8

Trends of Licensing Agreements in the Industrial Sector
and Subsequent Economic Problems

With the current serious economic conditions surrounding Japanese companies, intellectual property
strategy including licensing activities has become, and will continue to be, one of the important businessstrategies for such companies.
In this report, the actual conditions and the certain problems of companies’ licensing activities were
investigated and studied, while taking a look at the background of and the problems in the strengthened
Japanese patent system, the licensing regulations, and the relationship between the patent system and licensing
agreements.
Specifically, licenses in life science, biotechnological, and pharmaceutical industries as well as the electricand electronic industries and the research of the actual patent pool system and problems for such system wereanalyzed.
In addition to the above, the necessity for economic analysis, such as the evaluation and study oftechnological innovations and spread of the technology based on patent data, and the expected patent data for
performing such purpose, were also examined.

Ⅰ Introduction
1

Background and Outline of This Report

The following are cited as revisions forstrengthening the patent system in Japan: (1)expansion of the scope of patentable inventions, (2)extension of the term of patent, (3) expansion of therange of patent, (4) change in execution, and (5)limitation on compulsory license. Two points arecited as reasons for these revisions forstrengthening the patent system. The first isexternal pressure. This is the strengthening ofpatent protection, which the United States has been
carrying out as one of the means for restoring its
industrial competitiveness since the 1980s, that is,
adopting a pro-patent policy. The United States
tried to restore its industrial competitivenessthrough strong protection of its advantages, namely,
science and technology, by using the patent system,
and also requested Japan to strengthen its patent
system.
The second is that the technical level ofJapanese industry rose and the idea that strong
patent protection is necessary for Japanese industry
has expanded in Japan. On the other hand, thenegative effect of the strengthened patent systemon research and development has been increasingly
discussed, and it is thus now necessary to get backto and examine the basics—how the patent systemshould be to promote technological innovation.
In addition, the possibility that patent inhibits
technological innovation has been pointed out, andproblems known as “patent thicket” and “tragedy of
the anticommons” have been discussed. The

former problem is that it is necessary to negotiatewith many patentees to develop one product andlabor for the negotiations and the payment ofroyalties becomes a burden, obstructing actual
product development, like a thicket. The latter
refers to the situation where too many private
propertyrights(patents)
exist
in
the
biotechnological field and they end up making it
impossible to develop pharmaceuticals. Thissituation is contrary to the “tragedy of thecommons,” which means that overexploitation is
likely to happen in such places as common land andhigh seas where private property rights have notbeen established.
Similar problems have been pointed out atplaces of academic and scientific research, such asuniversities. Even if they are conducting purely
academic research through public funds, they may
be required to pay license fees depending on theexperimental method.(*1) Requiring universities andhospitals to pay patent royalties should not be
categorically denied, but the speedy, freepublication of research results and the freeexchange of opinions are essential for advance inscience. Therefore, it has become necessary to
examine the issue of how the patent system should
be for advance in science. This is a very important
issue for advance in science itself, but to maintainan environment that promotes advance in science isalso extremely important for advance in industrial
technology since academic research and science
have come to play a more important role inindustrial technology. In the United States, theNational Research Council has been working on
this issue for several years, and the NIH(*2) has also(*1) As a case in Japan, there is the model mouse case of Hamamatsu University School of Medicine, which is introduced in
Chapter 4 in this report.
(*2) National Institutes of Health.

