A complaint alleged that the CD product patent licensing practices in Chinese Taipei by Koninklijke Philips Electronics, N.V. (the Netherlands), Sony Corporation (Japan), and Taiyo-Yuden Co., Ltd. (Japan) were in violation of the Fair Trade Law
Case:
A complaint alleged that the CD product patent licensing practices in Chinese Taipei by Koninklijke Philips Electronics, N.V. (the Netherlands), Sony Corporation (Japan), and Taiyo-Yuden Co., Ltd. (Japan) were in violation of the Fair Trade Law
Key Words:
CD-R, patent licensing, royalties, abuse of market position
Reference:
Fair Trade Commission Decision of January 11, 2001 (the 480th Commissioners' Meeting); Disposition (90) Kung Ch'u Tzu No. 021
Industry:
Information Storage Media Production Industry (2640)
Relevant Laws:
Summary:
1. A complaint alleged that Koninklijke Philips Electronics, N.V. (the Netherlands), Sony Corporation (Japan), and Taiyo-Yuden Co., Ltd. (Japan) (the respondents) respectively owned a number of patents with specifications related to those of CD-R products. To facilitate patent licensing to CD-R producers around the world, the respondents adopted a joint licensing arrangement whereby Sony and Taiyo-Yuden first licensed their patent rights to Philips, and then Philips bundled the rights together for licensing to other companies. The practices called into question by the complaint were as follows: (1) the joint licensing practices of the respondents were in violation of provisions of the Fair Trade Law (FTL) regarding concerted actions; (2) the method employed by the respondents that set the amount of royalties was in violation of provisions of the FTL regarding price setting by monopolistic enterprises; (3) the respondents' acts of joint licensing caused such important trading information as patent terms and contents to be unclear and was in violation of provisions of the FTL regarding abuse of market position by a monopolistic enterprise. 2. Investigations by the Fair Trade Commission (FTC) were as follows: (1) Considering the competition relations among the respondents found that, although Sony and Taiyo-Yuden licensed Philips to handle matters pertaining to the negotiating and entering into of patent licensing agreements, Sony and Taiyo-Yuden actually had considerable influence and decision-making authority over the contents of the licensing agreements and royalties. Their consent was essential for using related patents. Consequently there were certainly competition relations among the respondents. With respect to the licensing of the CD-R patent technology in this case, the respondents adopted a joint licensing or "patent pool" arrangement in which a consensus was reached on royalties and others. Hence this joint licensing practice certainly constituted a concerted action under Article 7 of the FTL. (2) With respect to the setting of royalties, the FTC found that the respondents possessed an overwhelming advantage due to the patent technologies owned by them and the joint licensing practices among them. They were thus able to exclude other competitors from participating in competition, which was in violation of Article 5(2) of the FTL. The FTC also found that the licensing agreement in issue stipulated royalties to be paid as "3 % of the net selling price with a minimum of 10 Yen [per licensed product]." Furthermore, because CD-R prices had fallen substantially at the time, 10 Yen was obviously the larger figure. Hence royalties was up to at least 20 or 30 % of the selling prices. On several occasions the local firms requested the royalties to be reduced, but the respondents always refused. (3) Concerning the refusal of providing important information such as licensing agreements and others during the process of negotiating patent licensing with CD-R producers on behalf of the three patent holders, Philips, who represented the three above-mentioned companies, granted nearly 200 patents to an individual firm. Philips did not provide individual patent licensing offer; instead, it merely listed the numbers and names of the patents at issue in the U.S. and Japan. Obviously Philips failed to disclose whether any corresponding patents existed in other countries and the valid terms of the foreign patents. Philips also failed to state concretely the patents that individual firms might be able to use in specific products and the scopes of such patents. However, Philips required local firms signing the licensing agreement and paying royalties. 3. Grounds for Disposition (1) The respondents owned every important patent on CD-R technology patents; all manufacture and sale of CD-R products in the world had to obtain CD-R technology patents from the respondents. By joint agreement Sony and Taiyo Yuden gave up their individual licensing right, which forced potential licensees having no opportunity to choose trading partner but turning to Philips to obtain patent. Moreover, the respondents, by agreeing on the method of calculating royalties, blocked potential licensees' opportunity to pursue more favorable terms. Therefore, the respondents' agreement apparently affected the market function of supplying and demanding for CD-R patent. Because of concerted act's restricting market competition, impeding the functioning of price mechanisms and damaging consumer rights and interests the FTL imposes a relatively strict prohibition on concerted action. On the other hand, the FTL allows special exemptions under the circumstances enumerated in Article 14 where the action is beneficial to the overall economy, is in the public interest, and has been approved by the FTC. The respondents failed to apply to the FTC for such an exemption, and therefore were found to be in violation of Article 14, provision of which prohibits concerted act. (2) Article 10(1)(ii) of the FTL provides that monopolistic enterprises shall not improperly set, maintain or change the price for goods or the remuneration for services. The joint licensing agreement among the respondents enabled them to obtain an overwhelming position in the CD-R patent licensing market; hence they constitute monopolistic enterprises under Article 5 of the FTL. Although supply and demand in the market had changed, the respondents, who maintained their method of calculating royalties, and failed to effectively respond to changes in supply and demand in the market, were in violation of Article 10(1)(ii) of the FTL, provisions of which prohibit enterprises' monopolistic acts. (3) Article 10(1)(iv) of the FTL provides that monopolistic enterprises shall not abuse their market position by other acts. The joint licensing agreement among the respondents enabled them to obtain an overwhelming position in the CD-R patent licensing market; hence they constituted monopolies as defined in Article 5 of the FTL. On behalf of Sony and Taiyo Yuden, Philips signed the contested licensing agreements with the licensed manufacturers. In negotiating the royalty arrangements, Philips, together with the names of Sony and Taiyo Yuden, took advantage of its dominant position in the CD-R technology patent licensing market. While refusing to provide the licensees with important trading information such as the specific content, scopes, or valid periods of the patents, Philips demanded that the licensees signed the contested licensing agreement, and sought payment of royalties. Under the patent licensing arrangement, it also demanded that the licensees withdraw any invalidation actions against the patents at issue. Relying on its dominant position Philips obviously compelled the licensees to accept the licensing agreement. Its actions were an abuse of its position in the market for patent licensing of the technology at issue, and violated Article 10(1)(iv) of the FTL. (4) After considering the unlawful acts' impact on the functioning of market mechanisms of the technology patent licensing markets and associated products at issue, as well as the respondents' motives for the violation, benefits obtained thereby, and considerable business scales and prominent market standing, the FTC imposed administrative fines of NT$ 8 million on Philips, NT$ 4 million on Sony, and NT$ 2 million on Taiyo Yuden, and ordered the companies to immediately cease the illegal practices pursuant to the fore part of Article 41 of the FTL. Summarized by Chen, Ying-Ju; Supervised by Shih, Gin-Tsun