Patent Assertion Entities in Merger Review: Issues of ...

Patent Assertion Entities in Merger Review: Issues of Characterization and Remedies Andy C. M. Chen+

I. Introduction Patent Assertion Entities (PAEs) have received a substantial amount of attention from antitrust and intellectual property (IP) scholars. A significant portion of this rapidly growing literature highlights the competitive harms caused by the strategic aggregation and aggressive assertion of patent rights by PAEs. Jeruss, Feldman, and Walker have described them as having become the “modern villains” of the patent system.1 However, a more interesting question from the perspective of competition law is whether these alleged harms are attributable to the identity of being a PAE itself, and if they would challenge the existing antitrust analytical framework. After all, the study of competitive harms from the strategic utilization of property rights could be anchored in the broadly defined “raising rivals’ cost” (RRC) theory, which has been widely discussed in academia.2 Treating PAEs as an emerging topic for antitrust law requires showing how the status of being a PAE increases the probability of competitive harms caused by an action as compared with when the same conduct is undertaken by non-PAEs. Closely related to this proposition is the issue of characterization: when are patent holders qualified as PAEs? Few studies currently exist that attend to this question, and the ones that do tend to provide answers that are conceptual instead of operational. In 2014, the Taiwan Fair Trade Commission (TFTC) approved the sale by Nokia of its mobile-phone division to Microsoft. To ensure that the “overall economic benefits” from the merger would outweigh its “disinterests of restraining competition,”3 the TFTC imposed two behavioral remedies on Microsoft and Nokia, respectively. The TFTC prohibited Microsoft from engaging in undue pricing decisions or discriminatory treatment when licensing its patents to manufacture mobile devices. The TFTC +

SJD, Northwestern University; Professor of Law and Department Chair, Chung Yuan Christian University, Taiwan. 1 Sara Jeruss, Robin Feldman, & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities, 11 DUKE L. & TECH. REV. 357, 358 (2012). 2 See Steven C. Salop & David T. Scheffman, Raising Rivals’ Costs, 73 AM. ECON. REV. 267 (1983); Thomas G. Krattenmaker & Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to Achieve Power over Price, 96 YALE L. J. 209 (1986); Krattenmaker & Salop, Competition and Cooperation in the Market for Exclusionary Rights, 76 AM. ECON. REV. 109 (1986). 3 Article 12 of the Taiwan Fair Trade Act (TFTA). 1

elevated the commitment that Nokia made to the standard-setting organizations (SSOs) to charge “Fair, Reasonable, and Nondiscriminatory” (FRAND) royalties for Nokia’s standard essential patents (SEPs) in post-sale licensing arrangements as a remedy conditional to its approval. The TFTC also required Nokia to ensure that transferees of its SEPs would follow the FRAND commitment. Central to the TFTC’s concern was that Nokia may become a PAE and would focus predominantly on charging excessively high royalties that harm consumers and exclude competitors; Nokia would no longer need to be cross-licensed for the SEPs held by other competing device manufacturers to produce its own mobile phone, and would be relieved from the pressure of retaliation by competitors with increased cross-licensing royalties. However, Nokia would still engage in research and development (R&D) activities in the wireless telecommunications market after making sales. The Nokia transaction also does not symbolize typical “IP privateering” that involves a profit-sharing structure between a patent operating company and a pure PAE acting as a proxy for the operating company to jointly and indirectly monetize the patent right. Without providing a benchmark for defining PAEs, the TFTC’s decision and the FRAND remedy is questionable. In this paper, we use the case of Nokia v. TFTC (Nokia) to discuss the issue of PAE characterization that arises from merger reviews on asset disaggregation by SEPs owners. We present first the facts and decisions of this case, followed by an analysis of the problems arising from the TFTC decision and the decision by the High Administrative Court. In particular, we attempt to show that the TFTC failed to provide persuasive legal and economic evidence to substantiate their view of PAE transformation and the necessity of imposing an existing binding legal obligation as merger remedies. Lastly, we offer our thoughts on the possibility of establishing specific criteria for characterizing PAEs and their potential limits. The theoretical and practical problems associated with the FRAND remedy in Nokia and the derivable policy implications from our study are discussed at the end of this paper.

II. Nokia v. TFTC: Facts and Decisions4 In September 2013, Nokia and Microsoft entered into a sale agreement (Agreement) in which Microsoft agreed to purchase most of the services and assets from Nokia’s device and service division, including the design team, promotional supporting services, and design patents. According to the Agreement, Nokia promised to grant the 10-year non-exclusive licensing of its patents to Microsoft and Microsoft would have the right to renew this licensing indefinitely. In reciprocity, Microsoft also 4

This section is a summary of the opinions of the TFTC (Kong-Ge-Gzi No. 103001) and the Taipei High Administrative Court (103-Sue-Ze No.1858 & 1874). 2

agreed to cross-license its patents for digital-map and positioning services (i.e., the HERE service). The Agreement met the definition of “merger” under the then Article 6 of the Taiwan Fair Trade Act (TFTA). In addition, because Microsoft commanded more than one-fourth of the market share for personal computer operating systems, and because the business turnover of Microsoft and Nokia exceeded the threshold for filing pre-merger notifications under the then Article 11 of the TFTA, the application for approval of this merger was filed to the TFTC by the merging parties in November 2013. 1. The TFTC decision The then Article 12 of the TFTA required the TFTC to safeguard post-merger market competition by ensuring that the “overall economic benefits” would outweigh the “disinterests of restraining competition” from the merger under review. With this requirement, the TFTC recognized numerous efficiencies that could be implemented after the merger was performed. For example, the TFTC proposed that the Agreement would enable Microsoft to acquire the urgently needed technologies for hardware designs, management of supply chains, demand predictions, and to increase its sale outlets. By integrating software and hardware designs, Microsoft could improve its cost structure, accelerate its innovation, and combine its brand and marketing activities. The TFTC also acknowledged that the transaction would allow Microsoft to increase the install base of Windows phones and attract more application software developers to design software compatible with these phones. This would facilitate the emergence of a new competing operation system for mobile devices other than those available only for Android and Apple devices. Regardless of these pro-competitive potentials, the TFTC still held that the merger would create the types of competitive harms that could not be addressed without imposing remedies in parallel with its decision for approval. The TFTC was particularly concerned that the merger would relieve Nokia from the need to negotiate with its competitors when cross-licensing patents indispensable for manufacturing Nokia’s mobile devices. Without the merger, Nokia would be more reserved in attempting to raise patent royalties for fear of triggering retaliation from its licensees by also increasing their cross-licensing royalties to Nokia. However, this countervailing power of “mutually assured destruction” (MAD) would disappear after the merger. Because Nokia no longer engaged in manufacturing mobile devices, it did not need to account for retaliation when deciding whether to increase its royalties. Based on this prediction, the TFTC argued that Nokia would have a greater incentive to charge higher royalties for its primary sources of revenue from its SEPs and would ultimately become a PAE. Accordingly, the TFTC imposed the FRAND commitment that Nokia had made to the SSOs as a remedy for its approval. Because Nokia could 3

