[Federal Register Volume 59, Number 154 (Thursday, August 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19657]
[[Page Unknown]]
[Federal Register: August 11, 1994]
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DEPARTMENT OF JUSTICE
Antitrust Division
Request for Comments on Draft Antitrust Guidelines for the
Licensing and Acquisition of Intellectual Property
AGENCY: Antitrust Division, Department of Justice.
ACTION: Notice.
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SUMMARY: The Antitrust Division has drafted proposed new Antitrust
Guidelines for the Licensing and Acquisition of Intellectual Property.
The Guidelines, when adopted in final form by the Department of
Justice, will state the antitrust enforcement policy of the Department
with respect to the licensing and acquisition of intellectual property,
and will supersede section 3.6 in Part I, ``Intellectual Property
Licensing Arrangements,'' and cases, 6, 10, 11, and 12 in Part II of
the U.S. Department of Justice 1988 Antitrust Enforcement Guidelines
for International Operations. Comments should be submitted in writing
within 60 days of publication of these draft Guidelines.
FOR FURTHER INFORMATION CONTACT:
Submit views to Richard Gilbert, Deputy Assistant Attorney General,
Antitrust Division, Department of Justice, Tenth Street and
Pennsylvania Avenue, NW., Washington, DC 20530, 202-514-2408.
SUPPLEMENTARY INFORMATION: As announced by the Assistant Attorney
General in charge of the Antitrust Division, Anne K. Bingaman, in
published speeches on January 10, 1994 and June 16, 1994, these
proposed guidelines were drafted to state the current views of
Antitrust Division with respect to the licensing and acquisition of
intellectual property.
The Guidelines are not intended to create or recognize any legally
enforceable right in any person. They are not intended to affect the
admissibility of evidence or in any other way necessarily to affect the
course or conduct of any present of future litigation. Moreover,
changes in the relevant statutory framework, legal precedent, and
methods of internal Department analysis may occur over time, and these
changes will not always be simultaneously reflected in amendments to
the Guidelines. Parties seeking to know the Department's specific
enforcement intentions with respect to any particular transaction
should consider seeking a Business Review pursuant to 28 CFR 50.5.
Dated: August 8, 1994.
Richard Gilbert,
Deputy Assistant Attorney General, Antitrust Division.
U.S. Department of Justice Antitrust Guidelines for the Licensing and
Acquisition of Intellectual Property\1\
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\1\These Guidelines supersede section 3.6 in Part I,
``Intellectual Property Licensing Arrangements,'' and cases 6, 10,
11, and 12 in Part II of the U.S. Department of Justice 1988
Antitrust Enforcement Guidelines for International Operations.
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1. Intellectual Property Protection and the Antitrust Laws
These Guidelines state the antitrust enforcement policy of the U.S.
Department of Justice with respect to the licensing and acquisition of
intellectual property protected by patent, copyright, and trade secret
law.\2\ By stating its general policy, the Department hopes to assist
those who need to predict whether the Department will challenge a
practice as anticompetitive. However, these Guidelines cannot remove
judgment and discretion in antitrust law enforcement. Moreover, the
standards set forth in these Guidelines must be applied in
unforeseeable circumstances. Each case will be evaluated in light of
its own facts, and these Guidelines will be applied reasonably and
flexibly.
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\2\These Guidelines do not cover the antitrust treatment of
trademarks. Although the same general antitrust principles that
apply to other forms of intellectual property apply to trademarks as
well, these Guidelines deal with innovation-related issues that
typically arise with respect to patents, copyrights, and trade
secrets, rather than with product-differentiation issues that
typically arise with respect to trademarks.
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In the United States, patents confer rights to exclude others from
making, using, or selling in the United States the invention claimed by
the patent for a period of seventeen years from the date of issue.\3\
To gain patent protection, an invention (which may be a product,
process, machine, or composition of matter) must be novel, nonobvious,
and useful. Copyright protection applies to original works of
authorship embodied in a tangible medium of expression.\4\ A copyright
protects only the expression, not the underlying ideas. Unlike a
patent, which protects an invention not only from copying but also from
independent creation, a copyright does not preclude others from
independently creating similar expression. Trade secret protection
applies to information whose economic value depends on its not being
generally known. Trade secret protection is conditioned upon efforts to
maintain secrecy and has no fixed term. As with copyright protection,
trade secret protection does not preclude independent creation by
others.\5\
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\3\See 35 U.S.C. 154 (1988). In the case of process patents, the
protection extends to importation of goods made by a patented
process. See 19 U.S.C. 1337 (1988 & Supp. V 1993); 35 U.S.C. 271(g)
(1988).
\4\See 17 U.S.C. 102 (1988 & Supp. V 1993). Copyright protection
lasts for the author's life plus 50 years, or 75 years from first
publication (or 100 years from creation, whichever expires first)
for works made for hire. See 17 U.S.C. 302 (1988).
\5\The principles stated in these Guidelines also apply to
protection of mask works fixed in a semiconductor chip product (see
17 U.S.C. 901 et seq. (1988)), which is analogous to copyright
protection for works of authorship. These principles also generally
apply to licensing of know-how and other collections of information
which may not be protected by intellectual property rights, but
which may nonetheless have value to a licensee or transferee because
of the form into which they are assembled.
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Although there are clear and important differences in the purpose,
extent, and duration of protection provided under the intellectual
property regimes of patent, copyright, and trade secret, the governing
antitrust principles are the same. Antitrust analysis takes differences
among these forms of intellectual property into account in evaluating
the specific market circumstances in which transactions occur, just as
it does with other particular market circumstances.
The intellectual property laws and the antitrust laws share the
common purpose of promoting innovation and enhancing consumer
welfare.\6\ The intellectual property laws provide incentives for
innovation and its dissemination and commercialization by establishing
enforceable property rights for the creators of new and useful
products, more efficient processes, and original works of expression.
In the absence of intellectual property rights, imitators could more
rapidly exploit the efforts of innovators and investors without
compensation, thereby reducing the commercial value of innovation and
eroding the incentives to invest. The antitrust laws promote innovation
and consumer welfare by prohibiting certain actions by firms that deter
those firms and others from competing with respect to either existing
or new ways of serving consumers.
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\6\``[T]he aims and objectives of patent and antitrust laws may
seem, at first glance, wholly at odds, However, the two bodies of
law are actually complementary, as both are aimed at encouraging
innovation, industry ad competition.'' Atari Games Corp. v. Nintendo
of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).
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2. General Principles
2.0 These Guidelines embody three general principles: (a) For the
purpose of antitrust analysis, the Department regards intellectual
property as being essentially comparable to any other form of property;
(b) the Department does not presume that intellectual property creates
market power in the antitrust context; and (c) the Department
recognizes that intellectual property licensing allows firms to combine
complementary factors of production and is generally procompetitive.
2.1 Standard Antitrust Analysis Applies to Intellectual Property
The Department applies the same general antitrust principles to
conduct involving intellectual property that it applies to conduct
involving any other form of tangible or intangible property. That is
not to say that intellectual property is in all respects the same as
any other form of property. Intellectual property has important
characteristics that distinguish it from many other forms of property.
These characteristics can be taken into account by standard antitrust
analysis, however, and do not require the application of fundamentally
different principles.
