Monday, October 14, 2013
Posted by Logan Breed (Hogan Lovells)
As a general matter, patent holders are supposed to be able to exclude others from their inventions. However, there are certain circumstances in which patent holders may be constrained in their
ability to exercise the full scope of the exclusionary power granted by the patent system. The most prominent example is in the context of a standard setting organization, where industry participants agree to confer market power on a set of patents in exchange for the patent holders’ promise to license those patents to the rest of the industry on reasonable and non-discriminatory terms. If the patent holder reneges on that promise, it can “hold up” the rest of the industry by exploiting the locked-in users of the standard and extract supracompetitive royalties for its patents. In other words, duplicitous patent holders can get royalties that reflect the value of the standard, not the value of the individual patents as compared to the alternatives that existed before the
standard was created.
But there are other circumstances that create the exact same lock-in problem. In particular, anticompetitive hold-up can occur when (1) a company makes a prominent unilateral commitment to the market that it will offer its IP for free or at a reasonable rate in order to encourage adoption of its technology to the exclusion of other choices and (2) there are significant switching costs once the market adopts that technology. Once the market is sufficiently locked in, the patent holder can exercise the same power that an SEP holder wields.
The antitrust enforcement agencies recognize that such pledges can be competitively
significant. In its closing statement in the Google/MMI and Rockstar transactions, DOJ stated that anticompetitive harm may “arise in situations outside of the SSO context where a patent holder's prior actions, such as open source commitments, lead others to make complementary investments." See http://www.justice.gov/opa/pr/2012/February/12-at-210.html. And, as the FTC noted in its analysis to aid public comment regarding the Google consent order, "Both Section 5 and common law precedents support the conclusion that parties engage in coercive and
oppressive conduct when they breach commitments after those commitments have
induced others to make relationship-specific investments and forego otherwise
available alternatives." See ftc.gov/os/caselist/1210120/130103googlemotorolaanalysis.pdf.
This is not a new problem. The FTC cited two cases to support the “relationship-specific investments” proposition in the Google consent order, neither of which involved SEPs. First, in Holland Furnace Co. v. FTC, 295 F.2d 302, 305 (7th Cir. 1961), the FTC found a Section 5 violation when furnace salesmen dismantled furnaces for cleaning and then refused to reassemble them until customers agreed to buy additional parts or services. Second, the FTC went all the way back to the
turn of the century to cite Alaska Packers' Ass'n v. Domenico, 117 F. 99, 102-03 (9th Cir. 1902). In that case, the Ninth Circuit found that seamen acted coercively by threatening to strike unless the owners of a fishing vessel agreed to pay them wages higher than those they had negotiated before
the vessel set sail. The FTC noted that in both of these cases, the victims could have turned to
alternatives ex ante, but were “'locked in,' and therefore vulnerable to exploitation, ex post." Whenever that kind of lock-in and opportunism occurs – in the SSO context or otherwise – we have an antitrust problem on our hands.