The U.S. Department of Justice (DOJ) recently issues a business review letter (BRL) and press release concerning a proposed patent pool of patents owned by universities called the University Technology Licensing Program (UTLP) in response to UTLP’s BRL request of August 14, 2020.  The UTLP pool is not intended to have standard essential patents (SEPs), but has provisions in the event that a patent in the pool is found to be an SEP.  This business review letter provides incremental insight into DOJ’s competition law distinctions between SEP patent pools and non-SEP patent pools.

We do a quick summary of it below, but (as always) recommend that you read the BRL itself if you need to make decisions based on it.  Some incremental insights from this BRL with the distinction between SEP and non-SEP patent pools from a competition law point of view include:

• Competition law is particularly concerned with pooling together substitute patents (e.g., pooling together patents covering mutually exclusive, competing technologies), but a pool of standard essential patents do not raise that concern because such patent pools would have only complementary patents (e.g., patents on technologies that may be used together, which generally is the case for patents essential to the same standard).
• A licensee can pick-and-chose patents to license from a pool of non-SEPs, but cannot for a pool of SEPs because a license is required for all the SEPs (else patents in the pool are not essential to the standard after all).
• Price flexibility based on the number of patents in a non-SEP patent pool that one licenses is helpful because–unlike with a pool of SEPs–not all implementers will require access to every patent in that pool so discounts for licensing more patents provides incentives to use the technology and has transaction efficiencies.
• Competition concerns might be raised when sharing royalty distribution among all members of a pool of non-SEPs in which not all patents may be licensed (because not all licensees may use all the patented technology), but those concerns do not arise with SEP patent pools in which the entire SEP pool must be licensed (because licensees need a license to all patents that are essential to the standard).
• Making the patent pool of non-SEPs the exclusive entity to obtain a license to any patents in that pool was not a concern here given other circumstances, but it may be a concern for an SEP patent pool, which is why such SEP pools typically allow the patent owners to independently license there SEPs if not licensed through the SEP pool.

As we stated with other DOJ business review letters, this letter is limited to whether DOJ currently perceives any competition law issues with the proposed business plan and does not represent an endorsement that a business plan is substantively better than other approaches.  Thus, this business review letter’s conclusion is limited to finding that the “UTLP is unlikely to harm competition” so DOJ has “no present intention to challenge the program.”  DOJ also stressed that this letter is limited to the particular type patent pools of universities that have unique issues in enforcing their patents in this particular technological area of physical sciences.

Background

UTLP is a proposed licensing program for participating universities to license “complementary patents in the physical science sector.”  Complementary patents are patents directed to technologies that can be used together, as opposed to substitute or competitive patents directed to mutually exclusive technologies (i.e., you can use one technology as a substitute to the other, but you cannot use both at the same time).  In the BRL (page 10, n. 63), DOJ has explained its definition of substitute and complementary patents from a competition law point of view as follows:

• substitute patents are “patents covering technologies that compete with each other and that licensees can choose among”
• complementary patents are “patents covering separate aspects of a given technology that do not compete with each other.”

The physical science sector here is stated to be “technology applications for autonomous vehicles (e.g., optical components, sensor hardware and software, cybersecurity), connectivity or ‘Internet of Things’ or “IoT’ (e.g., millimeter-wave communication, power management, signal processing, location tracking), and ‘Big Data’ (i.e., technology for large-scale data storage, transmission, and analysis).”  The patent pool portfolio is divided into each of those categories.

Using UTLP as a centralized licensing agent and “one-stop shop” in this particular area is alleged to be more efficient than universities individually spending resources marketing and reaching out to the industry to license their own patents individually.  Universities often do not have the resources, practical understanding of the industry or much success in licensing their patents in this particular technology area where there may be many patents available for implementing technology and some may even be lost in the mix.  In contrast, for example, pharmaceutical patents generally may cover a specific drug and universities have seen much success in licensing such patents.

