Patent markets: an opportunity for technology diffusion and FRAND licensing?

Author:Chuffart-Finsterwald, Stephanie
Position:Fair, reasonable and non-discriminatory

INTRODUCTION I. LICENSING AND TECHNOLOGY DIFFUSION A. Why Patent Licensing Enhances Technology Diffusion B. Standard Setting and FRAND Terms II. THE EMERGENCE OF A PATENTS MARKET III. A MARKET ILLUSTRATION: IPXI AND UNIT LICENSE RIGHTS IV. PATENT MARKETS: TOOLS TOWARDS ENHANCED TECHNOLOGY DIFFUSION AND FULFILLMENT OF FRAND LICENSING COMMITMENTS? A. Features Favoring Technology Diffusion 1. Time Efficiency 2. Transparent Access 3. Equitable and Non-Exclusive Access to Technologies 4. Fair Pricing and Reduction of Legal Costs in Licensing Process 5. Inclusion of Patented Technology or Application Necessary to a Unit in ULR Contracts B. Market-Established Prices as Criteria in Interpreting FRAND Licensing Terms CONCLUSION INTRODUCTION

The increased complexity of technological features and a growing pace of innovation are forcing the innovation industry to adopt new research and development (R&D) strategies. Indeed, the production of most of today's technologies requires a variety of machines and processes that are significantly more diverse than those available in any single firm. In addition, the nature of firms is changing and as firms have a tendency to become smaller, there is a greater need for access to technologies that small firms cannot develop themselves. An increase in technology diffusion is also needed to address global challenges such as climate change and human health. For these reasons, there is a need for strategic alliances and innovative licensing agreements among industries. (1) At a time when technology diffusion is thus more needed than ever before, new solutions are required. However, in the absence of efficient forums, licensors, and licensees miss important opportunities in valuing intellectual property assets and diffusing technology. The emergence of patent markets where patents have become tradable assets can therefore present a unique opportunity, as these markets appear to be a relevant way of getting around the anti-commons.

Furthermore, patent markets are of interest in the current fair, reasonable, and non-discriminatory (FRAND) licensing debate. (2) As flagged by the recent amicus curiae submission presented by the Federal Trade Commission (FTC) in Apple v. Motorola, (3) FRAND licensing commitments are central to the fight against anticompetitive practices in the much needed, but highly complex, standard setting processes. In our interconnected society ruled by technology intensive devices, industry has come together to institute standard-setting organizations (SSOs), which are industry groups establishing technical models, rules, and principles authoritative in a particular industry. These organizations have become increasingly important and promote innovation as well as interoperability of products. (4) Standard setting and standard-essential patents can nevertheless be problematic from an antitrust point of view. This issue has been receiving a lot of attention lately, notably because of numerous litigations in the high-tech industry. Illustrative of these debates surrounding standard setting processes is the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights' hearing on "Standard Essential Patent Disputes and Antitrust Law" held on July 30, 2013. (5) Conscious of the competition issues caused by standard-essential patents, SSOs have adopted rules that control the disclosure and licensing of such patents. One of these rules is the requirement of FRAND licensing commitments by standard-essential patent owners. (6) These commitments have however proved difficult to enforce. Innovative implementation tools are therefore needed and patent markets may be relevant in establishing FRAND terms.

The aim of this article is to analyze the legal opportunities presented by patent markets for technology diffusion, as well as the role of patent markets as tools in establishing and fulfilling FRAND terms. As an illustration, the article will focus on the system established by Intellectual Property Exchange International Inc. (IPXI), an intellectual property platform already carrying 55,000 patents from Ford, Sony America, Philips, Com-Pac, MetaPower and Hewlett-Packard among others. The article focuses primarily on patents and patent markets because they are most central to technology diffusion and FRAND licensing issues. Patent licensing activities are therefore at the core of our analysis. As put forth by distinguished commentators, "[l]icensing [is] ... the predominant transaction model in the information economy." (7) The reason for this success appears to be a combination of increasing needs for technologies from the demand side, and the recognition of the flexible solutions offered by licensing activities. Nevertheless, other intellectual property rights can be of relevance in the technology diffusion and FRAND discussions. Therefore intellectual property rights will be addressed when appropriate.

The first section of this article explains how licensing can be used to enhance technology diffusion, and then introduce the process of standard setting as well as the concept of FRAND licensing terms. The second section, presents how the intellectual property market emerged and recount the milestones in the market building process. The third section then introduces one of the most sophisticated intellectual property market platforms at the present: the IPXI. Finally, this article assesses whether patent markets can be relevant as an incentive towards enhanced technology diffusion and as helpful criteria in defining and meeting FRAND licensing terms.


    1. Why Patent Licensing Enhances Technology Diffusion

      Patents appear as both an incentive and a barrier to technology diffusion. As stated by Rudolph Peritz, "patent protection is the private incentive necessary to spur invention and at the same time the social cost that prevents its optimal use." (8) Patents are legal and financial barriers to technology diffusion because they slow the rate of access to technologies, complicate the access process in general, and make technologies more expensive. Indeed, proprietary products undoubtedly cost more than generic ones. Moreover, patents can be barriers to accessing technologies as right holders may simply refuse to license a technology to competing manufacturers or to those in certain countries.

      On the other hand, one of the central arguments put forward by proponents of strong intellectual property rights regimes, and underlying the adoption of the World Trade Organization's (WTO's) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), is that such approaches not only increase innovation by firms, but also favor increased diffusion of technologies. (9) It is important to distinguish between the role of intellectual property rights as incentives to innovation, and their role in enhancing technology diffusion. Although it falls outside of the scope of the present study to analyze this distinction, we will briefly present both incentives separately.

      The justification behind the exclusive rights granted by patents and other intellectual property rights is precisely to provide a private incentive in favor of innovation. The U.S. Constitution indeed provides that Congress has the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." (10) As underlined by the U.S. Department of Justice's Antitrust Division in a recent statement,

      [p]atents, provided for in Article I of the U.S. Constitution have long played a central role in promoting innovation and economic growth by encouraging individuals and companies to apply their knowledge, take risks and invest in research and development to create a new product or process. (11) Since development of new technologies is largely led by private corporations driven by market incentives, intellectual property regimes appear to be incentives in favor of technology innovation as they reward inventors' efforts and investments. As stated by Mark Lemley, "[i]ntellectual creations are public goods that are much easier and cheaper to copy than they are to produce in the first place. Absent some form of exclusive right over inventions, no one (or not enough people) will bother to innovate." (12) Moreover, the protection offered by patents encourages firms and inventors to put products on the market and is, therefore, an incentive to design around the patented products. Some commentators have furthermore underlined that stronger intellectual property rights may facilitate the development of specialized technology markets.13 The existence of intellectual property regimes is hence necessary to secure and boost research and innovation.

      The role of patents in diffusing technology stems from both the disclosure requirement in patent applications and any licensing agreements that may be subsequently entered into. The patenting of an invention indeed requires that the inventor disclose its invention in its application to the Patent and Trademark Office (PTO), (14) thus revealing major technological information on the invention. This information will be precious in order to avoid R&D overlaps and to direct R&D in the industry. Moreover, licenses gran licensees the right to use intellectual property content otherwise protected by exclusive rights. More precisely, a license "conveys the patentee's permission to enjoy exclusively or non-exclusively some or all of the statutory exclusionary rights under [patent law] for a limited time and purpose, within a geographic area, and in certain distribution channel[s]." (15) Licensing contracts should also contain all the relevant knowledge to allow the licensee to work with the technology, thus diffusing additional technological information. A licensing operation may further involve technical...

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