Patent Assertion Entities and EU CompetitionLaw
DamienGeradin(*)
ABSTRACT
PatentAssertionEntities(“PAEs”)areplayingagrowingroleintheUnitedStates,butalsoin Europe. Their activities are controversial in that while they may be a source of efficiencies,they may also create anticompetitive harm. Given the growing trend of operatingcompaniestransferringpatentstoPAEsinordertoincreasetheirlicensingrevenues,therisksof anticompetitiveharmcreatedbyPAEactivitiesmustbetakenseriously.Whenanalysingthe impactofPAEactivitiesoncompetition,adistinctionmustbedrawnbetween“pure”PAEs,which acquire patents from a variety of sources and generate revenues by asserting them, and“hybrid” PAEs,whichacquirepatentsfromoperatingcompaniesandmaintainarelationshipwiththese companiespost-acquisition.WhilepurePAEscreaterisksofexploitation,hybridPAEscreate exclusionary concerns as such PAEs may be used by operating companies to harm their rivalson downstreamproductmarkets.Theseexclusionaryconcernsareparticularlyseriouswhenthe operating company retains a significant degree of control over the activities of the PAEfollowing thetransferofthepatents.AsthereiscurrentlynoEUcompetitioncase-lawontheactivitiesof PAEs, this paper attempts to show through hypotheticals that depending on the circumstancesof each case, privateering may lead toexclusion.
Keywords:Patentassertionentities,non-practicingentities,holdup,royaltystacking,Cournot complements, exploitation, exclusion, licensing, competitionlaw.
JEL codes: K21, K41, L24,L40.
(*)Foundingpartner,EDGELegal,Brussels.ProfessorofCompetitionLawEconomicsatTilburgUniversity;ProfessorofLaw,GeorgeMasonUniversitySchoolofLaw;andvisitingProfessorofLaw,
I.Introduction
Patentassertionentities(“PAEs”)arefirmsacquiringpatentportfolios,whichtheymonetize through licensing agreements with manufacturers.1PAEs play a growing role in patentlitigation in the United States with, according to a study, over 60% of infringement lawsuits being filedby PAEs in 2013.2PAEs are particularly active in the information technology sector given itshigh patentintensity.3
PAEsarecontroversial.WhilesomearguethatPAEsstimulateinnovationbyassistinginnovators, suchasuniversitiesorresearch-intensivefirms,whichmightnototherwisebeabletomonetize theirinventions,4othersconsiderthattheydetercompetitionandinnovationbyincreasingthecosts ofmanufacturers,ultimatelyrepresentingataxonconsumers.5Concernshavealsobeenexpressedabout the growing reliance of operating companies on PAEs to monetize their patents. Whilethis practice,referredtoas“privateering”,6maybejustifiedbyefficiencies,itcanalsobeusedasa strategy to harm rivals by raising theircosts.7
GiventhecriticismsexpressedoverPAEs,U.S.antitrustauthoritieshavedecidedtopaycloser attention to their activities. In March 2011, the Federal Trade Commission (FTC) issued areport examiningPAEs,aswellastheharmthatcanbegeneratedbytheiractivities.8InDecember2012, the FTC and the U.S. Department of Justice (“DoJ”) held a public workshop on PAEs todiscuss the“evolutionofeconomicandlegalanalysesofPAEbehavior,includingpatentacquisitionsand
1TheFTCdefinesthetermPAEas“firmswhosebusinessmodelprimarilyfocusesonpurchasingandassertingpatents.” See FTC, “The Evolving IP Marketplace”, March2011.
2 AccordingtothedataprovidedbyScottMortonandShapiro,in2013,67%ofallpatentlawsuitswerebroughtbynon-practicingentities(NPEs)andPAEsaccountedfor91%ofthepatentcasesbroughtbyNPEs.SeeFiona Scott Morton and Carl Shapiro, “Strategic Patent Acquisitions”, 79 (2014) Antitrust Law Journal463,465-66.
3Id. at 468.
