12

In the complete absence of regulations in 1856, one of the first patent pools was established in the US by the sewing machine industry, where the firms chose to pool patents with their competitors based on mutual agreement to mitigate the risk of litigation [11]. In 1890, the Sherman Act sought to prevent monopolies but excluded pooling and licensing due to freedom of contract and the dominancy of patent law over antitrust law in 1900s [12]. Based on a Supreme Court ruling, a patent owner enjoyed absolute freedom to license patents under any conditions decided by a contract between the patentee and the licensee [13]. The court refused to consider the creation of monopolies and fixed prices which granted the patentees an unrestricted right to practice collusive dealings under the protection of patent law [14].

13

In 1912, the absolute freedom was ended by a Supreme Court ruling, when it stated that the rights of the patentees had been pushed "to evil consequences" and that the Sherman Act imposed appropriate limits on such abuses [15]. Over the following fifty years, the Supreme Court addressed several pools, having approved some while dissolving others based on the competitive effects of each pool [16].

14

Due to the increasing demand for airplanes in WWI, the National Advisory Committee for Aeronautics proposed to form a patent pool in 1917 encompassing almost all aircraft manufacturers in the US. To access all the patents, they each had to pay a royalty. The Attorney General concluded that the pro-competitive effects of these arrangements outweighed anti-competitive effects [17].

15

Collective patent licensing reached its peak in the 1930s (with 14 pools in the US) but then curved down until 1990. The relaxing of antitrust scrutiny before WWII and the subsequent tightening after the War are often presented as an explanation for this change [18]. In addition, the Department Of Justice's (DOJs) list of patent licensing practices for per se antitrust violations (referred to as the “Nine No-No’s”) was another issue that made companies overcautious about concluding patent pooling agreements. However, the DOJ acknowledged in 1979 that many of those nine condemned practices had significant efficiency and pro-competitive virtues and thus it rescinded the list. [19]

16

Pool licensing practice started rising again in the 1990s when the DOJ and the Federal Trade Commission (FTC) jointly issued new guidelines [20] for a more “benevolent scrutiny of patent licensing and placed the analysis of patent pools under the rule-of-reason” (Baron & Pohlmann, 2015: 8-9). In 1997 and 1999, the DOJ cleared the MPEG2 and two DVD pools as the first modern patent pools in the ICT standards. In fact, this period is when the EU Commission also started to issue comfort letters for those pools and as a result, a new wave of pooling was triggered.

23

Patent pools have a long but uneven history. Some scholars divide their history into three periods: “beginning with deference, shifting to suspicion and per se prohibitions, and reaching a cautious endorsement” [29]. The ups and downs in their creation and operation as well as their growth and failure were significantly influenced by changes in antitrust enforcement practice and authority evaluations. The more lenient the antitrust policy is, the more patent pools emerge and develop.

24

As shown, there is no single purpose for creating a patent pool and no single way to manage it. Early pools were associated with monopolies and cartels, then later ones were created in response to US government policy objectives addressing standardization, biomedical, and agricultural technologies since the 1990s [30]. They were established for a number of reasons ranging from clearing blocking patent positions and avoiding potential litigation, to practicing anti-competitive behaviours such as market division among horizontal competitors or naked price fixing [31].

25

The modern patent pools were created mostly in connection to standardised technologies and under a more stable institutional environment which is a response to technological and commercial considerations. This evolution continues and today, product-based pools are particularly attracting players in the IoT era as they provide a package from all relevant patents for a product at once. The potential negative impact of the EU competition policy on this type of pools is discussed in § ‎ 4.2.3. 

30

Since 1968, the Antitrust Division of the DOJ has the regulatory task of reviewing different types of business practises proposed by private parties to determine how the Division may respond to proposed business conduct. The issuance of multiple patent pools-related BRLs [32] in the late 1990s shows their effectiveness [33]. Firms planning to establish a patent pool inform the DOJ who accordingly comments on the pool’s potential effects and announces whether the proposed plan is safe from an antitrust law perspective.