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● 64 ●

examined the issue and has been carrying out
measures. Japan should also immediately examine
desirable public research and desirable limits of thepatent right (Section 69 of the Japanese Patent
Law) for testing and research.
2

Patent System and Licensing Agreements

Elements that should be examined inconsidering the relationship between the patent
system and licensing agreements are discussed inthis chapter. First mentioned is knowledge andinformation as public goods. When dealing withknowledge that has not been embodied in a productin the market, a trade-off arises between ex-ante
efficiency and ex-post efficiency. The patent system
exists to create a balance between them. The effectof the patent system on incentive for innovation iscomposite. Second mentioned is the asymmetry of
information. If a licensee cannot clearly know
technical information that is the subject of a deal inadvance, and there is the situation that informationis uncertain between a licensor and a licensee inconcluding an agreement and such knowledge isasymmetric between them, the license agreement
in question will be incomplete (hold-up problem).
Third mentioned is the impossibility of exclusive
possession. The possibility of exclusive possessionof research and development results is imperfect.
Under the patent system, the users of the relevant
technology market bear R&D costs, but general
taxpayers bear a small part of the costs for researchand development conducted by the government andpublic institutions. The possibility of ex-post
observation of costs and benefits, the costs oflawsuits, and the easiness of finding infringements
determine a good part of the desirability of thepatent system. Fourth mentioned is the factor of
how much binding power the intellectual propertysystem has.
On the other hand, from the viewpoint oftheory and analysis, examination from the following
points is considered necessary: (1) strategic aspectof licensing, (2) strategic selection of technology
and licensing, (3) scope of patent protection andlicensing, (4) cumulative innovation and licensing,and (5) bilateral character of research anddevelopment.
In addition, it is also necessary to focus
attention on intellectual property right and spillover
effect. For example, the movement of laboraccompanies the transfer of knowledge and makes
it difficult to exclusively possess knowledge. The
effect on capacity to receive technology andspillover effect within and out of a country, region
or corporate organization must not be neglected.
In the last place, for pro-patent policy, a systemshould be carefully designed from the following
multifaceted viewpoints: (1) incentive towardinnovation, (2) incentive toward disclosure of

information, (3) effect on licensing, and (4) risk oflawsuit. In a small part of technical fields,
strengthened patent right seems to be activating
innovation, but this is not always true through theentire economy. In particular, sufficient attention
must be paid to the effect of cumulative property oftechnology on incentive toward invention, theeffect of the functions and characteristics of thetechnology
licensingmarketonthecommercialization of technology, and the degree ofsocial costs including costs for patent litigations.
Careful consideration should be given to theeconomic consequences of the fact that results
achieved by universities, etc. in the basic research
fields, which have not been subject to patent in thepast, become out of the public domain. In particular,from the viewpoint of benefits from diversity,
careful attention should be given to the adverse
effect of the exclusive possession of basic
technology based on an exclusive right.
3

Examination of the Antimonopoly Law

Among regulations based on the Antimonopoly
Law, licensing regulations mean regulations forlicensing under the competition law, and are
regulations under public law and functioning as theouter frame of licensing agreements that cannot becrossed over even by an agreement between theparties concerned. In the United States, judicial
precedents under the Antitrust Act were cumulated
in terms of licensing regulations by around 1970,
and the current case law was established. Licensing
practices are carried out in line with the licensing
regulations established as case law. The “Antitrust
Guidelines for the Licensing of Intellectual
Property,” which presents the competition
authority’s policy on application of law, waspublished in 1995. However, since the provisions of
the guidelines are looser than those of case law, theguidelines do not have much influence on licensing
practices. Although the “Guidelines for Patent andKnow-How Licensing Agreements under the
Antimonopoly Act” (hereinafter referred to asthese guidelines) were published in 1999 in Japan,
the effectiveness of these guidelines is not clear
because the Fair Trade Commission has notinstituted any lawsuits since the publication ofthese guidelines. The EC stipulates highly detailed
rules on the basis of the structure and technology
transfer block exemption regulation as provided in
Article 81 of the EC Competition Law. In the EC,
companies create licensing agreements within
limits that do not require notification based on theblock exemption regulation, in order to avoid
sending a notification to the European Commission.
This is the function of binding agreements by theblock exemption regulation, and companies tend tocreate somewhat rigid licensing agreements(referred to as the strait jacket effect). The● 65 ●IIP Bulletin 2003