Intellectual property law bestows on the owners of intellectual
property certain rights to exclude others. These rights help the owners
to profit from the use of their property. An intellectual property
owner's rights to exclude are similar to the rights enjoyed by owners
of other forms of private property. As with other forms of private
property, certain acquisitions of intellectual property, and certain
types of agreements with respect to such property, may have
anticompetitive effects against which the antitrust laws can and do
protect. Intellectual property is thus neither particularly free from
scrutiny under the antitrust laws, nor particularly suspect under them.
2.2 Intellectual Property and Market Power
Market power is the ability profitably to maintain prices above, or
output below, competitive levels for a significant period of time.\7\
The Department will not presume that a patent, copyright, or trade
secret necessarily confers market power upon its owner. Although the
intellectual property right confers the power to exclude with respect
to the specific product, process, or work in question, there will often
be sufficient actual or potential close substitutes for such product,
process, or work to prevent the exercise of market power.\8\ If a
patent or other form of intellectual property does confer market power,
that market power does not by itself offend the antitrust laws. As with
any other tangible or intangible asset that enables its owner to obtain
significant supracompetitive profits, market power (or even a monopoly)
that is solely ``a consequence of a superior product, business acumen,
or historical accident'' does not violate the antitrust laws.\9\ Nor
does such market power impose on the intellectual property owner an
obligation to license that technology to others. See, e.g., SCM Corp.
v. Xerox Copy., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S.
1016 (1982). As in other antitrust contexts, however, market power
could be illegally acquired or maintained, or, even if lawfully
acquired and maintained, would be relevant to the ability of an
intellectual property owner to harm competition through unreasonable
conduct in connection with such property.
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\7\Market power can be exercised in other economic dimensions,
such as quality, service and innovation. It is assumed in this
definition that all competitive dimensions are held constant except
the ones in which power is being exercised; it would not, of course,
be indicative of market power that a seller is able to charge higher
prices for a higher-quality product. The definition in text is
stated in terms of a seller with market power; a buyer could also
exercise market power (e.g., by maintaining the price below the
competitive level, thereby depressing output).
\8\The Department notes that the law is unclear on this issue.
Compare Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S.
2, 16 (1984) (expressing the view in dictum that if a product is
protected by a patent, ``it is fair to presume that the inability to
buy the product elsewhere gives the seller market power'') with id.
at 37 n.7 (O'Connor, J., concurring) (``[A] patent holder has no
market power in any relevant sense if there are close substitutes
for the patented product.''). Compare also Abbott Laboratories v.
Brennan, 952 F.2d 1346, 1354-55 (Fed. Cir. 1991) (no presumption of
market power from intellectual property right) with Digidyne Corp.
v. Data General Corp., 734 F.2d 1336, 1341-42 (9th Cir. 1984)
(requisite economic power is presumed from copyright), cert. denied,
473 U.S. 908 (1985).
\9\United States v. Grinnell Corp., 384 U.S. 563, 571 (1966);
see also United States v. Aluminum Co. of America, 148 F.2d 416, 430
(2d Cir. 1945) (Sherman Act is not violated by the attainment of
market power solely through ``superior skill, foresight and
industry'').
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2.3 Procompetitive Benefits of Licensing
Intellectual property typically is one component among many in a
production process and derives value from its combination with
complementary factors. Complementary components of production include
manufacturing and distribution facilities, workforces, and other items
of intellectual property. The owner of intellectual property has to
arrange for its combination with other necessary inputs to realize its
commercial value. Often, the owner finds it most efficient to contract
with others for these inputs, to sell rights to the intellectual
property, or to enter into a joint venture arrangement for its
development, rather than supplying these complementary inputs itself.
Licensing, cross-licensing, or otherwise transferring intellectual
property (hereinafter ``licensing'') can facilitate its integration
with complementary factors of production. This integration can lead to
more efficient exploitation of the intellectual property, benefiting
consumers through the reduction of costs and the introduction of new
products. Such arrangements increase the value of intellectual property
to consumers and to the developers of the technology. By potentially
increasing the expected returns from intellectual property, licensing
also can increase the incentive for its creation and thus promote
greater investment in research and development.
Sometimes the use of one item of intellectual property requires
access to another. An item of intellectual property ``blocks'' another
when the second cannot be practiced without using the first. For
example, an improvement on a patented machine can be blocked by the
patent on the machine. Licensing promotes the coordinated development
of technologies that are in a blocking relationship.
Field-of-use, territorial, and other limitations on intellectual
property licenses may serve procompetitive ends by allowing the
licensor to exploit its property as efficiently and effectively as
possible. These various forms of exclusivity can be used to give a
licensee an incentive to invest in the commercialization and
distribution of products embodying the licensed intellectual property
and to develop additional applications for the licensed property. The
restrictions may do so, for example, by protecting the licensee against
free-riding on the licensee's investments by other licensees or by the
licensor. They may also promote the licensor's incentive to license, by
protecting the licensor from competition in the licensor's own
technology in a market niche that it prefers to keep to itself. These
benefits of licensing restrictions apply to patent, copyright, and
trade secret licenses.
Example 1\10\
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\10\The examples in these Guidelines are hypothetical and do not
represent judgments about the actual market circumstances of the
named industries.
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Situation: Delta, Inc. develops a new software program for
inventory management. The program has wide application in the health
field. Delta licenses the program in an arrangement that imposes both
field of use and territorial limitations. Some of Delta's licenses
permit use only in hospitals; others permit use only in group medical
practices. Delta charges different royalties for the different uses.
All of Delta's licenses permit use only in specified geographic areas.
The license contains no provisions that would prevent or discourage
licensees from developing, using, or selling any other program. None of
the licensees are actual competitors of Delta in the sale of inventory
management programs.
Discussion: The key competitive issue raised by the licensing
arrangement is whether it harms competition that would likely have
taken place in its absence. (See section 3.) Such harm could occur if
the licenses foreclose access to competing technologies (in this case,
most likely competing computer programs), prevent licensees from
developing their own competing technologies (again, in this case most
likely computer programs), structure royalties to impose an effective
requirements contract upon licensees, or facilitate market allocation
or price-fixing for any product or service supplied by the licensees.
If the license agreements contained such provisions, the Department
would analyze their competitive effects as described in sections 3-5 of
these Guidelines. In this hypothetical, there are no such provisions,
and there is no apparent harm to competition. The arrangement appears
to do no more than increase the value of the licensed technology by
subdividing it among different fields of use and territories and
charging royalties that differ among licensees. The Department
therefore would be unlikely to object to this arrangement. The result
would be the same whether the technology was protected by copyright,
patent, or trade secret. The Department's conclusion as to competitive
effects could differ if, for example, the license barred licensees from
using any other inventory management program.
3. Antitrust Concerns and Modes of Analysis
3.1 Nature of the Concerns
While intellectual property licensing arrangements are typically
welfare-enhancing and procompetitive, antitrust concerns may arise when
licensing arrangements impede competition that likely would have taken
place in the absence of the license. Licensing arrangements that may
raise antitrust concerns include restrictions on goods or technologies
other than the licensed technology, contractual provisions that
penalize licensees for dealing with suppliers of substitute
technologies, and acquisitions of intellectual property that lessen
competition in a relevant antitrust market.
For example, a licensing agreement that transfers little or no
useful intellectual property, but imposes restraints upon entities that
otherwise would compete using alternative technologies, might have
significant adverse effects in downstream goods markets or in other
markets. (See, e.g., Example 5.) An arrangement that effectively merges
the research and development activities of two of only a few entities
that could plausibly engage in research and development in the relevant
field might harm competition for development of new intellectual
property. (See section 3.2.3, ``Innovation Markets.'')
