07 June 2014

Competition Law, Globalisation, Standards and Patent Pools

GlobeThe Australian government is currently conducting a review of competition policy, which was announced on 4 December 2014.  The Terms of Reference describe it as ‘an independent “root and branch” review of Australia's competition laws and policy in recognition of the fact that the Australian economy has changed markedly since the last major review of competition policy in 1993’, and are broad in scope.

An ‘Issues Paper’ was released on 14 April 2014, which states that the ‘overarching objective of this Review is to identify competition-enhancing microeconomic reforms to drive ongoing productivity growth and improvements in the living standards of all Australians’, and which poses a number of questions for public comment.  Written submissions in response to the Issues Paper are due by 10 June 2014.

Under the heading ‘Intellectual Property’, the Issues Paper states:

The underlying rationale for governments to grant intellectual property (IP) rights (such as patents, trademarks and copyrights) is that creations and ideas, once known, may otherwise be copied at little cost, leading to under-investment in intellectual goods and services.  However, providing too much protection for IP can deter competition and limit choice for consumers.

It goes on to ask the questions:

Are there restrictions arising from IP laws that have an unduly adverse impact on competition? Can the objectives of these IP laws be achieved in a manner more conducive to competition?

I am not sure that I agree completely with the characterisation of, and rationale for, IP rights as expressed in the Issues Paper, but it is certainly true that there is an inherent tension between competition law and IP laws.  This is no more true than in the case of patents, the purpose of which is to provide an exclusive right to practice a commercially valuable invention for up to 20 years.

I would argue that, for the most part, patent law and competition law have coexisted in relative harmony in Australia.  I am concerned, however, that this harmonious relationship is under threat from the globalisation of technology – and particularly technology standards – along with the associated IP.   I refer particularly to patents protecting essential aspects of standards, such as those governing widespread consumer electronics and international wireless communications networks, and the global “patent pool” arrangements that have emerged to facilitate access to those patents.  However, similar concerns are likely to arise in relation to other emerging business models involving the aggregation and licensing of patent and other IP rights.

Patent Law and Competition Law

The tension between patent law and competition law is expressly recognised in provisions of the Patents Act 1990 and the Competition and Consumer Act 2010 (“CCA”).  Chapter 14 of the Patents Act places specific constraints on contracts involving access to patented technologies, to ensure that the monopoly is not abused so as to restrict competition beyond the intended scope of the patent rights.  Conversely, section 51 of the CCA creates certain exceptions to liability for contravention of sections 46 or 46A (misuse of market power), or section 48 (resale price maintenance) where the acts in question are done in order to give effect to a provision in a contract relating to an otherwise legitimate grant of access to IP rights.

For the most part, the balance between competition and patent rights appears to have been appropriate. There have been few, if any, instances of which I am aware in which patents have restricted competition so as to significantly limit consumer choice – at least not without satisfying some other social benefit or policy objective.  Even in the pharmaceutical industry, where patents often provide the originators of new drugs with a total market monopoly for a period of time, there is little debate that the patent incentive provides an effective mechanism for encouraging investment of the substantial resources, time and money required to develop new drugs.  Rather, as the recent Pharmaceutical Patents Review concluded, the primary argument is over the term of the exclusivity that should be provided.

There is, however, one area in which I identify a growing cause for concern about the anti-competitive potential of patent rights, particularly for a relatively small economy such as Australia.  This is in relation to the increasingly important role played by industry standards in the development and deployment of widespread consumer technologies such as mobile voice and data communications, digital video and audio, Wi-Fi wireless networking and data storage (including DVD and Blu-ray optical discs).

Technology Standards

Technology standards are, in themselves, pro-competitive. A standard is, in effect, a “blueprint” setting out the rules, interfaces and processes that will enable components of a system to work together, regardless of the manufacturer. In the absence of agreed standards it would be impossible, for example, for smartphones made by competing companies such as Apple, Samsung, HTC and Sony (among others) to communicate with each other, or with network equipment supplied by companies such as Ericsson, Huawei, Alcatel-Lucent and Fujitsu (among others).