easily evade the commitment by transferring its SEPs to a third party, the TFTC further imposed on Nokia the obligation to ensure that the FRAND commitment would continue to be followed by the transferees of its SEPs. 2. The decision of the Taipei High Administrative Court Nokia appealed to the Taipei High Administrative Court with the following two justifications. 5 First, the TFTC’s decision on Nokia becoming a PAE was unpersuasively reasoned. It relied purely on theoretical deductions without providing empirical and impartial evidence to support its findings. In particular, the TFTC relied on the testimony of market competitors and other stakeholders, as well as on predictions of market developments by industry regulators to establish potential anticompetitive effects from the merger. Nokia maintained that the evidence was not balanced against the company’s counterevidence, which, according to Nokia, had a higher probative value than those of the TFTC. Second, Nokia alleged that the FRAND remedy was error-prone and unnecessary. Because the TFTC failed to support its findings with persuasive evidence for Nokia’s incentive to become a PAE and the potential harms the merger would present, it was highly questionable that the TFTC could construct a remedy that would meet the principle of proportionality. Taking into account the merger’s potential pro-competitive effects as recognized by the TFTC, the risk that the remedy would unnecessarily deter future innovation was high. Although it may have been justifiable for the TFTC to perform preventive measures in avoiding potential post-merger harms, Nokia’s incentive to charge excessive royalties would have already been contained by the subsequent disciplinary actions had it violated its FRAND commitment to the SSOs. The Taipei Administrative High Court found for the TFTC. It indicated that under Article 12 of the TFTA, it is within the discretion of the TFTC to decide the probability of competitive harms associated with a merger, as well as the types of remedies that would most effectively control these harms. The court further argued that the dynamic and uncertain nature of competition in the hi-tech market makes it unlikely that the TFTC could present clear and specific evidence to support its decisions. However, the court proceeded to ambiguously refute the arguments that the merger review was a process of “predicting” future market impacts. It denied Nokia’s challenge of the TFTC decision as unsupported by convincing evidence, and thus was

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In addition, Nokia also challenged the TFTC for lacking the authority to review how the merger would change Nokia’s post-merger competitive incentive and business model because Nokia was the “seller” and not the “acquirer” in the Agreement; therefore, the transaction would weaken rather than strengthen Nokia’s market dominance. Nokia contended that the scope of review should be limited to the party whose market power would be enhanced by the merger. This was also the position held by the European Union. See Case No. Comp/M.7047-Microsoft/Nokia, Commission Decision Pursuant to Article 6(1)(b) of Council Regulation No 139/2004 (hereinafter referred to as “Commission Decision”), para. 228 & 229. 4

“speculative” and a “misunderstanding of law and facts.” Based on these premises, the court accepted wholesale the TFTC’s reasoning regarding the issue of characterization and remedies. The court argued that the testimonies indicating Nokia’s propensity to become a PAE had been evaluated in its entirety by the TFTC with due care to exclude bias. The court held that the TFTC did not violate the principle of proportionality because it was within its authority to make the decision. Because Nokia had committed to the SSOs to charge FRAND royalties, the imposition of these royalties as a remedy would not add any uncertainty or hardship to the implementation by Nokia of its FRAND commitment. The court further cited the decisions by China and South Korea that imposed identical remedies on Nokia to support its arguments that the FRAND remedy was reasonable, regardless of arguments that other jurisdictions, including the United States, the European Union, Brazil, and Russia, had approved the same merger without imposing any remedies.

III. Issues of Characterization in Nokia v. TFTC The TFTC’s decision in Nokia was based on the belief that Nokia’s incentive and ability to behave like a PAE would be strengthened after Nokia sold its assets to Microsoft. As Popofsky and Laufert have indicated, the answer to this question depends on “the positions rights holders and enforcement targets occupy.” 6 As merger review requires the competition authorities to form difficult and imperfect predictions on the future market impact of a merger, it may be justifiable for a competition agency to enjoy a degree of discretion in selecting the types of preventive measures it uses to neutralize the costs incurred from misjudging an anticompetitive merger as competitively beneficial. As sympathetic as we are to the challenge that the TFTC needed to overcome in the proceedings of the merger review, we nevertheless argue below that the TFTC’s reasoning for Nokia’s transformation into a PAE is unpersuasive. In particular, the TFTC failed to present evidence capable of convincingly demonstrating that Nokia’s enhanced ability to act as a PAE would in theory also lead to a strengthened incentive to become a PAE in practice. 1. In Search of a Definition for Patent Assertion Entities Although they are increasingly important in competition law, the definition of PAEs remains unclear. Most commentators focus on the “business model” on which patent holders are based to realize the value of their patent rights. Using this approach, PAEs are firms that purchase patent rights and attempt to generate revenue by licensing to or litigating against companies who are or may be using patented technology. For 6

Mark S. Popofsky & Michael D. Laufert, Patent Assertion Entities and Antitrust: Operating Company Patent Transfers, THEANTIRUSTSOURCE at 1 (April 2013), available at www.antitrustsource.com. 5

example, the Federal Trade Commission of the United States has defined a PAE to be a business entity that uses “the business model focus[ing] on purchasing and asserting patents against manufacturers already using the technology, rather than developing and transferring technology.”7 Professor Coleen Chien offered a similar definition for which a PAE is an “entity that uses patents primarily to obtain license fees rather than to support the development or transfer of technology.” 8 Professor Carl Shapiro simplified the definition further to include companies that have a “business of asserting patents. They’re good at it. They’re trying to make the most of money, monetize those patents[.]”9 The key differentiator under the business-model approach for telling anticompetitive from legitimate patent-asserting endeavors is patent origination; namely, whether the patented technologies were purchased or created through in-house R&D capacities.10 However, commentators have also questioned the possibility and the need to provide a precise definition of PAEs for the purpose of antitrust analysis, and have argued for an effect-based approach to PAE issues. For example, Professor Shapiro indicated that the characterization of PAEs “can be a dicey exercise. Line drawing can be difficult, and an entity’s form is not determinative.”11 He further stated it more bluntly: “We don’t have a problem with trucking company as intermediary, if they are more efficient in terms of transportation services…. So we should not be focusing on the form of the entity, the PAEs. The question is, is the activity that they’re good at something that is socially valuable and beneficial?”12 This effect or tactic-based view was shared by Professor Merges who argued that “[t]rolling, to put it simply, is a matter of behavior rather than status. One can act as a troll, but it will usually not be true that one simply is a troll. The “troll line,” in other words, must be policed 7

