[Ip-health] Joel Klein on non-voluntary Aircraft Patent pool

[James Love]

Michael Palmedo found this interesting discussion of the 1917 Aircraft
patent pool. Jamie

Here are some interesting quotes regarding how the government set
compensation:

"In consideration for access to the basic patents, manufacturing members
would pay a flat $200-per-aircraft royalty, from which 67.5% went to
Wright-Martin, 20% to Curtiss, and the remainder to the pool entity for
administrative costs. 17  Wright-Martin and Curtiss were entitled to these
shares, up to a maximum of $2 million each, until their patents expired. 18
An arbitration panel would decide what other pooled patents merited
royalties and would set those royalties. 19  Unlike the flat $200 royalty,
20 the fee for other royalty-bearing patents was predicated on actual use;
the rest of the patents were available to the pool members on a royalty-free
basis. 21"

. . .
(8) Id. The Wright company was demanding $1000 per plane, George
Bittlingmayer, Property Rights, Progress, and the Aircraft Patent Agreement,
31 J. L. & Econ. 227, 232 (1988), which then amounted to five percent of
airplanes' $20,000 average cost, Harry T. Dykman, Patent Licensing Within
the Manufacturer's Aircraft Association (MAA), 46 J. Pat. Off. Soc'y 646,
649 (1964).
 . . .

(17)Dykman at 650. The following year, the Secretary of the Navy, armed
again with the threat of eminent domain, jawboned the per-unit royalty down
to $100, although the $2 million ceilings remained in place. Id. at 655; see
also Manufacturers Aircraft Association v. United States, 77 Ct. Cl. 481,
490-93 (1933)(action by pool for payment of royalties on airplanes made for
U.S. government by non-members of pool).

Here is the longer excerpt.  Jamie


http://www.apeccp.org.tw/doc/USA/Policy/speech/1123.htm

CROSS-LICENSING AND ANTITRUST LAW

Address by  JOEL I. KLEIN, Acting Assistant Attorney General, Antitrust
Division, U.S. Department of Justice
Before the American Intellectual Property Law Association
San Antonio Marriott Rivercenter, San Antonio, Texas

May 2, 1997

  [snip]

II. The Manufacturers Aircraft Association

By the time of America's entry into World War I in April 1917, our
Government had become an eager consumer of airplanes. Airplanes were still
so new that the Wright brothers' basic patent, then in the hands of the
Wright-Martin Aircraft Corp., still blocked would-be manufacturers, at least
for all practical purposes. 6 So too, apparently, did "numerous important
patents" in the hands of the Curtiss Aeroplane & Motor Corp. 7 The two firms
were demanding royalties from other aircraft manufacturers, although the
Attorney General singled out Wright-Martin for seeking "high" royalties. 8
The upshot for the Government was not only "excessive" airplane costs but an
inability even to obtain enough planes, since the cost of licensing
constrained industry capacity.

In the face of this problem, an obvious and time-honored Washington solution
presented itself: an advisory committee. This one, though, had a
better-than-average pedigree, having been convened by Assistant Secretary of
the Navy Franklin D. Roosevelt. 9 After a series of consultations with the
truculent patentees, 10 the committee recommended the  formation of a patent
pool, which was in place by the end of July 1917. The aircraft pool, which
encompassed "practically all" airplane manufacturers, 11 resolved all
pending infringement claims and bound the members to give each other
nonexclusive licenses to "all airplane patents of the United States (with
unimportant exceptions) now or hereafter owned or controlled by them." 12
Membership was open to three types of entities: (1) any "responsible"
present or potential airplane manufacturer; (2) any manufacturer to which
the federal government had awarded a contract for ten or more planes; 13 and
(3) any owner of U.S. aircraft patents. 14 The pool's charter contemplated
only 100 members, but that was apparently more than adequate to accommodate
the potential membership. 15 Members promised not to put relevant patents
out of the pool's reach, as, for instance, by taking an exclusive but
non-sublicensable license. 16


In consideration for access to the basic patents, manufacturing members
would pay a flat $200-per-aircraft royalty, from which 67.5% went to
Wright-Martin, 20% to Curtiss, and the remainder to the pool entity for
administrative costs. 17  Wright-Martin and Curtiss were entitled to these
shares, up to a maximum of $2 million each, until their patents expired. 18
An arbitration panel would decide what other pooled patents merited
royalties and would set those royalties. 19  Unlike the flat $200 royalty,
20 the fee for other royalty-bearing patents was predicated on actual use;
the rest of the patents were available to the pool members on a royalty-free
basis. 21

In September 1917, the Secretary of War passed along to the Attorney General
a request for an antitrust advisory opinion. 22 The Attorney General
responded in less than three weeks, concluding that there were no
anticompetitive effects that came close to outweighing the very real
procompetitive benefits resulting from assembling these patents into an
affordable package available to all comers. 23 In reaching that conclusion,
he touched on one after another of the issues that we would raise today as
well.
Let me go through them with you.


