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In a technology-driven economy, protection and effective exploitation of intellectual property rights is crucial. To maximize the value of intellectual property, firms often use licensing arrangements and find willing partners to exploit, develop, market and promote the technology fully. Although licensing arrangements are typically pro-competitive, they are receiving increasing scrutiny by the antitrust enforcement agencies and the courts. Most of the tough antitrust issues involve restrictions imposed in licensing arrangements. If properly constructed, these restrictions are perfectly permissible. However, licensing restrictions can sometimes raise important antitrust issues-especially when the licensee and licensor are actual or potential competitors, or the licensor possesses market power. This article discusses four situations where practitioners should be especially wary of the antitrust implications of their licensing arrangements: tying, exclusive licensing, exclusive dealing arrangements and field-of-use restrictions. In 1995, the Department of Justice and Federal Trade Commission issued guidelines addressing the antitrust implications of licensing arrangements. U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (April 6, 1995). These licensing guidelines are vitally important for the guidance they provide in a very complicated and often uncertain field of the law. The guidelines embody three general principles: First, intellectual property is regarded as being essentially comparable to any other form of property. Second, intellectual property rights do not create a presumption of market power in the antitrust context. And third, intellectual property licensing allows firms to combine complementary factors of production and is generally pro-competitive. Guidelines, at � 2.0. While the guidelines are not binding on courts, they provide guidance on deciding licensing issues on which there are no precedents, along with a measure of predictability to companies regarding the likelihood of their license being challenged by the antitrust agencies. Horizontal or vertical One of the most important factors in how a licensing arrangement will be treated by both the courts and the agencies is whether the licensor and licensee are in a horizontal or vertical relationship. The agencies normally treat a relationship between a licensor and its licensees as vertical when they are in a complementary relationship, for example when the licensor’s primary line of business is in research and development, and the licensees are manufacturers. In more limited cases the agencies will treat the relationship as horizontal when they would have been actual or potential competitors in a relevant market in the absence of a license. The guidelines adopt a more permissive approach to vertical licensing agreements. They presume that nonprice restrictions will not harm competition, with the exception of exclusive dealing arrangements. Vertical arrangements are analyzed under the rule of reason, if they attract antitrust scrutiny at all. The rule-of-reason test generally entails inquiring “whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects.” Id. at � 3.4. The guidelines contain a safe harbor that permits licensing arrangements when the share of the market is less than 20%. Horizontal arrangements attract more scrutiny. They are also generally analyzed under the rule of reason, but in certain circumstances can be held to be illegal without much analysis-that is, subject to a per se analysis. Those instances are generally confined to naked restrictions on competition, including price-fixing and market-allocation schemes. Tying arrangements A tie-in is an arrangement whereby a seller conditions the sale of one product (the “tying product”) on the purchase of a separate product (the “tied product”) or on the purchaser’s agreement not to purchase the tied product from any other seller. Eastman Kodak Co. v. Image Technical Services Inc., 504 U.S. 451 (1992); Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958). Courts will consider a discount on the tied package that is so large that it is not economically feasible to purchase the property separately as de facto tying. Package licensing, or the licensing of multiple items of intellectual property in a single license or in a group of related licenses are also likely to be treated as tying arrangements. The U.S. Supreme Court has stated, “the essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984). According to the licensing guidelines, the antitrust agencies will use a rule-of-reason analysis when looking at tying arrangements. They will be likely to challenge a tie-in when “(1) the seller has market power in the tying 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 effects.” Guidelines, at � 5.3. As a general rule for all types of licensing restrictions, the antitrust agencies will not imply market power from the existence of a patent right, and it is extremely unlikely that a court will either, although there have been a few cases in the past two decades that suggest otherwise. While the licensing guidelines specify that the antitrust agencies will use the rule of reason when evaluating tying arrangements, courts will deem tying arrangements to be per se illegal in certain narrow circumstances. The U.S. Circuit Court for the District of Columbia in United States v. Microsoft Corp., 253 F.3d 34, 