Does This Letter Give Us a Clue on WHO who the Original People Conspiring in the Iviewit Patent Stealing and Massive Shareholder Fraud that Followed?
No wonder MPEG LA, Toshiba, Japan - is all over the blogs on Iviewit.. they DONE BAD !!!
"" Response to Hitachi, Ltd.'s, Matsushita Electric Industrial Co., Ltd.'...and Victor Company of Japan, Ltd.'s Request for Business Review Letter
DEPARTMENT OF JUSTICE
Antitrust Division
JOEL I. KLIEN
Assistant Attorney General
Main Justice Building
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530-0001
(202) 514-2401 (202) 514-
2401 / (202) 514-6543 (f)
antitrust@justice.usdoj.gov (internet)
http://www.usdoj.gov/
(World Wide
Web)
June 10, 1999
VIA FAX
Carey R. Ramos, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Dear Mr. Ramos:
This letter is in response to your request on behalf of Hitachi, Ltd.,
Matsushita Electric Industrial Co., Ltd., Mitsubishi Electric Corporation,
Time Warner Inc., Toshiba Corporation, and Victor Company of Japan,
Ltd. (collectively, the "Licensors"), for the issuance of a business review
letter pursuant to the Department of Justice's Business Review Procedure,
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Response to Hitachi, Ltd.'s, Matsushita Electric Industrial Co., Ltd.'...and Victor Company of Japan, Ltd.'s
Request for Business Review Letter
28 C.F.R. § 50.6. You have requested a statement of the Department of
Justice's antitrust enforcement intentions with respect to a proposed
arrangement pursuant to which Toshiba will assemble and offer a package
license under the Licensors' patents that are "essential," as defined below,
to manufacturing products in compliance with the DVD-ROM and DVDVideo
formats and will distribute royalty income to the other Licensors.
I. The
DVD-ROM and DVD-Video Formats
The Standard Specifications for the DVD-ROM and DVD-Video formats
describe the physical and technical parameters for DVDs for read-onlymemory
and video applications, respectively, and "rules, conditions and
mechanisms" for player units for the two formats.(1) In either format, the
DVD has more than seven times the storage capacity of a compact disc; a
single-layer, single-sided DVD, for example, can store 4.7 billion bytes
(4.38 GB) of information including audio, video, text, and data. Employing
compression technology, a DVD-Video disc can hold a 135-minute feature
film on a single side.
The Licensors, along with a number of other producers of consumer
electronics hardware, software, or both,(2) established the Standard
Specifications.(3) These Standard Specifications appear to implicate the
intellectual property rights of numerous firms.
II. The Proposed Arrangement
A memorandum of understanding among the Licensors (the "MOU,"
attached as Exhibit 1 to your letter) sets forth the central terms of the
proposed arrangement, pursuant to which Toshiba will aggregate the
Licensors' "essential" patents and disseminate rights under them to
makers of Digital Versatile Discs (DVDs), DVD players, and DVD decoders
(4) ("DVD Products"), and distribute royalty income to the other Licensors.
The arrangement will be carried out through a group of other agreements,
including:
(1) a license that
Toshiba will receive from each other Licensor
to enable Toshiba to license users of the Standard Specifications under
that Licensor's "essential" patents (the "Authorization Agreement,"
attached as Exhibit 3);
(2) Toshiba's sublicense to makers of DVD
Products under the Licensors' patents (the "DVD Patent License," attached
as Exhibit 2);
(3) an agreement among the Licensors concerning the
retention and authority of experts to select and evaluate the patents to be
licensed (the "Expert Agreement," attached as Exhibit 4); and (4) the
"Ground Rules for Royalty Allocation" (attached as Exhibit 7), which set
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forth the formula that will determine how Toshiba will distribute royalties
among the Licensors.
(5)A. The patents to be licensed
In the MOU, the Licensors commit to license each other and third parties
to make, use and sell DVD Products under their present and future
patents that are "essential" to doing so.
(6) The Licensors agree to two separate means of carrying out this obligation. First, they agree to grant Toshiba the right to sublicense third parties under their present and future "essential" patents for these purposes, and Toshiba agrees in turn to sublicense those patents, along with its own such patents, in the DVD
Patent Licenses.