“Technology
Transfer
Block
Exemption
Regulation” was published in 1996.
Secondly, there are five major restrictions inlicensing agreements: (1) sales price restriction andquantitative restriction, (2) restriction on dealing
with competing goods, (3) grant back, (4) tie-in, and(5) obligation of not contesting the validity of therelevant patent. These restrictions are applicable tolicensing agreements concluded in the UnitedStates, Japan and EC countries, but all of thesecountries are oriented toward considering theserestrictions to cause big problems and thus beillegal under competition law.
With the establishment of the global market
that focuses on developed countries’ markets,
international licensing agreements that cover thewhole world have been concluded in all fields.
These agreements are casting a large doubt overthe effectiveness of each country’s licensing
regulations, but it is almost impossible, in practice,
to create a licensing agreement that surely clears
all competition laws in the world. To bring it all
down to earth, the competition authority in acountry other than countries to which parties
concerned belong has difficulty in examining
licensing agreements that cover the whole world
and ordering measures.
Finally, the “Study Report on Patents in New
Fields from the Viewpoint of Competition Policy”
published on June 26, 2002 brought out refusals tolicense on the back of use relations in thebiotechnological industry fields, which may become
problems under the Antimonopoly Law. However,refusals of this kind are considered not to actuallyexist in license deals between leading companies.

Ⅱ Actual Conditions and Problemsof Licenses in the Life Science,
Pharmaceutical and BiotechnologicalIndustries
4

Investigation of Examples and Problems

The actual conditions of licensing agreementsin the life science, pharmaceutical andbiotechnological industries are made clear withspecific examples, and certain problems are
explained in this chapter. Firstly, the following canbe cited as the characteristics of the pharmaceuticaland biotechnological industries: (1) manufacturing
approval system and long development period thatis 10 to 15 years from research and development toplacement on the market, (2) large development
costs of ¥10 billion to ¥90 billion, and (3) large risk
due to low performance up to supply to patients
after going through approval examination.
Secondly, the following can be cited in terms of
the importance of life science-related technology inthe pharmaceutical field: (1) business structure in

IIP Bulletin 2003

the life science-related industries, (2) increase indevelopmentsofbiotechnology-related
pharmaceuticals, (3) steep rise of counter value forlicensing agreements due to enclosure of tools andgenes, (4) intensification of research institutes’
pursuit of returning profits, and (5) increase inlicenses of a new type that uses gene information
and research tools. Thirdly, as for the specialty andproblems of the exercise of patent rights in the life
science field, gene patents, etc. are patents for
substance and the circumvention of such patents isoften difficult, while research tool patents arehighly versatile since they are tools used inperforming research in the life science field andtheir targets are thus not limited. Fourthly, thefollowing cases are cited as examples used in
examining the characteristics of licensing
agreements on life science patents: (1) researchtool patents that can be used for a wide range of
purposes and gene patents, (2) cases where two or
more similar patents were established in the same
technical field and contest a patent right, (3) sharp
rise of cumulated license fees due to obtainment ofmany licenses. There are examples such as thestrategy of dominating the DNA array market(Affymetrix), patent license for laboratory animals
in testing and research in the United States(problem of licensing of OncoMouse patent),setting of licensing fees to the total R&D costs andreach-through royalty license (patent license by
Housey Pharmaceuticals).
In particular, 23 Japanese companies have been
licensed by Housey Pharmaceuticals, and this issue
has a large influence. One remarkable characteristic
in the mode of licensing in the life science field
which is found from specific cases is that the
number of licenses from biotechnological venturecompanies that have received technology transferfrom a public institution has been increasing. The
excessive exercise of such rights as patents forresearch tools will bear down on researchers andthereby hinder the progress of research. Japan
should also examine the method seen in the UnitedStates cases in which a public institution mediates
and arbitrates between researchers and patentees
with social norm, limits patentees’ rights,
eliminates the necessity of obtaining a license fornon-commercial research, and makes researchers
be burdened with test sample transfer agreements.
In addition, research tools are to be used just at the
research and development stage, and they are notmethods for producing end products that are on salein the market.
Attention should also be paid to measuresagainst research-through licensing agreements,
such as those by Housey Pharmaceuticals, and the
sharp rise of cumulative royalties due toobtainment of many licenses.
It is necessary to allocate upstream researchand downstream research in the life science field in● 66 ●

a balanced manner, and it is considered necessary
to set the industrial policy that creates a balance
between respect for basic patents and limitations onthem through design of a system that does notinhibit continuing technological innovation.
5