Intellectual property licensing between actual or likely potential
competitors\11\ may raise antitrust concerns by reducing or eliminating
competition in the market(s) in which they compete or are likely to
compete. In addition, license restrictions with respect to one market
may reduce competition in another market by, for example, foreclosing
access to or raising the price of an important input (other than as a
natural consequence of the licensee acquiring a licensed technology for
its own use).
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\11\A firm will be treated as a likely potential competitor if
its entry is likely under the standards of section 3.3 of the U.S.
Department of Justice and Federal Trade Commission, Horizontal
Merger Guidelines (April 2, 1992), or if there is evidence of likely
actual entry by that firm. Competitive concerns are more likely to
arise when the number of actual and likely potential competitors is
not large.
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3.2 Markets Affected by Licensing Arrangements
A licensing arrangement may affect competition in a variety of
markets. In general, for goods markets and technology markets affected
by a licensing arrangement, the Department will approach the
delineation of relevant market and the measurement of market share in
the intellectual property area in the same way that it treats such
questions under section 1 of the 1992 Horizontal Merger Guidelines. In
addition, the Department may define an innovation market to aid in
assessing whether a licensing arrangement would be likely substantially
to reduce investment in research and development.
3.2.1 Technology Markets
Technology markets consist of the intellectual property that is
licensed, transferred, or acquired and the technologies that are close
substitutes for it. The owner of a process for producing a particular
good may be constrained in its conduct with respect to that process not
only by other processes for making that good, but also by other goods
that compete with the downstream good and by the processes used to
produce those other goods.
In many cases, particularly in the case of a product patent, there
may be little to be gained by analyzing competitive effects in a
separate technology market in addition to analyzing effects in the
associated goods market. Moreover, there may be practical problems in
gathering appropriate data to determine ``prices'' for the technology
and its substitute processes. For example, the technology may be
licensed royalty-free in exchange for the right to use other
technology, or it may be licensed as part of a package license. When
complicating factors preclude delineating a relevant market in which
the licensed technology competes, the Department may focus its
attention on effects in the associated goods markets.
To estimate the market share of a participant using new technology,
the Department generally will forecast market acceptance over a two-
year period using the best available information. For technologies not
yet commercialized, the two-year period will begin with commercial
introduction. When market shares or other indicia of market power are
not readily available, and it appears that competing technologies are
all equally efficient,\12\ the Department's analysis will treat each
participant in the technology market as having an equal market share.
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\12\In this analysis, the Department will regard two
technologies as being ``equally efficient'' if they can be used to
produce, at the same cost, goods perceived by consumers to be close
substitutes.
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3.2.2 Goods markets. A number of different goods markets may be
relevant to evaluating the effects of a licensing arrangement. A
restraint in a licensing arrangement may have competitive effects in
markets for final or intermediate goods made using the intellectual
property, or it may have effects upstream, in markets for goods that
are used as inputs, along with the intellectual property, to the
production of other goods.
3.2.3 Innovation markets. Firms compete in research and
development that may result in new or improved products or processes.
If the capacity for research and development activity that likely will
produce innovation in technology is scarce and can be associated with
identifiable specialized assets or characteristics of specific firms
(which may or may not currently participate in the relevant technology
or goods markets), in may be appropriate to consider separately the
impact of the conduct in question on competition in research and
development among those firms. The firms identified as possessing these
specialized assets or characteristics can be thought of as competing in
a separate innovation market. See Complaint, United States v. General
Motors Corp., Civ. No. 93-530 (D. Del., filed Nov. 16, 1993).
Alternatively, innovation markets may be used to assist with the
identification of competitive effects in relevant goods and technology
markets. See, e.g., Complaint, United States v. Flow International
Corp., Civ. No. 94-71320 (E.D. Mich., filed Apr. 4, 1994).
Example 2
Situation: Two companies agree to cross-license future patents
relating to the development of a new component for aircraft jet
turbines. Innovation in the development of the component requires the
capability to work with very high tensile strength materials. Aspects
of the licensing arrangement raise the possibility that competition in
research and development of this and related components will be
lessened. The Department is considering whether to define an innovation
market in which to evaluate the competitive effects of the arrangement.
Discussion: If the firms that have the capability to work with very
high tensile strength materials can be reasonably identified, the
Department will consider defining a relevant innovation market for
development of the new component. If the number of firms with the
required capability is small, the Department may employ the concept of
an innovation market to analyze the competitive effects of the
arrangement in that market, or as an aid in analyzing competitive
effects in technology or goods markets. In this analysis, the
Department would take into account the specific nature of the
restraint, the likelihood that other firms may in the future acquire
the requisite capability, other competitive factors, and any efficiency
justifications for the licensing arrangement.
If the number of firms with the required capability is very large
(either because there are a large number of such firms in the jet
turbine industry, or because there are many firms in other industries
with the required capability), then the Department will conclude that
the innovation market is competitive. Under these circumstances, it is
unlikely that any single firm or plausible aggregation of firms could
acquire a large enough share of the assets necessary for innovation to
have an adverse impact on competition.
If the Department cannot reasonably identify the firms with the
required capability, it will not attempt to define an innovation
market.
Just as goods markets are improperly defined if the firms in the
market, were they to coordinate their decisions, would not profitably
increase price above competitive levels, so too innovation markets are
improperly defined if hypothetical coordination among the firms in the
candidate market would not profitably retard or restrict innovation in
the technology.
When a relevant innovation market has been defined, the Department
may assess the competitive significance of each participant based on
shares of those identifiable assets or characteristics upon which
innovation depends, on shares of research and development expenditures,
on shares of the related product, or on equal shares assigned to
reflect the equal likelihood of innovating, depending on the facts of
each case. Cf. 1992 Horizontal Merger Guidelines Sec. 1,41 & n.15. In
evaluating competitive effects, the Department would also take into
account other factors such as competitive harms from the elimination of
alternative research paths and efficiency benefits from the integration
of complementary research and development programs.
3.3 Horizontal and Vertical Relationships
As with other property transfers, antitrust analysis of
intellectual property licensing arrangements examines whether the
relationship of the parties to the arrangement is primarily horizontal
or vertical in nature, or whether it has substantial aspects of both.
A licensing arrangement has a horizontal component with respect to
a technology market if it involves the acquisition of rights to
technologies that are economic substitutes for technologies that the
licensee owns or controls. For analytical purposes, the Department
ordinarily will treat a relationship between a licensor and its
licensees as horizontal with respect to a particular goods market when
the licensor and its licensees would be actual or likely potential
competitors in that market absent the license.
An arrangement has a vertical component when it affects activities
that are in a complementary relationship, as is typically the case in a
licensing arrangement. Such a relationship exists when the licensor and
its licensees stand in a seller-buyer relationship, or operate at
different levels of the chain of production and distribution. For
example, the licensor's primary line of business may be in research and
development, and the licensees, as manufacturers, may be buying the
rights to use technology developed by the licensor. Alternatively the
licensor may be a component manufacturer owning intellectual property
rights in a product that the licensee manufactures by combining the
component with other inputs, or the licensor may manufacture the
product, and the licensees may operate primarily in distribution and
marketing. Although licensing arrangements typically have a vertical
component, the licensor and its licensees may also have a horizontal
relationship in the market containing the technology being licensed or
in other markets in which they are actual or likely potential
competitors.
