid antitrust concerns.

The event will focus on 4 main parts as follows :

  1. Setting the scene
  2. Building and running a patent pool
  3. Users' experience
  4. Enabling frameworks

Report:

The main highlights of the workshop were:

  • There is no one-size-fits-all in the domain of patent pools.
  • Discussions evolved around the benefits and disadvantages for society of patent pools. While there was general support for the use of this tool, some industry representatives tended to favour bilateral agreements over patent pools.
  • Patent pools operate in an environment of three systems: The competition rules, the patent system, and the standardisation processes. EPO invited the EC and standard developing organisations (SDOs) to further cooperation in order to ensure that standards and patent pools are based on strong patents.
  • It was suggested to settle all issues regarding patent pool, including royalty rate before starting the standardisation process – except the royalty distribution.
  • The EC will consider the discussions and take these into consideration in its current review of the European Commission's Technology Transfer Guidelines as part of the overall review process.
  • The EC does not, at this stage, plan to take legislative action but merely to facilitate dialogue among stakeholders in this domain.
  • The workshop was the first on patent pools in the EC, and the participants encouraged further dialogue on the topic.

Welcome addresses

In his welcome addresses Mr Carlo Pettinelli, Director, DG Enterprise and Industry, reminded the participants about the purpose of the workshop, namely to freely discuss how patent pools can achieve transparency and predictability, how they can avoid anti-trust concerns, and how to strike a balance between benefits and disadvantages of patent pools. Mr Pettinelli underlined, that the EC is not preparing legislation in the area.

Mr Nikolaus Thumm, Chief Economist, European Patent Office (EPO), recognized how important it is that the European Commission and The European Patent Office jointly address the development of patent pools in information and communication technologies (ICT). He pointed out that standard setting processes have increased the demand for patenting in ICT. Patent pools are one established tool to overcome inefficiencies such as royalty stacking and increased transaction costs in the process of setting standards. He saw the workshop as an opportunity to optimize patent pools in a process of open exchange of best practices between all relevant stakeholders. Mr Thumm suggested that delegates and speakers considered themes for coming events.

Session 1: Setting the scene

Session 1 was moderated by Donncadh Woods, Deputy Head of Unit, DG Competition
The session's aim was to address the patent pools definitions, the different modes, the general pros and cons, the problems to be solved and their possible solutions.

The session saw three presentations about patent pools from a research and an industry perspective. While the research perspective is not very clear about the benefits of patent pools for innovation and society in general, there was general support for the use of this tool. The two speakers from the industry presented both pros and cons from two different perspectives: a telecommunications operator (France Telecom) and a research and development company (Qualcomm).

Mr Pierre Régibeau, Vice President, Charles River Associates, gave an economics primer about patent pools. From a theoretical perspective, a useful benchmark can be obtained for industry-wide pools and symmetric patent owners. In such a case, patent pools increase welfare by lowering retail prices as long as the IPR owners are free to license outside the pool. However, industry-wide pools are not the norm, so one has to worry about how the membership of a more restricted pool would be determined. Current knowledge on this aspect of pools is very limited: we only know that a rule requiring unanimity to admit additional pool members does ensure that the independent outside licensing condition is still sufficient for pools to be welfare-improving. However, it seems likely that antitrust authorities would balk at what they would perceive as overly exclusive membership policies. In a similar vein, the independent outside licensing clause only works if the patent pool manages to compensate different IPR owners differently as a function of the value of their assets. Not only is this an issue that actual pools struggle with but, again, competition authorities might be uncomfortable with what they might see as excessive “discrimination” within the pool.

Patent Pools can also affect further innovation. On the positive side, patent pools provide convenient access to existing (and possibly future) IPRs, thereby ensuring “freedom to design”. However, several empirical studies have found a negative impact of patent pools on innovation. Two mechanisms seem to be involved. Firstly, many pools use sharing rules based on the number of patents owned. This provides incentives to patent more at the expense of innovating more. Secondly, there is also evidence that patent pools sometimes facilitate anticompetitive behaviour that limits innovation.

