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”.
Patent pools in India are 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 competition but at the same time such agreements can generate significant efficiency which is preposterous without collective agreements.
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”.
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 foundation of patent pool lies in the multiple cross-licensing agreements between various patent holders and the other parties, hence, it is relevant to look into the provision that deal with assignment and licensing 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, term of 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 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 but 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 rule of reason so as to define whether the implications of certain pool arrangement are legitimate or not.
The promotion of dissemination of technology, assimilating complementary technologies, reduction in transaction costs, and to clear blocking positions, etc. are some of the pro-competitive implications of pooling. The Competition Commission of India (hereinafter ‘CCI’)has labeled the patent pooling agreements as ‘restrictive trade practice’ as the pooling agreements give the licensor rights which can have appreciable adverse effect on the market. In India, the Patent Pools are regulated under Section 3 of the Competition Act, 2002 (hereinafter, ‘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 among licensors can increase the price of goods due to minimal price competition or absence of any competition among competitors.
Moreover, the parties to the pool are also in a position to form cartels and can abuse the dominant status by way of concerting or collusion by exchanging competitively sensitive information, such as market strategy, know-how’s, or Research & Development (hereinafter, ‘R&D’) through the instrument of the pools. 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.
The term reasonable hasn’t been defined anywhere and changes from case to case basis. However, to simplify the term ‘reasonable’ Competition Commission of India (hereinafter ‘CCI’) has provided some instances which would ascribe any restriction as unreasonable restrictions and they include: any arrangements which will have adverse effect on price, quality, quantity or variety of the product, exclusive licensing agreements, grant backs and any arrangement which can have adverse effect on the market competition.
Patent Pools have social and economic benefits, they can reduce license transaction costs, have an ability to distribute risks and can encourage 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 small level patent holders from market or can facilitate group of major players to abuse their position and form a cartel which eventually lead to exclusion of new players in market. Patent pooling is anticompetitive if the members of pool intently dominate the relevant market and the main objective of such pool does not include dissemination of technology and proficient development.
Therefore, it won’t be incorrect to say that, patent pooling agreements may prima facie seem pro-competitive but they are capable of being an instrument for competitors to indulge in price coordination, the formation of cartels, sharing sensitive information, etc., thereby creating market imbalance.
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 isformed 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.
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.
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.
This article is written by Prishita Pandey and Ranish Alia who are 5th-year law students from Institute of law, Nirma University and share a common interest for IP and Antitrust Laws. They are interested in the debated Antitrust-IP intersection and conflict. Apart from this, Prishita Pandey is also interested in Corporate and commercial laws while Ranish Alia is interested in data privacy laws.
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