31

A firm requesting a business review may receive one of the following responses: (a) the DOJ does not presently intend to bring an enforcement action against the proposed conduct; (b) the DOJ declines to state its enforcement intentions and it may or may not file suit if the proposed conduct happens; and (c) the DOJ will sue if the proposed conduct happens. The first response i.e., the “safe” pooling proposal, emphasises that its enforcement intention is changeable, and the Department reserves the right to bring an enforcement action in the future if the actual operation of the proposed conduct proves to be anticompetitive in purpose or effect [34].

32

The BRLs have long provided a guidepost for private conduct offering safe harbours for business activity which the DOJ, as announced, would not condemn. Over time, they served as a “template for patent pooling arrangements that should not run afoul of the antitrust laws.” [35]. Firms desiring a favourable business review can attempt to eliminate or reduce the risk of anti-competitive effects through the application of certain safeguards or mechanisms incorporated in the BRLs.

33

However, some criticise the BRLs arguing that: (a) the validity of enforcement intention is limited to the date of the letter because the DOJ reserves right for future assessment, and (b) publishing all the information submitted by party may endanger its business [36]. Regarding the first criticism, one may counterargue that judiciary systems including courts and competition/antitrust authorities cannot and should not guarantee a future act as they do not make general rules like legislatures. In a limited and narrow manner, they evaluate what one has done or on occasions like business review/comfort letters, they evaluate the firms’ declared plans. They do not provide absolute legal certainty; however, they make a beneficial assessment template for the involved firms and public.

34

Publishing business information is debatable. What is mostly agreed upon between agencies and the parties when publishing a BRL is striking a balance between business secrets (private interest) and the right to information (public interests). One may advocate for the latter in the digital era because information availability (in the context of the antitrust authorities’ assessment) provides more certainty and a better self-assessment possibility for new players, particularly small firms who learn through other firms’ BRLs. However, the aim of these non-binding documents issued by the competition/antitrust assessment bodies is mainly to identify the key factors over which they are likely to ground their judgments of pro- vs. anti-competitiveness, and then to analyse the substance and boundaries of these components [37]. For these reasons, a letter serves its purpose by disclosing the method of analysis without needing to include confidential information.

35

Apart from the BRLs, the DOJ and FTC (the Agencies) issued IP Guidelines in 1995 [38] (updated in 2017 [39]) through which they clarified their antitrust enforcement position. The Guidelines deal with patent pools and emphasise that every case is evaluated in the light of its own facts to assist firms in assessing the antitrust risk related to their practice. It aims to inquire whether the restraint is likely to have anticompetitive effects and if so, whether the restraint is necessary to achieve pro-competitive benefits that outweigh anticompetitive effects [40]. The firms should, however, seek a BRL if they wish to know about the specific enforcement intentions regarding their particular business practice.

36

As non-binding law, the guidelines reflect the Agencies’ enforcement approach. That is why the IP Guidelines do not propose rigid rules and prohibitions, but instead they apply an effect-based analysis to the licensing mechanisms. They set out three core principles [41]:

37

In addition, the Agencies guidance published in 2007 deals inter aila with patent pools and presents further details regarding their efficiency and competitive concerns [43]. Nevertheless, none of these documents create laws or binding regulations. However, they can be regarded as definitive as they actually express the views of the administrative bodies responsible for assessing antitrust issues [44].

38

Until 2004, the EU Commission procedurally allowed parties to notify agreements to secure a decision on their legality. However, this system proved burdensome and the Commission frequently issued comfort letters, which were non-binding statements indicating that the Commission found no reason to interfere while providing some legal certainty. Since 2004, the system of notification has been removed and parties are expected to self-assess [45]. To facilitate transactions and, given the uncertainty in the application of Article 101(3), the Commission established Block Exemption Regulations (BER). These provide legal certainty for undertakings entering into certain types of agreements because they render Article 101(1) TFEU automatically inapplicable as BER presume those agreements satisfy all the conditions laid down in Article 101(3) TFEU. All other agreements require an individual assessment under Article 101 TFEU. Each BER is accompanied by some guidelines that summarise and interpret the related case law to provide practical examples of how to assess the compatibility of certain conduct with competition law rules.