4 See,e.g.,CliftonParker,“Patenttrollsservevaluableroleininnovation,Stanfordexpertsays”,StanfordNews,23February2015,availableatnews.stanford.edu/news/2015/february/haber-patent-trolls-022315.html
5RobertHarris,PatentAssertionEntitiesPrivateers:EconomicHarmstoInnovationCompetition",79(2014) Antitrust Bulletin281.
6 This expression is based on the past reliance of kingdoms on sea captains who attacked enemy vessels witha“letterofmarque”protectingthemagainstthechargeofpiracy.Theseseacaptainswouldthensharethespoilsof their attacks with their state sponsors. See John Golden, “Patent Privateers: PrivateEnforcement’sHistorical Survivors”, 26 (2013) Harvard Journal of Law & Technology546.
7MarkPopofskyandMichaelLaufert,“AntitrustAttacksonPatentAssertionEntities”,79(2014)AntitrustLaw Journal 445,456.
8See, FTC, The Evolving IP Marketplace, supra note1.
licensingactivity”,9aswellasthe“potentialefficienciesandharmstoinnovationandcompetition that this activity may generate”.10Finally, in September 2013, the FTC announced its intentionto conduct a study on PAE organization and activity to develop a better understanding of howPAEs may impact innovation andcompetition.11
AnintensedebatehasalsoemergedamongU.S.antitrustspecialistsastotheroleantitrustlaw should play with respect to PAEs.12Some have, for instance, suggested that antitrust rulesshould beusedtoexterminate13or,atleast,limittheadverseeffectsthatPAEactivitiesmayhaveon competition, innovation and, ultimately, consumers.14Others disagree on the ground thatthe harmfulactivitiesofPAEsarenotacompetitionproblem,butalitigationproblemarisingfromthe uncertaintyconcerningthevalidityoftheexcessivelylargenumberofpatentsgrantedbythePatent and Trademark Office (“PTO”).15In their view, this requires a reform of the PTO and the roleof antitrust rules is not to make up for patent lawdeficiencies.16
The PAE phenomenon is more recent and less pronounced in the European Union and it hasnot yet received the same degree of attention as in the United States. However, it would be wrongto thinkthatEuropeisimmunefromPAElitigation.ArecentempiricalstudyshowsthatPAEs accountedforroughly10%ofthelawsuitsfiledinGermany(during2000-08)andtheUnited Kingdom(2000-13),17andthereiseveryreasontobelievethatPAEactivityhasacceleratedin recent years.18 Given the anti-competitive effects this practice may have, some EU competition
9 See Public Workshop: Patent Assertion Entity Activities, availableat
10Id.
11SeeFTCSeekstoExaminePatentAssertionEntitiesandTheirImpactonInnovation,Competition,PressRelease, 27 September 2013, available at
12The Antitrust Law Journal devoted one of its issues to this debate (Volume 79,2014).
13Tim Wu, “How to Make War on Patent Trolls”, New Yorker, 3 June 2013, availableat
14See,e.g.,MichaelA.Carrier,“PatentAssertionEntities:SixActionstheAntitrustAgenciesCanTake”,(Winter 2013) CPI Antitrust Chronicle1.
15 See Joshua D. Wright and Douglas H. Ginsburg, “Patent Assertion and Antitrust: A Competition Cure foraLitigation Disease”, 79 (2014) Antitrust law Journal 501; John “Jay” Jurata and Amisha Patel, “TamingtheTrolls:WhyAntitrustisnotaViableSolutionforStoppingPatentAssertionEntities”,21(2014)GeorgeMason University Law Review1251.
16See Wright and Ginsburg, supra note 15, at525.
