IP Licensing Strategy: Yamaha vs Bombardier

I suppose you don't tend to think about Personal Watercrafts (PWCs) when it comes to patents.

But that is exactly what Yamaha sued Bombardier about in 2001 for importing and selling US products that infringed on Yamaha's patents, thereby violating of Section 337 of the Tariff Act, so to say in legal-speak. This was brought to trial at the International Trade Commission. Ultimately the parties reached a settlement based on the defense expert's analysis that distinguished Yamaha's use of patent rights from IP used to strategically raise rivals' costs and reduce competition, i.e. create antitrust.

On a side note, I was not aware that Yamaha Corporation offered products and services beyond pianos, since I was semi-forced to sit in front of one and practice everyday for a good ten years of my life. So yes, Yamaha does produce electronics, motorcycles, and power sports equipment on top of good old musical instruments.

The PWC industry is best characterized as a differentiated products oligopoly. Once the new sit-down PWC was introduced in the late 1980s, industry sales quickly picked up (as older stand-up PWCs were not super popular) and four to five competitors came to dominate the market, the top 2 being Yamaha and Bombardier. As with the auto industry, design and innovation are key- any delay in introducing new features can harm the firm's competitiveness in the long-term, therefore strategic use of patents to delay rivals or disrupt their design process can be very effective competition inhibitors.

In pursuing its patent strategy, Yamaha is far more aggressive than its competitors, holding some 90% of all patents in the industry at the time of litigation. Bombardier believed that Yamaha's behavior not only constituted patent flooding, but also wrongful patent filing on the grounds that several patents in Yamaha's portfolio represented merely trivial and obvious modifications of prior art. Nevertheless, Yamaha's strategy indeed forced its competitors to take a all-or-nothing package license with per-unit royalties to avoid infringement. Bombardier called Yamaha out on exacerbating the industry's intense price competition because Yamaha recommended its competitors to simply pass the royalty fee on to customers through a price increase. Eventually, Yamaha reached settlements with 2 of its 4 competitors.

Of course, determining whether Yamaha's strategic use of its patents was anticompetitive depends on whether you agree that the patents in its portfolio are valid, infringed, or practiced in the US. Assuming all 3 are true, Yamaha leaves its competitors with 3 options that all raise their prices: proceed with litigation to test these assumptions, take the license, or design around the patent.  With reduced output or higher prices from competitors, Yamaha gains in revenue and market share.

In this example, it appears that a lack of appropriate antitrust enforcement can fail to penalize firms that use vast patent portfolios to hurt competition in the markets. It also underpins the question of where law and economic regulation should draw the line between pro and anti-competitive exercise of patent rights.