(7) Second, each Licensor agrees to "offer to license its
essential DVD patents on a non-exclusive basis to interested third-party
licensees pursuant to separate negotiations on fair, reasonable and nondiscriminatory
terms, whether or not said third-party licensees intend to
make, use and sell DVD products that are in conformity with the
Specifications."
(8)A Licensor's patent is "essential," and thus subject to the commitments in
the MOU, if it is "necessarily infringed," or "there is no realistic alternative"
to it, "in implementing the DVD Standard Specifications."
(9) Initially, each
Licensor will identify its own "essential" patents in an attachment to its
Authorization Agreement with Toshiba.
(10) Toshiba will then incorporate
those patents in a list attached to the DVD Patent License.
(11) Shortly,however, an expert individual or panel, with "full and sufficient knowledge and skill in the relevant technology,"
(12) will complete a review the patents each Licensor has designated as "essential" in order to determine whether they satisfy the MOU criteria.
(13).MOU, ¶ 8; Expert Agreement, preamble.
(14) At that time, any patent initially designated by a Licensor for inclusion
in the DVD Patent License that the expert determines is not "essential" will
be excluded from subsequent DVD Patent Licenses, although current
licensees will have the option to retain it in their existing licenses.
(15)The expert will repeat this comprehensive review of all the patents in the
DVD Patent License portfolio every four years.
(16) In between the quadrennial reviews, the proposed program also provides a mechanism by which the expert may review individual patents whose essentiality comes
into question. If a Licensor comes to a good faith conclusion that a
licensed patent is not "essential," and provides a reasonable basis for that
belief, the expert will re-examine the patent.(17) If the expert concludes
that the patent is not "essential," the patent will be excluded from the
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DVD Patent License.
(18)The agreement provides that the expert's determinations are "conclusive
and non-appealable," although the expert must submit a report explaining
any decision that a patent was not "essential."
(19) Compensation will be at the expert's "standard hourly rates."(20) Each Licensor will bear the cost of the expert's review of its patents; the Licensors will share costs attributable to all of them, such as time spent reviewing the DVD Standard
Specifications.(21) The expert, although retained by the Licensors and
selected by a majority vote among them, will not have an economic
affiliation with any individual Licensor.(22) A majority of the Licensors may
remove the expert for failure or inability to perform the duties set forth in
the Expert Agreement "in a professional, competent, reliable or timely
manner."
(23) Although the proposed licensing program currently includes the patents of
only the Licensors, it is open to any owner of an "essential" patent willing
to license on the program's terms and conditions.
(24) B. The joint licensing arrangement In the Authorization Agreement, each Licensor grants Toshiba the nonexclusive right to grant:
(1) sublicenses, "substantially on the terms contained in the form of the DVD Patent License," on its "essential" patents to third parties to "make, have made, use, sell or otherwise dispose of DVD Products";
(25) and (2) releases to the same third parties from liability for pre-license infringement of the licensed patents.
(26)Toshiba assumes the obligation to grant such sublicenses and releases "to
all interested third party licensees,"(27) to collect royalties from licensees,
and to distribute royalty income to other Licensors.
(28) Consistent with the MOU, the Authorization Agreement preserves the
Licensors' right to license their "essential" patents independently for any
application.
(29) While the Licensors agree to provide each other with
notification of "infringement [of the portfolio patents] or other misuse or
unauthorized use" and to cooperate "in taking such steps as may be
reasonably necessary to prevent any such unauthorized uses,"
(30) each Licensor remains "solely responsible" for enforcing its own patent rights
against infringement.
(31) The Authorization Agreement requires Toshiba to charge royalties of $.075
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per DVD Disc and 4% of the net sales price of DVD players and DVD
decoders, with a minimum royalty of $4.00 per player or decoder.(32) It
provides that these royalty levels will remain unchanged by the addition of
any new members to the pool, unless a failure to raise royalties "would
cause a significant problem in maintaining or expanding the licensing
program."
(33)After deducting its licensing-administrator fee, Toshiba will distribute the
remaining royalties among the Licensors pursuant to an agreed allocation
formula set forth in the Ground Rules for Royalty Allocation.
(34).MOU, ¶ 8;Expert Agreement, preamble.