Similarly, technology standards relating to digital video coding enable a wide range of competing manufacturers to produce TV sets, set-top boxes and digital video recorders (DVRs) that are able to receive, process and record the signals transmitted by numerous broadcasters.

Technology Standards and Patents

The “flip side” of technology standards, however, is that in most cases they are covered by numerous patents obtained by the various companies that collaborate in their development.

Obviously enough, there is potential for abuse of such patents, to exclude potential competitors from the market for standard-compliant products.  Any party wishing to participate in such a market must secure a licence to every relevant patent, or risk legal action for infringement.  For participants in the standardisation process this is less of a concern – the mutual ability to use patents to block one another’s products ensures that effective cross-licensing arrangements will be negotiated.  The risk is that these parties, either individually or as a bloc, will use their patents to deny outside parties access to the market, or will set royalty rates that are so high as to effectively price competitors out of the market.

In an effort to avoid such abuse – and the adverse scrutiny of competition regulators – parties to standards development generally make legal undertakings to make their “standard essential patents” (SEPs) available on “fair, reasonable and non-discriminatory” (FRAND) terms.

The Rise of Patent Pools

A patent pool, in the context of SEPs, is a collection of such patents available for licensing as a group to facilitate the authorised production and sale of products implementing an associated standard.  One of the first modern patent pools to be formed was the MPEG-2 pool, which has been operated by MPEG LA, LLC since the mid-1990s.  At its height, the MPEG-2 pool brought together patents held by nearly 30 technology companies, including competitors Philips, Sony, LG Electronics, Toshiba, Panasonic, Samsung and others, that are essential for the implementation of digital video standards used for DVD video, online streaming, digital TV broadcasting and digital video recording.

Pools have since been established, or are under development, for patents relating to further advances in digital video coding technology, Wi-Fi wireless networking, cellular mobile communications (3G/4G/LTE), DVD disc and Blu-ray disc, among others.

Patent pools, like technology standards, can be pro-competitive, in that they significantly simplify obtaining licences to all of the patents required to develop and market products conforming to a standard.  Even so, a patent pool constitutes a collaboration between competitors – some of them dominant players in the relevant markets – to enter into contractual arrangements involving the imposition of conditions, including royalty obligations, upon other competitors.  Therefore the pro-competitive effect of patent pools is not guaranteed, and is strongly dependent upon the terms of the specific pool licensing arrangements, both between the licensors and licensees and between the licensees themselves.

Patent Pools and Competition

In order to address competition concerns, pool operators have sometimes sought advance assurances from regulators that proposed arrangements are appropriate, and will not attract prosecution for anti-competitive conduct.  In 1997, MPEG LA, LLC, along with the proposed founding members of the MPEG-2 pool, requested and received a Business Review Letter, issued by the US Department of Justice Antitrust Division, which gave a stamp of approval to the proposed licensing arrangement on the basis that it would “have features designed to enhance the usual procompetitive effects and mitigate potential anticompetitive dangers”.

The Department of Justice was particularly influenced in its conclusion by a number of features of the proposed arrangements:
  1. the patents included in the pool would be “complementary”, i.e. would work together to implement the standards and not cover “competitive” alternatives;
  2. “essentiality” of patents in the pool would be assessed by an independent expert;
  3. the licensors would all agree to make their patents available, on an individual or portfolio basis, outside the pool arrangements;
  4. MPEG LA was obliged to provide all would-be licensees, including “maverick competitors and upstart industries”, with access to the pool patents on identical terms; and
  5. a “most favoured nation” clause in the licence would act as a further guarantee against attempts to discriminate on royalty rates.
Following the approval of the MPEG-2 arrangement, most subsequent patent pools have structured their agreements along similar lines.

Patent Pools and SEPs – A Backlash?

