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The so-called new economy has precipitated a surge in patent applications and heightened sensitivity by the federal antitrust agencies to competition issues involving intellectual property. IP laws encourage innovation by granting owners exclusive rights over their property. In the past, antitrust law viewed these exclusive rights as “monopolies” and certain restrictive licensing practices as per se illegal. More recent analysis, however, views licensing as pro-competitive and recognizes that IP does not create market power because even patented products are subject to competing technologies. Still, there are times when the advancement of competition may compromise IP rights, or when the unrestrained use of IP rights may inhibit healthy competition. There also has been debate as to whether IP trumps antitrust law, although the courts have recognized that IP rights do not confer a license to violate antitrust laws. As a result, IP and antitrust frequently intersect — and sometimes collide. Luckily, the antitrust agencies and the courts have provided some guidance. In 1995, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) issued “Antitrust Guidelines for the Licensing of Intellectual Property,” 4 Trade Reg. Rep. (CCH) 13,132 (1995), which articulate three basic principles: The agencies will apply the same general antitrust principles to IP as to other forms of property; they will not presume that IP creates market power; and they will generally consider IP licensing as well as certain restrictions in licenses to be pro-competitive. The IP guidelines recognize that an IP owner has no obligation to license, but also state that any effort to enforce invalid IP rights can be challenged as an antitrust law violation. Under the IP guidelines, the agencies will determine whether a restraint is likely to have anticompetitive effects and, if so, will usually evaluate it under the “rule of reason” to decide whether its pro-competitive benefits outweigh its anticompetitive effects. The IP guidelines also confirm that certain licensing restrictions, such as price-fixing, output restraints and market division among horizontal competitors, will be treated as per se illegal. The IP guidelines establish a safe harbor for certain license restrictions based on the type of restriction, the market share of the parties to the license and other factors related to market dynamics. In a market for goods subject to IP protection, the safe harbor is a 20 percent market share. When the market involves innovation without commercial products, the safe harbor involves four or more independent technologies. AGENCIES CHALLENGE PATENT POOLS ONLY IN CERTAIN CASES Recent agency actions provide guidance for patent pooling agreements, which are agreements among IP owners to license one another. Pools are frequently used to develop new technology and can provide pro-competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking patent positions and avoiding costly litigation. Patent pools, however, also can raise significant antitrust issues. For example, in In re Summit Technology Inc.and VISX Inc., No. 9286 (FTC March 24, 1998), the FTC challenged a patent pooling arrangement for laser vision equipment by the only firms that marketed such equipment, which contributed their current and future patents for laser eye surgery. The pool then operated as the exclusive licensor of the technology and licensed Summit and VISX, which charged their sublicensees at least the amount they paid to the pool. The two companies agreed not to license their technology independently, and each company had veto power over licensing to others. The FTC alleged that the pool operated as a price-fixing scheme that facilitated and stabilized supracompetitive pricing. The case was settled by an order dissolving the pool and granting each firm nonexclusive royalty-free cross licenses. In contrast to the Summitmatter, the DOJ issued three recent Business Review Letters in which the DOJ advised that it would not challenge patent pools related to the joint licensing of existing patents for DVD technology and MPEG-2 video data storage compression standards. These actions suggest that patent pools are unlikely to be challenged when the following characteristics are present: The pool is composed of complementary patents that are “essential” to preclude foreclosure of competing patents; the licenses are nonexclusive, and each licensor may independently license its patents; the pool provides for “equal access” for all licensees on nondiscriminatory terms; contributors to the pool are not precluded from developing competing technologies; the pool reduces transaction costs for licensors and licensees; the pool is limited to existing patents and patent applications; and the pool offers significant efficiencies that cannot be achieved by less restrictive means. EXCLUSIVE LICENSING, GRANTBACKS AND NAPS Exclusive licensing may increase a licensee’s incentives to invest in development and commercialization of a product, but also may foreclose competition. In FTC v. Mylan Laboratories Inc., No. 1:98CV03114 (D.D.C. amended complaint filed Feb. 8, 1999), the FTC challenged the 10-year exclusive licenses that Mylan sought for suppliers’ “active pharmaceutical ingredients” (APIs) for certain drug formulations that restricted API supplies to rivals and thereby raised rivals’ prices dramatically by raising their costs. Mylan settled by agreeing not to engage in the challenged (or similar) conduct, and by paying $100 million. Exclusive licensing is most likely to raise concerns when one or both parties possesses market power, or when the license could create market power. One often overlooked aspect is that the grant of an exclusive license can trigger Hart-Scott-Rodino Premerger Notification when HSR thresholds are satisfied. Grantback provisions require a licensee to “grant back” to the licensor related IP rights that the licensee may acquire or develop. For example, if a licensee improves the licensed technology, the licensee may be required to license this newly developed technology to the original licensor. Although grantbacks typically are limited to such “improvements,” their scope may vary. Non-assertion