(35) This formula takes into account how often a Licensor's "essential" patents are infringed by either manufacture or sale of licensees' products, the age of the patents, and, in the case of patents "essential" to disc standards, whether the Licensor's patents relate to optional or mandatory features of the standard.
(36) Pursuant to the expert's quadrennial review of the portfolio, the formula also takes into account the elimination of patents from the portfolio, whether due to
expiration, the departure of a Licensor from the joint licensing program, or
the expert's determination that a patent is no longer "essential," and the
addition of new "essential" patents.
(37) Until the first allocation pursuant to the formula is calculated, Toshiba will distribute royalties equally among the Licensors;
(38) thereafter, Toshiba will distribute royalties in accordance with the formula, adjusting distributions so as retroactively to make the total distributions during the initial two-year period conform to the formula.
(39) Each Licensor may retain an independent accountant to audit
Toshiba's licensing activities up to twice a year.
(40)Toshiba will sublicense the Licensors' patents through a single DVD Patent
License, which will convey to licensees a non-exclusive, non-transferable
license under the licensed patents to "make, have made, use, sell, and
otherwise dispose of DVD Products" in exchange for the aforementioned
royalties.
(41) As contemplated in the Authorization Agreement, the DVD Patent License will also release licensees from liability for any infringement of the licensed patents prior to the effective date of the license.
(42) The license will inform the licensee of the specific patents being licensed,
(43)and will state that the licensee may choose instead to license the patents
separately from the individual Licensors on "fair, reasonable and nondiscriminatory
terms, whether or not Licensee intends to manufacture and/
or sell DVD Products in conformity with the DVD Standard
Specifications."
(44) A most-favored-nations clause will entitle the licensee to opt for any more favorable royalties that Toshiba agrees to with any other licensee, if the licensee is willing to agree to "any additional benefits http://www.justice.gov/atr/public/busreview/2485.htm (5 of 19) [7/9/2010 6:41:46 AM]
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to Licensor that may be included among the terms and conditions
corresponding to such royalty rates."
(45)The licensee's only grantback obligation covers any "essential" patents it
may own or control during the term of the license. Each licensee agrees to
grant non-exclusive licenses on such patents, on "fair, reasonable and nondiscriminatory terms," to the Licensors, their affiliates, and all other
licensees of the pool.
(46) Disputes between the licensee and any Licensor over what constitutes "fair and reasonable terms and conditions" for the license are subject to arbitration by an expert "jointly appointed and paid" by the parties to the dispute.
(47) The failure to grant such a license to a Licensor, followed by an infringement suit against the Licensor under that "essential" patent, subjects the licensee to termination of the DVD Patent License with respect to that Licensor's "essential" patents.
(48) The DVD Patent License will run until December 31, 2007, and renew
automatically for 5-year terms thereafter unless the licensee provides 60
days' notice of its intent not to renew.
(49) Notwithstanding that, the license will terminate on the expiration of the last of the licensed patents to expire.
(50) Toshiba may terminate the license in the event of the licensee's bankruptcy,
(51) and either party may terminate the license on
30 days' notice for a breach that is not remedied within 30 days after
notice of the breach.
(52) During the term of the license, Toshiba will have the right to have an
independent auditor review the licensee's books "with respect to sales,
other transfers and royalties."
(53) Pursuant to the MOU, Toshiba will erect
internal firewalls to protect competitively sensitive information, such as
sales volume and selling prices of particular DVD Product models, that it
receives from licensees.
(54) Toshiba's internal procedures for protecting the confidentiality of this information will prohibit Toshiba licensing and accounting personnel who receive confidential licensee information from disclosing that information to any unauthorized person, whether or not that person is a Toshiba employee.
(55) Toshiba will implement these procedures in part through confidentiality agreements it will enter into with its licensing and accounting employees who are authorized to receive confidential licensee information.
(56)III. Analysis 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
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Response to Hitachi, Ltd.'s, Matsushita Electric Industrial Co., Ltd.'...and Victor Company of Japan, Ltd.'s Request for Business Review Letter proposed licensing program must examine both the pool's expected competitive benefits and its potential restraints on competition.
The potential benefit of a patent pool is that it "may provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation."(57) At the same time, "some patent pools can restrict competition, whether among intellectual property rights within the pool or downstream products incorporating the pooled patents or in innovation among parties to the pool."