39

The Technology Transfer Block Exemption Regulation (TTBER) was adopted in 2004 (updated in 2014 [46]) as a regulation on technology transfer agreements [47]. The TTBER applies only to bilateral contracts between a licensor and a licensee where the latter manufactures licensed goods, provides licensed services, or has them manufactured or provided for his account.

40

There are two main agreements in the context of pools. First, are the agreements for establishing patent pools which have been always excluded from the scope of the TTBER [48] for two reasons: (a) according to the council regulation, the commission is not empowered to block exempt technology transfer agreements concluded between more than two parties [49], and(b) licensing programmes involving multiple parties do not permit the production of contract products, a necessary condition for the application of the TTBER. The second agreement is licensing out which is concluded between a pool and a third party. In 2004, the only agreements excluded in the TTBER were those to establish a pool, but the licensing out agreements were covered and benefit from the exemption. In 2014, the Commission narrowed the scope of TTBER (the licensing out agreements were also excluded) and now neither agreements for setting up pools nor licensing out agreements are covered.

41

The Commission’s reasoning was that licensing out from a pool is a multiparty agreement (since contributors of a pool determine the licensing terms and conditions together) which is in contrast with the TTBER as it should principally cover only bilateral agreements [50]. This reasoning seems unconvincing because the TTBER was supposed to cover bilateral agreements even in 2004 [51]. One may question why those agreements, which were considered bilateral based on the TTBER 2004, are considered multilateral after the regulatory change in 2014. It is not clear whether in 2014 the Commission saw the TTBER 2004 as a mistake so the 2014 policy change was actually a correction, or it just decided to change the definition for licensing out agreements. Lundqvist found this policy change correct, suggesting that the 2004 TTBER scope was odd and the 2014 change is a return to the right direction for the Commission [52].

42

In any case, the 2014 policy change seems anti-pooling because licensing out agreements could benefit from the exemption as they were under the scope of the TTBER. This issue makes us believe that the inclusion of licensing out agreements in the TTBER and the consequent high legal certainty could have effectively attracted firms to the pools, as the agreements’ parties were sure that their agreements could benefit from the exemption (subject to the TTBER conditions [53]). In this line, the issuance of many comfort letters in the 2000s clearing patent pools can be regarded as an outcome of the legal certainty created by that policy. Alas, as the comfort letters are not in access, the extent of this effect cannot be examined.

43

The Technology Transfer Guidelines (TT Guidelines) [54], however, deal with patent pools and provide a comprehensive safe harbour for both the pools’ creation and the licensing out agreements. The TT Guidelines safe harbour is a promising progress in the EU, although the Commission guidelines are soft law as they are not rule of law but rule of practice [55]  [56]. Through guidelines, the Commission limits its power and is to follow the rules laid down therein because of the creation of legitimate expectation amongst the firms [57]. In fact, the guidelines bind the Commission in its decision but not the pooling parties, and therefore if the parties disagree, the Guidelines act no more than a good practice guidance.

44

The comparison of the two systems’ procedural frameworks shows that the antitrust authorities assess patent pools through some guidelines which although soft law are helpful since their providers are the assessors of patent pools.

45

The US has a higher number of guidelines and guidances with very elaborated analyses referring to the US case law. The EU has only the TT Guidelines and since there has been limited case-law they offer less certainty than their US counterparts. However, the US regulatory framework on patent pools is soft law. The EU once provided pools with legal certainty for a decade (2004 - 2014) where licensing out agreements benefit from the binding rules of the TTBER. Although this legal certainty did not last after 2014, it may have significantly impacted the Commission assessments and the issuance of comfort letters for the patent pools at the time.

46

In the US, patent pools have been treated more stably thanks to the BRLs, while the EU due to its procedural modifications (from individual exemption to self-assessment) could not provide equal stability. The public availability of the US BRLs compared to the inaccessibility of the EU comfort letter is another advantage of the US procedural framework. This issue is further discussed in section 4.1.

