A ‘patent thicket’ effect has been observed by various scholars due to the expedition of modern inventions which is stalling the commercialization of new inventions.[i] The advent of modern inventions has led to the increasing complexities regarding the rights of a patent holder. As to produce a final product one might require different technologies (some might be old foundational or might be advanced) which are often subject to the protection of multiple patents.
The adversity to acquire licenses of various patented technologies can thwart the commercialization as well as the development of new technology. The concept of ‘patent pooling’ has the potential to curb such difficulties. Patent pools are the agreement between two or more patent owners to license one or more of their patents to one another or the third party. The first patent pool was formed in 1856 by Grover, Baker, Singer, and Wheeler & Wilson for the sewing machine.
The concept of patent pools in India is expanding incessantly which at the same time raises an alarm from the antitrust perspective. As the patent pools have the potential for substantial harm to the competition but at the same time such agreements can generate significant efficiency which is preposterous without collective agreements. Any arrangements made merely to facilitate price fixing, collective output restrictions or any other exclusionary conducts are illicit by ‘The Competition Act, 2002’ (hereinafter, ‘the Act’).
To this end, this article first provides the background of patent pools, focusing on the pro-competitive and anti-competitive effects of such patent pools and how the competitive evaluation of such arrangements can be done and finally, suggesting how these pools can be re-tooled.
Patent Pooling in India
Patent pools have no legal definition, it can be explained as “In a patent pool patent rights are aggregated amongst multiple patent holders. Then, the pooled patents are made available to member and non-member licensees and typically the pool allocates a portion of the licensing fees it collects to each member in proportion to each patent’s value”.[ii]
Under the Patent Act, 1970 (hereinafter, ‘Patent Act’) there is no express provision containing patent pooling arrangements but at the same time, it does not restrict the formation of such pools. As the basis of a patent, the pool is the multiple cross-licensing agreements between various patent holders and the other parties, it is relevant to look into the provision dealing with licensing and assignment under the patent act.
Section 68 of the Patent Act specifies that a patent may be transferred by an assignment or license and the agreement to transfer must contain all the terms and conditions to the license (e.g. royalty amount, the term of the license, etc.) and must be written and duly signed by the parties. Section 69 provides that an agreement for transmission or license to be registered and entered into the register of patents. Section 84 provides for the compulsory licensing of the patents (if a party fails to acquire a voluntary license) on certain grounds through which a pool can be created. Whereas Section 140 imposes certain restrictions on the parties and stipulates certain conditions that cannot be inserted into a license agreement. Although the patent act doesn’t provide for a specific provision for patent pools through various provisions the patent pools are governed in India and have proved to be a great success.
Implications of Patent Pools on Competition
Patent pools are not considered per se illegal due to its dual nature. The patent pools are therefore governed under the rule of the reason so as to define whether the implications of certain pool arrangements are legitimate or not.
The promotion of dissemination of technology, integrating complementary technologies, reducing transaction costs, and clearing blocking positions, etc. are some of the pro-competitive implications of pooling. The Patent holder enjoys the right to form Patent Pools but this right is often considered as an obstacle to the market competition as the parties which fall outside the pool can’t enter the market without paying hefty royalties.
The CCI has labeled the patent pooling agreements as ‘restrictive trade practice’ as the pooling agreements give the licensor rights which can have an appreciable adverse effect on the market competition. In India, the Patent Pools are regulated under Section 3 of the Act restricts the parties from entering into any agreement which would be anti-competitive. The pool’s licensor can enter into horizontal agreements or vertical agreements which are restricted as per Sections 3(3) & 3(4)of the Act respectively and can restrict the entry of new market players. This kind of coordination amongst the licensors can lead to a reduction in price competition as patent pools could lead to increased prices in the goods market due to the absence of any competition.
Moreover, the parties to the pool are in a position to form cartels by way of concerting or collusion by exchanging competitively sensitive information, such as pricing, marketing, or Research &Development (hereinafter, ‘R&D’) information through the mechanism of the pool. Additionally, the formation of cartels would also discourage R&D because by virtue of being members of the pool, the licensors grant each other rights to exploit their patents at a very nominal cost, thereby discouraging them from putting in efforts into R&D as the licensors no longer exercise the exclusive right to retain and exploit their patents.
The Competition Law recognizes IP Rights by mean of Section 3(5) but at the same time put reasonable restrictions on the rights of IP holder if they tend to be anti-competitive. In order to determine whether a Patent Pool is having a pro-competitive or an anti-competitive effect, one has to study the provisions of the Act discreetly, especially Sections 3 & 4. As per Section 3(5) of the Act, nothing under Section 3 would restrict any IP holder from restraining any infringement or imposing reasonable conditions necessary for safeguarding such rights that are conferred upon him.