FED. TRADE. COMM’N, THE EVOLVING IP MARKETPLACE 8 (2011), available at www.ftc.gov/os/2011/03/110307patentreport.pdf ; James Bessen & Michael J. Meurer, Patent Trolls in Public, PATENTLYO (Mar. 19, 2013), www.patentlyo.com/patent/2013/03/patent-trolls-in-public.html (describing three types of PAEs: (i) “middlemen” that acquire and assert patents (e.g., Acacia); (ii) “R&D-based” PAEs, that file patents on internal inventions (e.g., Rambus); and (iii) “salvage” PAEs, which are former operating companies that no longer practice their patents (e.g., Asure/Forgent)). 8 Colleen Chien, Patent Assertion Entities, Presentation Slides for PUBLIC WORKSHOP: PATENT ASSERTION ENTITY ACTIVITIES (December 10, 2012), available at http://www.justice.gov/atr/events/public-workshop-patent-assertion-entity-activities . 9 Carl Shapiro, Patent Assertion Entities: Effective Monetizers, Tax on Innovation, or Both? Transcript of Presentation for PUBLIC WORKSHOP: PATENT ASSERTION ENTITY ACTIVITIES 25, available at http://www.justice.gov/sites/default/files/atr/legacy/2013/07/14/290074.pdf. 10 Jiaqing “Jack” Lu, The Economics and Controversies of Nonpracticing Entities (NPEs): How NPEs and Defensive Patent Aggregators will Change the License Market (Part 1), 2012 LES NOUVELLES 55, 58 (2012). 11 Erica S. Mintzer and Suzanne Munck, The Joint U.S. Department of Justice and Federal Trade Commission Workshop on Patent Assertion Entity Activities- “Follow the Money”, 79 ANTITRUST L. J. 423, 426 (2014). 12 Shapiro, Transcript for PUBLIC WORKSHOP: PATENT ASSERTION ENTITY ACTIVITIES 27, available at https://www.ftc.gov/sites/default/files/documents/public_events/Patent%20Assertion%20Entity%20Act ivities%20Workshop%20/pae_transcript.pdf . 6

case-by-case and fact-by-fact.” 13 Popofsky and Laufert have expressed the same line-drawing concern, and particularly the determination of the scale and scope of a patent portfolio that should raise competitive concern.14 We support the non-formalistic view toward competition-law analysis and agree that market impacts from business arrangements should not be predicated upon the format of the implementing parties. However, as Professor David Scheffman reflected in his article on the accomplishments of the RRC theory, “[a] more serious limitation of the RRC analysis is that it does not provide guidance on how to distinguish cost-raising strategies from ‘competition on the merits,’ or pro-competitive strategies that shift business from rivals.”15 The application of dynamic economic theories to analyze strategic behavior in competition cases is particularly incentive-driven; for example, whether the predicted foreclosure effect will occur is frequently dependent upon the existence of a heightened motivation from the investigated party to engage in the anticompetitive conduct assumed in the analytical model. The RRC theory is thus susceptible to a double-edged-sword problem inherent in the process of assessing the probative value of evidence relating to subjective legal requirements. Using Nokia as an example, the sale of Nokia’s device and services division to Microsoft may incentivize Nokia to become more aggressive in generating revenue from licensing SEPs. However, it may also be reasonable to assert that Nokia would not only be encouraged to become more specialized in technological innovation to profit from future patents, but also be discouraged from increasing its royalties for existing patents to maintain its competitive edge from network effect. Therefore, it is insufficient for the competition authority to simply allege that it is theoretically possible that Nokia would focus predominantly on maximizing royalty revenues after a merger. It is necessary for the authority to explain why it is unlikely that Nokia would choose to be more innovative. To determine the actual incentive on the merging parties to behave as a PAE, numerous legal mechanisms are available. First, we can establish a legal standard describing the general features of a PAE and allow a final conclusion to be reached 13

Robert P. Merges, The Trouble with Trolls: Innovation, Rent-Seeking, and Patent Law Reform, 24 BERKELEY TECH. L.J. 1583, 1611 (2009). 14 Mark S. Popofsky & Michael D. Laufert, Antitrust Attacks on Patent Assertion Entities 79 ANTITRUST L. J. 445, 451(2014)( “[T]he FTC would face significant line-drawing problems: How big a portfolio is too big? What type of patent acquisition trigger the ‘safety in numbers concern’-the purchasing of patents clustered in particular industries or other types of acquisitions?”)(footnote omitted). 15 David T. Scheffman & Richard S. Higgins, Twenty Years of Raising Rivals’ Costs: History, Assessment, and Future, 12 GEORGE MASON LAW REVIEW 371, 379 (2003). This observation implies that the foreclosing effects from strategic patent exploitation by PAEs may be specific to the assumptions made by various models. See Jiaqing “Jack” Lu, The Myths and Facts of Patent Troll and Excessive Payment: Have Nonpracticing Entities (NPEs) Been Overcompensated? 47 BUS. ECON. 234, 235, 236-37 (2012) (comparing various economic models with contradicting research results regarding PAEs overcompensation.) 7

through the evaluation of competing evidence presented by the interested parties of the merger. Second, we can propose a rule detailing the specific criteria for establishing a PAE. Mergers that fail to meet these criteria would be exempted from the PAE investigation. Third, we can combine the first and second approaches to capture the benefits of each one, while containing the costs that each approach is likely to generate.16 2. Nokia and the Characterization of Privateering Patent Assertion Entities The other related characterization issue arising from Nokia is what researchers have termed “Privateering PAEs.” IP privateering refers generally to a business arrangement in which an IP operating company transfers its patents to a PAE to facilitate the assertion of patent rights held by the operating company.17 Privateering could be undertaken by the operating company to implement its anticompetitive IP strategy. Florian Mueller asserted that IP privateering is “the act of large companies feeding trolls with patents in order to maximize their patent monetization income and/or increase their competitors’ total cost of defense.” 18 For example, by transferring its SEPs to and entering into a profit-sharing agreement with a non-committing PAE for revenues generated from subsequent assertions of the rights transferred to the PAE, an operating company could thus evade its FRAND commitment to SSOs or avoid royalty stacking.19 In addition, unlike an operating company, a PAE’s ability and incentive to aggressively assert the acquired patent rights through litigations are not constrained by retaliatory countersuits from cross-licensees.20 Unlike an operating company, it is also unnecessary for a PAE to be as frequently concerned about opposition from inside the organization to bring infringement suits because rights assertion through litigation is one of the specific functions that PAEs aim to deliver.21 Accordingly, PAEs rarely need to deal with