Examination Based on Interviews with
Companies

This chapter makes clear problems in licensing
agreements between companies on the basis of theresults of interviews with major Japanesepharmaceutical companies, biotechnological venturecompanies, and electric and electronic companies,
and examines the problems based on personalviews. Many Japanese companies now require theintroduction of licenses from European and U.S.
venture companies in order to put forward theresearch and development of biotechnologicalpharmaceuticals. This fact revealed that Japanesecompanies were in a vulnerable position inlicensing negotiations for screening methods andgene information. In addition, it was recognized that
there were cases where they were required toobtain licenses for testing and research and pay
counter value. Pharmaceutical companies havebeen strongly based on the “principle ofself-sustaining,” and to say nothing of theintroduction of licenses from competitors, there has
been scarcely any joint development or partnership.
However, with an increase in the burden of
research and development costs, pharmaceuticalcompanies have been activating joint research anddevelopment in cooperation with venturecompanies and competing manufacturers, both inand out of Japan.
It was also revealed that in the electric andelectronic industries (interview was conducted forcomparison)
that
are
based
on
a
horizontally-divided
business
structure,across-licensing agreement scheme has become lessavailable between companies specialized indevelopment due to the development of digital andnetwork technology, and that the conventionalframework has thus been collapsing. In the future,
standard technologies are expected to increase dueto the spread and advance of network technology,
and the utilization of patent pool is also expected tointensify.
On the other hand, it is considered necessary
to examine the utilization of the patent poolmechanism in relation to gene chips in thebiotechnological industry.
6

discusses the effect of the characteristics onlicensing. First described is the process ofpharmaceutical research and development andlicensing. Enormous costs and period are required
to develop new drugs as stated in Chapter 4. If
capital costs are included, more than ¥10 billion isrequired. In addition, most of the costs are “sunk”
costs, and a problem called “hold-up” is likely tooccur in deals that involve investment in whichcosts are sunk. When a pharmaceutical company
that has succeeded in developing a new drug issued for injunction by a third party due to patent
infringement, if the company can make gross profit
of even ¥1, it will grant a license under the hold-up
condition and sell the new drug. Because of the fearof such situation, pharmaceutical companies have
incentive to conclude licensing agreements at theearly development stage. However, the countervalue payment method of the licensor and licensee
differs depending on the degree of probability ofsuccessful placement on the market.
The second point is the existence of venturecompanies in the biotechnological field. Due to theabsence of vertical integration, venture companies
that are carrying out upstream development are in
the environment where they can demand highpatent royalties from major pharmaceuticalcompanies, and licensing fees are the only source ofincome for venture companies that do not
manufacture and sell. Therefore, venturecompanies tend to set an aggressive price in orderto maximize their income. However, these venturecompanies are in danger of being acquired by major
pharmaceutical companies.
Thirdly, the boundary between academic
research and commercial research has been getting
ambiguous. In the United States, there areexamples in which the NIH concludes anarrangement with patentees in which patentees do
not require the obtainment of a license in relation touse of the relevant technology in research fornoncommercial use by the NIH’s funds. However,in Japan, there is no organization corresponding to
the NIH. Fourthly, the possibility that a patent poolmechanism for DNA chips is formed is considered
low due to absence of network externality.
Finally, regarding effect on the product market,
the price elasticity of demand for a new drug is low.
In addition, when the price elasticity of demand islow, even if the price is raised, the demandedamount will not largely decrease, so income will
increase. For this reason, licensors have incentive
to demand high royalties without caring about
decrease in demand due to a sharp price rise.