The existence of a horizontal relationship between a licensor and
its licensees is not inherently suspect. Identification of such
relationships is merely an aid in determining whether there may be
anticompetitive effects arising from a licensing arrangement. Such a
relationship need not give rise to an anticompetitive effect, nor does
a purely vertical relationship assure that there are no anticompetitive
effects.
The following examples illustrate different competitive
relationships among a licensor and its licensees.
Example 3
Situation: Alpha, a manufacturer of farm equipment, develops a new
emission control technology for its tractor engines and licenses it to
Beta, another farm equipment manufacturer. Alpha's emission control
technology is far superior to the technology currently owned and used
by Beta, so much so that Beta's technology does not discipline the
prices that Alpha could charge for its technology. Beta has no
likelihood of developing an improved emissions control technology on
its own.
Discussion: Alpha's and Beta's emission control technologies are
not economic substitutes for each other. Beta is a consumer of Alpha's
technology and is not an actual or likely potential competitor of Alpha
in the relevant market for technologically superior emission control
devices of the kind licensed by Alpha. This means that the relationship
between Alpha and Beta with regard to the supply and use of emissions
control technology is vertical. Assuming that Alpha and Beta sell farm
equipment products that are economic substitutes for each other, their
relationship is horizontal in the relevant markets for farm equipment.
Example 4
Situation: Beta develops a new value technology for its engines and
enters into a cross-licensing arrangement with Alpha, whereby Alpha
licenses its emission control technology to Beta and Beta licenses its
valve technology to Alpha. Alpha already owns an alternative valve
technology that is an economic substitute for Beta's valve technology.
Before adopting Beta's technology, Alpha was using its own valve
technology in its production of engines and was licensing (and
continues to license) that technology for use by others. As in Example
3, Beta does not own or control an emission control technology that is
an economic substitute for the technology licensed from Alpha.
Discussion: Beta is a consumer and not a competitor of Alpha's
emission control technology. As in Example 3, their relationship is
vertical with regard to this technology. The relationship between Alpha
and Beta in the relevant market that includes engine valve technology
is vertical in part and horizontal in part. It is vertical in part
because Alpha and Beta stand in a complementary relationship, in which
Alpha is a consumer of a technology supplied by Beta. However, the
relationship between Alpha and Beta in the relevant market that
includes engine valve technology is also horizontal in part, because
both firms own valve technologies that are economic substitutes for
each other. Whether the firms license their valve technologies to
others is not important for the conclusion that the firms have a
horizontal relationship in this relevant market. Even if Alpha's use of
its valve technology were solely captive to its own production, the
fact that the two valve technologies are economic substitutes means
that the two firms have a horizontal relationship. For the firms to be
in a horizontal relationship, it is also not necessary that Alpha
actually uses its valve technology prior to licensing technology from
Beta, provided that Alpha's technology is an economic alternative to
Beta's.
As in Example 3, the relationship between Alpha and Beta is
horizontal in the relevant markets for farm equipment.
3.4 The Rule of Reason and per se Rules
In the vast majority of cases, restraints in intellectual property
licensing arrangements are evaluated under the rule of reason (see
section 4). In some cases, however, the courts conclude that a
restraint's ``nature and necessary effect are so plainly
anticompetitive'' that it should be treated as unlawful per se, without
an elaborate inquiry into the restraint's purpose and effect, National
Society of Professional Engineers v. United States, 435 U.S. 679, 692
(1978). Among the restraints that have been held per se unlawful are
naked price-fixing, output restraints, and market division among
horizontal competitors, as well as certain group boycotts and resale
price maintenance.
To determine whether a particular restraint in a licensing
arrangement is given per se or rule of reason treatment, the Department
will first determine whether the restraint in question can be expected
to contribute to an efficiency-producing integration of economic
activity. In general, licensing arrangements promote such integration
because they facilitate the combination of the licensor's intellectual
property with complementary factors of production owned by the
licensee. A restraint in a licensing arrangement may further such
integration by, for example, aligning the incentives of the licensor
and the licensees to promote the development and marketing of the
licensed technology, or by substantially reducing transactions costs.
In assessing whether a particular restraint contributes to an
efficiency-producing integration, the Department briefly will review,
inter alia, the business of the parties to the license, the markets in
question, and the purpose and effect of the particular restraint. If
there is no efficiency-producing integration of economic activity and
if the type of restraint is one that otherwise is appropriately
accorded per se treatment, the Department will challenge the restraint
under the per se rule. Otherwise, the Department will apply a rule of
reason analysis.
Because licensing arrangements typically involve vertical
relationships that create significant integrative efficiencies,
restraints associated with those arrangements usually will have
sufficient relationship to an efficiency-producing integration to merit
analysis under the rule of reason. An ordinarily suspect restraint
incorporated in a licensing agreement will not escape per se treatment,
however, if the putative integration itself is a sham or if there is an
insufficient relationship between the restraint and an efficiency-
producing integration.
Example 5
Situation: Gamma, which manufactures Product X using its patented
process, offers a license for its process technology to every other
manufacturer of Product X. The process technology does not represent an
economic improvement over the available existing technologies. Indeed,
although several manufacturers accept licenses from Gamma, none of the
licensees actually uses the licensed technology. The licenses provide
that each manufacturer has an exclusive right to sell Product X
manufactured using the licensed technology in a designated geographic
area and that no manufacturer may sell Product X, however manufactured,
outside the designated territory.
Discussion: The manufacturers of Product X are in a horizontal
relationship in the goods market for product X. Those that are
licensees of Gamma's process technology would also be in a vertical
relationship with Gamma if they actually used Gamma's technology,
although in this example, that is not the case. Any manufacturers of
Product X that control technologies that are economic substitutes for
Gamma's process are also horizontal competitors of Gamma in the
relevant technology market.
The licensing arrangement restricts competition in the relevant
goods market among manufacturers of Product X. The restriction applies
both to Product X that is manufactured with the licensed technology and
to Product X manufactured with any other technology. The latter
restriction is the key competitive concern because it harms competition
that would have taken place in the absence of the licensing agreement.
Such a restriction could conceivably benefit competition by promoting
the adoption of Gamma's technology (see Example 6). In this example,
however, the technology is not being used despite being licensed. If
further investigation shows that there is no likelihood that the
manufacturers of Product X will use Gamma's technology, the Department
is likely to conclude that there are no conceivable benefits from the
license restrictions.
If the Department concludes that the restraint does not contribute
to an efficiency-producing integration of economic activity, the
Department would be likely to challenge the arrangement under the per
se rule as a horizontal territorial market allocation scheme and to
view the intellectual property aspects of the arrangement as a sham
intended to cloak its true nature. Since such a restraint is per se
unlawful, the Department likely would challenge the arrangement even
absent proof of substantial market power by the licensor and the
licensees.
The competitive implications do not generally depend on whether the
licensed technology is protected by patent, is a trade secret or other
know-how, or is a computer program protected by copyright. Nor do the
competitive implications generally depend on whether the allocation of
markets is territorial, as in this example, or functional, based on
fields of use.
Example 6
Situation: As in Example 5, Gamma offers a license to every other
manufacturer of Product X for the patented process that it uses to
manufacture Product X. The license provides that each manufacturer has
an exclusive right to sell Product X manufactured using the licensed
technology in a designated geographic area, and that no manufacturer
may sell Product X, however manufactured, outside its designated
territory. As in Example 5, several manufacturers accept licenses. In
this example, however, the licensed process is an advance over their
previously used process. Furthermore, Gamma's licensed process is the
sole technology used by the licensees.