(58) Accordingly, the following analysis addresses (1) whether the proposed licensing program here at issue is likely to integrate complementary patent rights and (2), if so, whether the resulting competitive benefits are likely to be outweighed by competitive harm posed by other aspects of the program.
A fundamental premise of the following analysis is that the patents to be licensed are valid. While this is a legitimate presumption with any patent,
(59) "[a] Licensing scheme premised on invalid or expired intellectual
property rights will not withstand antitrust scrutiny."
(60) Unaccompanied by legitimate intellectual property rights, restrictions on licensors or licensees are highly likely to be anticompetitive. None of the information that you have provided us, however, warrants abandonment of the
presumption of validity as to any of the patents to be licensed.
In particular, although Article 4.1 of the DVD Patent License explicitly
disavows any warranty of validity,(61) a final determination of a licensed
patent's invalidity by a competent court will lead to the patent's exclusion
from the DVD Patent License.
(62) This provision should ensure that this pool is unlikely to foist invalid patents upon users of the Standard Specifications. However, should the Department subsequently receive information that undercuts this conclusion, its enforcement intentions as to the proposed arrangement might be very different from those
expressed below.
A. Integration of Complementary Patent Rights
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. A pool that
served that purpose "would raise serious competitive concerns."
(63) In combining such substitute patents, the pool could serve as a price-fixing
mechanism, ultimately raising the price of products and services that
utilize the pooled patents.
If, on the other hand, the pool were to bring
together complementary patent rights, it could be "an efficient and
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procompetitive method of disseminating those rights to would-be
users."
(64) By reducing what would otherwise be six licensing transactions
to one, the pool would reduce transactions costs for Licensors and
licensees alike. By ensuring that each Licensor's patents will not be
blocked by those of the other five, the pool would enhance the value of all
six Licensors' patents.
One way to ensure that the proposed pool will integrate only
complementary patent rights is to limit the pool to patents that are
essential to compliance with the Standard Specifications. Essential patents
by definition have no substitutes; one needs licenses to each of them in
order to comply with the standard.
At the same time, they are complementary to each other; a license to one essential patent is more valuable if the licensee also has licenses to use other essential patents.
An inclusion criterion broader than "essentiality" carries with it two
anticompetitive risks, both arising from the possibility that the pool might
include patents that are substitutes for one another and not just
complements. Consider, for example, a situation in which there are several
patented methods for placing DVD-ROMs into packaging -- each a useful
complement to DVD-ROM manufacturing technology, but not essential to
the standard. A DVD-ROM maker would need to license only one of them;
they would be substitutes for each other.
Inclusion in the pool of two or more such patents would risk turning the pool into a price-fixing mechanism. Inclusion in the pool of only one of the competing nonessential patents, which the pool would convey along with the essential
patents, could in certain cases unreasonably foreclose the non-included
competing patents from use by manufacturers; because the manufacturers would obtain a license to the one patent with the pool,they might choose not to license any of the competing patents, even if they otherwise would regard the competitive patents as superior. Limiting a pool to essential patents ensures that neither of these concerns will arise; rivalry is foreclosed neither among patents within the pool nor
between patents in the pool and patents outside it.
From the information you have provided us, it appears reasonably likely
that the pool will combine only complementary patents for which there are
no substitutes for the purpose of compliance with the Standard
Specifications.
To be sure, the definition of "essential" contained in the
MOU and the Authorization Agreement introduces some uncertainty.
By asking the expert to identify not only those patents that are literally
essential to compliance with the DVD-ROM and DVD-Video standards, but
also those for which there is no "realistic" alternative, the definition
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introduces a degree of subjectivity into the selection process. Based on
your representations, however, it appears that the expert will interpret
"realistic" to mean economically feasible.
So long as the patent expert applies this criterion scrupulously and independently, it is reasonable to expect that the Portfolio will combine only complementary patent rights, and not limit competition between them and other patent rights for
purposes of the licensed applications.(65) If, however, the expert over time
interprets "realistic" more broadly, so as to include patents for which
economically feasible alternatives exist, there would be serious questions
as to whether the pool might injure competition by including such
substitutes.