provisions (NAPs) are similar to grantbacks — a licensee agrees not to assert a certain class of patents against the licensor. NAPs may be limited to improvements on what is claimed in the licensor’s patent, or may extend to all inventions relating to the subject matter of the licensor’s patent. NAPs may be coupled with a grantback setting a royalty rate that the licensor must pay. The IP guidelines recognize that “[g]rantbacks can have pro-competitive effects, especially if they are nonexclusive.” Yet grantbacks may discourage innovation by the licensee by limiting the licensee’s right to exclude others from its IP. A number of factors are relevant to antitrust analysis, including whether the grantback is exclusive, whether it is sufficiently limited in time and scope, whether it is royalty-free, whether the parties are competitors and whether they have market power. Also relevant is the overall effect of the grantback on the incentives for development and research. Successful challenges to grantbacks are rare. STANDARD-SETTING GROUPS, REFUSALS TO LICENSE High-tech industries are often characterized by network effects, which operate like demand-side scale economies, with the value of a product increasing as the number of users increases. The most common example is a telephone network, which is more desirable to each user as more users join. Due to network effects, certain products tend to a de facto “monopoly.” Network effects also may allow a technically inferior standard to withstand being supplanted by a superior one. Because of these possibilities, “open” networks based on objective criteria are generally encouraged. One way of promoting this outcome is through development of joint standards that facilitate interoperability of products. Standard-setting activities can raise antitrust problems in several ways. For example, antitrust liability could attach if a member of a standard-setting body sets a standard and later asserts its patent rights against those implementing the standard, as in the FTC’s case against Dell. Dell Computer Corp., 1996 WL 350997. Antitrust issues also may arise if a standard-setting organization adopts a specification that nonmembers are not able to meet, giving the members of the group a competitive advantage. Another issue to watch for is whether the standard-setting group creates rules and procedures that are used unreasonably to exclude some competitors and technologies. Generally, standards should be adopted on the basis of quality, technological attributes and ability to address legitimate goals. Several recent cases consider whether an IP owner has an unqualified right to refuse to license its IP if it acts unilaterally. The U.S. Courts of Appeals for the Federal Circuit and 9th Circuit reached differing conclusions. The Federal Circuit believes unilateral refusals to license should be immunized from antitrust challenges absent tying or efforts to enforce invalid IP rights. In contrast, the 9th Circuit ruled that refusals to license IP to obtain or maintain a monopoly in a second market not covered by the IP violates the antitrust laws. In CSU LLC v. Xerox Corp., 121 S. Ct. 1077 (2001), the U.S. Supreme Court declined to resolve the conflict. Outgoing FTC Chairman Robert Pitofsky was critical of the Federal Circuit’s position, but the DOJ’s amicus brief in Xeroxurged the court not to grant certiorari and instead to “allow these difficult issues to percolate further in the courts of appeal,” so the issue remains unresolved. CREATION OF DELIBERATE INCOMPATIBILITIES, MERGERS Because of the network effects that exist in many high-tech industries, compatibility is often critical to competition with a dominant network. Creation of incompatibilities for the purpose of limiting such competition can therefore have anticompetitive consequences. In C.R. Bard v. M3 Systems Inc., 157 F.3d 1340 (Fed. Cir. 1998), rehearing denied, 161 F.3d 1380 (Fed. Cir. 1998), cert. denied, 526 U.S. 1130 (1999), the Federal Circuit upheld a jury verdict that Bard engaged in illegal monopolization by modifying its biopsy guns in order to exclude competing replacement needles. The court, which typically supports broad patent rights, determined that Bard had created a deliberate incompatibility for the purpose of harming competition, and not improving its product. In evaluating the competitive effect of mergers, parties must consider not only the effect the transaction may have on their commercialized products and services, but also the possible effects on technology and innovation. The FTC challenged a pharmaceutical merger involving Ciba-Geigy, Chiron and Sandoz, which were leading commercial developers of gene therapies, alleging that the merger would result in a monopoly in certain IP necessary for the development and commercialization of gene therapies targeted to the treatment of cancer, hemophilia and bone marrow transplantation complications. In re Ciba-Geigy Ltd., No. C-3725 (FTC March 24, 1997). At the time of the merger, no gene therapy product was on the market or approved by the FDA. The FTC alleged that, absent the consent agreement, the merger would harm competition by combining alternative technologies and reducing innovation competition, heightening barriers to entry and creating a disincentive in the merged firm to license IP rights. Settlements required the licensing of certain patents and technologies to a third party, which could then compete with the merged firm. Critics have questioned the ability of the agencies and the courts to address the increasingly complex issues posed by the intersection of IP and antitrust. Commentators have identified these issues as requiring heightened examination. Both the FTC and DOJ have affirmed their belief that they are equipped to consider these issues, and recent enforcement actions show that the agencies will continue to review these issues. Thus, an understanding of the antitrust/IP interplay is of vital import to leading industries. Janet L. McDavid is a partner, and Erica S. Mintzer is an associate, at Washington, D.C.’s Hogan & Hartson, where they specialize in antitrust law. Ms. McDavid is the immediate past chair of the ABA Antitrust Section.

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