79

While the EU Commission provides a comprehensive safe harbour for technology pools, the US Agencies provide neither per se prohibitions nor safe harbours explicitly, as they do not measure a pool against a checklist of safeguards but evaluate the particular facts and circumstances to determine whether the actual conduct is anticompetitive [97]. However, the Agencies identify the following safeguards that patent pools can apply to reduce the risk of competitive harm [98]:

80

Notably, the absence of these safeguards does not imply that the pool necessarily harms competition in violation of the antitrust laws. The IP Guidelines, however, state that patent pooling is anti-competitive if any of the following conditions are met:

81

While in the EU, the safe harbour of the TT Guidelines covers both pool creation and licensing out agreements. Regardless of the market position of the pool’s parties, if the following conditions are met [99], Article 101 (1) will be inapplicable otherwise the pools come within the application of Article 101 (3) TFEU:

82

The presented substantive analysis of antitrust law described how the two systems apply their competition policies (i.e., the Sherman Act, and Articles 101 and 102 TFEU) to the patent pools assessment through their soft-law regulatory frameworks. This comparative analysis can be summarised as follows:

97

Despite having effect on antitrust assessment, the distinction between complementary/substitute and essential/non-essential patents is unclear and requires an on-going assessment. As a matter of fact, certain non-essential patents may become essential as technology evolves and certain technologies can be partly complementary and substitute.

98

Additionally, the essentiality test does not work well for patent pools outside standards and even in the case of standard-related pools, this concept is inherently ambiguous [120]. Neither system defines essential patents clearly as what is essential may vary from one patent pool to another [121]. Some pools define an essential patent in a technical context as one that is essential to manufacture a product in accordance with standard specifications. While some others, once a patent is commercially necessary based on consumers’ demand, regard it as essential in assessing the potential threats on competition in by the pool creation. In this context, the definition of essentiality encompasses not only patents that are necessarily essential to the standard, but also those essential to the standard as a practical matter because there are no economically viable substitutes for that patent [122]. We believe that the determination of commercially essential patents is impossible as it requires proving the absence of real alternatives known as devil’s proof, i.e. impossible proof of nonexistence [123].

99

Perhaps that is why the US IP Guidelines avoid explicitly mentioning the distinction between complementary and substitute patents, nor give any reference to their essentiality. They assess the inclusion of non-essential/substitute patents under the rule-of-reason and consider it possible, reasonable, and even efficient under some circumstances. Oddly, although the Commission highlights that the distinction between substitute and complementary is unclear [124], it makes explicit distinctions between them and accordingly specifies principles to assess competitive characteristics of each type. In addition, the Commission expresses that the essentiality examination is time dependent, as a patent essential at one point may later become non-essential or substitute due to the emergence of new third-party technologies [125].

100

One may conclude that when a distinction is not clear nor absolute, the EU, instead of taking a strict position, is better to adopt the US approach through assessing patent combinations on a case-by-case basis.

101

Tying prevents licensees from switching to substitute technologies [126]. Once substitute technology is bundled in the pool and licensed as a part of the package, and the royalty paid for the package covers already a substitute technology, then licensees are less likely to license a competing technology outside the pool [127]. However, this does not always lead to price fixing and competition foreclosure. As far as price fixing is concerned, the pool is unlikely to enable collusion among licensors and create price fixing if: (a) the royalty rate is charged per-unit irrespective of patents number and type (as it was the case in the 3C DVD pool [128]), and (b) the royalty is sufficiently small compared to the total costs of manufacture [129].

102

In the EU, there is no decision that addresses tying in the context of licensing agreements and as such, this article studies the US Philip case to see under what circumstances tying and competition foreclosure may happen.

US Philip case

103

The International Trade Commission (ITC) ruled that Philips' licensing arrangement comprising of essential and non-essential patents for CD products was a tying arrangement and constituted patent misuse. The ITC decided that the anti-competitive effects of this inclusion outweighed its pro-competitive effects as it could foreclose alternative technologies and harm competitors seeking to license alternative technologies to parties who needed to obtain licenses to Philips’s essential patents [130].