17BrianJ.Loveetal.,“PatentAssertionEntitiesinEurope”,forthcominginDanielSokol(ed.),PatentAssertionEntities and Competition Policy, Cambridge University Press, 2016, currently availableatpapers.ssrn.com/sol3/papers.cfm?abstract_id=2689350
18PAEs,suchasIPCom,UnwiredPlanet,Vringo,andSaintLawrencehave,forinstance,filedaseriesoflawsuitsagainstmanufacturersofmobiledevicesforallegedbreachesof2G,3Gand4GSEPs.
lawexpertshavealsocalledforantitrustinterventiontoputanendtosomeofthepracticesin which PAEs areinvolved.19
Againstthisbackground,thispaperisdividedinfiveparts.PartIIdescribestheoperationand activities of PAEs. It seeks to clarify what should be understood by the termspracticing-entities (“PEs”),non-practicing-entities(“NPEs”),PAEsand“patenttrolls”.PartIIalsodiscussesthe “positive”andthe“negative”casesforPAEs.PartIIIdiscussesthecompetitionlawprovisions that can be used to place limits on the activities of PAEs. Part IV analyses the activities ofPAEs that may have the object or effect of restricting competition, as well as the ways inwhich competition rules can be used to put an end to such practices. This analysis distinguishesbetween the competition law issues that may be created by “pure” PAEs and those that may be createdby “hybrid”PAEs.20PartVconcludesthatwhilepurePAEscreaterisksofexploitation,hybridPAEs create exclusionary concerns, as they can be used by operating companies to harm their rivalson downstreamproductmarkets.Theseexclusionaryconcernsareparticularlyseriouswhenthe operating company retains a significant degree of control over the activities of the PAE afterthe transfer of the patents has beencompleted.
II.What is a PAE and PAEs’ activities “desirable” ornot?
Intellectualproperty(“IP”)lawyersrefertoaseriesofacronymsandlabelstodescribethevarious typesofcompaniesactiveintheIPmarketplace.SectionAdistinguishespractisingentities(“PEs”) from non-practising entities (“NPEs”), NPEs from PAEs, and PAEs from patent trolls. AsPAEs can at the same time support and harm innovation, Section B discussed the positive andnegative cases forPAEs.
A.PEs, NPEs, PAEs and patenttrolls
Intellectualpropertyrights(“IPRs”)areheldbydifferentcategoriesofcompanies.First,inthe high-technologysector,manufacturersoftenholdportfoliosofpatents,theteachingsofwhichthey use in their products.21This is why they are often referred as practising entities (“PEs”).Second, a variety of entities develop patent portfolios either by patenting their inventions (e.g.,university research centres, labs, etc.) or by acquiring them from other entities against payments orrevenue-
19See,e.g.,MauritsDolmans,“Privateersandtrollsjointheglobalpatentwars;cancompetitionauthoritiesdisarm them?”, 37 (2014) Computerrecht80.
20See infra text accompanying notes25-26.
21Largehigh-technologycompanieslikeApple,Google,IBM,MicrosoftorSamsungholdthousandsofpatentscovering a wide variety of technologies, usually related to the products or services they offer to theirclientsorusers.
sharingagreements.TheseentitiesarereferredtoasNPEssincetheydonotpracticetheirpatents.22Instead,theyderiverevenuesfromlicensingthem.PAEsareasubcategoryofNPEsinthat,unlike universityresearchcentresorlabs,theydonotdeveloptechnologies.However,theymayteamup with research centres in order to help them to monetise their patents. PAEs owe their name tothe fact they generate revenues by asserting their patents or those of third parties. PAEstypically initiatelicensingnegotiationswithmanufacturerstheybelievehaveinfringedtheirpatentsand when these negotiations fail they file a patent infringement lawsuit against them. PAEsare sometimesreferredtoas“trolls”.23ThetermtrollisusedpejorativelytodenouncePAEsthat engageinparticularlyegregiousactivities,suchas,forinstance,sendinglettersofdemandto thousandsofusersofproductsthatwouldallegedlyinfringedtheirpatents(oftenofhighlydubious quality).24Since some PAEs engage in desirable activities, such as assisting inventors to obtaina return on their R&D, trolls can be seen as a subcategory ofPAEs.
