Patent Law

Monopoly

By Gary Odom and Jordan Kuhn

To FTC Commissioner J. Thomas Rosch, patents are inherently anti-competitive. To what degree depends upon the situation. Rosch reserves special ire for patent holders of technology standards, but would limit damages for inventors to what it cost to obtain a patent.

Remarks by Rosch May 31, 2008, at a "Summit on Antitrust and Economics," on the "nominal topic" of "the Supreme Court's decision in eBay v. MercExchange":

Although the majority opinion does not come right out and say it, the sub-text is that the public interest is disserved if and to the extent that patent "trolls" can obtain injunctive relief. In the concurring opinion to which Justices Kennedy, Stevens, Breyer and Souter subscribed, this concern is more than sub-text.

[I]n certain situations, injunctions can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. For example, when the patented invention is a small component of the product produced, and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages are often sufficient to compensate for the infringement and an injunction would not serve the public interest.

The threshold issue is what is meant when we refer to a person or firm (I'll just use the word firm) as a patent "troll." At one extreme - and this occurs in the context of standard setting - is a firm that obtains a patent from a patentee who made reasonable and non-discriminatory (RAND) licensing commitments or other monetary forbearance commitments to get its patent implemented in the standard; who itself produces no product or service utilizing the patent (sometimes these entities are referred to as "non-practicing entities" or NPEs); but who instead lies in wait for some other firm (or firms) to do so and become "locked in" to the industry standard covered by the patent; and who then sues that "locked in" firm for infringement, shrugging off the commitments that its predecessor made. This is the type of conduct that the FTC addressed in its Negotiated Data Solutions LLC settlement.

At the other extreme is a firm that obtains a patent on a product or service (or a component of the same) that it makes, uses or sells. There are no antitrust issues with this type of conduct in and of itself; it is perfectly legal and efficient and what the patent laws are designed to encourage.

[third scenario] In between is a situation involving a firm that obtains all of the patents required to make, use or sell a product that it itself makes uses or sells, and thereafter refuses to license those patents to any other potential entrant into the product (or service) market.

A fourth scenario is where a firm with a patent right which, like the first firm, does not itself make, use or sell any product or service but instead lies in wait until some other firm (or firms) does so and becomes locked into the technological process covered by the patent, and then sues that firm for infringement, but, unlike the patent in the first hypothetical, in this case the patents do not cover any standard or at least the firm's predecessor made no monetary commitment if there is a relevant standard.

I think we can all agree that the firm in the second hypothetical is not a "troll." Indeed, to treat it as such would chill patent licensing for no good reason--it would inhibit inventors from being rewarded by licensing their inventions and thereby stifle innovation. However, that cannot be said of the other three firms. In each case, their conduct can impose unwarranted barriers to entry into the product market - in the first instance by exploiting locked-in producers who are practicing a standard in reliance on a RAND commitment; in the third instance by erecting a "patent wall" that would-be rivals in the product market cannot penetrate; and in the fourth instance, by extracting more than the patent is really worth from producers who can't afford to stop producing the product or service. This is sometimes referred to as patent "hold up."

So, to Rosch, inventors who don't sell what they have patented, or investors, who treat patents literally as intellectual property, are monopolistic bandits, practicing patent "hold up" on infringers.

Now let me turn to what I described earlier in the third scenario as a "patent wall," where a firm independently develops and manufactures a product that competes in what constitutes a relevant market for antitrust purposes, and then files multiple patent applications covering certain features of the product and the patents issue. After competing products are brought to market, the firm acquires additional patents from third parties. It then uses those patents, and its prior existing patents, to threaten its present and potential competitors with litigation and "build a wall" around the market, eliminating competition and preventing entry. I would suggest that Section 7 of the Clayton Act and the Sherman Act are viable law enforcement tools in this scenario.

Turning to the fourth and last scenario, where a "putative troll" engages in patent hold up outside the standard setting context, application of Section 5 or standard antitrust statutes as law enforcement tools is more problematic. Suppose a firm acquires one or more patents from a third party who never sought to license or otherwise assert its patents in a market. The new patent holder never seeks to develop, license, market or otherwise invest in the technologies covered by the patents. Instead, it simply puts them in its pocket and waits for others to develop products that may infringe on the acquired patents. Eventually the patent holder identifies a feature or component of the product that it believes infringe on its patents and it seeks to assert the patents against all firms manufacturing the product. The patent holder enjoys some additional leverage because redesign of the product to avoid the patent would be expensive and time consuming. Thus, the patent holder can engage in patent "hold up."

The first question is whether this conduct can be challenged under the Sherman Act. It is arguable that it can be. However, it is very doubtful that a challenge could be based on effects of the conduct in product market because by definition the "troll" does not participate as a competitor in that market. Instead the theory would have to be that this course of conduct constituted monopolization of the relevant technology licensing and/or innovation market. A challenge based on the Sherman Act would not be free of issues.

So, alas, it may be difficult to criminalize patents by inventors who enforce their legal rights. The most that may be hoped for is to limit compensation to whatever price paid to acquire the patent.

At the end of the day, the most significant deterrent against the kind of behavior I've discussed may lie in a limitation on the amount of damages the alleged "troll" can collect. It is arguable that in this situation, the lion's share of the proceeds that the product or service can fetch in the market should go to the producer of the product or service rather than to the holder of the patent because the value of the patent is little more than what the firm obtaining, but not practicing, the patent paid to obtain it. If recovery of damages were limited in this fashion, there would be little room for real "exploitation" of the producer.

Full post as published by The Patent Prospector on June 03, 2008 (boomark / email).