More recently, however, the pro-competitive effect of patent pools has been called into question.  A recent article on the US political news site The Hill is typical of criticism of the MPEG-2 pool which has emerged over the past 18 months.  The article notes that although 85% of patents in the pool have now expired, royalty rates have not fallen significantly, suggesting that pool members are, effectively, continuing to collect royalties on patents that are no longer in force.

Meanwhile, the European Commission (EC) conducted its own investigations into the use of SEPs relating to 3G mobile communications technology in patent litigation involving (separately) Motorola and Samsung.  As a result of these investigations, both companies have agreed to adopt specific practices in relation to negotiations, licensing and enforcement of SEPs, and the EC will expect all holders of SEPs to operate on similar terms.

The practices imposed by the EC are designed to redress the inherent power imbalance that exists between a holder of an SEP, and a willing licensee that wishes to negotiate a licence on FRAND terms, in order to enter the market for products or services which conform to a corresponding standard.

Patent Pools, SEPs and Australian Law

In Australia, patent pools and SEPs have not received the same degree of scrutiny as in the US and Europe.  The issue of SEPs and FRAND terms has arisen in the litigation between Apple and Samsung, where Samsung has asserted a number of its 3G SEPs against Apple, however the Federal Court has yet to hand down a judgment in this case.

Recently, an independent Australian manufacturer of DVD discs, Regency Media Pty Ltd, sought to use one of the “pro-competition” provisions in Chapter 14 of the Patents Act to terminate its MPEG-2 pool licence with MPEG LA.  While unsuccessful so far, leaving the patent pool operator with the upper hand, Regency Media has since appealed the decision to a Full Bench of the Federal Court.

Particular Concerns for Australia

The concerns raised recently in the US about the MPEG-2 pool, and other patent pools are, if anything, even more pertinent in Australia.  Significantly, existing patent pools operate on a global basis, whereby a single standard licence agreement and royalty regime provides access to all patents in the pool on a worldwide basis. This represents a very convenient and efficient access arrangement for multinational companies operating in multiple markets, and for national companies operating in large markets, such as the US and Europe, in which the vast majority of inventions incorporated within a technology standard are protected by patents.

However, most patent holders employ cost-effective patenting strategies, whereby the amount they are willing to invest in patent protection within each country is dependent upon the significance of the corresponding market.  For example, as of May 2013, the MPEG-2 pool included 466 patents globally.  While dozens of patents had been obtained in each of the US, key European countries and Japan, there were only 11 Australian patents in the pool.  Furthermore, these Australian patents were held by just two companies out of the 12 licensors still having unexpired patents in the pool.

The technologies covered by technology standards are generally developed outside Australia, and products embodying the standards are predominantly manufactured overseas by multinational corporations, many of which have participated in the standards process and are themselves holders of SEPs.  They may have the benefit of cross-licensing arrangements with other SEP holders (which generally fall outside the scope of FRAND obligations), and they certainly have the advantage of global economies of scale.

According to data recently published in IP Australia’s Australian Intellectual Property Report 2014, around 90% of patent applications filed in 2013 originated overseas.  Given the size of our population, Australians are, and always will be, minority users of the Australian patent system. It is likely that SEPs obtained in Australia will remain overwhelmingly of foreign origin.

In such circumstances it may be very difficult for an independent Australian company to compete with multinationals to provide products or services to a local or regional market, particularly if it is required to pay for a global patent licence, without the corresponding benefit of cross-licences or global economies of scale.


While the existing balance between competition law and patent law has been effective in the past, it is facing new challenges from globalisation of industries and associated technology standards.  The current provisions in the Patents Act and the CCA, intended to ensure that patents do not unduly deter competition, or limit consumer choice, were not drafted with arrangements such as patent pools, or the evolution of global technology standards, in mind.

And patent pools are just one of a number of emerging business models based on aggregation and licencing of IP rights.  So-called “patent aggregators”, also known as “non-practising entities” (NPEs) or sometimes the pejorative “patent trolls”, are increasingly a fact of life as global markets for intangible assets continue to evolve.