PAEs are not a unitary phenomenon as different categories of PAEs can be distinguished.First, ScottMortonandShapiromakeadistinctionbetween“pure”PAEsand“hybrid”PAEs.25Pure PAEs acquire patents from a variety of sources and generate revenues by asserting them.Hybrid PAEsacquirepatentsfromoperatingcompaniesandmaintainarelationshipwiththesecompanies post-acquisition. For instance, the operating company transferring its patents to the PAE maybe compensatedthrougharevenue-sharingagreementand,insomecases,thetransactionisstructured insuchawaythatthePAEwill(primarily)targettherivalsoftheoperatingcompanyona downstreamproductmarket.Asnotedabove,thispracticeisgenerallyreferredtoas“privateering”.26
Second,notallPAEshavethesamestrategy.WhilesomePAEsjustholdafewpatents,which they will use to “strike it big in court” (“lottery tickets” trolls),27others (“bottom feeders”trolls) send thousands of letters of demand to small businesses using products allegedly infringingtheir patentsinthehopethattheywillsettletheamountsrequestedratherthanfacethecostsand uncertainty associated with a patent infringement lawsuit.28 Another category of PAEs
22OnthefeaturesandactivitiesofNPEs,seeDavidL.SchwartzandJayP.Kesan,“AnalyzingtheRoleofNon-Practicing Entities in the Patent System”, 99 (2014) Cornell Law Review425.
23ColleenV.Chien,“OfTrolls,Davids,Goliaths,andKings:NarrativesandEvidenceintheLitigationofHigh-Tech Patents”, 87 (2009) North Carolina Law Review1571.
24 Julie Samuels, “A Closer Look at Patent Troll Demand Letters: A Dangerous Problem that Must BeFixed”,ElectronicFrontierFoundation,5November2013,availableat
25See Scott Morton and Shapiro, supra note 3, at465.
26See supra note6.
27MarkA.LemleyandA.DouglasMelamed,“MissingtheForestfortheTrees”,113(2014)ColumbiaLawReview 2117,2126.
28Id.
(“aggregators”) accumulate large quantities of patents from a variety of sources(operating companies, NPEs, etc.).29For instance, Intellectual Ventures claims it has acquired morethan70,000 patents and patent applications since its creation.30These aggregators license thesepatents tomanufacturersagainstthepaymentofroyaltiesandsuethemiftheyareunwillingtotakea licenseatthetermstheyseektoobtain.Whilemostaggregatorshavean“offensive”business model,someaggregatorsarealsousedbyoperatingcompaniesfor“defensive”purposes.For instance,RPXoffersa“defensivepatentacquisitionservice”,which“reducespatentriskforclients by removing the threat posed by potentially problematicpatents.”31
B.The cases “for” and “against”PAEs
As noted above, commentators are divided over whether PAEs are desirable or not. Primafacie, thereisnoreasontobelievethatthePAEmodeliswronginitself.Patentsaretradeablerightsand thereisnothinginpatentlawsuggestingthatpatentscanonlybeassertedbytheentitiesobtaining themfromthepatentoffice.Moreover,entitieshavedifferentskills.32Forinstance,researchcentresmaybegoodatinnovatingandpatentingvaluabletechnology,butmaynothavethe resources and expertise to monetize their inventions. A specialist entity may thus helpinnovators to obtain a return from their R&D activities by negotiating licenses with companies interestedin exploitingtheirtechnology.Incaseofinfringement,PAEsmayalsoassistinnovatorsinenforcing theirpatentsandobtaincompensationfortheirinvestments.Fromthatstandpoint,PAEsmay improvethefunctioningofthemarketforideas,generatereturnforinnovators,andstimulate innovation.
However, some claim that there is scarce evidence that PAEs enhance rewards forinnovators.33Only a small fraction of the sums PAEs collect would be shared with the originalpatentees. Moreover, commentators have expressed concerns about PAEs’ negotiation and litigationtactics. ScottMortonandShapiro,forinstance,allegethatPAEsmayseektoobtain“unreasonable” royaltiesbyusing“outsizedthreats”,34suchasseekinginjunctionsandexclusionorders,suing customersinordertopressuremanufacturersorfilinglawsuitsatamomentwherethetargetis particularly vulnerable (e.g., just before an IPO).35Finally, allegations have been made thatPAEs
29Id.