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The “standard” approach provides enforcement agencies the discretion to consider a broader range of facts and evidence as they deem necessary for ascertaining the characterization issue. However, the approach could render the enforcement of competition law less predictable and more arbitrary. Alternatively, under the “rule” approach, merger review could become a more predictable process and is beneficial for business planning. Nevertheless, the approach will constrain the flexibility of the enforcement agencies to conduct more comprehensive reviews on facts and evidence. It concurrently may increase the probability of misjudgment. See Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L. J. 557, 568-85 (comparing the costs from using standard and rule.) 17 See Tom Ewing, Introducing the Patent Privateers, 45 INTELLECTUAL ASSET MGMT. MAG. 31, 35-36 (2011). 18 Florian Mueller, Ericsson's pseudo-sale of patents to Unwired Planet and the rampant problem of privateering, (April 21, 2015), available at http://www.fosspatents.com/2015/04/ericssons-pseudo-sale-of-patents-to.html 19 Popofsky & Laufert, supra note 6, at 5. 20 Id. at 4. 21 Michael Carrier, Patent Assertion Entities: Six Actions the Antitrust Agencies Can Take, CPI ANTITRUST CHRONICLE, January 2013, at 7 (“PAEs also produce few documents, do not face disruption to their business since ‘litigation and licensing are their business,’ and often pay lawyers on a contingency-fee basis.”(citation omitted). 8

board members or shareholders that are skeptical of the necessity of patent litigations.22 Similarly, because PAEs typically do not have customers, they do not face pressure from final customers to settle litigations against suspicious infringing suppliers to preserve the benefits that customers might derive from transacting with multiple suppliers. 23 Finally, operating companies typically face reputational constraints on patent monetization that are absent for PAEs. A reputation for being aggressive in asserting patent rights would reduce the probability for the operating company’s technology to be included in standards. 24 In contrast, PAEs are not frequently repeated players in SSOs. These differences between PAEs and operating companies make PAEs an ideal proxy for operating companies to indirectly exploit their patent rights. The concern expressed in Nokia regarding destabilization of the equilibrium maintained by MAD consideration attests that the TFTC was substantially influenced by the “Privateering PAE” hypothesis. However, the comparison is problematic. Current literature on anticompetitive IP privateering typically assumes the presence of various key characteristics of IP privateering. 25 The corporate structure of the privateer and the profit-sharing structure in the privateering scheme are two characteristics crucial for the validity of the hypothesis. In most studies, including those that specifically implicated Nokia as being engaged in anticompetitive IP privateering,26 a separate privateer is involved who was either independent of or wholly or partially controlled by the operating company.27 Although it may not be universally true, an operating company acting as a privateering PAE would put itself at risk of retailing countermeasures by targeted firms unless the operating company and the targeted firms operate in different industries. 28 Furthermore, effective exclusionary privateering often involves a profit-sharing structure that describes how profits from patent assertions are to be allocated between the privateer and the operating company. The structure could be arranged as the sharing of royalties and/or litigation costs, or as debt repayment from the privateer.29 In this context, the Nokia transaction is dissimilar to the type of PAE privateering that would raise antitrust 22

Danielle Williams & Steven Gardner, Basic Framework for Effective Responses to Patent Trolls, NORTH CAROLINA BAR ASS’N, at 1, Apr. 2006, available at http://www.kilpatricktownsend.com/~/media/Files/articles/BasicFrameworkforEffectiveResponsestoPat entTrolls.ashx 23 Id. 24 Popofsky & Laufert, supra note 6, at 4. 25 See Tom Ewing, Indirect Exploitation of Intellectual Property Rights by Corporations and Investors, 4 HASTINGS SCI. & TECH. L. J. 1, 49 (2012). 26 See e.g. Ewing, id. at 55-73 (discussing various types of strategic IP monetization which all involve the participation of a separate PAE.); Popofsky & Laufert , supra note 6, at 7-8 (describing how Nokia and Microsoft had jointly outsourced to MOSAID, a PAE, to facilitate the assertion of Nokia’s SEPs.) 27 Id., at 53-54. 28 Id., at 54. 29 Id. 9

concerns. Microsoft would not be a typical or “pure” type of PAE before or after the merger, nor was there credible evidence indicating the existence of a profit-sharing structure that would encourage Nokia to aggressively assert its SEPs after the sale. Because of the failure by the TFTC to note the differences between IP privateering and the Nokia transaction, Nokia pushed the contested PAE issue into a new and controversial frontier. In the absence of a separate business entity functioning as a collaborating PAE or quasi-PAE, the TFTC may need to provide specific baselines by which to assess the degree of asset divesture that would be necessary to relieve Nokia from MAD pressure, and would thereby turn itself into a patent-monetizing PAE.

IV. Suggested Approaches for Characterizing Patent Assertion Entities and the Problems with the Nokia Decision The prevalent definitions of PAEs based on the “business model” that patent holders adopt tend to be more conceptual than operational. Admittedly, determining specific criteria for characterizing PAEs is challenging in practice, even though this information is valuable for merger reviews. Recent litigations among hi-tech companies have revealed that IP licensing and litigations are typically part of a wider-ranging IP managerial plan designed by these companies. Licensing and litigation are strategies that can be practiced individually, complementarily, or together with other types of IP strategies, depending on the respective cost and benefits that they provide.30 For example, a holder of a patent portfolio may idle several of its patents and actively implement others, but also aggressively assert the remainder of them by using licensing or infringement suits. Focusing on the manner in which patent royalties are asserted in a specific relevant market to establish the identity of the patent holders in competition law risks missing the bigger picture. As Jeruss, Feldman, and Walker have aptly described, the situation where Apple and Samsung were engaged in cross-licensing each other and suing each other at the same time may have been caused by “an industry-wide effort to establish standards, a friendly cross-licensing deal, a litigation cease-fire, or simply an effort to generate additional revenue. Nevertheless, the primary activities of Apple and Samsung remain product creation.”31 30

See Robert Pitkethly, IP strategy in Intellectual Property Management in HEALTH AND AGRICULTURAL INNOVATION: A HANDBOOK OF BEST PRACTICEs 459, 463-465 (A Krattiger, RT Mahoney, L. Nelson et al. ed., 2007) available at http://www.ipHandbook.org; See also William W. Fisher III & Felix Oberholzer-Gee, Strategic Management of Intellectual Property: An Integrated Approach, 55 CALIFORNIA MANAGEMENT REVIEW 157 (2013). 31 Jeruss, Feldman, & Walker, supra note 1, at 368. See also Michael J. Mazzeo, Jonathan H. Ashtor & Samantha Zyontez, Do NPEs Matter? Non-Practicing Entities and Patent Litigation Outcomes, 9 J. COMP. L. & ECON. 879, 883(2013)(The types of patent licensing “can be subdivided to infinitesimal degrees of scope, duration, and control rights. These features are fundamental to patents and are true 10