UTLP has technical experts and experienced licensing counsel that examine patents that are submitted for inclusion in the program to avoid having patents on competing technologies and to avoid standard essential patents.  Further, “in the event that a UTLP patent is deemed a standards-essential patent (SEP) subject to a standards development organization’s licensing commitment, the [UTLP] Board will approve a sublicense to the SEP on the same terms as required by the licensing commitment (e.g., FRAND or RAND terms).”  Further, the UTLP Board “cannot approve a sublicense agreement that would discriminate among similarly situated willing sublicensees, or have the effect of putting one willing sublicensee at a competitive disadvantage in the relevant market to any other willing sublicensee.”  Further, unlike SEP patent pools considered by DOJ, this UTLP pool requires its members to exclusively license the patents to UTLP, which then is the sole source for prospective licensees to obtain a license (technically a sublicense) to the patents in the pool.

DOJ Analysis

DOJ’s analysis starts with the benefits of patent pooling of “complementary technologies” using a rule of reason approach to whether the pool’s efficiency are likely to outweigh the pool’s potential for anticompetitive effects.”  DOJ discussed potential anticompetitive effects of patent pools, particularly where they have substitute patents:

The joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants.  For example, the pooling of substitute patents may lead to price fixing of these technologies and result in higher royalties and higher goods prices than would result if the owners licensed or used their technologies independently.

DOJ also identified some “antitrust safeguards” for a patent pool that “can mitigate competitive harm”:

These safeguards include excluding substitute patents from the pool; permitting independent licensing outside the pool; making the license agreement available to all interested licensees; providing clear notice of the contents of the license; and limiting access to competitively sensitive information, such as pricing, marketing, or R&D information through the pool. … [T]he absence of one or more of these provisions would not automatically render a pool anticompetitive.

DOJ found that the UTLP was different from prior patent pools on which DOJ gave a business review letter, because those prior pools involved SEPs.  But DOJ found that provisions of the UTLP made it sufficiently similar to SEP pools that much of its prior analysis would apply to the UTLP:

In our current review, we have considered both the similarities and differences between UTLP and the prior patent pools that the Antitrust Division has reviewed, which all involved the aggregation of standards-essential patents.  UTLP’s structure differs from these prior pools in that it is not formed around an industry standard, but is aimed at aggregating technologically important, but non-essential complementary patents.  Unlike prior pools, UTLP also requires Members to commit to exclusively licensing UTLP the patents they choose to contribute.  To mitigate competitive harm, however, UTLP proposes certain safeguards aimed at alleviati8ng price fixing, tying, and foreclosure.  Consequently, much of our prior considerations of potential efficiencies and harms are applicable to our analysis of UTLP.

DOJ found that UTLP’s proposed licensing structure would provide licensing efficiencies, particularly in the physical science industries in which universities are not well situated to market and license the industry.  The UTLP licensing structure could increase licensing and use of federally funded research leading to patented inventions and also could allow universities to receive revenue that they would reinvest into further research and development.

Exclusive License to Pool

DOJ found that members granting an exclusive license to UTLP (rather than non-exclusive licenses granted for a pool of SEPs) was permissible here because UTLP invested substantially in licensing expertise and to curate the physical science patents and exclusive licensing would “prevent free riding on innovation” that is a specific concern in the context of licensing universities’ patents in the physical sciences.”  DOJ also found that the exclusive license to UTLP is balanced by the ability of a licensee to pick and chose which patents to license within the pool, unlike a pool of SEPs in which all patents in that pool need to be licensed (else the patent is not an SEP) but the pool permits independent licensing outside the jSEP pool:

Finally, we address UTLP’s argument that a non-exclusive license to a pool of complementary patents is not necessary when sublicensees can choose which patents to license within a UTLP portfolio.  Unlike standards-essential patent pools, where the license offer is only for the entire portfolio, the curated patents are not all necessary for an implementer to make its product, and thus it can pick its patents.  Although there are other benefits to non-exclusive licensing, we agree that the ability to license independently outside the pool is less critical when sublicensees have such flexibility.