Examination from the Economic Viewpoint

On the basis of the contents of Chapters 4 and5, this chapter brings together the characteristics ofthe pharmaceutical industry, explains thesecharacteristics from economic viewpoints, and then
● 67 ●IIP Bulletin 2003

Ⅲ Actual Conditions, Problems andEconomic Effects of the Patent
Pool System
7

Technical Standards and Patent Pools:
Actual Conditions and Problems

This chapter discusses technical standards andthe actual conditions and problems of patent pools.
In relation to the problem of patent license that isessential for technical standards, patent pools havebeen bought to attention, and they have been more
actively utilized mainly in the information andcommunications fields. However, patent pools do
not completely solve the problems, and there
remain problems to be solved for the industrial
sector. This chapter first reviews the actual
conditions of patent pools in operation or thosesuggested, and then extracts future important tasks
and proposes possible solutions.
First of all, the following are considered to be
the causes of generation of patent pools: (1)compatibility of information and communications
technology, (2) network externality of technicalstandards, and (3) prevention of a sharp rise of
cumulated royalties.
Secondly, the process of establishment ofpatent pools consists of (1) ascertainment oftechnical standards, (2) evaluation and selection of
essential patents, (3) decision of licensing
conditions, and (4) selection or establishment of alicense management company.
Thirdly, as for patent pool mechanisms, thereare (1) the lump-sum sublicense method which istypified by MPEG2 and (2) the mutual license
method.
Fourthly, regarding legal infrastructure for
implementing patent pools, it is necessary to makeclear (1) the relationship with the Antimonopoly
Law, (2) the relationship with the principle ofterritoriality, and (3) self-protection means ofpatentees.
In the last place, for problems with patentpools and their solutions, the following is
considered necessary: (1) fostering a common
understanding in the industrial sector, (2) reviewing
the patent policy of technical standardization bodies,(3) government involvement, and (4) attracting
companies specialized in development.
Patent pools in the information andcommunications technology field are expected to befurther sophisticated. Particularly, in order to apply
patent pools in the biotechnological field, theevaluation of subject patents and the creation of an
appropriate counter value allocation system areessential. In addition, in order to encouragecompanies specialized in development toparticipate in patent pools, it is necessary toconsider RAND plus approach in relation to thepatent policy of technical standardization bodies.

IIP Bulletin 2003

Therefore, a mechanism for government
involvement should not be considered to be a taboo
for technical standards that have a large influenceon the society.
8

Economic Effects

This chapter explains the economic effects ofpatent pools.
First of all, as the complementary economic
effects of patent pools are (1) the advantage of
avoiding excessive licensing fees, (2) diffusion tothird parties, (3) one stop shopping of essential
patents, and (4) more effective deterrence of thepossibility of hold-up by patentees who holdessential patents.
Secondly, as for constraint in patent pools,
there are (1) the generation of outsiders of patentpools and (2) the problem of breakup of patent pools.
One of the reasons for this is the conflict of basic
interests between vertical integration-based
companies and companies specialized in researchand development.
In short, since there is the conflict of basic
interests concerning prices of patent pools invertical relations, research and development-based
companies may have difficulty in participating inpatent pools that were set up on the initiative ofvertical integration-based companies. Such a basic
confrontational structure is anticipated to exist in
the background of Qualcomm’s showing no
inclination to participate at the present moment.
Another reason is a free ride on demand due to low
prices of patent pools. The pools of complementary
patents include internal uncertainty arising from afree ride, and unless this problem is solved, a single
patent pool will not be actually realized even if it isbeneficial to both companies and society.
Thirdly,
regardingpatentpools
andcompetition, consideration must be made (1) fromthe
aspectofthesubstitutability
andcomplementarity of patents (in the case ofbi-directional blocking between patent pools ofpatents, both of which are individually exploitable
and are in a substitutive relation) and (2) from theviewpoint of incidental constraint and openness tothird parties.
Fourthly, the following are considered in termsof the management of patent pools and future policy
issues: (1) fair distribution according to technicalcontribution, (2) utilization of a reciprocity clausefor preventing free rides, (3) strengthening ofstandard policy, and (4) compulsory license tooutsiders. In particular, careful examination isrequired for the propriety of (4).