An unspoken but important premise of the Attorney General's analysis is that
the patents were valid. Of course, restraints imposed in conjunction with
licenses of invalid or illusory intellectual property rights would be highly
anticompetitive. 24 Moreover, as the possessor of its own blocking, and
presumably valid patents, Curtiss had more to gain than anyone else from
challenging the validity of Wright's patent. If there were any significant
doubt about validity, the cross-license between the firms could entail a
real loss to the market, since Curtiss would no longer have that impetus to
eliminate a  principal entry barrier. 25

The Attorney General's stated analysis began with the patents' relationship
to the airplane industry and each other. In particular, he observed that the
pool solved what we now call the bilateral monopoly problem. Both
Wright-Martin and Curtiss separately had the industry over a barrel. Anyone
that wanted a license from Wright-Martin had to pay the "excessive" royalty
the Attorney General mentioned, only to find that Curtiss wanted something,
as well. Combining the Wright and Curtiss patents in the pool resolves this
dilemma: the Attorney General noted that the pool royalty is "materially
lower" than what Wright-Martin alone had demanded, leading to "a substantial
saving to the Government." 26


Implicit in this analysis is that Wright-Martin and Curtiss had each other
over a barrel as well. 27 If each had not needed the other's intellectual
property to make a viable aircraft, their technologies would have been
competitors, not complements, and the combination of the patents would have
been a very different story. In that case, instead of reducing a series of
monopoly rent- seekers to one, it would have made a monopolist out of the
only two competitors in the field. Then, manufacturers probably would have
faced a higher royalty than the two competitors quoted separately. 28 As it
was, though, the complementary relationship of the patents made their
combination in the pool procompetitive. Just how procompetitive it was
depended in part on whether the benefit that Wright-Martin and Curtiss were
bestowing on each other would be freely available to their manufacturing
competitors. Because the pool was open to all, the Attorney General found,
the cross-license "render[ed] competition freer by giving every responsible
manufacturer of aircraft access to all the inventions in the field." 29


On the other hand, an agreement by the two firms not to license their
patents to others would have drastically limited the procompetitive benefits
that the Attorney General saw in the pool. If the two firms' patents were
competitors, such an agreement would be little more than a horizontal
boycott by competitors, which is a clear Sherman Act violation. To be sure,
when, as here, the patents compete neither with each other nor with any
others, there is no current competition to be harmed. But if there were or
might soon have been alternatives to the pooled patents, an agreement not to
license to others might then have prevented Curtiss, for example, from
combining its patents with some technology that substituted for
Wright-Martin's. This could be a potent strategy for stifling new rivalry.
On the other hand, in a robustly competitive market, mutually exclusive
cross-licenses might not be at all troublesome.



What if Wright-Martin and Curtiss agreed that they would make their pooled
patents freely available, but only as a package? Again, as long as the
firms' patents truly blocked the industry, and each other, it is hard to see
how such an agreement would harm competition. But once plausible
alternatives appeared for either Wright's or Curtiss' inventions, the
mandatory package would begin to look more like a tying arrangement. But
even that's not the end of the issue. Under our Intellectual Property
Guidelines, tying arrangements are generally subject to an analysis that
balances procmpetitive benefits against anticompetitive effects. 30 And, as
I indicated at the outset, we will be giving some additional guidance in the
future about the tying and bundling together of intellectual property. For
now, suffice it to say that the general question is whether the tie really
helps to increase output, lower costs, or create an otherwise unavailable
product -- or whether it simply serves to raise the price of the tying
product.



The fact that the Wright and Curtiss patents blocked the industry also made
the flat per-airplane royalty acceptable. This provision, the Attorney
General observed, "at first sight seems objectionable as possibly designed
to extend the patent rights of these corporations to objects not covered by
their patents." 31 While this is phrased in the parlance of misuse law, the
concern is much the same as the one raised by Microsoft's per-processor
license for DOS, which was at issue in the case we brought against Microsoft
in 1994. 32



Since the flat royalty must be paid whether or not you use the licensed
technology, it discourages you from using competing technologies. But in the
1917 aircraft industry, there was no OS/2, no operating system from Apple,
and apparently, no new entrants on the horizon. In short, since there was
essentially no technological competition out there to be squeezed, the
convenience that the per-airplane royalty offered could not be outweighed by
any anticompetitive effects.