Mr Serge Raes – Standards & Intellectual Property Senior Manager, France Telecom, assessed the pros and cons of patent pools. France Telecom has benefited from being a licensor in more than 30 patent pools. In Mr Raes' analysis, patent pools can in some instances accelerate technology transfer, forming the link between standardisation and products on the market. Mr Raes concluded that there are many benefits in patent pools, such as faster access to IPR, they are easy to engage in, and they provide a credible benchmark for essential patent royalties as well as an evaluation of patent essentiality in relation to the standard. He warned, however, against regarding patent pools as a panacea, especially for large licensors, who prefer to apply their own negotiating power.

Mr Daniel Hermele, Senior Director and Legal Counsel, Qualcomm, outlined the specifics of the mobile industry, emphasising that it is a complex and heterogeneous sector with companies of very different sizes, IP portfolio positions and business models, which makes it difficult to align the interests of the players in a patent pool. He noted that the predominant licensing instruments in this sector are bilateral agreements that are inherently more flexible than patent pools and are necessary in any event. He also argued that bilateral agreements have been successful in enabling this vibrant sector leading to competition, growth, new entrants and lower prices. He recognised that predominantly downstream business interests are advocating for patent pools but that this could lead to problems with buyer-side collusion. He argued strongly for multiple bilateral licensing, but supported truly voluntary pools where IP owners decide to join in their own best commercial interests. However, Mr Hermele warned against using patent pool licensing terms as a benchmark for licensing outside of the pool, because this might artificially lower prices and would essentially mean imposing certain pool terms on those who decided not to join the pool.

Questions and answers

The discussion highlighted that downstream players, whose business it is to deploy the mobile network, look differently at patent pools than upstream players, whose main interest is research. Downstream players are interested in setting the lowest possible royalty on standards, while upstream players need to maximise profits for conducting more research. Vertical players have mixed incentives.

On questioning, two members of the panel voiced opposition to use of pool terms as a benchmark outside the pool.

It was emphasised that patent pools do not check for patent validity. This is something that is decided by patent offices and/or the court system. But usually patent pool members must provide a patent prosecution history for the essentiality evaluation.

The question was raised whether Standard Developing Organisations (SDOs) should make it mandatory to participate in pools if you take part in standardisation. The idea was floated after a discussion around the strong wish by some participants to establish an LTE patent pool very soon.

Session 2: Building and running a patent pool

Moderator: Stefan Engel-Flechsig - Legal Counsel, NGMN Ltd.
The aim of session 2 was to present different types of patent pools with different governance models and services.

In this session, representatives of Via Licensing, Sisvel and Philips shared their experiences with the formation and running of patent pools. The presentations analysed the different interests of upstream and downstream players, which makes it difficult and costly to achieve success in forming patent pools. The patent pools representatives gave ideas on how to establish a fair and transparent patent pool that creates value for its members.

MrRoger Ross, President, Via Licensing, shared Via Licensing’s experiences as patent pool administrator. Via Licensing operates on the principles of transparency, fairness, enabling the market, efficiency, independence and integrity. He emphasised that it is important to make a public patent call and that all pool members are indeed essential patent holders. Most importantly, the reward must be distributed among members according to their contribution, which in Via Licensing means a per patent reward. However, to encourage participation of small patent holders, a portion of the patent pool is set aside to a "per company" rather than a "per patent" reward. He added that good design of the operations of a patent pool does not necessarily mean that it always runs peacefully.

He strongly recommended patent pools over joint licensing programmes in enhancing transparency and predictability. In his opinion, joint licensing programmes are expensive and opaque. He proposed that administrators should publically declare their intention to form either a patent pool or a joint licensing programme. This would facilitate licensors' decision to participate in a mechanism, which conforms to their interest. Finally, Mr Ross added that as an administrator, Via Licensing would like to also include non-essential patents in the pool and more freedom to operate in general.

From SISVEL, Mr Giustino de Sanctis, Chief Executive Officer, shared his experience with running a patent pool. He made a case for the importance for a patent pool to have enforcement mechanisms to ensure compliance. Compliance and enforcement are key to protect companies that take a license from the pool and that would otherwise be disadvantaged with respect to unlicensed companies. He then analysed why it is so difficult to coordinate a joint approach to consolidate interests in a patent pool – and as a result why it is so difficult to form one. He concentrated on the differences between two groups of players: the "Newcomers" (with high volumes of production but low number of patents), and the "Researchers and Developers" (with high number of patents but low production volume). In his analysis, the Newcomers push royalties as low as possible, while the Researchers and Developers are interested in setting royalties at a higher level to compensate their investment in research. It is difficult to create consensus among such disparate interests, and this is why there is no one-size-fits-all when it comes to patent pools.