This multifaceted nature of IP management further implies that the conclusion regarding the elimination of MAD pressure and the potential for Nokia to become a PAE may be impulsive. In stating that Nokia would no longer be concerned with countersuits from its targeted device manufacturers after it sold its device division, the TFTC focused too narrowly on the negative competitive impact that the merger might exert on the “product” market. The TFTC failed to recognize that in the highly dynamic and interdependent wireless telecommunications market, retaliating pressure may come from the “technology” or “innovation” market, rather than the “product” (device) market. Nokia’s incentive to exploit its patent rights could still be counteracted by the need for the cross-licensing of patents owned by other targeted device manufacturers, which are essential for improvements or innovation for its wireless technologies. Accordingly, the characterization of PAEs in asset disaggregation cases requires a framework that can integrate the analysis of at least the following two questions: (1) Is the framework likely to establish indicators to discern the type of disaggregation that would alter the incentive of SEP owners to transform their business models from implementation to exploitation? (2) Can post-disaggregation MAD pressure originate in relevant markets outside of where SEP owners aim to exploit their patent rights? 1. Quantitative Indicators for Determining the Timing of Business-Model Transformation Perhaps the most straightforward method of defining PAEs in disaggregation cases is to adopt a rule-type quantitative threshold for the presumption of business-model transformation.32 For example, the competition authorities may use a percentage of settlements or damage awards from infringement litigations accounting for the total revenue for an IP operating company after disaggregation to indicate transformation. 33 The higher the percentage is, the higher the probability for business-model transformation would be. The other similar approach might be to investigate the patterns of damages awarded in infringement litigations. As PAEs do not produce patented products, they usually are not entitled to the damages of lost profits from selling patented products had infringements not occurred.34 Therefore, we could reasonably expect that the major type of damages awarded to PAEs would be the payments of reasonable royalties. for patents held by universities, inventors, practicing companies, PAEs, and true ‘trolls’ alike.”) 32 Quantitative presumptions such as market share, HHI, or number of firms are a methodology frequently employed to evaluate competitive effects in merger cases. See Steven C. Salop, The Evolution and Vitality of Merger Presumptions: A Decision-Theoretic Approach 1, 13-15 (Draft 6/22/15), Working Paper, Georgetown University Law Center, available at http://ssrn.com/abstract=2375354 33 Lu, supra note 15, at 235. 34 KIMBERLEY A. MOORE, TIMOTHY R. HOLBROOK, & JOHN F. MURPHY, PATENT LITIGATION AND STRATEGY 932 (4th ed. 2013). 11

Other indicators may also be useful, such as the percentage of crucial assets being disaggregated or the value of a remaining crucial asset in comparison with the value of total assets after disaggregation. In this regard, the suggested approaches for defining and measuring market power in the relevant “innovation market” in IP licensing cases are informative. For example, in the Antitrust Guidelines for the Licensing of Intellectual Property issued by the U.S. Department of Justice and the Federal Trade Commission, it is suggested that competition authorities may rely on the shares of research and development expenditures to assess the power of market participants in an innovation market.35 Because the percentage of R&D expenditure may signal a firm’s ability and incentive to engage in competition in an innovation market, the percentage of disaggregated assets that are crucial for device manufacturing or R&D activities are also indicative of the weakened ability to compete and the increased incentive to exit the market. Therefore, competition authorities may consider assigning a specific percentage for the disaggregated crucial assets to the total assets, above which a rebuttable presumption of the intention to become a PAE would be established. The mirror image of this approach is to establish a percentage threshold based on the value of the remaining crucial asset to the total assets, below which the same PAE presumption would be made. The underlying rationale of this approach was reflected in the EU decision in the same case. In unconditionally approving the merger, the EU Commission specifically stressed that “Nokia has invested considerably over the past years into R&D in order to generate innovations that are protected by patents, a characteristic that also differentiates it from a PAE.”36 Undeniably, the use of this quantitative approach may be arbitrary. It requires a firm to have knowledge of the minimal assets and IP portfolios for it to compete effectively in a market. Competition authorities must also be able to ascertain whether the disaggregated or remaining assets are crucial. To this end, useful assessing factors from the EU Guidelines on Horizontal Cooperation Agreements could be used. The EU Guidelines imply that the competition authorities could evaluate the “nature, scope, and size” of the remaining assets, the degree of specificity of those assets, and the timing and resources for competitors to acquire or duplicate those assets.37 The weaker the results are from these investigations, the less likely that the remaining

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ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY §3.2.2 (1995); see also Richard J. Gilbert & Steven C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: the Use of Innovation Markets, 63 ANTITRUST L. J. 569, 596-97 (1995). 36 Commission Decision, supra note 5, para. 254. 37 See HORIZONTAL COOPERATION GUIDELINES, OJ 2011 C11/1, para. 120 (To consider the credibility of competing poles, the Commission will take into account “the nature, scope and size of any other R&D efforts, their access to financial and human resources, know-how/patents, or other specialized assets as well as their timing and their capability to exploit possible results.”) . 12

assets are competitively crucial. 2. Qualitative Inferences of the Plausibility for Business-Model Transformation Although the quantitative approach offers a predictable reviewing process, the information required for constructing its threshold may be unavailable or costly to acquire. Indicators chosen based on incomplete information are likely to be challenged as simplistic. In contrast, we may infer qualitatively from the evidence or “plus factors” presented in a disaggregating case to reach a reasonable conclusion on business-model transformation. In the context of PAE characterization, the following inference can be made from this approach. 2.1. History of implementing the PAE strategy by the disaggregator Although the past does not necessarily predict the future, antitrust rules and standards are frequently established or debated based on prior beliefs.38 If credible evidence exists to show an asset disaggregator’s past experience in implementing PAE strategy in markets with similar or identical market structures and conditions, then the possibility for a business-model transformation after disaggregation would also be high. In contrast, if no such experience is present, the competition authority should be cautious of hastening to the conclusion of PAEs transformation. In Nokia, the TFTC was silent on this issue. It disregarded the fact that there was additional evidence indicating Nokia’s willingness to maintain the existing licensing conditions with its licensees and competitors. For example, the EU Commission in the same case also denied the PAE allegation by indicating that several participating firms have signed licensing or cross-licensing agreements with Nokia for SEPs to be used in the manufacturing of mobile devices.39 In addition, based on sale data from 2012, 70% to 90% of the device manufacturers in the European Economic Area and 60% to 70% of global device manufacturers will continue to be protected by valid licensing agreements in the near future. 40 Similarly, major device manufacturers, such as Samsung, Apple, and Blackberry, have either renewed their licensing agreements with Nokia or were still protected by valid licensing agreements.41 2.2. Statements or actions of the disaggregator 38

