Cablegate: Us/Taiwan Hold First Anti-Trust Working Group

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

1. Summary: Representatives from the US Department of
Justice and Fair Trade Commission and representatives from
the Taiwan Fair Trade Commission held a Digital Video
Conference (DVC) March 16. This was the first meeting under
the auspices of the U.S./Taiwan Anti-trust Working Group.
The TFTC presented a short discussion of patent pooling in
Taiwan and then outlined their decision making process in a
recent case. USDOJ and FTC introduced the U.S. business
review and advisory opinion process then discussed U.S.
procedures in a U.S. patent pooling case. In addition to the
first meeting of the Anti-trust Working Group, this was
TFTC's first DVC. TFTC representatives were very pleased
with the discussion, wished the DVC could have been extended
and are eagerly anticipating the next working group meeting.
End Summary.

2. The first meeting of the US/Taiwan Anti-trust working
group was via DVC on the morning of March 16 Taipei time.
USDOJ Stuart Chemtob led the U.S. delegation, accompanied by
USDOJ Special Counsel for Intellectual Property Frances
Marshall, Attorneys Hill Wellford and Jennifer Dixton, and
Economist Suzanne Majewski, FTC Associate Director Alden
Abbott and Asia-Pacific Counsel Deirdre Shanahan. US Deputy
Assistant Attorney General Makan Delrahim also attended
briefly. The Taiwan FTC delegation was headed by Deputy
Chairman Shin Chih-jeng, accompanied by several members of
his staff.

Discussing Patent Pooling Guidelines

3. Introductions were followed by a TFTC presentation on
patent pooling regulations in Taiwan. Patent pools are
created by rightsholders as a means of simplifying licensing
procedures for manufacturers who would like to use the
patented technology. Relevant patents are included in a
"pool", the licensee then pays a royalty fee to license all
patents in the pool, rather than negotiating separate
agreements for each patent. TFTC's staff, Ms. Chen Ying-ju
discussed the TFTC's methodology for determining whether
patent pools were anti-competitive. Taiwan has published
guidelines based on international and domestic case law to
determine how to handle patent pooling cases. These
guidelines include eleven examples of permissible patent
pools and direct investigators to consider reasonableness of
the pool, the market power of the licensor, the relative
market position of the parties, whether the patents are
substitutable or complimentary, and whether the arrangement
will discourage innovation.

4. The TFTC then introduced its first patent pool case,
decided in 2004. Philips, Sony, and Taiyo Yuden created a
patent pool for CD-Recordable (CD-R) production. Taiwan has
a large CD-R manufacturing industry that licenses technology
from the patent pool administered by Philips. In 1999, the
Taiwan CD-R industry brought a case to the TFTC alleging that
Philips had set the royalty rate too high, refused to
negotiate a lower rate, and required licensees to provide
confidential and irrelevant business data as a requirement of

licensing. After a lengthy investigation, the TFTC found in
2004 that Philips was in violation of Taiwan's anti-trust law
and authorized compulsory licensing of CD-R patents. The
TFTC based its decision on several factors, including
Philips' unwillingness to adjust the royalty fee, the
inability of licensees to choose substitutes, and an improper
agreement between the patent-holders to set prices, share
royalties and not compete. The TFTC also found that some of
the patents in the pool were irrelevant or substitutable, not
complementary patents.

5. USDOJ officials, questions focused on how the TFTC
determined that the patent pool was anti-competitive,
including a discussion of the differences between US and
Taiwan procedures for gauging anti-competitive behavior.
Rather than looking at price or lack of competition, the
USDOJ directs its attention to whether patents included in
the pool are substitutable or complementary. Pooling
complementary patents can encourage greater competition and
lower prices for consumers by eliminating inefficiencies and
lowering transaction costs. The USDOJ does not believe that
inclusion of substitutable patents in a pool automatically
makes it anti-competitive, but such pools invite closer
scrutiny to determine whether innovation is suppressed. The
TFTC representatives agreed that further discussions of how
to define complementality and substitutability would be
useful. The USDOJ was interested to see TFTC's evidence
pertaining to the royalty sharing agreement, noting that the
US has not investigated this type of case and could benefit
from Taiwan's experience.

USDOJ Offers Experience in Business Reviews

6. The USDOJ/USFTC presentation discussed their business
review and advisory opinion processes. Companies can apply
to the DOJ in advance of any action to ask for a review of
their proposed conduct. DOJ will then analyze the proposal
and recommend changes if needed, to ensure the planned course
of action does not violate the law. DOJ noted that even if
the company does not follow DOJ recommendations, there is
still no presumption of anti-competitive behavior. The FTC
advisory opinion is similar in that it applies only to
prospective actions. There are two types of advisory
opinions. Commission-issued opinions are agreed upon by the
whole commission and are legally binding. Staff-issued
opinions are not legally binding, however, there has never
been a case where a staff opinion was overruled.
7. The FTC then introduced its experience in a patent pool
case. In the Visix-Summit case, two competing laser surgical
equipment manufacturers pooled their patents and set a fixed
price for all licensees. Visix and Summit argued that their
patents were complementary, but the FTC found they were
substitutable and the pool artificially increased prices and
restricted innovation. In this case, the FTC employed
independent experts to help determine whether the patents in
the pool were technically essential and whether there were
feasible alternatives. In response to TFTC questions about
whether the high fixed royalty rate influenced the decision,
the FTC argued that the royalty rate should not be a
determining factor, rather it is the availability of
substitutes that should control the decision. The FTC noted
that setting standards and royalty fees often seek a
"reasonable and non-discriminatory" standard, but it is
impossible to project what will be considered reasonable as
technology develops and matures.

Positive Reactions, Looking for Future Meetings
============================================= ==

8. In a brief closing, both the USDOJ and TFTC expressed
their satisfaction with the exchange of views and professed a
clearer understanding of the factors considered by their
counterparts in determining what comprises anti-competitive
practice. During the post-meeting wrap-up, TFTC officials
told AIT/T that they very pleased with the discussion, would
have liked the opportunity to extend the discussion beyond
the two hour time frame and hope next time to include more
TFTC staff. Attendees noted that the Philips case was
controversial, even within the TFTC, and were appreciative of
the opportunity to hear the views of US experts about key
aspects of the case. The TFTC officials hoped the next
meeting of the working group could be scheduled as soon as
possible, and suggested further discussions about patent
pooling might be useful.

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