Patent owners disagree not only on the size of the royalty rate, but also on the scope of the pool, defensive suspension (the so-called yanking clause) and grant back, making it a difficult, high-risk and costly process for administrators to establish patent pools.

To spur further discussion, Mr de Sanctis finalised his presentation with a suggestion to consider setting the royalty rate before the standard is agreed upon, because it is much easier to set the price earlier in the process.

Mr Ruud Peters, Executive Vice President in Philips, based his presentation on the company's 30 years of experience with participation in a variety of patent pools, the most recent being the One-Blue patent pool for Blu-ray technologies. One-Blue rewards its members according to contribution and it offers a product license which is payable per what licensees ship, thus making it easier to ensure payment to the pool.

Mr Peters presented the conditions for success of a patent pool. Firstly, an independent licensing agent needs to be appointed. Mr Peters warned against using percentage license revenues for administration, because this gives incentive to easy picks. Instead, the administrator should be remunerated on a cost plus an incentive-based scheme. He recommended using a globally operating licensing agent for globally used standards.

Secondly, transparency must permeate the process for inclusion of patents in the pool. This includes the evaluation of essentiality of the patents, which can be evaluated along three lines: Essential to standards, technically essential, and commercially essential. A problem for the industry is, however, that there are only a few evaluators, making it quite costly to conduct and evaluation; Mr Peters estimated that it costs 5.000-10.000 USD per patent.

Finally, it is important that there is a fair sharing of the revenues, which in Mr Peter's experience is not always best based on a patent count, since some players can be tempted to file for continuations or divisional patent applications. One-Blue deals with divisional applications by basing their patent count on unity of invention as declared by the patent office. In addition, he recommended following the example of One-blue, which weighs physical layer patents higher than application patents.

To give the patent pool strength, its members must be prepared to enforce their patents. Licensees may be tempted to refuse to pay licenses if licensors do not enforce. Similarly, some companies (licensees) cheat with reporting, and it is virtually impossible to stop it, because of lengthy litigation times. One-Blue deals with this by stopping the issuance of the documents needed for shipping goods on the one hand, and on the other hand by cooperating with customs.

Mr Peters concluded that he believes that product pool licensing is the future to reduce transaction costs.

In conclusion, Mr Stefan Engel-Flechsig noted that there are different descriptions of patent pools, and that this is related to the different conditions for setting up a patent pool according to technology.

Questions and answers

The following question and answer session brought up the topic of how reliable the essentiality evaluations are. Generally, the patent pool administrators rely on established law firms, which have to guard their own reputation. The evaluation is used for determining who can be a member of the pool and how to distribute revenues, and in this way, there seems to be a great deal of self-regulation in this area.

Patent pools accept prospective members who do not have a granted patent yet. To contain the risks associated with the patenting process, patent pools demand from prospective pool members that the patents' claims remain unchanged during the formation of the pool.

Regarding the cost of evaluating patents, it was reiterated that there is indeed a lack of evaluators. Prices very much depend on volume and bargaining power.

Session 3: Users' experience with Patent Pools

Moderator: Dirk Weiler – Chairman of the ETSI General Assembly
This aim of this session was to focus on beneficiaries of patent pools. In the mobile communication industry, this includes both licensors and licensees. The session concerned what services are offered by the patent pools, and which of these are found useful by users.

Session 3 brought attention to the suggestion to settle all patent pool issues except the royalty distribution at the beginning of the standardisation process, including license fee, administration fee and types of devices. The key value drivers in patent pools was identified by a representative of Nokia, and the opportunities for start-up companies in patent pools were also brought up as a question about the possibility to file for divisional patent applications.

Mr Jari Vaario – Director of IPR Strategy, Nokia – opened the session as a representative of a company, which operates both as a licensor and licensee. He started his presentation by listing the key principles of patent pools, which include that the patent owners decide the royalty rate, which an administrator distributes, and which licensees should see as attractive.

The perceived benefits for the licensor are lower transaction costs even after pool setup cost and administration fee, and a more efficient use of patents, which would not have been licensed otherwise. The main benefit for a licensee is that patent pools provide a one-stop shop for access to standards, which in a mobile phone can amount to 100 standards. The pool rate only gives value through access to essential patents and through offering a rate that is better than what is achievable from bilateral licensing agreements.