The rule of “per se illegal” for price-fixing cases and the change of the reviewing rule from per se to rule of reason to accommodate the efficiency justifications in cases of vertical restraints are two of the most evident examples. See Northern Pacific R. Co. v. United States, 356 U.S. 1, 5 (1958)(“ there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”); Leegin Creative Leather Products Inc. v. PSKS, Inc. 127 S.Ct. 2705, 2730(2007)(“All this is to say that the ultimate question is not whether, but how much, ‘free riding’ of this sort takes place”; Justice Breyer dissenting.); James C. Cooper, Luke M. Froeb, Dan O’brien, & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, INT. J. INDUS. ORG. 639, 648-658 (2005). 39 Commission Decision, supra note 5, para. 245. 40 Commission Decision, supra note 5, para. 246. 41 Commission Decision, supra note 5, para. 247, 248 & 249. 13

Competition authority may infer the intention to transform a business model from the statements made or from the actions taken by SEP owners. In Nokia, for example, the Ministry of Economic Affairs of Taiwan predicted that Nokia would become a PAE for the following two reasons. First, Nokia continued to litigate against device manufacturers in the recent past; second, after the merger, Nokia announced publicly that it would license its SEPs to other firms to generate additional revenue from royalties.42 In addition, several device manufacturers in Taiwan have argued that Nokia’s structuring of sales to include only devices and non-SEPs indicated its intention to exploit the SEPs it retained in post-transaction licensing.43 The same inference might be made on the basis that a disaggregating SEP owner retained licensees not to be asserted against by subsequent IP buyers.44 However, inferring the intention of PAEs from statements by disaggregating SEP owners requires competition agencies to exclude or weigh those statements against the possibilities that they are created from legitimate business considerations.45 For example, the IP holder may respond by asserting that the undertaken actions are competitively neutral arrangements that are commonly practiced by competitors.46 2.3. Opinions of industry stakeholders and government agencies Opinions from industry stakeholders, such as customers or competitors, may be a crucial source of evidence for verifying factual issues in merger cases. Customers tend to have the most to lose from an anticompetitive merger and are frequently able to provide evidence for how a merger would harm competition and consumers. 47 Similarly, competitors may be able to provide crucial information regarding the impact on competition from a merger, and may be uniquely placed to offer a theory of harm to facilitate investigations.48 Nevertheless, opinions from customers are likely to be “biased, unreliable, or poorly informed” to serve their personal agendas, and competitor testimonies are rarely neutral.49 The ICN (International Competition Network) has cautioned that “[opinions] from competitors must be analyzed critically, however, because the competitor is likely focused on perceived potential risks of the merger to its interest rather than its likely effect on customers…. Complaining competitors often are motivated by a concern that the merged company will be a more formidable 42

Answers of the TFTC for Administrative Litigation, at 11. Answers of the TFTC for Administrative Litigation, at 12-13. 44 Popofsky & Laufert, supra note 6, at 7-8. 45 See Pitkethly, supra note 30. 46 This is how Nokia responded to the question of a non-SEP versus SEP sales arrangement during the EU investigation. See Commission Decision, supra note 5, para 215. 47 Nicholas Levy, Evidentiary Issues in EU Merger Control in ANNUAL PROCEEDINGS OF THE FORDHAM COMPETITION LAW INSTITUTE: INTERNATIONAL ANTITRUST LAW & POLICY 81, 133-34 (Barry Hawk ed. 2009). 48 Levy, id., at 139. 49 Id., at 138, 139. 14 43

competitor, rather than a concern that the transaction will harm competition.”50 In Nokia, the probative value of the competitors’ opinions of Nokia and the PAEs were taken literally by the TFTC. The TFTC did not demonstrate in its published decision the type of skepticism toward those opinions as was suggested by the ICN. Opinions from other government agencies were frequently treated as impartial and heavily relied upon by the TFTC to evaluate future market impacts that would result from a merger. One caveat for using this type of evidence is that non-competition agencies could be pursuing policy goals that may not coincide with competition policy. Opinions based on the consideration of those divergent policy agendas could render the opinions irrelevant or even misleading. In Nokia, for example, the majority of opinions stated by the Ministry of Economic Affairs of Taiwan were not about why and how Nokia could become a PAE after disaggregation. Instead, because smart mobile devices form an important industry and export product for Taiwan, the Ministry was particularly concerned about the cost-enhancing effects resulting from higher royalties on domestic device manufacturers and the entire wireless telecommunications industry in Taiwan if Nokia did become a PAE.51 The Ministry suggested that the TFTC consider the impacts on domestic industry policy and the international competitiveness of domestic firms, to which the TFTC consented. The TFTC relied on this opinion to inappropriately equate reduced competitiveness with reduced competition, and thereby justify its concern for Nokia’s transformation into a PAE.52 2.4. Inference from the economic rationality of becoming PAEs A more objective and effect-based approach for making qualitative inferences is to investigate whether it is economically rational for IP-implementing companies to become PAEs by using asset disaggregation. Consider first the TFTC’s link between the disappearance of MAD force in the device market and the emergence of a post-disaggregation PAE in Nokia. This causality could be questioned by raising the possibility that the retaliatory constraint on Nokia’s incentive to aggressively assert its patent rights may originate from outside the device/product market. In an industry where sequential and repeated interactions among market participants are common, competition is rarely a one-shot game. Accordingly, competitive assessment in the industry should include the impacts from technological and innovative competition. This dynamic and R&D-driven approach is particularly crucial for merger analysis53 because merger analysis frequently requires the competition authorities to form 50