The true antitrust cognoscenti among you will probably be amazed to learn
that nowhere in the opinion letter did Attorney General Gregory discuss the
concept of innovation markets. I can attribute this lapse only to the press
of wartime, and perhaps the fact that our Intellectual Property Guidelines
were not issued until 78 years later. 33 But while he didn't explicitly
enunciate the concept of a specific "market" in which innovation takes
place, competition among the pool's members in aircraft research and
development was clearly an important factor in the Attorney General's
analysis. He noted that the members' obligation to contribute future
inventions to the pool, for compensation to be determined by arbitrators,
"might possibly be used to secure valuable inventions at unreasonable
compensation." 34 But taking into account that the obligation helped ensure
that each subscriber's patents would be open to all, the Attorney General
concluded that the obligation's "possible abuse . . . scarcely justifies its
condemnation in the absence of such abuse." 35



Today, I believe that the impact on the members' incentives to innovate
would receive at least a bit more attention. The obligation to contribute
future patents was not limited to improvements on the fundamental patents;
thus, it didn't serve simply as insurance against the possibility that a
licensee might expropriate the entire value of a patent in the field.
Instead, it guaranteed that any innovation, no matter how revolutionary,
would be thrown into the pot, probably for nothing and otherwise for an
amount to be determined by arbitration. Now, it may be possible that the
arbitration mechanism was so fair that other manufacturers could have felt
confident that their research and development would be competitively
rewarded. But in ordinary circumstances,



I wonder whether "the purpose of keeping [all] the patents of each of the
subscribers open to all" ought to prevail over the drag such a broad
obligation might exert on innovation. Of course, these weren't ordinary
circumstances: there was a war on and the U.S. needed airplanes quickly. The
government was willing to give up long-term innovation -- and accept what we
now have learned to call "dynamic inefficiencies" -- in exchange for the
current technology at an attractive price.  And in this situation, that
"policy choice" -- even with the benefit of hindsight -- would still appear
to make sense. Unless World War I had developed into another Thirty Years'
War, the promise of long-run innovation competition would have been pretty
cold comfort to our troops. Still, as long as there isn't a war on the next
time you form a patent pool, give some thought to members' future-patent
obligations. Do they have to contribute only improvements? Or anything they
invent in the field? If the latter, what is the justification? Are members
free to license their future patents independently of the pool? Or is the
pool going to be the only route the technology can travel to the market?
Again, if the latter, what's the justification? 36 If the answers to these
questions don't tell a very persuasive story about how the future patent
obligations contribute to the pool's procompetitive purpose, you may want to
rethink what's going on, or else risk Sherman Act exposure. The question of
compensation that the Attorney General addressed is worth considering, too.
The most obvious threat to the innovation incentive is if pool members have
to give royalty-free licenses. But even if the pool agreement provides for a
"reasonable" royalty, the actual royalty for new inventions may be
artificially low if it set by the rest of pool -- i.e., by the innovator's
competitors. 37





Manufacturers Aircraft Association -- Antitrust Laws, 31 Op. Atty. Gen. 166
(1917).

7 Id. at 167.

8 Id. The Wright company was demanding $1000 per plane, George
Bittlingmayer, Property Rights, Progress, and the Aircraft Patent Agreement,
31 J. L. & Econ. 227, 232 (1988), which then amounted to five percent of
airplanes' $20,000 average cost, Harry T. Dykman, Patent Licensing Within
the Manufacturer's Aircraft Association (MAA), 46 J. Pat. Off. Soc'y 646,
649 (1964).

9 Dykman at 647.

10 Id. Dykman characterizes the aircraft manufacturers and patentees as
classic rugged individualists who were damned if they would readily give
their competitors access to their inventions "under anything like a
reasonable basis." Id. Of course, this tends to suggest that, if they were
each that determined to go it alone, they either were not blocked by, say,
the Wright patent, or they were deluding themselves. In any case, it appears
that the specter of eminent domain helped bring them all to the table. See
Bittlingmayer at 232.

11 31 Op. Atty. Gen. at 167.

12 Id. at 168. Among them were some very basic patents indeed, such as
"Method of Getting a Hydroairplane Off the Water Into the Air," and "Heavier
Than Air Flying Machines." Dykman at 648-49.

13 Evidently the award of a government contract was deemed a satisfactory
indicator of responsibility.

14 31 Op. Atty. Gen. at 171.