In Nokia’s experience, only one in ten pools leads to successful licensing, i.e. attracting licensees. Nokia is licensor in five pools, is a licensee in three pools, and has a double role in one pool. Mr Vaario counted the criteria for successful patent pools: There should be a substantial number of essential patents, there should be many patent holders joining the pool and many potential licensees, the rate and terms should be attractive, and the patent pool should cover a whole product, so that there is no need to license other technologies from the same patent holders. It was Mr Vaario's assessment that this beneficial situation does not exist today in the area of mobile phones.

Mr Vaario stressed that it is important to be careful about which products to include in a patent pool. He assessed that it would be difficult to establish a single pool for mobile phones, for which Nokia owns around 2000 essential patents. Mr Vaario recommended establishing patent pools for single technologies rather than product pools.

In his concluding remarks, Mr Vaario warned against confusing licensors and licensees. Technology developers are licensors, while technology users are licensees. When selecting technologies for a patent pool, he urged administrators and pool members to be careful to uncover these interests.

Senior Vice-President, of T-Mobile International Austria GmbH Mr Heinz Polsterer argued that the way the standardisation works today gives patent holders the opportunity to block or delay the standardisation process and in this way extract maximum value of their IP rights. For an operator such as Deutsche Telecom it is a huge investment to participate in standardisation, and in Mr Polsterer's experience it is also a very resource consuming process to set up a patent pool. This is why operators have a strong incentive to make the standard a success. His experience is that the issues discussed at the 50 odd meetings held to form a patent pool could essentially have been settled at the start of the standardisation process. These issues include the royalty rate, the types of devices, and the administration fee. His suggestion was to settle all issues at the start of the standardisation process – including the license fees. The only thing that could wait till the end of the standardisation process would be the royalty distribution.

Ms Sarah Guichard is Vice-President for Patent Development & Standards Strategy, in Research In Motion. However her presentation contained only her personal observations. Although she saw many benefits from patent pools, she also drew the attention to a number of challenges:

When companies function as both technology developers and technology users, they find themselves in a difficult position. In bilateral negotiations it is possible to design the license agreement accordingly, but in a patent pool there is no mechanism for this situation.

Another difficult situation occurs, if a company has already entered into a bilateral license agreement with a pool member, and then needs to license from the pool. In this case it is difficult to negotiate rates and usually the issue is dealt with in bilateral negotiations anyway.

With regard to abuses in pools, Ms Guichard remarked that start-ups find it costly to file for a patent and they may pack many inventions in one patent application. Limiting divisionals can lead to fewer incentives for start-ups to join patent pools. Basing the patent count on the patent offices' assessment of unity of invention can delay the process, because there are patent office backlogs of up to three years.

Ms Guichard noted the stacking of different patent pools in the mobile phone sector: UMTS, GSM, 2G, 3G, 4G etc. In her opinion, the royalty rate here is not reasonable anymore, and she would like to see reduced transaction costs. She also observed that members of the patent pools are some of the same companies.

Mr Weiler concluded from the speakers' part of the session that the licensing system works well, but that there should be more transparency.

Questions and answers

With regard to divisional applications, the EPO informed that it has a rule that no amendment to an application can expand the scope of the original invention. A way to deal with divisionals in some patent pools is to allow licensors to prove that divisionals are actually needed.

The suggestion to agree on all issues regarding the patent pool at the beginning of the standardisation sparked a lively discussion among the workshop participants. One counterargument to the idea was that it is not possible to fix one specific financial element – the license rate – while other elements of the business case remain open, i.e. the volume of expected sales, the sales price etc.

It was mentioned that when there are two or more standards, there is, at a global level, a grey area with regard to competition law and the definition of essentiality. To address this, discussions among EU, US, Japanese, and Korean competition authorities was encouraged in order to find a way to set the boundaries in the right way. Mr Woods addressed this issue at the outset of his presentation in session 4 by pointing out that the definition of essentiality for pools set out in the Commission's 2004 Technology Transfer Guidelines covers, inter alia, "a package of technologies for the purposes of producing the products ….to which it relates". In other words there was no inherent link to a standard.