Substitute Patents

DOJ found that there is good reason for patent pools to avoid substitute patents, because this risks competitive harm like price fixing.  DOJ states that under the UTLP “Substitute Patents” are defined as “any Patent that under applicable Law provides a different technical way of a licensee accomplishing the same task as another Patent contributed to [UTLP],” which is similar to how DOJ defined substitute patents for cellular technology.  DOJ found that UTLP has sufficient safeguards to keep substitute patents out of the patent pool portfolio.  UTLP counsel and technical experts will use “commercially reasonable efforts” to select patents that are not substitute patents.  Further, if patents are later found to be substitutes for each other, implementers would be granted a license on both patents but only have to pay for one.  Alternatively, a substitute patent may be licensed on terms determined independently by the university owning that patent.  Members retain the right to “negotiate and grant a separate, non-exclusive license for a substitute technology if UTLP does not negotiate the terms.”  Further, licensees do not need to license the entire portfolio and can decline to  license patents they deem substitutional.

Bundled Patent Packages and Royalty Discounts

DOJ found that UTLP’s permitting licensees to chose among a menu of patents to license rather than license all patents mitigates tying concerns that can arise from package licensing, because they do not need to commit to licensing “more technology than they need.”  UTLP also provides a royalty discount based on the number of patents a licensee chooses to license, which has administrative efficiencies and may lead to more patents being licensed.  DOJ found that “[p]ricing flexibility is important because not all implementers will require access to every patent as they would in a pool comprised of standards-essential patents.”  DOJ found that discounting in this case based on the number of patents licensed would not raise concerns about foreclosing use of competing technology, because pool contributors “do not ordinarily compete with industry, universities, or other entities in licensing their physical science patents, making foreclosure even less likely.”

Royalty Distribution

The UTLP royalty distribution to members was based in part on even distribution and in part on distribution based on patents actually licensed.  This raised a concern not found with SEP patent pools in which licensees required a license on the entire patent pool:

The Department considered whether this royalty sharing method could harm incentives for innovation because all Members [of the pool] will share in the distribution even if only some of the Members’ patents generate income in a particular case.  This issue was not present in other pools the Department has reviewed because implementers licensed the whole portfolio and had no option to take a partial pool license.

DOJ ultimately found that UTLP’s royalty distribution was not likely to harm competition or innovation because UTLP represents that its method compensate Members for significant investment in UTLP itself, the UTLP pool may increase licensing and overall royalty income for all contributors, and the increased income could be invested into further research and development by the universities (big and small).

Litigation/Enforcement

UTLP has the sole right to enforce the patents in the pool.  This may lead to increased enforcement, because universities have resource constraints and often forego enforcing their patents.  But increased enforcement alone is not anticompetitive.  Enforcement may allow appropriate compensation.  Further, contributors independently decide whether patents they contribute to the pool may be enforced by litigation.  UTLP also represents that any litigations it files will be made in good faith.  DOJ, therefore, concludes that the litigation provisions assist good faith patent enforcement and are not likely to harm competition.

Conclusion

DOJ ultimately concluded that the UTLP licensing program creates efficiencies without raising competitive harm that would lead DOJ to bring an enforcement action, but stressed that this is based on its current views limited to this particular industry:

[T]he Department finds that UTLP is likely to create licensing efficiencies and increase output by expanding access to university inventions that may be unlicensed and under-utilized.  It also may be a source of funding for additional university research and development.  In addition, the potential for competitive harm is low.  Therefore, we are not presently inclined to initiate an antitrust enforcement action against UTLP.  We note, however, that UTLP is a mechanism that addresses licensing inefficiencies and institutional challenges unique to its Members in the physical science context.  This review makes no assessment about whether this mechanism if set up in another context, or if in practice it diverges from UTLP’s stated intentions, would have similar procompetitive benefits or low potential for harm.