15 Of course, 100 would seem like an absurdly high number for today's
aircraft industry, but that's another speech.

16 Id. at 168-69.

17 Dykman at 650. The following year, the Secretary of the Navy, armed again
with the threat of eminent domain, jawboned the per-unit royalty down to
$100, although the $2 million ceilings remained in place. Id. at 655; see
also Manufacturers Aircraft Association v. United States, 77 Ct. Cl. 481,
490-93 (1933)(action by pool for payment of royalties on airplanes made for
U.S. government by non-members of pool).

18 31 Op. Atty. Gen. at 169.

19 Id. at 169.

20 Id. at 169, 170.

21 Dykman at 650.

22 The Secretary may have been acting under duress, since the pool's
formation had provoked an uproar about an "aircraft trust." Bittlingmayer at
235 n.30. Today, if you were to ask us for a business review letter on
conduct your client had embarked on five months earlier, you'd be out of
luck. See Antitrust Division Business Review Procedure, 28 C.F.R. ?50.6, ?
2.

23 31 Op. Atty. Gen. at 170-71.

24 This was the point of our suit against Pilkington PLC, which employed a
web of exclusive licenses on its expired patents and commonly known know-how
to maintain an international cartel in the manufacture of float glass. See
United States v. Pilkington plc, n.2, supra.

25 While the Attorney General had to take validity on faith, soon after, the
Bureau of Aircraft Production submitted the question to a panel of patent
experts, who confirmed both validity and the bargain the $200 royalty
represented. See Manufacturers Aircraft Association v. United States, 77 Ct.
Cl. at 489-90. Because the pool provided that Wright-Martin's and Curtiss'
royalties would terminate upon the expiration of their patents, the Attorney
General did not have to consider the implications of any mechanism to
provide post-expiration income to the patentees. It is not clear from the
Attorney General's opinion whether the two firms' role in the pool's
governance was to expire with their patents.

26 31 Op. Atty. Gen. at 167. Absent government arm-twisting, one might not
expect every such pool to lead to such dramatically reduced aggregate
royalties. But any combination of complementary intellectual property rights
brings with it the potential for genuine savings in transaction costs and
provides a forum for owners of blocking complementary patents to reach a
royalty agreement that will make access to their technologies feasible.

27 All that was judicially determined was that Wright had Curtiss over a
barrel. Wright sued Curtiss in 1909, contending that Curtiss' use of wing
flaps (suggested by Alexander Graham Bell) infringed the basic Wright
patent. Bittlingmayer at 231. Although Wright won, Curtiss altered its
invention, reopening the dispute, which was still underway at the time of
the pool's formation. Id. At a minimum, the Curtiss invention seems to be a
valuable improvement on Wright's.

28 Admittedly, they would save the cost and inconvenience of negotiating a
competitive royalty.

29 Id. at 171. This conclusion, which focuses on the pool's cross-license,
seems to depend upon the representation made to the Attorney General that
the by-laws' limitation of membership to 100 was more than adequate to
accommodate the likely interest in membership. Id. However, the Attorney
General stated, that limitation "may prove objectionable" if the industry
expanded. Id.

30 IP Guidelines, ? 5.3.

31 Id. at 170.

32 See United States v. Microsoft, n.2, supra.

33 The Attorney General would have found Section 3.2.3 especially helpful.

34 Id. at 170. This was essentially the very same issue that fueled our 1994
inquiry into the intellectual property policy of the European
Telecommunications Standards Institute, which raised the specter of a
technology buyers' cartel. Because ETSI changed its policy, we chose not to
pursue the matter further.

35 Id.

The answer to this question could be very important if the new technology
were itself a rival of the basic pool technology or could be used in
combination with such a rival.

37 That our own analysis today of the pool at its outset would be very much
along the lines of the Attorney General's doesn't mean that our stance
towards conduct we assess in a business review might not change over time if
the facts or circumstances change, or antitrust analysis evolves. In fact,
while the aircraft pool got a clean bill of health from us in 1917, it was
the subject of several antitrust investigations, and ultimately was ended by
a consent decree we obtained after suing in 1972 to break it up, on the
ground that it had, in fact, retarded innovation. See United States v.
Manufacturers Aircraft Assn., 1976-1 Trade Cas. (CCH) ? 60,810 (S.D.N.Y.
1975). This suit has been the subject of thought-provoking commentary. See,
e.g., Bittlingmayer at 235-40. The moral of this story is that not even a
business review is forever, and that, to be responsible enforcers of the
antitrust laws, we have to reserve the right to review the effects of old
practices as times change, especially if things pan out differently from how
they were originally presented to us.