30See Intellectual Ventures, Our Patent Portfolio, available at
31See
32DamienGeradinetal.,“ElvesorTrolls?Theroleofnonpracticingpatentownersintheinnovationeconomy”,21 (2012) Industrial and Corporate Change73.
33See Lemley and Melamed, supra note 27, at 2125 and 2151 and the studiescited.
34Inthispaper,Iunderstandunreasonableroyaltiesthatexceedthevalueofthepatents.
35See Scott Morton and Shapiro, supra note 27, at474.
maybeusedbyoperatingcompaniestotargettheirrivalsandraisetheircostssoastogaina competitive advantage on downstream product markets.36
Inlightoftheseobservations,itisclearthatonecannotgiveageneralanswerastowhetherPAEs are desirable or not. It entirely depends on their business model and the way they implement itin practice.
III.Use of EU Competition Law to Place Limits on PAEactivities
Byobtainingapatent,anentityisallowedtopreventtheunauthoriseduseofitsintellectual property, as well as to exploit it by, for instance, licensing it to third parties. The fact thatpatent lawgrantsthemanexclusiverightofexploitationdoesnot,however,immunizepatentholders fromtheapplicationofcompetitionlaw.AspointedoutbyAdvocateGeneralWatheletinits opinioninHuaweiv.ZTE,“therighttointellectualpropertyisnotanabsoluteright.”37TheCJEU alsoheldthattherearesituations“inwhichthefreeexerciseofanexclusiveright,beingaright whichrewardsinvestmentorinnovation,maybelimitedintheinterestofundistortedcompetition on the common market.”38In several instances, the European Commission has thus intervenedto bring anti-competitive exercises of intellectual property rights to anend.39
Three branches of EU competition law can potentially be used to place limits onanti-competitive activities that would be carried out by patentholders.
First, subject to the exception contained in Article 101(3) TFEU, Article 101(1) TFEUprohibits allagreementsandconcertedpracticesbetweenundertakingsanddecisionsbyassociationsof undertakingswhichmayaffecttradebetweenMemberStatesandwhichhaveastheirobjector effect the prevention, restriction or distortion of competition. This provision can thus be usedto challenge IP-related agreements that would have the object or effect of restricting competition.In ordertooffersomeguidancetopartiesconcludinglicensingagreements,theCommissionhas adoptedaRegulation,40aswellasGuidelinesontheapplicationofArticle101TFEUtotechnology
36See Popofsky and Laufert, supra note 7, at445.
37 Opinion of Mr Advocate General Wathelet delivered on 20 November 2014, Case C-170/13,HuaweiTechnologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH, 2015 E.C.R.I-0000.
38Case T-321/05, AstraZeneca v. Commission, (2010) E.C.R. II-02805, at §26.
39See,e.g.,JoinedCasesC-241/91PandC-242/91P,RTEandITPvCommission(‘Magill’)[1995]ECRI-743;CaseC-418/01,IMSHealthGmbHCo.OHGvNDCHealthGmbHCo.KG.,2004E.C.R.I-05039;CaseT-201/04, Microsoft Corp. v Commission, 2007 E.C.R. II-03601; Case C-170/13, Huawei v. ZTE, supranote37.