104

Philips then appealed and the Court of Appeal overturned the ITC’s decision based on distinguishing between “patent-to-product” and “patent-to-patent” tying arrangements. According to the ruling, in patent-to-product tying, the patentee uses the market power conferred by the patent to force customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor. Hence, the patentee can use its market power to foreclose competition in the market for the product [131].

105

However, patent-to-patent tying (which is what was discussed in Philips case) is different as the package licensing including both essential and non-essential patents does not: impose any requirement on the licensee; prevent the licensee from using any alternative technology that may be offered by a competitor of the licensor; and, foreclose the competitor from licensing their alternative technology [132].

106

The Court also stipulated that Philips gave its licensees the option of using any of the patents in the package at the licensee’s option and charged a uniform licensing fee regardless of which or how many of the patents in the package the licensee chooses to use in its manufacturing process [133]. The royalty fee neither increased nor decreased regardless of number of patents chosen by the licensee, and inclusion of non-essential patents avoided increasing the royalty rate [134].

107

The Court conclusion was that bundling essential and non-essential patents in the form of patent-to-patent arrangements is unlikely to create anti-competitive effects and is not considered an unlawful practice,

108

A nonessential patent is valueless. The Court explained that the value of any patent package is largely (if not entirely) based on the essential patents. It found it rational for a patentee who has essential and non-essential patents to charge what the market will bear for the essential and to offer the others for free. Because if the patentee allocates royalty fees between its essential and non-essential patents, he runs the risk that licensees will take a license to only the essential ones and thereby, he will not be able to obtain the full royalty value of the essential patent [138].

109

The court also referred to the fact that the line between competitive and complementary patents is very difficult to draw. It also added that an agreement that was perfectly lawful when executed could be challenged as per se patent misuse due to developments in the technology of which the patentees are unaware or which have just become commercially viable. Such a rule would make patents subject to being declared unenforceable due to developments that occurred after execution of the license or were unknown to the parties at the time of licensing. Not only would such a rule render a licence subject to invalidation on unknown grounds at the time of licensing but it would also provide a strong incentive to litigation by any licensee since the reward for showing that even a single license in a package was non-essential would render all the entire package unenforceable [139].

110

The case analysis shows that the anti-competitive effects of tying practice which result from the inclusion of non-essential patents into the pool is much doubtful. Therefore, the tying practice should be examined on a case-by-case basis given the fact that the inclusion may lead to pro-competitive effects, since:

111

The EU’s strict approach toward inclusion of non-essential/substitute patents into a pool may also affect the product-based pools as a recent form of pooling discussed in section ‎‎ 2.2.2(b). This type of pooling offers all patents necessary for a product which may consist of essential and non-essential/substitute patents. Such pooling has attracted several licensing providers including One-Blue and Avanci where they can provide their licensees with as many patents as possible for a specific application or product all at once. This also can attract newcomers in the IoT era.

112

This approach can, therefore, prevent the promotion of such pools and their significant role in the EU’s economy. The 23 million European SMEs, as the lifeblood of Europe’s economy, accounting for 98 percent of businesses [140] are often behind large firms in standardisation due to the technological complexity and/or the huge investment required to develop a competitive technological platform. They, however, can enhance their competitiveness and reputation by implementing standards in their products  [141]. Nevertheless, as pure implementers, SMEs mostly lack the skills necessary to identify the key players in the field. Or if they identify them, they lack the means to contact them or to identify the essential patents because large licensors mainly conclude their deals within each other. Thus, providing them with one package of necessary technologies tested by an independent agent along with the cost benefit and other advantages of patent pools can be very beneficial for such a large chunk of the European economy.  [142].

113

The discussion presented in this section shows that the EU’s approach toward inclusion of substitute/essential patents into pools is not reasonable. Hence, we propose to analyse patent combinations on a case-by-case basis for three reasons. First, the characterisation of pooled patents is very difficult in practice and founding the legality of a practice on a varying characterisation makes no sense and undermines legal certainty. Second, this inclusion does not necessarily create price fixing nor competition foreclosure as shown. Third, this approach can negatively affect product-based pools as effective mechanisms which satisfy the IoT newcomers’ needs in getting required licences for their products.