(66) The retention of the expert by the Licensors creates some initial concern
about the expert's ability to apply the essentiality criterion entirely
independent of the Licensors. While the Licensors have agreed that the
expert must be free from any substantial business relationship with any
individual Licensor, the Licensors as a group, to which the expert answers,
have an economic incentive to do the opposite of what they have retained
the expert to do -- to combine in the pool their competing DVD-related
patents and to foreclose others' competing patents. Without more, there
would be justifiable skepticism that the expert can be counted on to
undertake a disinterested review of the "essentiality" of the patent rights
put forward.
However, several factors suggest that the expert should be able to identify
"essential" patents independently of the Licensors. First, the Licensors'
Expert Agreement explicitly sets forth the rules governing the expert's
review and provides that the expert's determination of essentiality is
"conclusive and non-appealable."
(67) Second, the bases for which the Licensors may dismiss the expert -- malfeasance and nonfeasance -- should insulate the expert's work from undue pressure. Third, since the expert's compensation will be based directly on time spent evaluating
patents, regardless whether a given patent is designated as "essential,"
the expert's compensation will not be affected by his or her determinations as to essentiality. Finally, the basis on which Toshiba will allocate royalties gives the Licensors an incentive to ensure that the expert does its job. The formula that will determine the royalty allocation is based on how many of each Licensor's "essential" patents are infringed.
Thus,although the formula weights the patent count with other factors, each
Licensor will benefit monetarily from the exclusion of other Licensors'
non-"essential" patents and accordingly has a strong incentive to
encourage the expert to review other Licensors' patents critically, and to
bring to the expert's attention any patents that have ceased to be
"essential." These factors suggest that it is reasonably likely that the expert will
function independently and, consequently, that the portfolio will contain
only complementary patents without foreclosing competition.
In that case,the proposed arrangement would serve the procompetitive purpose of
combining complementary technologies into a package that will be likely
to lower costs to makers of DVD-Video and DVD-ROM discs, players and
decoders. If, however, these factors prove to be insufficient either to
ensure the expert's ability to function independently and objectively or to
ensure that the pool will contain only "essential" patents, the
Department's conclusions as to the proposed arrangement might be very
different.
B. Foreclosure of Competition in Related Markets
As mentioned above, the Licensors are competitors in markets vertically
related to the licensed technology -- not only in "downstream" markets
such as the manufacture of DVD discs and players, but also in the creation
of content that is incorporated in DVD discs. Consequently, the question
arises whether the pool is likely to impede competition in any of those
markets, not only between any Licensor and licensees or other third
parties, but also among the Licensors themselves.
Based on what you have told us, the proposed licensing program does not
appear to have any such anticompetitive potential in the markets in which
the licensed technology will be used. First, the agreed royalty is
sufficiently small relative to the total costs of manufacture that it is
unlikely to enable collusion among sellers of DVD discs, decoders or
players. Second, the proposed program should enhance rather than limit
access to the Licensors' "essential" patents. Because Toshiba, the joint
licensor, must license on a non-discriminatory basis to all interested
parties, it cannot impose disadvantageous terms on competitors, let alone
refuse to license to them altogether.
(68) Third, the extent of Toshiba's access to proprietary licensee information, either through information provided directly to its licensing employees or through audits conducted by independent accountants, is unlikely to afford it anticompetitive access to competitively sensitive proprietary information, such as cost data.
The other Licensors' similarly limited right to an annual audit of Toshiba's conduct as joint licensor should not increase the likelihood of collusion.
Nor does there seem to be any facet of the proposed program that would facilitate collusion or dampen competition among the Licensors in thecreation of content for software.
C. Effect on Innovation
The proposed licensing program would require Licensors and licensees
alike to agree to license to each other not only their present "essential"
patents, but also any ones they obtain in the future.
(69) The procompetitive benefits of such a requirement are clear. It ensures that no
party to the pool will be able to benefit from the pool while blocking other
parties from utilizing the Standard Specifications.
Further, by bringing other "essential" patents into the portfolio, the requirement lowers licensees' costs in assembling the patent rights they need to comply with
the Standard Specifications. And while it is unclear whether any future
"essential" patent will emerge absent an amendment of the Standard Specifications, the requirement as to future patents reduces the possibility that a future patent will block licensees from practicing a technology in which they may already have invested in heavily. Reducing this uncertainty may be a significant benefit to licensees.