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Ⅳ Patent Database
9

Necessity of Economic Analysis
Patents and Desirable Patent Data

ofFirst of all, the necessity and problems of
economic analysis of patents are discussed.
Empirical analysis from various aspects ofpatent has been required, including analysis fromresearch and development, filing applications,licensing, technological evolution process, processof spread of technology, and lawsuit. However, theactual condition in the past was that the aggregationof patent data by the unit of company, which serves
as a basis for economic analysis, could not be
conducted at a low price. This is one of the reasonsfor no progress of empirical analysis of patents inJapan. In addition, for the economic analysis ofpatents, easy access to only patent data is not
sufficient, and it is necessary to combine
aggregated patent data with other databases andstudy their relationships.
Secondly, the patent database of the NBER(*3)
in the United States is for free, and it is easy tounderstand and analyze companies’ patent portfolio
data using the database. In addition, it is easy to
combine the patent database with financial data,
corporate ownership-related data, or financial
market data. However, data from other aspects,
such as concordance with products/industry andlicensing, have not been prepared.
Therefore, a patent database for the economic
analysis of patents in Japan is proposed, and thisdatabase is expected to be a better information
source than NBER patent data in terms of theunderstanding of extinction of rights and disputed
relations such as trial for invalidation. The future
problems with a Japanese patent database are theweakness of quoted information and the necessityof efforts to combine it with other databases forunderstanding the patent portfolio of concatenateddata and conducting an analysis in combination withfinancial or fiscal databases. In the future,
combination with other survey data andinternational patent family data is desired.
10 Development of Patent Statistics by the
OECD

Japan as vital source materials for legislation at theDiet, policymaking by ministries and agencies, andresearch activities by such research institutes asuniversities.
In
terms
of
scienceandtechnology-related statistics, the OECD has
traditionally led the rulemaking for R&D (researchand development) statistics and has devoted its
efforts to transmit reliable results.
In recent years, there has been increasingly
more request especially for more multifaced
analysis of policy. In order to meet such request,
the OECD is expanding the scope of its activities
for science and technology statistics and is also
active in the development of new science andtechnology statistics. Among new science andtechnology statistics, patent statistics that include
an abundant volume of information and have thepotential for various forms of analysis are especiallya focus of attention, and the development of suchstatistics is an important task of the OECD.
Although the OECD’s patent project is anunspectacular activity, it holds the potential toimpact on researchers and government officials inJapan in the sense of the creation of a research
environment and the provision of a specific, simple
patent indicator for policymaking. Therefore,
relevant ministries and agencies as well as
researchers are asked to pay particular attention to
the trend of the OECD patent project and toactively get involved in it.
11 Survey on Intellectual Property Activity
This chapter introduces the survey on
intellectual property activity conducted last year
(October 2002).
This survey was implemented in response to
the “development of intellectual property-related
statistics” which was indicated as a specific action
plan of the “Intellectual Property Policy Outline”
that was decided by the Strategic Council onIntellectual Property hosted by the Prime Ministeron July 3, 2002. The result will be published at theend of FY 2003, and it is expected to serve as anextremely important material for promoting theunderstanding and analysis of corporate intellectual
property activities.

This chapter introduces the development ofpatent statistics by the OECD. The OECD(*4) is aninternational organization based on the OECD
Convention and a collection of developed countries
that have a policy of market economy (30members).
Among the OECD’s activities, various
statistics are especially cited as reliable data
throughout the world, and they are also utilized in(Senior Researcher: Fumio Ishikawa)(*3) National Bureau of Economic Research(*4) The Organization for Economic Cooperation and Development● 69 ●IIP Bulletin 2003