Session 4: Legal and organisational frameworks

Moderator: Konstantinos Karachalios - Public Policy Issues, EPO
The aim of the session was to analyse how competition laws, standardisation processes and the patent system influence downstream the standards chain, with a view to improve the conditions within which different patent pool stakeholders have to operate.

Session four included presentations on the EU competition rules with regard to patent pools, an SDO's experiences with a more active role in the creation of patent pools, and on the need for closer cooperation between the patent and standards systems to facilitate licensing of technology.

Deputy Head of Unit at the European Commission Directorate General for Competition Mr Donncadh Woods offered his personal interpretation of the European Union competition rules applicable to technology pools. The EC looks favourably on licensing as a driver of innovation. The Commission's 2004 Technology Transfer Guidelines set out the principles for the assessment of technology pools under the European Union competition rules (Article 101 and the Treaty on the Functioning of the European Union)

Technology pools may be restrictive of competition. The creation of a technology pool necessarily implies joint selling of the pooled technologies, which in the case of pools composed solely or predominantly of substitute technologies amounts to a price fixing cartel.

Technology pools can also produce pro-competitive effects, in particular by reducing transaction costs and by setting a limit on cumulative royalties to avoid double marginalization. The creation of a pool allows for one-stop licensing of the technologies covered by the pool. This is particularly important in sectors where intellectual property rights are prevalent and where in order to operate on the market licenses need to be obtained from a significant number of licensors.

The way in which a technology pool is created, organized and operated can reduce the risk of it restricting competition and provide assurances to the effect that the arrangement is overall pro-competitive. This is the case if the pool only includes essential patents. When a pool encompasses non-essential technologies, the agreement is likely to be caught by Article 101(1) TFEU where the pool has a significant position on any relevant market. Such pools are subject to individual assessment under the EU Technology Transfer Guidelines. Mr Woods gave an overview of the assessment of individual restraints.

The 2004 EU Technology Transfer Guidelines are currently under review. The review was triggered by the fact that the Technology Transfer Block Exemption Regulation will expire in April 2014. Mr Woods encouraged all interested parties to participate in the review process.

Mr David Law, IEEE-SA Standards Board, explained how previously, IEEE-SA partnered with an established patent pool administrator to explore possible partnership in facilitating patent pools. This lead to a call to form a patent pool by the patent pool administrator for IEEE 802.3af and IEEE 802.3at Power Over Ethernet standards, however the pool was never established. In its current approach, IEEE-SA works in a less prominent role. At present IEEE-SA facilitates industry discussion, under the umbrella of IEEE-SA Industry Connections. Currently 10 potential IEEE 802.11 licensors, which is fundamental to wireless local area network, have formed a IEEE-SA Industry Connections committee to identify potential patent pool administrator, best practices for patent pool formation and best practices for patent pool administration. This activity is ongoing.

Mrp Michel Goudelis, acting Principal Director Telecoms, EPO, emphasised that valid patents are paramount for the stakeholders in ICT licensing. A barrier for this is the differences between patent systems in the world. He called for more cooperation between patent offices and SDOs in order to ensure that granted patents are of high quality.

Mr Karachalios added that the patent and standard systems magnify each other. Standardisation in the ICT area can benefit from updating and completing patent declarations with patent office data, and patent examination in the ICT area is significantly improved by access to standardisation literature as grounds for its decisions. Consequently, EPO has reasoned that it is important to improve the interface between the two systems. It has done so by signing memoranda of understanding with ITU, ETSI and IEEE. EPO is cooperating with IEEE on mapping smart grid technologies. The patent landscape will provide an overview over which technologies are relevant for the smart grid in some 40 categories. For this purpose, EPO has retrieved information on all relevant patents worldwide and what are the emerging technologies.

Wrapping up and conclusions

The speakers expressed support for the dialogue established by the EC and EPO in the area of ICT standardisation and IPR and were willing to support further events in the domain.

Mr Antonio Conte summarised the next steps from an EC point of view. The Commission will consider the workshop discussions. Issues raised in the workshop could be relevant for review of the Technology Transfer Guidelines as part of the overall review process. He stressed that the Commission does not plan to take legislative action on patent pools and standardisation. Its role is merely to facilitate dialogue among stakeholders. The next scheduled event will focus on the use of open source and will take place on 22nd November 2012. The EC will conduct an assessment of the various events in the area, and it will be evaluated how the series of events on ICT standardisation and IPR issues tie in with the Digital Agenda.

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