40CommissionRegulation(EU)No316/2014of21March2014ontheapplicationofArticle101(3)oftheTreaty on the Functioning of the European Union to categories of technology transfer agreements, 0.J.2014,L93/17.
transfer agreements (respectively, the “TTBER” and the “TTBER Guidelines”).41The Commission has also provided guidance on standardization agreements in its Guidelines onthe applicability of Article 101 TFEU to horizontal co-operationagreements.42
Second, Article 102 TFEU prohibits an undertaking holding a dominant position to abuse fromit. Thereisanabundantcase-lawoftheEUcourtsontheapplicationofArticle102TFEUtoabusive exercisesofintellectualpropertyrights.43Whileintellectualpropertyrightsdonotnecessarily confer a dominant position to its holder,44there are circumstances where it does and in suchcasesArticle 102 TFEU has been regularly used to place some limits on the exercise of such rightsby their holders.45Article 102 TFEU condemns a variety of abuses of an exploitative orexclusionary nature, as well as pricediscrimination.46
It is important to note that both Articles 101 and 102 TFEU have direct effect, which meansthat theycanbeinvokedbeforenationalcourts.47Aswillbeseenbelow,theseprovisionsareregularly used as a means of defence (sometimes referred to as “EURO defence”)48by defendants inpatent infringementcases.
Finally, pursuant to the EU Merger Control Regulation (“EUMCR”), the Commission hasthe abilitytoprohibitconcentrationsofaCommunitydimensionthatwould“significantlyimpede effective competition in the common market or in a substantial part of it, in particular as aresult of the creation or strengthening of a dominant position.”49The question is, of course, whetherthe saleofapatentportfoliocouldgiverisetoaconcentrationwithinthemeaningoftheEUMCR. Suchasalecanbeconsideredtobeaconcentrationiftheportfolioinquestionconstitutesa business with a market turnover.50 Thus, the acquisition by a PAE of a patent portfolio could in
41O.J. 2014, C89/3.
42O.J. C 11/1.
43See supra note39.
44For a discussion, see Jonathan D.C. Turner, Intellectual Property and EU Competition Law, 2nd Ed.,OxfordUniversity Press, at Section3.02.
45See supra note39.
46See Damien Geradin et al., EU Competition Law & Economics, Oxford University Press, 2012, Chapter4.
47Articles 5 and 6 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of therules on competition laid down in Articles 81 and 82 of the Treaty, 2003 O.J., L1/1.
48ArielEzrachi,EUCompetitionLaw:AnAnalyticalGuidetotheLeadingCases,HartPublishing,4thEd.2014,at542.
49Article2.2ofCouncilRegulation(EC)No139/2004of20January2004onthecontrolofconcentrationsbetween undertakings, O.J. 2004, L24/1.
50OECD, Definition of Transaction for the Purpose of Merger Control Review, 2013 available at at79.
theoryfallunderthescopeoftheEUMCRandbeprohibitedorsubjecttoremediesifitcreated the risk of significantly impeding competition in the commonmarket.
TransactionsinvolvingPAEsare,however,unlikelytofallundertheEUMCRbecauseofthe turnoverthresholdsrequiredforaconcentrationtohavea“Communitydimension”.51WhilePAEs havebecomeactivelitigantsbeforeEuropeancourts,theirturnoverremainsinferiortotheEUmerger control thresholds, and there is no precedent where a patent transaction involving aPAE has been notified to the Commission.52It is, however, important to note that patenttransactions that do not fall within the scope of the EUMCR may nevertheless fall under the scope ofnational mergercontrolregulations.TheycanalsobeexaminedunderArticle101TFEUaswillbeseen below.
WhendiscussingthelimitsthancanbeplacedbyEUcompetitionlawontheexerciseofpatent rights, it is important to draw a distinction between standard-essential patents (“SEPs) andnon- standard-essential patents (“non-SEPs”).53Most of the recent competition casesinvolving intellectual property rights concernSEPs.54
Astandardcanbedefinedasasetoftechnicalspecificationswhichseekstoprovideacommon design for a product or process.55By allowing complementary or component productsfrom different manufacturers to be combined or used together, standards increase consumer choiceand convenience, and reduce costs. Standards are generally created by voluntaryorganizations (generally referred to as standard-setting organizations or SSOs) composed of participants froma given industry (electronic components, communications, etc.).56 They meet to discuss, analyze,
51See Article 1.3 of Regulation 139/2004, supra note49.
