A complaint filed against Koninklijke Philips Electronics, N.V. for a violation of the Fair Trade Law in its patent licensing

Chinese Taipei

Case:

Key Words:

CD-R, technology licensing

Reference:

Fair Trade Commission Decision of April 20, 2006 (the 754th Commissioners’ Meeting), Disposition Kung Ch’u Tzu No. 095045

Industry:

Data Storage Media Units Manufacturing and Reproducing (2640)

Relevant Laws:

Article 24 of the Fair Trade Law

Summary:

1. This case originated from a complaint filed against Koninklijke Philips Electronics, N.V. (hereinafter referred to as Philips) for violating the Fair Trade Law in its new licensing agreement. In March 2001, Philips introduced a new licensing agreement for the CD-R patented technology and unilaterally determined the licensing agreement terms. The manners of conduct that have been accused of violating the Fair Trade Law are as such:
1. Determination of royalty: In the new licensing agreement, Philips requested every licensee to pay US$ 0.06 or US$ 0.045 to Philips for every CD-R produced. The ex-factory price for each CD-R was approximately US$ 0.18. Therefore, the cost of royalty ranged between 25% and 33% of the ex-factory price, and beyond the industry’s standards. Hence, it is deemed that Philips has acquired huge improper profits and restricted the resale price of CD-R. Furthermore, the prohibition of preferential treatment clause was deleted in the licensing agreement at issue. Such deletion has thus permitted Philips to give favorable terms of royalty to the larger scale CD-R companies. It is deemed that Philips has adopted differential treatments on different companies.
2. Obtaining confidential information: In the licensing agreement at issue, Philips requested the licensees to provide a manufacturing equipment list. The said list must include the model, serial number, supplier and installation date of each machine and facility used in the manufacturing of CD-R. In addition, the licensees were also requested to provide a written sales report within 30 days after the end of each season. The buyer’s identification and its trademark were recorded in the report according to its country and product model. However, there was no direct relation between the aforementioned request and the collection of royalty. Furthermore, Philips also sold OBM CD-R. Hence, there is a doubt that Philips has taken advantage of its market position and compelled the licensees to provide information irrelevant to the licensing.
3. Grant–back provisions: Philips demanded the licensees, within ten years from the agreements become effective, must grant back any rights that they currently possess or rights related to manufacturing, sales or other disposition that they will acquire from any country in the future to Philips. In addition to Philips, such grant-back must be given to the affiliated companies of Philips, and any third party that signs licensing agreement for the relevant licensed product with Philips or its affiliated companies. Therefore, it is deemed that the said “Grant-back provisions” has impeded the wills of the licensees to research, develop and innovate, hence causing anti-competition effect.
2. Findings of investigation:
1. From the product and technology standpoints, there were no logical substitution relations between CD-R and CD-RW, DVD, MD, DCC. Therefore, the technology market in this case referred to “the technology required for producing CD-R discs”.
2. Concerning the technology required for manufacturing CD-R discs, Philips and Sony have formulated specifications jointly. In order to produce CD-R that meets the specifications of “Orange Book”, the local companies must first acquire patent licensing from Philips, Sony and Taiyo Yuden. Therefore, Philips does not have ability to eliminate competition in the said relevant market, and thus not a monopoly enterprise defined in the Fair Trade Law.
3. Grounds for disposition:

   Although Philips does not have monopolistic position in “the market of technology required for producing CD-R discs”, but Philips and Sony have formulated specifications jointly and hence the local companies that want to produce CD-R meets the specifications of “Orange Book” still have to first acquire patent licensing from Philips. Therefore, the licensees, in the process of acquiring CD-R patent licensing agreements actually do not have other alternative sources of licensing besides Philips. Relative to the licensees, Philips indeed is in the advantage position. However, Philips has requested the licensees to provide “manufacturing equipment list” and “written sales report” in the licensing agreements. The contents of the said list and report included the licensees’ production capacities, utilization rates, outputs; clients name list, and trading volume with individual client, the operating cost of licensees and important information concerning market competition, but such information has nothing to do with the computation of royalty charges. Therefore, it is difficult to conclude that the provision of the aforementioned information requested by Philips is a rational business goal to guarantee the royalty collection. Philips is the holder of the patent at issue, Philips also grants licensing to other manufacturers to produce CD-R discs and engages in the sales of OBM CD-R discs. Thus, Philips is a competitor to the licensees in the market of CD-R products. Philips takes advantage of its dominant position in the process of signing CD-R patent licensing agreement to acquire the material information of the licensees’ operating costs. Therefore, such conduct may caused unfair competition between the complainant and the respondent in CD-R product market and violates the provision of Article 24 of the Fair Trade Law. Hence, a fine of NT$ 6 million is imposed on Philips.

Summarized by: Lai, Shu-Ching;
Supervised by: Liou, Chi-Jung

Appendix:
Koninklijke Philips Electronics, N.V.
Uniform Invoice Number: Nil