Tying and Bundling Involving Standard-Essential Patents

Abstract

Competition agencies around the world, including in Canada, China, India, Japan, Korea, and the United States (at least prior to the current administration), have taken the unwarranted position that antitrust enforcement involving standard-essential patents (SEPs) upon which a patent holder has made an assurance to license on fair, reasonable, and nondiscriminatory (FRAND) terms should be subject to special rules or unique presumptions and burdens of proof. Recently, this approach has manifested itself in contentions (and in the case of the Korea Fair Trade Commission, an administrative decision) that it is somehow “unfair” (and therefore unlawful) for a SEP holder to license its patents, including both SEPs and non-SEPs, on a portfolio basis. This is because, as the contention goes, the SEP holder is either unfairly forcing implementers to license more than they desire or evading its FRAND assurance through package licensing. This article explains that neither of these are economically sound theories of harm, particularly in jurisdictions like the United States that do not punish the mere extraction of monopoly profits, but instead focus on the unlawful acquisition or maintenance of monopoly power. We set forth the mainstream alternative theories of harm — namely leveraging and monopoly maintenance — and apply them to common portfolio licensing practices of SEP holders, particularly those in the SEP-intensive telecommunications sector. We also address allegations that a vertically-integrated SEP holder’s decision to license at the end-user device level amounts to de facto bundling, relying on a recent paper by Dr. Jorge Padilla and Koren W. Wong-Ervin. In that paper, the authors show through a simple model that a vertically integrated firm’s de facto bundling of a component and its SEP portfolio will not result in foreclosure of the component market if: (i) the vertically integrated SEP holder does not assert its patents at the component level, and (ii) it licenses its SEP portfolio to end-device manufacturers on FRAND terms irrespective of whether they source components from its own subsidiary or from the non-integrated rival.

Keywords: standard-essential patents, SEPs, tying, bundling, antitrust, leveraging, monopoly maintenance, excessive pricing, market power

JEL Classification: K21, L4, L5