Patents and Competition

My recent column on the Canadian Competition Bureau’s new Intellectual Property Enforcement Guidelines, patent pooling, PAEs and standard-essential-patents as applied to tech patents, was published earlier this month.

The article, Competition and Tech Patents, was originally published on Slaw on May 9, 2016. It is reproduced below:

Competition and Tech Patents

On March 31st, the Canadian Competition Bureau released newIntellectual Property Enforcement Guidelines (IPEGs). These guidelines directed to explain the Bureau’s approach to enforcing competition law with respect to intellectual property, particularly patents.

Patents are an exclusionary right; the owner has the right to exclude others from practicing the claimed invention (see Section 42 of the Patent Act) as an incentive for innovation and new technology. This exclusivity can, in some circumstances, run counter to the goals of competition law to maintain vigorous rivalry among firms. The courts have looked to “something more” than merely exercising or transferring intellectual property rights to trigger the application of competition law. The Federal Court of Appeal said:

Where, however, there is evidence of something more than the mere exercise of patent rights that may affect competition in the relevant market, Molnlycke does not purport to completely preclude application of the Competition Act. (Apotex Inc. v. Eli Lilly and Co., 2004 FCA 232 at para 15)

Much of the commentary on these new guidelines have focused on their application to pharmaceuticals. The guidelines include examples of how the Competition Bureau will approach settlements in pharmaceutical litigation including applications under Patented Medicine (Notice of Compliance) Regulations. It also includes a section on product switching, where a product covered by a soon-to-expire patent is phased out and replaced with a new patented product. These situations involve the complicated interactions between the Patented Medicine (Notice of Compliance) Regulations, including damages under Section 8 of those regulations, as well as provincial substitution policies for pharmaceutical products.

Outside the pharmaceutical industry, the guidelines likely will have the most application to the high-tech industry. Some interesting scenarios discussed in the Guidelines include standard essential patents, patent pooling and patent assertion entities.

Patent Pooling

Patent pools are arrangements where several firms license or assign patents to a common entity which in term licenses the entire pool of patents to interested parties, typically on a non-exclusive non-discriminatory basis. This arrangement can allow companies to more easily access a core technology without requiring arranging separate licenses for each of the patents.

In some circumstances though, agreements between competing companies to pool or cross-license patents can be considered anti-competitive. The Guidelines identifies some of these potential concerns:

Despite their potential benefits, patent pools may also raise competition concerns. If the patented technologies inside the pool are substitutes then the pool can be a mechanism for the pool members to restrict competition between themselves and increase royalty rates above levels that would have existed in a competitive market. Alternatively, if a patented technology inside the pool is a substitute for a technology outside the pool, the pool could be used as a bundling mechanism to effectively foreclose the outside technology. Other potential competition concerns are that a pool’s members may discriminate among licensees or use the pool to share confidential business information so as to reduce competition in a downstream market.

Patent Assertion Entities

A patent assertion entity (PAE) is an entity that asserts patents as its primarily activity and does not otherwise practice the patented invention. In some cases, a PAE can aggressively pursue licenses for its patents using means that may become anti-competitive. There are many reasons a PAE may not be practicing its patents including because it is directed purely to research, such as a university or its operating business was not successful or it purchased the patent from an innovator.

The Guidelines suggest that the Bureau may look closely at the representations made by a PAE while pursing settlements to ensure they are true and not misleading. The examples mentioned in the Guidelines include threatening legal action but lacking any intention to commence legal proceedings or misrepresenting the extent of other settlements. In such cases, the Bureau may seek administrative penalties or if the misrepresentations were knowingly made, criminal penalties.

The Bureau also notes that the assignment of a patent from a practicing company to a PAE for the purposes of enforcement is unlikely to raise issues under the Competition Act.

Standard Essential Patents

Standard essential patents are patents that are typically identified by participants in an organization developing a new technical standard. For example, the Institute of Electrical and Electronics Engineers (IEEE) may identify such patents when developing a new wireless protocol. Such standards can promote inter-operability and therefore competition. A well-known example is the 802.11 standard used by computers and smartphones for Wi-Fi access.

Patents associated with standards can also be anti-competitive if they are used to block access to the standard. The Guidelines describe some of these concerns:

Once a standard is selected, however, irreversible investments may lock firms into the standard, making switching prohibitively costly or impractical. High switching costs may create market power for the owners of patents that cover the standard due to the inability of firms using the standard to easily substitute other technologies to avoid high royalties.

The Bureau identifies some concerns with standards organizations if the standard is actually an improper agreement between competitors to fix prices and hinder innovation.

The Bureau’s more significant concerns relate to entities that participate in the standard setting process but then renege on their obligations to disclose and license their patents. The issue of injunctions for patents incorporated into standards is especially important because injunctions can trap users of the standard into paying higher royalties. The Guidelines includes some of the factors where it may be appropriate to seek an injunction for a standard essential patent:

  • when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator;
  • when a prospective licensee refuses to engage in licensing negotiations;
  • when a prospective licensee constructively refuses to negotiate (for example, by insisting on terms clearly outside the bounds of what could be considered to be FRAND terms) or
  • when a prospective licensee has no ability to pay damages (for example, a firm that is in bankruptcy).

The Bureau considers that reneging on a commitment to a standards organization and seeking maximum royalties would be considered ‘something more’ than the mere exercise of patent rights for the purposes of investigating and exercising penalties under the competition act.

The exercise of intellectual property exclusionary rights in connection with a standard essential patent has been more fully debated in the United States. For example, in 2013, the United States Trade Representative vetoed an International Trade Commission (ITC) decision blocking importation of certain iPhones based on a standard essential patent.

What’s next?

I am not aware any reported decisions directly relating to these issues in Canada yet but with the increased focus on this area by the Competition Bureau and in the United States, there will likely be more in the future. In 2002, the Federal Court struck allegations that because a standard essential patents was being asserted and had not been disclosed during the standard setting process, the plaintiff was estopped from seeking damages – see Telefonaktiebolaget LM Ericsson v. Harris Canada Inc., 2002 FCT 599.

For companies involved in standard setting organizations or being threatened with patent infringement for implementing a standard should look closely at these guidelines. Those who may receive demand letters from Patent Assertion Entities with misleading demands should review the demands carefully and raised any concerns with the Bureau if appropriate.

Recently, several proceedings have been initiated relating to technology standards. Wi-LAN sued Telus, Bell and Rogers earlier this year on three patents relating to the 4G LTE standard for wireless communication but these proceedings are only in the pleadings stage. These proceedings will be very interesting to watch as they work their way through the system.