52 The potential impact of intellectual property on competition was, however, reviewed by the Commissioninsome recent merger decisions. Case No COMP/M.7047, Microsoft Nokia, 4 December 2013,C(2013)8873;Case No COMP/M.6381 - Google / Motorola Mobility, 13 February 2012, C(2012)1068.
53 For a discussion of the notion of standard-essential patent, see Damien Geradin, “The EuropeanCommissionPolicytowardstheLicensingofStandard-EssentialPatents:WhereDoweStand?”,9(2013)JournalofCompetition Law & Economics1125.
54 Case AT.39985, Motorola - Enforcement of Standard Essential Patents, 29 April 2014, C(2014) 2892final;Case AT.39939, Samsung - Enforcement of UMTS Standard Essential Patents, 29 April 2014, C(2014)2891final.
55SeeHerbertHovenkamp,MarkD.JanisMarkLemley,IPandAntitrust:AnAnalysisofAntitrustPrinciplesApplied to Intellectual Property Law, (2003-04 Supplement) at35.1.
56 For instance, the European Telecommunications Standards Institute (ETSI), headquartered in SophiaAntipolis, France, was formed in 1988 by the European Conference of Postal andTelecommunicationsAdministrations(“CEPT”)andisofficiallyrecognizedbytheEuropeanCommissionastheorganizationresponsible for standardization of information and communication technologies within Europe. Its missionisto“developgloballyapplicabledeliverablesmeetingtheneedsoftheInformationandCommunicationsTechnologies(“ICT”)community.”See,generally,MarkLemley,“IntellectualPropertyRightsandStandard-Setting Organizations”, 90 (2002) California Law Review,1889.
refine, and ultimately adopt mutually acceptable standards. SSOs have thus gainedimportance over the years in technology-drivensectors.
Standardsmay,however,beencumberedbypatentswhenthetechnologiestheyimplementare proprietary. This is the case in the IT industry, for instance, where a given standard may relyon technologies protected by a very large number of patents, sometimes in the hundreds oreven thousands.57Thismeansthatmanufacturersarenotabletoimplementastandardunlessthey obtainalicensefromtheholdersofpatentsthatareessentialtothestandardinquestion.These patentholdershavearighttoobtaincompensation,whichcanforinstancetaketheformofan upfront cash payment, royalties,etc.
Most formal SSOs have IPR policies which generally encourage patent owners involvedin standardization to disclose any patent(s) that they consider essential upfront, i.e., prior tothe standard’sadoption.Oncedisclosureismade,orcontemporaneouslywithdisclosure,patent holders are typically asked to provide an assurance or commitment that, should their patent(s)be essential for a standard, they will license them on fair, reasonable andnon-discriminatory (“FRAND”) terms to members of the SSO and outsiders.58The IPR policies of most SSOs donot oblige owners of essential IPR to grant irrevocable licences thereto on FRAND terms. But ifthe ownerofSEPsseekstohaveitstechnologyincludedinastandard,thereisanincentivebutno obligationtoprovidetheSSOwiththecontemplatedassurancethatitwilllicenseonFRAND terms.
Licensing negotiations between SEP holders and potential licensees are conducted outsideSSOs. Parties to such negotiations, however, regularly disagree over what FRAND terms mean withthe standardimplementersbeingunwillingtopaythefinancialcompensationtheSEPholdersdemand. From a competition law standpoint, the two main issues that have arisen are whether theseeking by an SEP holder of financial terms that are not FRAND can be considered as excessivepricing underArticle102TFEU,aswellasthecircumstancesinwhichSEPholderscanseekcourt injunctionswithoutcommittinganabuseofdominanceunderArticle102TFEU.Theseissueswill be discussedbelow.
57 Thisis,forinstance,thecaseoftheWCDMA(3G)mobilestandard.SeeRudiBekkersetal.,Essentialpatentsin industry standards: The case of UMTS, available at
58ForadiscussionoftheFRANDcommitment,seeDamienGeradin,“StandardizationandTechnologicalInnovation: Some Reflections on Ex-ante Licensing, FRAND, and the Proper Means to RewardInnovators”,29 (2006) World Competition511.
