TIPS^®  Taiwan Intellectual Property Special

AAC Withheld the Compulsory License for Philips CD-R Patents

On July 26, 2004, Taiwan Intellectual Property Office granted a compulsory license to Gigastorage for 5 patents related to CD-R of Phillips, through the expiration of the patent term of said 5 patents, based on the reasons that Gigastorage failed to reach a licensing agreement with reasonable commercial terms through certain period of negotiation. Philips appealed the decision of the compulsory license to the Administrative Appeal Commission (AAC), the Ministry of Economic Affairs. After almost 2 years of consideration and several oral arguments between the parties, the AAC dismissed Philips’ appeal.

During the period of the appeal, the AAC invited the parties to negotiate a settlement, but the gap between each party’s expectations regarding the royalty rate is too high to reach a consensus. Although Gigastoratge engaged in infringement on Philips’ patents before the compulsory license was granted, it is not a ground to deny the granting of the compulsory license. Philips asked US$ 0.045 per unit for the royalty. However, since the market price for the CD-R products has fallen from US$ 5 per unit to US$ 0.19 per unit between 1997 and the middle of 2003, Gigastorage can only afford a royalty rate at 2% to 5% of the sales prices. The AAC believes the royalty demanded by Philips is too high under the current market condition. Pursuant to Article 76 of Taiwan Patent Law, where a user fails to reach a licensing agreement with reasonable commercial terms after a certain period of negotiation, the Patent Authority may grant a compulsory license upon the user’s application and the practice of the subject patent under such compulsory licensing should mainly for supplying the domestic market. As a result, ACC ruled to withhold the compulsory licensing granted to Gigastorage.

Philip insists that the royalty rate proposed by Gigastorage is unreasonable, and Philips does not deny the possibility of licensing to Gigastorage. It will file an administrative litigation against the AAC’s decision to the Administrative High Court.

However, the compulsory licensing issue is not the only problem Philips faces in Taiwan regarding it CD-R licensing practice. Several major recording media manufacturers in Taiwan also filed request for the permission of concerted action with Taiwan Fair Trade Commission (Taiwan FTC) in June, hoping to combine the power to each individual licensee to increase their bargaining power. While Philips reduces the royalty rate to US$ 0.025 per unit for licensees in the European Union, such new royalty rate is not available for licensees in Taiwan. As a result, 4 of the companies filed a request for the permission of concerted action, which is, in principal, not allowed under the Fair Trade Law in Taiwan, to allow the CD-R manufacturers to act together for the licensing negotiation. Also in this April, Taiwan FTC issued a decision, finding Philips engaged in unfair competition, upon the complaints filed by the same manufacturers here. A new licensing mechanism of Philips requires that the licensees should provide inventory list of the manufacturing equipment, written sales reports, adding designated marks in the process of manufacturing, and providing correspondence made between the licensee and supplier or customers. Such request of information was ruled as unfair practice by Taiwan FTC because Philips is also a competitor in the recording media market against those licensees.