ICN, INVESTIGATIVE TECHNIQUES HANDBOOK FOR MERGER REVIEW 43 (June 2005). Answers of the TFTC for Administrative Appeal, at 16. 52 Id. 53 Wolfgang Kerber, Competition, Innovation and Maintaining Diversity Through Competition Law, in ECONOMIC APPROACHES TO COMPETITION LAW: FOUNDATIONS AND LIMITATIONS 173, 194 (Josef Drexel, Wolfgang Kerber, & Rupprecht Podszun eds. 2010). 15 51

educated predictions on future market changes. Along this line of reasoning, a more complete analysis of the PAEs issue in Nokia should involve the inquiry and investigation into whether device manufacturers are or will be competing with Nokia in technology and innovation markets for wireless telecommunications. If competition between Nokia and other device manufacturers truly exists in those markets, then the competition authorities may consider whether the demand for the licensing of patents owned by competing device manufacturers in those markets would be sufficiently strong to deter Nokia from exploiting its patent rights in the device markets. Although the technology or innovation market is difficult to define,54 Nokia could nevertheless be questioned whether it is economically rational for Nokia to transform into a PAE in the device markets. At least two economic reasons exist to suspect that it may not be economically rational. First, the implementation of exploitative IP strategies incurs costs to the implementers. The cost may appear in the form of additional litigation costs for Nokia if it transforms into a PAE and decides to bring more infringement suits against device manufacturers. Recent empirical studies further demonstrated that both the success rates and awarded damages were actually lower for PAEs than for non-PAEs plaintiffs in infringement litigations. 55 These findings has led the authors to question the concerns for PAEs exploitation as overstated; rather, patents litigations by PAEs may simply be competitive-neutral and efficient arrangements aiming to obtain returns on their patent acquisitions.56 The TFTC’s decision in Nokia appeared to assume that the increased revenue of royalties for Nokia would offset costs; however, this hypothesis may not always be supported. Because the transaction did not increase the number of pre-sale SEPs that Nokia already possessed, maintaining a constant licensing demand for those SEPs, Nokia’s post-disaggregation increase of revenue from royalties was constrained by the market power that pre-existing SEPs endowed upon Nokia.57 Another explanation for Nokia risking a net loss from practicing PAE strategies is that it may have corroborated with device manufacturers to raise the costs of competing manufacturers and to exclude competition in the device market. However, in the 54

For the complexity of defining innovation market, see Dennis W. Carlton & Robert H. Gerner, Intellectual Property, Antitrust, and Strategic Behavior, in 3 INNOVATION POLICY AND THE ECONOMY 29, at 41. (Adam B. Jeffe, Josh Lerner, & Scott Stern eds. 2003); Joshua D. Wright, Antitrust, Multidimentional Competition, and Innovation, in COMPETITION POLICY AND PATENT LAW UNDER UNCERTAINTY 228, 239-48 (Geoffrey A. Manne & Joshua D. Wright eds. 2011). 55 Mazzeo, Ashtor & Zyontez, supra note 31, at 889, 898; Lu, supra note 15, at 244. 56 Mazzeo, Ashtor & Zyontez, id., at 902. 57 Due to the highly limited substitutability of SEPs, the implementation of SEPs with other non-SEPs to produce final products demonstrates the trait of a fixed-proportions production function. Namely, licensees could not adjust the combinations of IP inputs for the same final production. Constrained by this production function and without any vertically integrated arrangements, profits for SEPs holders would be the same. For this “single-monopoly profit” hypothesis, see Michael A. Salinger, Vertical Mergers in THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS 551, 556-557 (Roger D. Blair & D. Daniel Sokol eds, 2014). 16

absence of a separate corroborative business entity and a profit-sharing structure to compensate Nokia for exploitative costs,58 the PAE conclusion is unsound. Second, increasing SEP licensing royalties simultaneously augments the cost of producing smart devices that implement SEPs. This may increase the final prices of these devices, reduce their overall market demands, and reduce the demand from Nokia for SEP licensing. This double-marginalization problem 59 may be a disincentive for Nokia to become a PAE. Furthermore, if Nokia could enlarge its customer base to use its SEPs by maintaining or lowering its royalties, it could also strengthen its competitive advantage from owning its SEPs and increase the possibility of its SEP licensees by using its complementary patents. Exploitative strategies of increased royalties hinder the realization of direct and indirect network effects for Nokia.60 Professor Morton and Shapiro have expressed a similar view in explaining why Motorola has the disincentive to not bring infringement lawsuits or file for injunctions after it sold its assets to Google.61

V. FRAND Commitment as a Remedy for Preventing PAE Exploitation Because the competitive concerns in Nokia were not sufficiently reviewed, it is equally questionable that the FRAND remedy imposed in this case would be proportional to the competitive harms likely to be caused by Nokia’s PAE strategies. This has also raised the question of whether the remedy violated emerging key principles for merger remedies. These principles can be summarized as follows:62 (1) the purpose of merger remedies is to preserve competition, not to protect competitors or to promote industry or non-competition policies; (2) remedies are to be imposed only when competitive threats are verified, and should be the least restrictive measures to correct the threats concerned; (3) imposed remedies should meet the 58

Opinions provided by one of the device manufacturers in Nokia stressed that Microsoft agreed in the deal to finance Nokia in exchange for three packages of convertible bonds issued by Nokia. See Answers of the TFTC in Administrative Appeal, Annex 2. However, this contractual arrangement at most indicates that Microsoft would welcome the increase of revenues for Nokia; it does not support the finding that Nokia will become a PAE. 59 See WILLIAM F. SCHUGHART, THE ORGANIZATION OF INDUSTRY 317-24 (1990). 60 61

Pitkethly, supra note 30, at 465.

Fiona Scott Morton & Carl Shapiro, Strategic Patent Acquisition, 79 ANTITRUST L. J. 463, 493 (2014). 62 See U.S. DEPARTMENT OF JUSTICE, ANTITRUST DIVISION, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES (2011), available at http://www.justice.gov/atr/public/guidelines/272350.pdf. ; OECD POLICY ROUNDTABLES ON STANDARDS OF MERGER REVIEWS, available at http://www.oecd.org/dataoecd/19/37/46503256.pdf. (OECD Meeting, June 2009); ICN MERGER WORKING GROUP, ANALYTICAL FRAMEWORK SUBGROUP, MERGER REMEDIES REVIEW PROJECT 10, Report for the Fourth ICN Annual Conference (Bonn, June 2005), available at http://www.internationalcompetitionnetwork.org/uploads/library/doc323.pdf. 17

