DOJ Business Advisory letter 99-2 of 6/10/99 concerning Video Information Computers Patent Licensing
Video Information Computers Patent Licensing
Hitachi, Ltd./Matsushita Electric Industrial Co., Ltd./Mitsubishi Electric Corp./Time Warner, Inc./Toshiba Corp./Victor Company of Japan, Ltd.
Facts: Hitachi, Ltd., Matsushita Electric Industrial Company, Ltd., Mitsubishi Electric Corporation, Time Warner, Inc., Toshiba Corporation, and Victor Company of Japan, Ltd. (collectively, the "Licensors") propose to enter into an arrangement whereby Toshiba will assemble and offer a package license under the Licensors' patents that are "essential" to manufacturing products in compliance with the DVD-ROM and DVD-Video Standard Specifications and will distribute royalty income to the other Licensors. The Specifications, which were established by the Licensors and four other firms to define the Digital Versatile Disc for video and ROM applications, including rules, conditions, and mechanisms for players to read the discs and convert them into images for screen display, implicate the intellectual property rights of a number of firms, including the Licensors. Through the license from Toshiba, makers of discs and players that comply with the Standard Specifications will be able to license the essential patents of all six Licensors in a single transaction. The license will tell potential licensees exactly what patents are in the portfolio and that a license on each portfolio patent is available independently from its owner. The Licensors have retained patent experts to review their patents to ensure that the license conveys rights only to patents that licensees will need in order to comply with the Standard Specifications.
Response: As with any aggregation of patent rights for the purpose of joint package licensing, commonly known as a patent pool, an antitrust analysis of this proposed licensing program must examine both the pool's expected competitive benefits and its potential competitive hazards. In particular, one expects that a patent pool may provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. At the same time, some patent pools can restrict competition, whether among intellectual property rights within the pool, downstream products incorporating the pooled patents, or in innovation among parties to the pool.
First, the patents to be licensed must be assumed to be valid, since a licensing scheme premised on invalid or expired intellectual property rights is highly likely to be anticompetitive. Second, if the Licensors owned patent rights that could be licensed and used in competition with each other, they might have an economic incentive to utilize a patent pool to eliminate competition among them. If, on the other hand, the pool brings together complementary patent rights, it could be an efficient and procompetitive method of disseminating those rights to would-be users. Limiting the pool to patents that are essential to compliance with the Standard Specifications will ensure that the proposed pool will integrate only complementary patent rights since essential patents, by definition, have no substitutes; one needs licenses to each of them in order to comply with the Specifications. Given the small size of the royalty relative to the total cost of manufacture of DVD discs, decoders, or players, and the fact that the proposed program should enhance rather than limit access to the Licensors' essential patents, it is unlikely that competition, either between the Licensors themselves or with third parties, in downstream markets will be restricted. Nor does there seem to be any facet of the proposed program that would facilitate collusion or dampen competition among the Licensors in the creation of content for software, or raise significant concerns as to innovation competition. The Department has no present intention to challenge the proposal.
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