85 (D.C. Cir. 2001), held that a per se tying violation would be found if: “(1) the tying and tied goods are two separate products; (2) the defendant has market power in the tying product market; (3) the defendant affords consumers no choice but to purchase the tied product from it; and (4) the tying arrangement forecloses a substantial volume of commerce.” One of the most challenging issues in this area involves the use of bundled rebates. In one recent case, LePage’s v. 3M, 324 F.3d 141 (3d Cir. 2003), the 3d Circuit upheld a jury verdict that a bundled rebate program violated � 2 of the Sherman Act. 3M Co. was held to have illegally maintained its monopoly by offering higher rebates to customers who purchased various different 3M products, which the court analogized to a conventional tying arrangement. This decision is controversial because there was no evidence that the bundled rebates were below cost, that there was significant harm to consumers (in terms of higher prices) or that the rebates made it impossible for LePage’s to compete with 3M profitably. The LePage’s decision, which is currently on appeal to the Supreme Court, should sound a note of warning to firms with monopoly-sized market shares that their licensing arrangements could be in for particularly close scrutiny if they engage in aggressive pricing strategies. Exclusive licenses In an exclusive license, the licensor agrees to license the particular intellectual property right to only one licensee. The licensor also agrees not to exploit the licensed intellectual property right itself. If the circumstances warrant, a license can be deemed exclusive even when nominally nonexclusive. See United States v. S.C. Johnson & Son, 1995-1 Trade Cas. (CHH) � 70,884 (N.D. Ill. 1994), 59 Fed. Reg. 43, 859 (1994) (nominally nonexclusive insecticide license was de facto exclusive as the licensor refused all offers to license and did not itself use the technology). Exclusive licenses must be reported under the Hart-Scott-Rodino Act if the size of the parties and value of the license are above a threshold amount. Currently, the license must be valued at or above $50 million to be reportable, a figure that is scheduled to change in 2005. Exclusive licenses are quite common, and are normally seen as pro-competitive, at least when the licensee and licensor are not direct competitors. They provide the licensee with the security necessary to develop and market the licensed intellectual property. Courts have repeatedly held that a grant of an exclusive license is within the scope of the patent grant, and the licensing guidelines state that “an exclusive license may raise antitrust concerns only if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship.” Guidelines, at � 4.1.2. If there is a competitive relationship between the licensor and the licensee, an exclusive license will be analyzed by the agencies under the principles used to analyze mergers and acquisitions as set forth in the 1992 Horizontal Merger Guidelines. This will usually involve a rule-of-reason analysis that takes into account the market shares of the respective parties, the percentage of the licensee’s market that the exclusive license will have an impact on, the existence of other prospective licensees for sellers of competing technologies, as well as any other pro-competitive justifications that can be claimed for the exclusive license. If the parties to an exclusive licensing agreement are competitors, they should carefully document the legitimate business rationale for the agreement as well as any pro-competitive benefits that the license might produce. In recent years, the federal antitrust agencies have increasingly scrutinized exclusive licenses in the pharmaceutical sector, where several companies have been investigated for acquiring exclusive licenses for the purpose of delaying the entry of generic drugs into the market or increasing the price of generic drugs. See, e.g., In the Matter of Biovail Corp., 2002 F.T.C. Lexis 56 (Oct. 4, 2002); FTC v. Mylan Laboratories Inc., FTC File No. X990015) (D.D.C.). There have also been a number of exclusive licensing arrangements that have been challenged as disguised market-allocations schemes. United States v. American National Can Co., 61 Fed. Reg. 34,862 (1996). Exclusive dealing In an exclusive dealing arrangement, the license prevents or refrains the licensee from licensing, selling, distributing or using competing technologies. Exclusive dealing arrangements attract antitrust scrutiny because they serve to restrict competition in products beyond the scope granted by the patent or copyright laws. They are generally viewed as somewhat more problematic than exclusive licensing arrangements from an antitrust perspective. Nonetheless, many exclusive dealing arrangements have pro-competitive effects, such as allowing manufacturers to market and promote goods cost-effectively, preventing free riding and developing brand loyalties. See Standard Oil Co. v. United States, 337 U.S. 293, 306 (1949); Haagen-Dazs Co. Inc. v. Double Rainbow Gourmet Ice Cream Inc., 895 F.2d 1417 (9th Cir. 1990). Exclusive dealing provisions are generally upheld if the licensor’s market share is small and there are alternative outlets for competing technologies. The key element of an exclusive dealing arrangement is that the licensor must effectively prevent the licensee from dealing with competing technologies. The courts and antitrust agencies go beyond