Discussion: The competitive relationships of the firms in this
example are the same as in Example 5 and the licensing restraint has a
similar effect on competition among the manufacturers of Product X.
This example is distinguished from the previous example in that the
licensed technology is useful, and, indeed, is used extensively by the
licensees. As a consequence, the vertical dimension of the licensing
agreement, and the benefits of the licensing restrictions in promoting
the adoption of the technology, assume greater importance.
Again, the key competitive issue is the effect of the territorial
restraint in the licensing arrangement on competition in the goods
market that includes Product X. The restraint applies to all sales of
Product X, without regard to whether it was made using the licensed
technology. Such a restraint could have a benefit in promoting
manufacturing and marketing efforts on behalf of the licensed
technology, in part by making it easier for Gamma to monitor use of its
licensed technology. The benefits come at the cost of restricting
competition that would have taken place in the absence of the licensing
arrangement. If the restraint contributes to an efficiency-enhancing
integration of economic activity, the Department would evaluate this
arrangement under the rule of reason. It would take into account such
factors as the share of the licensor and the licensees in the relevant
markets affected by the licensing arrangement, the level of
concentration and difficulty of entry in these markets, and the
promotional benefits to be gained by focusing manufacturing and
marketing efforts on the licensed technology.
4. General Principles Concerning the Department's Evaluation of
Licensing Arrangements Under the Rule of Reason
4.1 Antitrust ``Safety Zone''
Absent extraordinary circumstances, the Department will not
challenge a restraint in a licensing arrangement if (1) The restraint
is not of a type that normally warrants condemnation under the per se
rule and (2) the licensor and its licensees collectively account for no
more than twenty percent of each relevant market affected by the
restraint.\13\ This ``safety zone'' is designed to provide owners of
intellectual property with a degree of certainty, so as to encourage
procompetitive licensing arrangements. It is not intended to discourage
parties falling outside the safety zone from adopting restrictions in
their license arrangements that are reasonably necessary to achieve an
efficiency-producing integration of economic activity. The Department
will analyze arrangements falling outside the ``safety zone'' based on
the considerations outlined in this section.
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\13\As stated in section 1.41 of the 1992 Horizontal Merger
Guidelines, market shares for goods markets ``can be expressed
either in dollar terms through sales, shipments, or production, or
in physical terms through measurement of sales, shipments,
production, capacity, or reserves.'' Special considerations affect
the measurement of market shares in some technology markets. The
measurement of market shares in that context is discussed in section
3.2.1.
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This ``safety zone'' does not apply to transactions that amount to
mergers or acquisitions, which are governed by the 1992 Horizontal
Merger Guidelines.
The Department will include innovation market shares in its
evaluation of whether a licensing arrangement falls within the safety
zone only if the assets required to compete in research and development
are specialized and identifiable. If not, the Department will confine
its analysis to the goods and technology markets affected by the
licensing arrangement.
4.2 General Statement of the Rule of Reason
In analyzing a restraint in a licensing arrangement under the rule
of reason, the Department first inquires whether the restraint has an
anticompetitive effect. If so, the Department next inquires whether the
restraint is reasonably necessary to achieve procompetitive benefits
that outweigh those anticompetitive effects. See NCAA v. Board of
Regents of the University of Oklahoma, 468 U.S. 85 (1984); see also 7
Phillip A. Areeda, Antitrust Law, Sec. 1502 (1986). In pursuing these
inquiries, the Department will be guided by several general principles.
These principles apply to both vertical and horizontal licensing
restraints that are analyzed under the rule of reason.
4.3 Analysis of Anticompetitive Effects
The existence of anticompetitive effects resulting from a restraint
in a licensing arrangement may be evaluated on the basis of a variety
of factors taken together, including the following.
4.3.1 Market structure, coordination, and foreclosure. When a
licensor and its licensees compete in technology or goods markets, a
restraint in a licensing arrangement may increase the risk of
coordinated pricing, output restrictions, or the acquisition or
maintenance of monopoly power. The potential for competitive harm
generally increases with the degree of concentration in, the difficulty
of entry into, and the inelasticities of supply and demand in markets
in which the licensor and licensees are in a horizontal relationship.
Cf. 1992 Horizontal Merger Guidelines, Secs. 1.5, 3.
When the licensor and licensees are in a vertical relationship,
harm to competition from a restraint may occur if it forecloses access
to, or increases competitors' costs of obtaining, important inputs
(other than as a natural consequence of the licensee acquiring a
licensed technology for its own use). An example is a licensing
arrangement with most of the established manufacturers in an industry
preventing those manufacturers from using any technology. The risk of
foreclosing access or increasing competitors' costs is related to the
fraction of markets affected by the licensing restraint and to other
characteristics of the input and output markets, such as concentration,
difficulty of entry, and elasticities of supply and demand.
Harm to competition from a restraint in a vertical licensing
arrangement also may occur if a licensing restraint facilitates
coordination to raise prices or reduce output in markets in which one
of the parties participates. For example, if owners of competing
technologies impose similar restraints on their licensees, the
licensors may find it easier to coordinate their pricing. Similarly,
licensees that are horizontal competitors may find it easier to
coordinate their pricing if they are subject to common license
restraints imposed either by a common licensor or by competing
licensors. The risk of anticompetitive coordination is increased when
the relevant markets are concentrated and difficult to enter.
4.3.2 Licensing arrangements involving exclusivity. A licensing
arrangement may involve exclusivity in two distinct respects. First,
the licensor may grant one or more exclusive licenses, which restrict
the right of the licensor to license others and possibly also to
practice the technology itself. Generally, such as grant to exclusivity
may raise antitrust concerns only if the licensees themselves, or the
licensor and its licensees, are actual or potential competitors in a
relevant technology or goods market in the absence of the licensing
arrangement. Examples of exclusive licenses with possible competitive
consequences include cross-leasing by parties collectively possessing
market power (see section 5.5), grantbacks (see section 5.6), and
acquisitions of intellectual property rights (see section 5.7).
A second form of exclusivity, exclusive dealing, arises when a
license prevents or restrains the licensee from using competing
technologies. Such restraints can have the effect of denying rivals
sufficient outlets for exploiting their technologies and thus be
anticompetitive. Exclusivity may be required by the licensor, as in an
explicit exclusive dealing arrangement (see section 5.4), or induced
through economic incentives. For example, a royalty arrangement based
on total sales of a licensee's product, regardless of whether it is
made using the licensed technology, may increase the cost to a licensee
of substituting alternative technologies, and thus may have effects
similar to an exclusive dealing arrangement. See Complaint, United
States v. Microsoft, Inc., Civ. No. 94-1564 (D.D.C., filed July 15,
1994); Competitive Impact Statement, id. (filed July 27, 1994). Whether
a restraint of this kind has anticompetitive effects depends, inter
alia, on the availability of other outlets for competitively viable
exploitation of rival technologies.
Restraints that impose or encourage exclusive dealing may have
procompetitive effects. For example, a licensing arrangements that
prevents the licensee from dealing in other technologies may encourage
the licensee to develop and market the licensed technology or
specialized application of that technology. See, e.g., Example 7. The
Department will take into account such precompetitive effects in
evaluating the reasonableness of the arrangement. See section 4.4.