The question arises, nevertheless, whether these procompetitive benefits
are likely to be outweighed by significant discouragement of research and
development relating to the Standard Specifications.
(70) Licensors and licensees might have greater incentives to invest in research and
development in the field were they free to refuse to license other users of
the Standard Specifications under any patent that resulted.
Several considerations suggest that the magnitude of any disincentive
resulting from this requirement will not be sufficiently great to outweigh
the requirement's procompetitive benefits. In the first place, the scope of
the requirement is commensurate with that of the license: It covers only
"essential" patents.
The requirement does not prevent Licensors and
licensees from capturing whatever value they create in non-"essential"
technology.
(71) Second, the pool's royalty-allocation formula makes each
Licensor's share of the royalties a function of the number of its patents
that are infringed, and newer patents are weighted more heavily than
older ones; so each Licensor benefits from introducing new "essential"
patents into the pool.
Third, licensees can choose between licensing their own "essential" patents through the pool, pursuant to the same royaltyallocation rules, and licensing them separately, on "fair, reasonable, and non-discriminatory terms," to each Licensor and pool licensee that requests a license. Finally, licensees, and to a lesser extent, Licensors, remain free to capture whatever value such new patents may have
outside the standard.(72) On balance, on the basis of the information
before us, it appears unlikely that the requirement the program will
impose on Licensors and licensees concerning "essential" patents not
already licensed by the pool will be anticompetitive.
In the current circumstances, the proposed term of the license to
December 31, 2007, does not pose significant concerns as to innovation
competition.
The DVD Patent License authorizes only a limited field of use
for the licensed technology -- the manufacture and sale of products that
comply with the Standard Specifications -- and does not limit licensees'
other options. Licensees may seek presently unknown methods of
complying with these standards, or they may support altogether different
product standards.
IV. Conclusion
Based on the information and assurances that you have provided us, it
appears that the proposed arrangement is likely to combine
complementary patent rights, thereby lowering the costs of manufacturers
that need access to them in order to produce discs, players and decoders
in conformity with the DVD-Video and DVD-ROM formats. Your assurances
and information indicate that the proposed arrangement is not likely to
impede competition, either in the licensing or development of technology
for use in making DVDs, players, or decoders or for other products that
conform to alternative formats, or in the markets in which DVDs, players
and decoders compete.
For these reasons, the Department is not presently inclined to initiate
antitrust enforcement action against the conduct you have described. This
letter, however, expresses the Department's current enforcement
intention.
In accordance with our normal practices, the Department
reserves the right to bring an enforcement action in the future if the actual
operation of the proposed conduct proves to be anticompetitive in purpose
or effect.
This statement is made in accordance with the Department's Business
Review Procedure,28 C.F.R. § 50.6. Pursuant to its terms, your business review request and this letter will be made publicly available immediately, and any supporting data will be made publicly available within 30 days of the date of this letter, unless you request that part of the material be withheld in accordance with Paragraph 10(c) of the Business Review Procedure.
Sincerely,
Joel I. Klein
JIK/cjk
cc:Stuart Robinowitz, Esq.
Time Warner Inc.
Jeffrey L. Kessler, Esq.
Weil, Gotshal & Manges LLP
Carl W. Schwarz, Esq.
McDermott, Will & Emery
FOOTNOTES
1. DVD Specifications for Read-Only Disc (the "Standard Specifications"),
Part 3: Video Specifications, Version 1.1 (December 1997), § 3.3.1. DVDVideo,
which is described in Part 3 of the Standard Specifications, appears
to be a subunit of the DVD-ROM format.
The DVD-Video specifications state that DVD-Video discs shall comply with Parts 1 and 2 of the Standard Specifications, which describe the disc's physical and file-system characteristics, respectively. Id., § 1.1.
2.
Other than Time Warner, each of the Licensors is a leading
manufacturer of consumer electronics equipment, such as DVD players.
Several Licensors produce DVD discs and content for such discs.
3. In addition to the Licensors, the publishers of the DVD-ROM
Specifications are Philips Electronics, N.V., Pioneer Electronic Corp., Sony
Corp., and Thomson Multimedia. While your letter includes information
concerning the process by which these formats were established, you
have not requested, and this letter does not offer, an opinion on any
competitive issues presented by the development of these formats or any
other DVD-related format.