principles of proportionality and effectiveness and should be chosen after considering their implementing benefits and costs; (4) effective remedies should be enforceable and could be supervised by enforcement agencies, and remedies should be able to control competitive threats within an appropriate period of time; and (5) the process for remedy determination should be transparent and consistent. With respect to conduct remedies, such as the FRAND commitment, Ken Heyer proposed that an effective conduct remedy should meet the following conditions:63 (1) a close nexus must exist between the imposed conduct remedies and the theory of harm for the reviewed merger; (2) conduct remedies should be imposed with a specified period of duration that is reasonably necessary for correcting the competitive threats; (3) conduct remedies should be convenient to monitor and simple for the merging parties to understand and satisfy; (4) when several jurisdictions are involved, the remedies imposed by the highly competitive jurisdictions are the more valuable experiences to be learned from; (5) conduct remedies are more appropriate for mature markets where cost structures, demands, and technological changes are stable. From these suggested principles and conditions, several issues regarding the use of the FRAND commitment as a remedy for PAE exploitation arise. The FRAND commitment was established by SSO members with the SSOs, and several SSOs have already expanded the coverage of the FRAND commitment to SEP transferees.64 Breaches of these commitments may result in the suspension of the ability for the breaching members to participate in the standard-setting process.65 Similarly, unfair and unreasonable royalties by SEP holders may constitute an abuse of market power, which is reviewable under existing antitrust rules for monopolization. Conditioning merger approval on the compliance of the FRAND commitment creates a third layer of regulations to prevent the same potential competitive harms. It may create controversy over unnecessary deterrence and the possibility of violating the principle of proportionality. Overbroad coverage of the FRAND commitment may also reduce the incentive for the SEP owner to join the SSOs, and may lead to more SEPs not being covered by any commitment. 66 Excessive restrictions on the ability to enforce patents may discourage patent holders from investing in innovation and may decrease the economic value of SEPs and 63

Ken Heyer, Optimal Remedies for Anticompetitive Mergers, 26 ANTITRUST 26, 27-28 (2012). See National Research Council, Committee on Intellectual Property Management in Standard-Setting Processes, Transfers of Patents with Licensing Commitments, in PATENT CHALLENGES FOR STANDARD-SETTING IN THE GLOBAL ECONOMY: LESSONS FROM INFORMATION AND COMMUNICATIONS TECHNOLOGY 81, 82 n.3 (Keith Maskus and Stephen A. Merrill, eds. 2013)(hereinafter referred to as “PATENT CHALLENGES.”) 65 See ETSI RULES OF PROCEDURES, Annex 6, Section 6.3, available at http://www.etsi.org/images/files/IPR/et-si-ipr-policy.pdf 66 PATENT CHALLENGES, supra note 64, at 82. 18 64

hamper their transfer.67 This is particularly the case in Nokia because the TFTC did not specify the period of duration for the FRAND remedy, which would further decrease the value of Nokia’s SEPs because of the uncertainty surrounding the enforcement of patent rights by future transferees. The FRAND commitment as a merger remedy may generate additional legal effects not considered by legislators, and thus violate the principle of separation of power in countries adopting the civil law system, such as Taiwan. Unfair and unreasonable royalties charged by SEP owners could be treated as abusive cases that are reviewable under the TFTA.68 According to Article 40 of the TFTA, the types of sanctions that can be imposed by the TFTC include requesting the violating party to cease the alleged abusive practices, to adopt rectifying and corrective measures, and to impose specified amounts of administrative fines. Non-compliance of the TFTC’s order is subject to repeated sanctions of the same types. The resulting consequence from non-compliance of the FRAND commitment (i.e., the revocation of the approved merger by the TFTC) is a penalty outside the stipulated scope of sanctions for abusive cases. What could buttress this ultra vires challenge is that conduct remedies in practice are typically the products of prosecutorial discretion by the TFTC. Rarely have the merging parties been able to settle with the TFTC on mutually agreed types of remedies.69 Finally, the FRAND commitment may not be as easy to comply with as the TFTC expects. The uncertainty and complexity of determining FRAND royalties may be evidenced by the rapidly growing literature on this subject. 70 The FRAND commitment as a merger remedy will increase the compliance costs for the merging parties and the monitoring costs for the competition authorities. Uncertainty may even be a virtue that the FRAND commitment intends to offer. Its meanings are intentionally left undefined to allow the SEP owner and its licensees the flexibility to accommodate the contingencies that were difficult or unlikely to be factored into the 67

Id. Article 9 of the TFTA sets forth that “Monopolistic enterprises shall not engage in any one of the following conducts:… 2. improperly set, maintain or change the price for goods or the remuneration for services[.]” 69 Competition authorities are frequently given the power of investigation and adjudication to maintain their independency. However, the exercise of this power may lead to an investigative proceeding that has been dubbed as an “inquisitorial model with prosecutorial bias.” Damien J. Neven, Competition Economics and Antitrust in Europe, 2006 ECONOMIC POLICY 742, 763 (2006). Namely, competition authorities under this system tend to demonstrate a “self-confirming” bias in which they selectively focus on evidence capable of supporting their prematurely reached conclusion, but neglect evidence opposing their conclusion. Id., at 773. 70 See e.g. Janusz Ordover & Allan Shampine, Implementing the FRAND Commitment, THE ANTIRUSTSOURCE 1 (October, 2014)(“a mere commitment to license on FRAND terms does not ensure that the ex-post negotiations will invariably satisfy the FRAND principles.”); Roger G. Brooks & Damien Geradin, Interpreting and Enforcing the Voluntary FRAND Commitment, (July 20, 2010) available at SSRN: http://ssrn.com/abstract=1645878; Commission Decision, supra note 5, para. 203. 19 68

process of licensing negotiations. For example, the value of a technology, if it is adopted in a dynamic market, may be difficult to verify to assist the contractual parties in reaching an appropriate royalty rate at the beginning of the contracting process. Ex post negotiation over the meanings of “fair” or “reasonable” allow parties to “adapt more efficiently over time to changes in market conditions than under a more rigid and complete contract.”71

VI. Conclusion We used the case Nokia in Taiwan to illustrate and discuss a relatively unattended legal issue in literature regarding PAEs and competition law: merger review of asset disaggregation by SEP owners. We argued that if the competitive effects of asset disaggregation by SEP owners are to be examined using the theory of business-model transformation, various rules or standards for characterizing PAEs are necessary. For this purpose, we tentatively offered several approaches that may be applied to define PAEs. In sum, PAEs could be defined by quantified thresholds indicating SEP owner intentions to disengage from market competition. It could also be characterized by inferring from evidence that will either implicate the SEP owner intentions to switch to patent exploitation or reveal the underlying economic rationality for the owners to transform to a PAE business model. However, these approaches are not perfect, and each approach could be challenged from various legal and economic perspectives. This characterization problem makes the use of the FRAND commitment as a merger remedy increasingly controversial. One of the policy implications from our study is that additional empirical studies are needed to substantiate the probability of using asset disaggregation to facilitate the PAE strategies. Equally critical is a revived attention to the role evidentiary rules might play to assess the probative value of the opposing evidence prevalent in cases involving strategic behavior in dynamic markets. Before competition authorities can properly administer these policy propositions, PAE exploitation through asset disaggregation may be better reserved as IP or contractual issues and investigated on a case-by-case basis.

71

Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 ANTITRUST L. J. 157, 163 (2015). 20