The Department will focus on the actual practice and its effects,
not to the formal terms of the arrangement. A license denominated as
non-exclusive (either in the sense of exclusive licensing or in the
sense of exclusive dealing) may nonetheless give rise to the same
concerns posed by formal exclusivity. A non-exclusive license may have
the effect of exclusive licensing if it is structured so that the
licensor is unlikely to license others or to practice the technology
itself. A license that does not explicitly require exclusive dealing
may have the effect of exclusive dealing if it is structured to make it
costly for licensees to use competing technologies. However, a
licensing arrangement will not automatically raise these concerns
merely because a party chooses to deal with a single licensee or
licensor, or confines his activity to a single field of use or
location, or because only a single licensee has chosen to take a
license.
Example 7
Situation: Eta, the inventor of a new flat panel display
technology, lacking the capability to bring a flat panel display
product to market, grants Rho an exclusive license to make and sell a
product embodying Eta's technology. Rho does not currently sell a
product that would compete with the product embodying the new
technology or control rights to another display technology. Several
firms offer competing displays, the relevant markets for manufacturing
and distribution of such displays are unconcentrated, and entry into
these markets is relatively easy. Demand for the new technology is
uncertain and successful market penetration will require considerable
promotional effort. The license contains an exclusive dealing
restriction preventing Rho from selling products that compete with the
product embodying the licensed technology.
Discussion: This example illustrates both types of exclusivity in a
licensing arrangement. The license is exclusive in that it restricts
the right of the licensor to grant other licenses. In addition, the
license has an exclusive dealing component in that it restricts the
licensee from selling competing products.
The inventor of the display technology and its licensee are in a
vertical relationship and do not compete in the manufacture or sale of
display products or in the sale of technology. Hence, the grant of an
exclusive license does not affect competition between the licensor and
the licensee. The exclusive license may promote competition by
encouraging Rho to develop and promote the new product in the face of
uncertain demand by rewarding Rho for its efforts if they lead to large
sales. Although the license bars the licensee from selling competing
products, this exclusive dealing aspect is unlikely in this example to
harm competition by foreclosing access or facilitating anticompetitive
pricing because several firms offer competing products, the relevant
manufacturing and distribution markets are unconcentrated, and entry is
easy. On these facts, the Department would be unlikely to challenge the
arrangement.
4.3.3 Benefits to the parties from reduction of competition. In
some cases, the benefits of a restraint in a licensing arrangement to
the licensor or its licensees may derive primarily from reductions in
competition that likely would have occurred absent the license rather
than from the restraint's relationship to efficiency-producing
objectives of the arrangement. In determining whether to challenge a
particular restraint in a licensing arrangement, the Department will
assess evidence indicating which of these possibilities better
describes the purpose and effect of the restraint.
4.3.4 Other factors. Factors such as a history of rivalry and a
rapid pace of innovation are also relevant to an analysis of the
potential for harm to competition. The presence of these factors may
indicate that licensors and licensees are less likely successfully to
engage in coordinated behavior to raise prices or restrict output, and
their absence may signal a greater likelihood of such behavior.
4.4 Efficiencies and Justifications
If the Department finds that a restraint in a licensing arrangement
has an anticompetitive effect, the Department will consider whether the
restraint produces offsetting procompetitive effects, such as by
facilitating the efficient development and exploitation of intellectual
property. If offsetting benefits are established, the Department will
determine whether the restraint is reasonably necessary to achieve the
efficiencies. If the restraint is reasonably necessary, and if the
efficiencies outweigh the anticompetitive effect, the Department will
not challenge the licensing arrangement.
The Department's comparison of anticompetitive harms and
procompetitive efficiencies is necessarily a qualitative one. The risk
of anticompetitive effects in a particular case may be insignificant
compared to the expected benefits, or vice versa. As the expected
anticompetitive effects in a particular licensing arrangement increase,
the Department will look for evidence establishing with greater
certainty that the arrangement achieves net benefits.
The existence of practical and significantly less restrictive
alternatives is relevant to a determination of whether a restraint is
reasonably necessary. If it is clear that the parties could have
achieved similar efficiencies by means that are significantly less
restrictive, then the Department will not give weight to the parties'
efficiency claim. In making this assessment, however, the Department
will not engage in a search for a theoretically least restrictive
alternative that might be easier to construct in hindsight than in the
practical prospective business situation faced by the parties.
When a restraint has an anticompetitive effect, the duration of
that restraint can be an important factor in determining whether it is
reasonably necessary to achieve the putative procompetitive effect. The
effective duration of a restraint may be dependent on a number of
factors, including the option of the affected party to terminate the
arrangement unilaterally and the presence of contract terms (e.g.,
unpaid balances on minimum purchase commitments) that encourage the
licensee to renew a license arrangements. Consistent with its approach
to less restrictive alternative analysis generally, the Department will
not attempt to draw fine distinctions regarding duration; rather, its
focus will be on situations in which the duration clearly exceeds the
period needed to achieve the procompetitive effect.
The evaluation of procompetitive efficiencies, of the reasonable
necessity of a restraint to achieve them, and of the duration of the
restraint may depend on the market context. A restraint that may be
justified by the needs of a new entrant, for example, may not have a
procompetitive efficiency justification in different market
circumstances. Cf. United States v. Jerrold Electronics Corp., 187 F.
Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961).
4.5 Restraints Subject to a Quick-Look Analysis
A rule of reason analysis may require no more than a ``quick look''
at the anticompetitive effects of a particular restraint and the extent
to which the restraint is reasonably necessary to achieve an
efficiency-producing integration. When the restraint is one that
ordinarily warrants per se treatment, and a quick look at the claimed
efficiencies reveals that the restraint is not reasonably necessary to
achieve procompetitive efficiencies, the Department will likely
challenge the restraint without further analysis. See FTC v. Indiana
Federation of Dentists, 476 U.S. 447, 459-60 (1986); NCAA v. Board of
Regents of the University of Oklahoma, 468 U.S. 85, 109-10 & n.39
(1984).
5. Application of General Principles
This section illustrates the application of these principles to
particular licensing restraints and to arrangements that involve the
cross-licensing, pooling, or acquisition of intellectual property. The
restraints and arrangements identified are typical of those that are
likely to encounter antitrust scrutiny; however, they are not intended
as an exhaustive list of practices that could raise competitive
concerns.
5.1 Horizontal Restraints
While licensing arrangements among horizontal competitors, like
joint ventures, often promote rather than hinder competition, there are
a number of circumstances in which antitrust scrutiny is warranted.
Generally speaking, the licensor and the licensee are deemed to be
horizontal competitors only if they own or control technologies that
are economic substitutes for each other or if they are competitors in a
goods market other than through the use by the licensee of the licensed
technology. See section 3.3. Consistent with the principles set forth
in section 3.4, the Department will challenge certain types of
horizontal restraints as per se unlawful in appropriate cases.
Horizontal restraints in licensing arrangements that constitute price
fixing, allocation of markets or customers, agreements to reduce
output, and certain group boycotts may merit per se treatment. In other
cases, the restraints will be evaluated under the rule of reason,
following the general principles set forth in section 4.
Example 8
Situation: Two of the leading manufacturers of a consumer
electronic product hold patents that cover alternative circuit designs
for the product. None of the patents is blocking; that is, each of the
patents can be practiced without infringing a patent owned by the other
firm. The different circuit designs are economic substitutes. Each
permits the manufacture at similar cost of products that consumers
consider to be interchangeable. The manufacturers assign their patents
to a separate corporation wholly owned by the two firms. That
corporation licenses the right to use the circuit designs to other
consumer product manufacturers and establishes the license royalties.