4. A DVD decoder, implemented in computer hardware or software,
receives and decodes transmissions from a DVD-ROM player over a
computer system bus. DVD Patent License, Art. 1.7.
5. You have designated all the documents attached to your letter, except
the DVD Patent License, as confidential.
6. MOU, ¶ 2; Authorization Agreement, §§ 1.3, 1.8.
7. MOU, ¶ 3.
8. Id.
9. MOU, ¶ 4. These commitments do not, however, apply to patents
"related to" the Content Scramble System or "MPEG-2 data compression
patents that may be applicable to DVD Products." Id. We understand
"MPEG-2 data compression patents" to refer to patents that are essential
to compliance with the MPEG-2 standard.
10. MOU, ¶ 8.
11. Id.
12. Expert Agreement, § 2.3.
13. MOU, ¶ 8. The expert's final review of the Licensors' patents is due to
be completed by June 30, 1999.
Although the MOU suggests that the expert will not only "determine which patents are essential"
14. but also "evaluate the patents for the purpose of determining a fair
and equitable allocation of royalties," id., the allocation will be based on a
mechanical application of an agreed formula set forth in the Ground Rules
for Royalty Allocation, discussed below, rather than on a subjective
evaluation by the expert. The Licensors have already retained experts with
regard to U.S. and Japanese patents.
These experts will also review patents granted in countries other than the U.S. and Japan and will designate as "essential" those that contain a claim "substantially the same as, or broader than, that of an essential
U.S. or Japanese patent." Ground
Rules for Royalty Allocation, ¶ 5. Because the experts will be performing
the same function, I will refer to them in the singular.
15. MOU, ¶ 4. Although the MOU does not state explicitly that the expert's
determination of essentiality is binding on the Licensors, the Expert
Agreement does. Expert Agreement, § 2.3.
16. MOU, ¶ 8; Expert Agreement, § 2.4.
17. Expert Agreement, § 2.5, as will be adopted as set forth in your letter
to Christopher J. Kelly dated June 4, 1999, 2.
18. MOU, ¶ 4.1, as will be adopted as set forth in your letter of June 4,
1999, 3.
19. Expert Agreement, § 2.3.
20. Expert Agreement, § 3.1.
21. Id. Similarly, when a Licensor challenges the essentiality of a patent in
the DVD Patent License, it will bear the cost of the expert's review of the
patent unless the expert upholds the challenge, in which case the
patentee Licensor will bear the cost. Expert Agreement, § 3.1, as will be
amended as set forth in your letter of June 4, 1999, 2.
22. MOU, ¶ 8.
23. Expert Agreement, § 1.4, as will be amended as set forth in your letter
of June 4, 1999, 2.
24. MOU, ¶¶ 2, 6.
25. Authorization Agreement, § 2.1.
26. Id.
27. Authorization Agreement, § 3.1.
28. Authorization Agreement, § 4.1. In compensation for acting as the
licensing administrator, Toshiba will collect a fee of three percent of the
annual royalties it collects up to $100 million, and two percent of any
royalties above that amount. Authorization Agreement, § 5.1. It will share
these fees with Hitachi, Ltd., which will be Toshiba's licensing agent in
Asia (except for Japan), Australia, and the Middle East, and Matsushita,
which will be its licensing agent in the Western Hemisphere. 3-Party MOU,
attached as Exhibit 6, Arts. 3.1, 7.1.
29. Authorization Agreement, § 2.3.
30. Authorization Agreement, § 3.2.
31. Authorization Agreement, § 3.3.
32. Authorization Agreement, § 5.1.
33. Id.
34. Authorization Agreement, § 4.2. Thus, although the MOU suggests
that the expert will have a dual role, not only to "determine which patents
are essential,"
35. but also to "evaluate the patents for the purpose of determining a fair
and equitable allocation of royalties," the allocation will be based on a
mechanical application of the Ground Rules for Royalty Allocation rather
than on a subjective evaluation by the expert.
36. Ground Rules for Royalty Allocation.
37. MOU, ¶ 8; Authorization Agreement, § 4.2.3.
38. Authorization Agreement, § 4.3.
39. Authorization Agreement, § 4.4.
40. Authorization Agreement, § 4.9.
41. DVD Patent License, Art. 2.1.
42. DVD Patent License, Art. 2.2. This release is not gratuitous; it is in
exchange for a payment based on the royalty rates. DVD Patent License,
Exhibit 3, Art. 2.1.