In this global IP environment, Australian companies may find themselves to be increasingly reliant upon securing appropriate patent licences in order to participate in markets for standardised products and services.  In seeking to negotiate such licences, they may further find themselves dealing with a range of global licensing administrators with little concern for the nuances or particular conditions of local or regional markets.  Existing provisions in the Australian patent and competition laws may prove inadequate to address the new challenges posed by these developments.

An expanded version of this article has been submitted to the Competition Policy Review in response to its Issues Paper.  An earlier version was originally published by CCH.


Unknown said...

From the version of the article published in the CCH:

I believe that Australia’s patent and competition laws must also evolve to meet these new challenges.

Do you have any suggestions about how the Patents Act or CCA could be amended to deal with these challenges?

Unknown said...

I have some thoughts. However, details would depend on the extent to which the Federal Court and the ACCC are willing and able to interpret existing provisions to accommodate the changing circumstances. My involvement in ongoing matters, in which it is my job to work and advocate for particular interpretations and outcomes on behalf of a specific client, rather than in the broader public interest, makes it inappropriate for me to promote specific amendments at this time.

As it is, it would be apparent that my views are influenced by my particular experiences working on one side of this issue. However, I have been quite open about my interests.

I would say, however, that mechanisms along the lines set out in the European Commission's decisions (which are themselves based on proposals put forward by Samsung, in response to EC investigations) would seem to have considerable merit, at least as a starting point.

My articles, and submission to the Review, are intended to raise some of the issues that have been occupying my mind in recent times, in the hope that others may be prompted to consider them also. Operators of patent pools, and other licensing entities, might equally put their own views forward to the Review Committee. I am hopeful that there will be an opportunity to speak more candidly with the Committee, on a confidential basis, during the next stage of the consultation process.

Unknown said...

Is the memo you linked to the entirety of the EC decision? is there a link to Samsung's proposals?

Here are two interesting links:
EU Competition Law
Patents and Standardisation: Competition Concerns in New Technology Markets

Unknown said...

The Samsung investigation is EC Competition case no. 39939. There are links here to all of the relevant documents (including Samsung's earlier proposal).

The Motorola investigation is case no. 39985.

Thanks for the links!

Unknown said...

At the moment governments seems to play a reactive role in the SEP disputes. I think governments should play a more pro-active role in coordinating the parties to achieve a fair and efficient outcome.

Here's an outline of how SEPs should be coordinated:

1. Standard body (e.g. IEEE) sets a standard
2. Any patentee that has a patent that could be considered a SEP must declare their patent or else forfeit their right to use it against anyone who licences from the patent pool.
3. Patent pool is formed with all SEPs
4. Compulsory licensing is used when necessary to make sure the patent pool contains all SEPs.
5. Standard and patent pool coordinators decide the royalty split, licensing fees, and conditions of licensing.
6. Government agency (or inter-governmental agency) can direct any change to the royalty split, licensing fees, or conditions of licensing at any time.

Unknown said...

Sorry Mark, but you're being far too harsh on the judge here.

Patent law may have its own special rules, but IPA's decisions are also administrative decisions and the normal principles of admin law apply. For IPA to accept an application, engage in correspondence with the applicant, reject the application, let it go to court then finally declare in an affidavit that they had completely ignored part of the application because it wasn't in the correct form is really not on. Procedural fairness doesn't work like that.

That's not to say IPA had to give serious weight to a series of mystery files in an obscure scripting language that it had no way of opening. It just couldn't ignore them and not tell anyone about it until it was too late. If there had been some statutory basis for IPA to do this (as opposed to the ample statutory basis it may well have had for just rejecting the specification, or asking the applicant to either provide whatever was in the scm files in another format or remove them) it could have explained this to the judge, but it doesn't seem to have done so. In particular, it didn't maintain before the court the submission that its actions were justified by the electronic business rules.

As for the costs bit: I don't think Jessup was trying to dissuade the Commissioner from applying for costs at all. I think he was just telling her to expect a discount based on the possibility that the litigation could have been avoided, or at least reduced in scope, if IPA had done what it should have from the start. This isn't exactly unorthodox, either.