IV.Addressing PAE-related issues with competitionlaw
This part analyses the extent to which Articles 101 and 102 TFEU can address the problemsthat maybecreatedbyPAEactivities.Itisimportanttonotethatcompetitionrulesdonotapply differentlydependingonthenatureoftheundertaking(s)atstake.Thus,thereisnoreasonwhy PAEs should be subject to a harsher treatment than practising entities. PAEs may, of course,raise issuesthataredifferentfromthosecreatedbypractisingentitiesandtotheextentthattheseissues are a source of competition harm, they require remedies designed to address thatharm.
Before analysing the extent to which competition rules can “address” the “problems” createdby PAEs it is important to identify the criticisms that have been made against their activities.First, someoftheconcernsthathavebeenexpressedregardingPAEsarethattheseentitiesareless constrainedthanoperatingcompaniesinmonetizingtheirpatentsandarethusmorelikelyto engageinaggressivenegotiationandlitigationtactics.ThisisbecausePAEs,unlikeoperating companies,arenotexposedtocountersuitssincetheyhavenoproductstoprotect.ThePAE business model therefore creates “asymmetrical risks”. PAEs would also threaten “patentpeace”.Whenoperatingcompaniesusetheirpatentportfoliosfordétenteortoobtaincross-licenses,PAEs acquiringtheseportfolioswillendthatapproachandinsteadchargeroyaltiesfortheir technology.59
Second,itisarguedthatPAEsdonotfacethesame“reputational”constraintsfacedbymajor operatingcompanies.60Inotherwords,whilesomewell-knownoperatingcompaniesmaynot engageincertainlitigationtacticsbecauseofthefearthismayaffecttheirreputationandtheir long-termabilitytocollaboratewithotheroperatingcompanies,PAEsdonotfacesuchconstraints. Tothecontrary,beingperceivedasruthlessmayincentivizepatentholderstousethemtomonetize theirpatentsandmayalsoconvincetheirlitigationtargetsthat,evenifthepatentsatstakeare weak,itisbettertosettleratherthanfacelitigation.61Asfarassuchtacticsareconcerned,wehave seen that Scott Morton and Shapiro argue that PAEs may use “outsized threats” toextractunreasonableroyalties.62It isalsoallegedthattheymayrenegeoncommitments,suchasFRAND commitments, that were made by the original patentholder.63
59Scott Morton and Shapiro, supra note 3, at487.
60 Mark S. Popofsky and Michael D. Laufert, “Patent Assertion Entities and Antitrust: Operating CompanyPatent Transfers”, The Antitrust Source, April 2013, 1,4.
61Ananalogycanbedrawnwithpredatorypricing,astrategyinwhichdominantfirmsmayengagetodeterentry. See Paul Milgrom and John Roberts, “Predation, Reputation, and Entry Deterrence”, 27 (182)Journalof Economic Theory280.
62Scott Morton and Shapiro, supra note 3, at470.
63Id. at 475.
Finally,itissaidthatPAEs(hybridPAEs)maybeusedbyoperatingcompaniestoengagein privateering, hence creating harm to rivals by raising theircosts.64
In what follows, I operate a distinction between the potential competition issues raised by“pure” PAEsandthoseraisedby“hybrid”PAEs.Aswillbeseen,“privateering”activitiesgenerate particularly challengingquestions.
A.Pure PAEs and competitionlaw
PurePAEsacquirepatentportfoliosofSEPsandnon-SEPsfromavarietyofsources:researchinstitutions,otherPAEsoroperatingcompanies.Unlike“hybrid”PAEs,theydonotmaintainany link with operating companies after they have acquired the patents. There is therefore little orno risk that their assertion strategy will be guided directly or indirectly by “exclusionary”motives. But there is of course a risk that they may engage in “exploitative” behaviour in breach ofArticle 102 TFEU.65Some of their licensing agreements may also raise issues under Article 101TFEU when they contain provisions that restrictcompetition.