43. DVD Patent License, Exhibit 2.
44. DVD Patent License, Art. 2.3.
45. DVD Patent License, Art. 6.1. The most-favored-nations clause does
not apply to terms arising from dispute settlements, court orders, and
individual Licensors' independent licenses to third parties. Id.
46. DVD Patent License, Art. 3.1.
47. Id. The license does not indicate who will determine whether or not
the patent in question is in fact "essential" within the meaning of the DVD
Patent License.
48. DVD Patent License, Art. 3.2.
49. DVD Patent License, Art. 5.1.
50. DVD Patent License, Art. 5.2.
51. DVD Patent License, Art. 5.4.
52. DVD Patent License, Art. 5.3.
53. DVD Patent License, Exhibit 3, Art. 2.8.
54. MOU, ¶ 13. The MOU provides further that the Licensors may have
access to information "as to the names of licensees, categories and model
numbers of licensed products, total quantities of sales of such products
and total royalties." Id.
55. Procedures for Protecting the Confidentiality of Information Provided
by DVD Patent Licensing Program Licensees, attached as Exhibit 8, ¶ 4.
56. DVD Licensing Program: Authorized Employee Confidentiality
Agreement, attached as Exhibit 9.
57. Department of Justice-Federal Trade Commission, Antitrust
Guidelines for the Licensing of Intellectual Property ("IP
Guidelines"), § 5.5.
58. Letter from Joel I. Klein to Gerrard [sic] R. Beeney, Esq., June 26,
1997 ("MPEG-2 Business Review Letter"), 9 (citing IP Guidelines, § 5.5).
59. See 35 U.S.C. § 282 (in an action for infringement, "[a] patent shall
be presumed valid"); Genentech, Inc. v. Novo Nordisk, A/S, 108 F.3d
1361, 1364 n.2 (Fed. Cir. 1997).
60. MPEG-2 Business Review Letter, 9 (citing United States v.
Pilkington plc, 1994 Trade Cas. (CCH) ¶ 70,842 (D. Ariz. 1994)).
61. DVD Patent License, Art. 4.1.
62. MOU, ¶ 4.1, as will be amended as set forth in your letter of June 4,
1999, 3.
63.
MPEG-2 Business Review Letter, 9.
64. Id.
65. Whether any of the licensed patents might be substitutes for each
other in connection with some other application is not an issue here
because the license here will neither authorize nor impede the use of the
licensed patents for any other application.
66. This is not to say that the Department would challenge such an
arrangement without taking into account the possibility that it creates
significant efficiencies. IP Guidelines, § 5.3. Moreover, the availability of
licenses on the Licensors' "essential" patents independently of the pool
might ameliorate some of the potential competitive harm.
67. Expert Agreement, § 2.3.
68. Although the meaning of "reasonable" is open to various
interpretations, each Licensor's commitment to license its "essential"
patents independently of the pool on reasonable, non-discriminatory terms
may further ensure that the proposed program facilitates, rather than
forecloses, access.
69. MOU, Article 1.3; DVD Patent License, Art. 3.1.
70. See IP Guidelines, § 5.6.
71.
DVD Patent License, Art. 3.1. Licensees' freedom to exploit their
non-"essential" patents will be meaningful only to the extent that the
determination whether a licensee's patent is "essential" is made
independently of the Licensors and other licensees, who may earnestly
wish to practice a DVD-related patent that, although attractive, is not
essential to the standard.
The documents you have provided do not
indicate who would determine "essentiality" in this instance. If it is to be
the expert, this points up again the need to ensure the expert's
independence.
72. The Licensors have limited their own options somewhat, having
committed to making their "essential" patents available on reasonable,
non-discriminatory terms independently of the pool license, even for
applications that do not comply with the Standard Specifications.
MOU, ¶3. Licensees, in contrast, remain free to decide how best to exploit their
"essential" patents outside of the Standard Specifications. See DVD Patent
License, Art. 3.1; MOU, ¶4.
http://www.justice.gov/atr/public/busreview/2485.htm (19 of 19) [7/9/2010 6:41:46 AM]"
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