Unknown said...

Interesting ideas, but how would you propose to deal with the international aspects of this? Patent pools generally provide access to a global portfolio of patents. Do patentees have to declare their SEPs, and follow these rules, in every country, or is this something you see being enforceable by individual countries on the basis of their own national patents only?

Some Australian companies might want/need global portfolio licenses. Others may wish to operate only within a local or regional market. I doubt there is a 'one size fits all' solution.

Standards bodies, such as ETSI and IEEE, already impose licensing obligations on member companies that participate in standards-setting. These are legally-binding contractual arrangements that are compulsory for participation. I understand that the IEEE, at least, has discussed the possibility of extending these provisions to require participation in pool arrangements. However, there is no general legal mechanism to compel the owner of a patent to behave in a particular way if they did not participate in the standardisation process.

While countries such as Australia already have compulsory licensing provisions (which could be extended to explicitly include such circumstances), there are other countries (such as the US) where compulsory licensing is philosophically and politically unpalatable, and would never get passed into law.

The contracts constituting patent pool arrangements (between licensors and the pool operator, and between the pool operator and the licensees) must be subject to the laws and courts of some jurisdiction. Often this is somewhere in the US. There would be problems with trying to compel a patentee, who has perhaps not participated in the standardisation process, to compulsorily licence an Australian patent (with appropriate sublicensing rights) to a patent pool operator based in, say, Japan, under licensing contracts constituted under the laws of, say, New York.

For governments to be more pro-active in all of this, they would need to work together. And the US would be opposed, for certain! On top of which, I do not particularly wish to see a further increase in the inclusion of IP rights provisions in international trade negotiations! There is already too much, and I think it is widely considered to be a back-door mechanism to pursue special-interest agendas through the mechanism of 'trade' treaties, like the TTPA.

The ACCC could play a more pro-active role in Australia by defining licensing practices that it would consider prima facie anticompetitive, and requiring any entity wishing to engage in those practices to obtain prior approval in order to avoid investigation and potential prosecution. The question is then whether it would need any additional powers in order to do this effectively, and/or whether the existing provisions in the Patents Act and CCA limit its ability to do so.

Unknown said...

I agree that the circumstances raise issues of procedural fairness. However, I do not think that IP Australia was, or should be, obliged to do anything more than inform an applicant, at the earliest practical stage in the process, that some parts of the application were in an unacceptable format, and have been disregarded.

There is no obligation on the Patent Office the provide an applicant with a special opportunity to rectify this kind of problem. Any applicant can file additional information and/or amend an application at any time, subject to satisfying the requirements of the Act and Regulations. Early notification of the issue would have been sufficient, and I agree that IP Australia should have provided such notice.

I do not think we should read too much into the Commissioner's failure to defend her actions at trial. She was faced with a self-represented litigant, who showed up in court with his computer and ran a demonstration (was this formally entered as evidence, or was it merely performed by way of 'argument'?) Counsel probably had no instructions to respond to this, or to the indignation doubtless expressed by the applicant at the fact that his software had been ignored. And what, really, would have been the point? There are some battles you no doubt just step down from when facing a litigant-in-person.

The fact that the applicant had a computer implementation which he asserted to be an embodiment of the invention is, in any event, irrelevant to the requirements for patentability. The application was properly rejected on the face of the specification.

My concern is not that the judge was annoyed with IP Australia for failing to communicate adequately with the applicant. It is that he appears to be saying that because the applicant incorporated his alleged embodiment by reference into the specification, the court was unwilling, and IP Australia was not entitled, to reject the application on grounds of lack of manner of manufacture without properly considering the referenced embodiment.

With all due respect, the days of providing models to patent offices are long gone. The judge could, and should, have decided the question of manner of manufacture, as he was urged to do, on the face of the specification. That is the law, and dodging the issue as he did creates a dangerous precedent, in my view.

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