Discussion: In this example, the manufacturers are horizontal
competitors in the goods market for the consumer product and in the
related technology markets. The competitive issue with regard to a
joint assignment of patent rights is whether the assignment has an
adverse impact on competition in technology and goods markets that is
not outweighed by procompetitive benefits in the use or dissemination
of the technology. Each of the patent owners has a right to exclude
others from practicing its patent. That right does not extend, however,
to the agreement to assign rights jointly. To the extent that the
patent rights cover technologies that are substitutes, the joint
determination of royalties may result in higher royalties and higher
goods prices than the owners would have charged on their own. In the
absence of evidence establishing efficiencies from the joint assignment
of patent rights, the Department may conclude that the joint marketing
of competing patent rights constitutes horizontal price fixing and
could be challenged as a per se unlawful horizontal restraint of trade.
If there are plausible efficiency justifications for the joint
marketing arrangement, the Department would evaluate the arrangement
under the rule of reason. However, the Department may conclude that the
anticompetitive effects are sufficiently apparent, and the proposed
integrative efficiencies are sufficiently weak or unrelated to the
restraints, to require only a ``quick look'' rule of reason analysis
(see section 4.5).
5.2 Resale Price Maintenance
Resale price maintenance is illegal when ``commodities have passed
into the channels of trade and are owned by dealers.'' Dr. Miles
Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). It has
been held per se illegal for a licensor of an intellectual property
right in a product to fix a licensee's resale price of that product.
United States v. Univis Lens Co., 316 U.S. 241, 243-45, 249-51 (1942);
Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 446-48, 452, 457
(1940).\14\ Consistent with the principles set forth in section 3.4,
the Department will enforce the per se rule against resale price
maintenance in the intellectual property context.
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\14\But cf. United States v. General Electric Co., 272 U.S. 476
(1926) (holding that an owner of a product patent may condition a
license to manufacture the product on the fixing of the first sale
price of the patented product). Subsequent lower court decisions
have distinguished the GE decision in various contexts. See, e.g.,
Royal Indus. v. St. Regis Paper Co., 420 F.2d 449, 452 (9th Cir.
1969) (observing that GE involved a restriction by a patentee who
also manufactured the patented product and leaving open the question
whether a nonmanufacturing patentee may fix the price of the
patented product); Newburgh Moire Co. v. Superior Moire Co., 237
F.2d 283, 293-94 (3rd Cir. 1956) (grant of multiple licenses each
containing price restrictions does not come within the GE doctrine);
Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646, 647
(5th Cir.) (owner of an intellectual property right in a process to
manufacture an unpatented product may not fix the sale price of that
product), cert. denied, 323 U.S. 726 (1944); Barber-Colman Co. v.
National Tool Co., 136 F.2d 339, 343-44 (6th Cir. 1943) (same).
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5.3 Tying Arrangements
A transaction is said to involve tying if: (1) There are two
separate products, and (2) the sale of one product is conditioned on
the purchase of the other. Thus, conditioning the ability of a customer
to license one or more items of intellectual property on the customer's
purchase of another item of intellectual property or a good or service
has been held to constitute illegal tying. See, e.g., United States v.
Paramount Pictures, Inc., 334 U.S. 131, 156-58 (1948) (copyrights);
International Salt Co. v. United States, 332 U.S. 392 (1947) (patents).
Tying can, however, be efficiency-enhancing under some circumstances.
See, e.g., Jerrold Electronics Corp. v. Westcoast Broadcasting Co., 341
F.2d 653 (9th Cir.), cert. denied, 382 U.S. 817 (1965). The Department
would be likely to challenge a tying arrangement if: (1) The seller has
sufficient economic power in the market for the tying product to enable
it to restrain trade in the market for the tied product, (2) the
arrangement has an adverse effect on competition in the relevant market
for the tied product, and (3) efficiency justifications for the
arrangement do not outweigh the anticompetitive effect.\15\ The
Department will not presume market power solely from the existence of a
patent or other intellectual property right.\16\
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\15\As is true throughout these Guidelines, the factors listed
are those that guide the Department's internal analysis in
exercising its prosecutorial discretion. They are not intended to
circumscribe how the Department will conduct the litigation of cases
that it decides to bring, nor to opine on how the courts should
resolve questions that are currently unsettled in the case law.
\16\See section 2.2. This policy is consistent with the
requirement that market power be demonstrated to establish patent
misuse based on tying. 35 U.S.C. Sec. 271(d) (1988) (as amended by
Pub. L. No. 100-703, 201 Stat. 4676 (1988)).
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Package licensing--the licensing of multiple items of intellectual
property in a single license or in a group of related licenses--may be
a form of tying arrangement, but only if the items licensed constitute
``separate products'' and the licensing of one product is used to force
the acceptance of a license of another. Such practices can be
efficiency enhancing under some circumstances. When multiple licenses
are needed to practice any single item of intellectual property, for
example, a package license may present such efficiencies. If a package
license constitutes a tying arrangement, the Department will evaluate
its competitive effects under the same principles it applies to other
tying arrangements.
5.4 Exclusive dealing
In the intellectual property context, exclusive dealing occurs when
a license prevents the licensee from licensing, selling, distributing,
or using a competing technology. Although such restraints can be
procompetitive in some circumstances, in other situations they can deny
rivals sufficient outlets for competitively viable exploitation of
their technologies and thus can be anticompetitive. See section 4.3.2.
5.5 Cross-Licensing and Pooling Arrangements
Cross-licensing and pooling arrangements are agreements of two or
more owners of different items of intellectual property to license one
another or third parties. These arrangements may promote economic
welfare by integrating complementary technologies, reducing
transactions costs, clearing blocking positions, and avoiding costly
infringement litigation. By promoting the dissemination of technology,
cross-licensing and pooling arrangements are often procompetitive.
Cross-licensing and pooling arrangements can have anticompetitive
effects in certain circumstances. When these arrangements are a
mechanism to accomplish price fixing, or market or customer allocation,
they can lead to a significant lessening of competition. See United
States v. New Wrinkle, Inc., 342 U.S. 371 (1952) (price fixing); United
States v. United States Gypsum Co., 333 U.S. 364 (1948) (customer
allocation). The joint marketing of pooled intellectual property
rights, with collective price setting or coordinated output
restrictions, may violate section 1 of the Sherman Act. Compare NCAA v.
Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984)
(output restriction on college football broadcasting held unlawful
because it was not reasonably related to any purported justification)
with Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979) (blanket license
for music copyrights upheld because the cooperative price was found
necessary to the creation of a new product).
Settlements involving the cross-licensing of intellectual property
rights can be an efficient means to avoid litigation over infringement
and interference proceedings, and, in general, courts favor such
settlements. When such cross-licensing involves horizontal competitors,
however, the Department will consider whether the effect of the
settlement is to diminish rivalry that would otherwise have occurred.
In the absence of offsetting efficiencies, such settlements may be
challenged as unlawful restraints of trade. Cf. United States v. Singer
Manufacturing Co., 374 U.S. 174 (1963) (cross-license agreement was
part of broader combination to exclude competitors).
Pooling arrangements and the like generally need not be open to all
who would like to join. Cross-licensing and pooling arrangements among
parties that collectively possess market power may, under some
circumstances, harm competitions by significantly disadvantaging
competitors. Cf Northwest Wholesale Stationers, Inc v. Pacific
Stationery & Printing Co., 472 U.S. 284 (1985) (exclusion of a
competitor from a purchasing cooperative not unlawful absent a showing
of market power).