the terms of a licensing agreement to determine whether a license arrangement establishes significant incentives to create de facto exclusivity. In some cases, the courts have found an exclusive dealing arrangement when a purchaser was effectively required to deal solely with one seller because the buyer’s economic viability depended on obtaining discounts offered by the seller to those manufacturers. Exclusive dealing arrangements are analyzed under the rule of reason and are considered unlawful only if the probable effect of the arrangement is to lessen competition in the relevant market substantially. See, e.g., Roland Machinery Co. v. Dresser Industries Inc., 749 F.2d 380, 393-96 (7th Cir. 1984). The court will look to a variety of factors in evaluating the reasonableness of the arrangement, including the licensor’s market power, the existence of barriers to entry in the field, the actual competitive impact of the agreement and the existence of any business justifications, among other factors. The recent decision in United States v. Dentsply Int’l Inc., No. 99-005-SLR (D. Del. Aug. 8, 2003), highlights the importance of direct distribution in exclusive dealing analysis. This case involved exclusive dealing arrangements that Dentsply, the dominant manufacturer of artificial teeth, had with its distributors. The district court rejected the Justice Department’s monopolization claim even though Dentsply had market power and was motivated by anti-competitive intent, because rival distributors could distribute to customers directly. Field-of-use restrictions Field-of-use provisions restrict the ways in which a licensee is allowed to exploit an intellectual property right. Field-of-use restrictions are also relatively common, and are generally viewed as pro-competitive, because they give the licensee more of an incentive to invest in the commercialization and distribution of the licensed product. Guidelines, at � 2.3. It has long been held that the patent grant encompasses the right “to exclude others from making, using, selling, offering to sale, or importing the claimed apparatus or composition for any use of that apparatus or composition, whether or not the patentee envisioned such use.” Watson & Chalin Mfg. Inc. v. Boler Co., 227 F. Supp. 2d 633 (E.D. Texas 2002). Thus, field-of-use restrictions are judged according to whether the given restriction is “reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.” Mallinckrodt Inc. v. Medipart Inc., 976 F.2d 700, 708 (Fed. Cir. 1992). The courts have held that a restriction falls within the patent grant when it “relates to subject matter within the scope of the patent claims. When the restriction reasonably falls within the patent grant, the inquiry is at an end and the restriction is a valid one.” Monsanto Co. v. Scruggs, 249 F. Supp. 2d 746, 753 (N.D. Miss. 2001). Field-of-use restrictions can be considered anti-competitive when the licensing restriction forecloses access to competing technologies or harms competition among entities that would have been actual or likely potential competitors in the absence of the arrangement. Guidelines, at � 2.3. As with other licensing restrictions, field-of-use provisions would then be evaluated under the rule of reason. As with exclusive licenses and exclusive dealing arrangements, the two most important issues to be examined in the rule-of-reason analysis are whether the licensor and licensee are actual or potential competitors and whether the licensor and licensee have large market shares. Patent misuse doctrine Finally, intellectual property practitioners should always keep in mind the patent misuse doctrine, an IP law concept that presents another limit on the anti-competitive use of patent rights. The key inquiry as to whether misuse is present is “whether, by imposing the condition [in a patent license], the patentee has impermissibly broadened the ‘physical or temporal scope’ of the patent grant with anticompetitive effect.” B. Braun Medical Inc. v. Abbott Laboratories, 124 F.3d 1419 (Fed. Cir. 1997) Examples of the misuse doctrine would be using a patent that enjoys market power in the relevant market to restrain competition in an unpatented product and employing the patent beyond its 17-year term. Such practices will be analyzed using the rule of reason. Conduct that does not result in an antitrust violation can still be considered as patent misuse, when the Supreme Court has condemned the practice as per se anti-competitive. If a court finds that a patent has been misused, the patent will be deemed unenforceable until the misuse is purged. Although misuse doctrine originated in the patent field, it has since been extended to cover copyrights as well. Licensing is becoming increasingly important in our technology-driven economy. However, the very existence of IP does not preclude the application of antitrust law and, as recent enforcement activity and civil cases demonstrate, courts and enforcement agencies may restrain the exercise of IP rights when there are competitive concerns. In this environment, prudent IP attorneys should seek out advice on how to avoid the potential antitrust risks. David Balto is a partner in the Washington office of the worldwide antitrust practice of New York’s White & Case. In the Clinton administration, he was director of the office of policy and evaluation in the Federal Trade Commission’s bureau of competition.

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