This simply means that, for example, if the IP holder enters into a patent pool arrangement so as to adversely control the prices, quality, quantities of the goods and services in the market it would attract the Competition Law. Such arrangements create appreciable changes in the market by means of price coordination or refusal to grant licenses to the third party, etc. Therefore, in order to be exempted under Section 3(5) of the act, the restrictions should be reasonable, i.e., if the patent holders are entering into pooling agreements, the exercise of their rights should only impose reasonable restrictions or otherwise, they’ve to waive off their right of exclusivity.
The term reasonable hasn’t been defined anywhere and changes from situation to situation. CCI has offered some clarity through certain instances which qualify as unreasonable restrictions and they include licensing arrangements likely to affect adversely the prices, quantities, quality, or varieties of goods and services, agreement which divides the markets among firms that would have competed using different technologies, arrangements that effectively merges the R&D activities of two or only a few entities that could plausibly engage in R&D in the relevant field, exclusive licensing arrangements, including cross-licensing by parties collectively possessing market power, grant backs, exclusive licensing and acquisition of IPRs.
Patent Pools are important for the functioning of the IP regime despite their monopolistic nature. Patent Pools have social and economic benefits and abuse of such a patent monopoly is anticompetitive in nature and the competition law has to counter such abuses. Patent pools also reduce license transaction costs; distribute risks among the members of the pool and foster a better exchange of information. It also provides for a common tool to deal with the inefficiency and allowing various complementary patents to be organized under one agreement which can facilitate the production of goods and services, thereby increasing efficiency.
On the contrary, patent pools sometimes can be expensive to negotiate, can exclude patent holders with smaller numbers of patents, or enable a group of major players to form a cartel that excludes new competitors. Patent pooling is anticompetitive if the excluded firms cannot actively compete in the market and the patent poolers actively dominate the relevant market and the object of such pooling is not for the efficient development and dissemination of the technology. Similarly, when patent pooling is used so as to shield an invalid patent or when the pool is of patents that are not complementary to one another, it amounts to an anti-competitive practice with the aim of hampering market competition.
Therefore, it won’t be incorrect to say that, patent pooling agreements may prima facie seem pro-competitive but they also discourage outside firms to invest in R&D if they increase the threat of litigation, pools may slow innovation if they redirect R&D by outside firms towards technologies that are not covered by pool patents, especially if those technologies are inferior substitutes to innovation. Moreover, patent pools are capable of being an instrument for competitors to indulge in price coordination, the formation of cartels, sharing sensitive information, etc., thereby affecting the normal functioning of the market. All these play a crucial role to determine whether a pool arrangement is pro-competitive or anti-competitive.
Re-tooling Patent Pools
Industry standard-setting endeavors provide the most common contemporary context in which patent pools are to be formed. The authors provide two ways in which the pools can be re-tooled:
Pooling Substitute Technologies
The essential product doctrine (or ‘essential facilities doctrine’) restricts one player from taking undue advantage of his position by conniving with others to bereave other players from having fair participation in the market. Such products have the power to hold a monopoly in the market due to their uniqueness. This doctrine can be used to ascertain the dominant position in the market; however, in cases of patent pools, it can be applied to examine whether the pool is formed to create a monopoly to hamper the competition in the market. Wherein the nature of the relevant product will be looked upon and if it is independent to exist without the pool then that pool can be considered unreasonable and will not be given exemption under Section 3(5) of the Act.
However, if the product becomes entirely essential then it can lead to price-fixing and other anticompetitive activities. The authors believe that the set standard of pooling can be modified and the inclusion of essential patents that even have significant chances of having substitutes can be permitted.
Exclusivity
Exclusive agreements are governed under Section 3(4)(c) of the act; it defines two types of exclusive agreements, supply, and distribution. The exclusivity in pools can take four forms: (a) the pool members are free to license to the third party, (b) the pool can as licensee accept an offer from a third party for inclusion in the pool, (c) the pool can as a licensor grant license to a third party, and (d) the pool members can restrict the licensee in various ways like the field of use, etc.
All these forms individually as well as if operated together can cause major harm to the competition. Hence, it is suggestive that the non-exclusivity of pools should be mandated to solve such exclusivity issues. For example, there is a pool with an exclusive license between members if a third party shows interest to get included in the pool and if refused a license can cause potential harm to innovation as well as competition, whereby if no exclusive license was present than the third party can also take individual license which would lead to more competition in the market.
Due to the increase in the number of patent pools in India, the authors think that the specific provisions regarding patent pools must be formed and appropriate measures should be taken to regulate the anti-competitive effects of these pools.
[i]Carl Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting, NBER Conference on Innovation Policy and the Economy (May 4, 2000).
[ii]Robert P. Merges, Institutions for Intellectual Property Transactions: The Case of Patent Pools, in Expanding the Boundaries of Intellectual Property, Innovation Policy for the Knowledge Society, 123, 129 (Rochelle Cooper Dreyfuss ed., 2001).