Another possible anticompetitive effect of pooling arrangements may
occur when participation in the arrangement deters or discourages
participants from engaging in research and developing, thus retarding
innovation. A pooling arrangement in which members grant licenses to
each other for current and future technology at minimal cost may
encourage free-riding and reduce the incentives of its members to
compete in their research and development efforts. See generally United
States v. Automobile Manufacturers Association, 307 F. Supp. 617 (C.D.
Cal 1969), modified sub nom. United States v. Motor Vehicle
Manufacturers Association, 1982-83 Trade Cas. (CCH) 65,088 (C.D. Cal
1982); United States v. Manufacturers Aircraft Association, 1976-1
Trade Cas. (CCH) 60,810 (S.D.N.Y. 1975). Such an arrangement is more
likely to cause competitive problems where the arrangement includes a
large fraction of the potential participants in research and
development.
Example 9
Situation: As in Example 8, two of the leading manufacturers of a
consumer electronic product hold patents that cover alternative circuit
designs for the product. The manufactures assign several of their
patents to a separate corporation wholly owned by the two firms. That
corporation licenses the right to use the circuit designs to other
consumer product manufacturers and establishes the license royalties.
In this example, however, the manufacturers assign to the separate
corporation only patents that are blocking. None of the patents
assigned to the corporation can be practiced without infringing a
patent owned by the other firm.
Discussion: Unlike the previous example, the joint assignment of
patent rights to the wholly owned corporation in this example can have
procompetitive benefits in the use of dissemination of the technology.
Because the manufacturer's patents are blocking, the manufacturers are
not in a horizontal relationship with respect to those patents. Neither
patent can be practiced without the right to a patent owned by the
other firm, so the patents are not economic substitutes. (The pooling
of patents also would not raise competitive problems in the relevant
technology market if the pool involved complementary patents and
enabled licensing of a package whose value exceeded the sum of its
component patents.)
As in Example 8, the firms are horizontal competitors in the
relevant goods market. In the absence of evidence suggesting that the
joint assignment of patent rights is also contributing to coordinated
pricing of the firms' final products, the Department would be unlikely
to challenge this arrangement.
5.6 Grantbacks
A grantback is an arrangement under which a licensee agrees to
extend to the licenser of intellectual property the right to use the
licensee's improvements to the licensed technology. Grantbacks can have
procompetitive effects, such as providing a means for the licensee and
the licensor to share risks and rewarding the licensor for making
possible further innovation based on or informed by the licensed
technology. Such arrangements can both promote innovation in the first
place and promote the subsequent licensing of the results of the
innovation.
Grantbacks may adversely affect competition, however, if they
substantially reduce the licensee's incentives to engage in research
and development and limit rivalry in innovation markets. In deciding
whether to challenge a grantback, the Department will consider the
extent to which, as compared with no license at all, the license with
the grantback provision may diminish total research and development
investment or lessen competition in innovation or technology markets.
5.7 Acquisition of Intellectual Property Rights
The legality of transactions resulting in an actual or effective
acquisition of intellectual property rights is analyzed under section 7
of the Clayton Act and sections 1 and 2 of the Sherman Act. SCM Corp.
v. Xerox Corp., 645 F.2d 1195, 1210 (2d Cir. 1981) (patents); United
States v. Columbia Pictures Corp., 189 F. Supp. 153, 183 (S.D.N.Y.
1960) (copyrights). The Department will analyze such transactions as
acquisitions of assets just as it does other asset acquisitions. When a
license is non-exclusive, the exclusivity is temporary, or the
acquisition is otherwise structured to allow the parties freedom to
compete independently in related products, the Department will take
these aspects of the arrangement into account, as it does in the case
of other asset acquisitions and joint ventures.
With respect to horizontal acquisitions, the Department will apply
the analysis contained in the 1992 Horizontal Merger Guidelines. The
Department will evaluate the effects of an acquisition of intellectual
property in affected technology, innovation, and goods markets. As
described in section 4 of the 1992 Horizontal Merger Guidelines, the
Department takes into account integrative efficiencies that could not
reasonably be achieved without the acquisition as well as any
anticompetitive effects of the acquisition from the lessening of
competition among existing technologies or goods or from the lessening
of competition to develop new technologies.
Example 10
Situation: Omega develops a new, patented pharmaceutical for the
treatment of a particular disease. The only drug on the market approved
for the treatment of this disease is sold by Zeta, which has invested
large sums in advertising to achieve brand name recognition. Omega's
patented drug has almost completed regulatory approval by the Food and
Drug Administration. Omega has invested considerable sums in testing
market acceptance for its new drug. However, rather than enter the
market as a direct competitor of Zeta, Omega licenses to Zeta the
exclusive right to manufacture and sell Omega's patented drug.
Discussion: Assuming that Zeta would manufacture and sell Omega's
patented drug, the relationship of Omega and Zeta is in part vertical,
because Zeta would be a customer of Omega in the technology market.
However, their relationship is also horizontal in part, because Omega
is a likely potential competitor of Zeta in the relevant goods market
as well as in the relevant technology market. Although the vertical
aspects of this arrangement pose no threat to competition in this
example, the horizontal aspects would require further analysis. The
Department would evaluate Zeta's acquisition of Omega's patent rights
as an acquisition of the assets of a likely potential competitor, using
the methodology described in the Department's merger guidelines. The
Department would consider the impact of the acquisition on market
concentration, other factors that affect the likelihood that
competition would be affected by the acquisition, and possible
efficiency defenses. In this example, Zeta's market position prior to
the acquisition as the only seller of a drug treatment of this disease
makes it more likely that the acquisition would have anticompetitive
effects.
6. Enforcement of Invalid Intellectual Property Rights
The Department may challenge the enforcement of invalid
intellectual property rights as antitrust violations. The Supreme Court
has held that enforcement of a patent obtained by fraud on the Patent
and Trademark Office can violate section 2 of the Sherman Act if all
the elements otherwise necessary to establish a section 2
monopolization charge are proved. Walker Process Equipment, Inc. v.
Food Machinery & Chemical Corp., 382 U.S. 172 (1965). Enforcement of a
patent obtained by mere inequitable conduct before the Patent and
Trademark Office, however, cannot be the basis of a section 2 claim,
because inequitable conduct does not involve knowing and willful patent
fraud. Argus Chemical Corp. v. Fibre Glass-Evercoat Co., 812 F.2d 1381
(Fed. Cir. 1987). An objectively baseless infringement action, brought
in bad faith, when the complainant knows the intellectual property
right to be invalid, may violate section 2 of the Sherman Act. See
Professional Real Estate Investors, Inc. v. Columbia Pictures
Industries, Inc., 113 S. Ct. 1920, 1928 (1993); Handgards, Inc. v.
Ethicon, Inc., 743 F.2d 1282, 1288-89 (9th Cir. 1984). cert. denied,
469 U.S. 1190 (1985) (patents); Handgards, Inc., v. Ethicon, Inc., 601
F.2d 986, 992-96 (9th Cir. 1979), cert. denied, 444 U.S. 1025 (1980)
(patents); CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985)
(trade secrets).
[FR Doc. 94-19657 Filed 8-10-94; 8:45 am]
BILLING CODE 4410-01-M
