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The following suggested three-step test can aid courts in determining the antitrust validity of contractual restraints in patent licensing. This analysis also highlights the antitrust issues that may be implicated by IP licensing. In many cases, this test is but a variation on antitrust analysis already under development for vertical nonprice restraints. First, the court should verify — as a matter of substance, not form [FOOTNOTE 1]– whether the restraint at issue affects only intellectual property rights and related goods and services. To the extent the restraint affects goods and services not covered by intellectual property protection, it should be subject to ordinary antitrust analysis, and no special analysis should apply. Second, to the extent that the restraint affects only intellectual property rights and related goods and services, the court should analyze its net anticompetitive effect, balancing procompetitive against anticompetitive effects. Like all contractual restraints, [FOOTNOTE 2]licensing restraints merit condemnation under the antitrust laws only if they produce an actual or probably anticompetitive effect. If a restraint has no anticompetitive effect, or if any anticompetitive effect is outweighed by procompetitive benefits, then the restraint should be validated without further analysis, for in that case nothing in the antitrust laws disfavors it. [FOOTNOTE 3]Only if the restraint is, on balance, anticompetitive should the analysis proceed further. The 1995 Licensing Guidelines [FOOTNOTE 4]are in accord on these points. Under the Guidelines, the enforcement Agencies will not challenge a licensing restraint if it is “unlikely to have an anticompetitive effect[.]” [FOOTNOTE 5]If the licensing restraint is likely to have an anticompetitive effect, the Agencies “will consider whether the restraint is reasonably necessary to achieve procompetitive efficiencies. If the restraint is reasonably necessary, the Agencies will balance the procompetitive efficiencies and the anticompetitive effects to determine the probable effect upon competition in each relevant market.” [FOOTNOTE 6]Although the Agencies will consider alternative means of achieving the claimed efficiencies, they will not require the restraint to be the least restrictive alternative. [FOOTNOTE 7] In evaluating anticompetitive effects of contractual restraints in licensing, the courts should focus on interbrand competition, just as in assessing the legality of vertical nonprice restraints under the rule of reason. [FOOTNOTE 8]For example, analysis of tying arrangements involving patents should proceed upon lines established in tying cases generally, with an investigation of market power as a first step toward determining whether or not a per se rule should be applied. [FOOTNOTE 9] Finally, if a net anticompetitive effect arises out of aspects of the restraint related solely to licensing, the court should look for enhancement of the patent incentive, as measured by its proxy, increased income to the licensor. [FOOTNOTE 10]If restricted licensing increases the licensor’s projected revenue, for example, compared to that to be expected from a hypothetical program of unrestricted, nonexclusive licensing on a nondiscriminatory basis to all interested parties, then the increase in revenue (and hence the incentive) should be weighed against any net anticompetitive effect determined in the preceding step of the analysis. Only if there is such a net anticompetitive effect, and only if it outweighs any enhancement of the patent incentive, should the restraint be condemned on antitrust grounds. The 1995 Licensing Guidelines [FOOTNOTE 11]do not include this final step in the analysis. Instead, they treat intellectual property like any other property that may become the subject of contractual restraints. [FOOTNOTE 12]In failing to account for the unique purpose and nature of intellectual property in their analysis, the Guidelines ignore the wise policy under which intellectual property protection has been an exception to the prohibitions of antitrust law for over 350 years. [FOOTNOTE 13] In cases of doubt or uncertainty, courts should validate the restraint for two reasons. First, as indeterminacy in the governing economic theory suggests, [FOOTNOTE 14]analyzing costs and benefits in this manner is a highly uncertain process. Both the inherent uncertainty and the relatively primitive state of relevant economic analysis should give courts a great deal of humility as they approach questions of this sort. Under these circumstances, courts should heed the prime directive of antitrust law — “do no harm” [FOOTNOTE 15]– and abstain from intervention in business and the economy unless the reasons for doing so are clear. Second, the patentee imposing the restraint may well have a greater understanding of its benefits than the courts. [FOOTNOTE 16]Accordingly, in close cases, courts should give patentees and licensors some leeway for errors in analysis and good faith errors of business judgment. These guidelines are intended to serve solely as guidance and may need to be modified to conform to the legal requirements of your jurisdiction. It in no way constitutes legal advice. Dr. Dratler is the Goodyear Professor of Intellectual Property at the University of Akron School of Law, Akron, Ohio, where he teaches Patent Law and Policy, Cyberspace and Telecommunications Law, Trade Secrets, Copyright, and Computer Law. He practiced law for eight years in San Francisco and in California’s Silicon Valley before turning to teaching. To purchase the book, “Licensing of Intellectual Property,” click here. ::::FOOTNOTES:::: FN1Substance, not form, governs antitrust analysis, particularly of vertical restraints. See� 6.05[1][a], [2][a][111] supra. FN2 See� 5.02[1][a], [2][a][ii], [iii] supra. FN3 See generally, � 5.02[2][a][ii] (discussing rule of reason). FN4United States Department of Justice and Federal Trade Commission, Antitrust Guidelines for Licensing of Intellectual Property, reprinted in 49 Patent, Trademark & Copyright J. (BNA) 714 (April 13, 1995), discussed in: �� 5.02[2][b][i][C] supra; 7.01 [1][d] supra; 7.01[1][d] infra. FN5United States Department of Justice and Federal Trade Commission, Antitrust Guidelines for Licensing of Intellectual Property, � 4.2, reprinted in 49 Patent, Trademark & Copyright J. (BNA) 714, 722 (April 13, 1995). FN6 Id. FN7 See id.: “If it is clear that the parties could have achieved similar defficiencies by means that are significantly less restrictive, then the Agencies will not give weight to the parties’ efficiency claim. In making this assessment, however, the Agencies will not engage in a search for a theoretically least restrictive alternative that is not realistic in the practical prospective business situation faced by the parties.” FN8 See� 6.05[1][a], [2][c][i] infra. FN9 See� 7.06 infra. FN10It should not matter whether the licensor is the patentee. The point is to determine the effect on the incentive to innovate not just for the patentee (who, after all, has already made the invention in question) but for all similarly situated. Once precedent establishes that certain restraints are lawful, the market should factor that information into the price of licenses, resulting in appropriate benefit to succeeding patentees, and hence to the patent incentive in general. FN11 SeeN. 54 supra. FN12 SeeUnited States Department of Justice and Federal Trade Commission, Antitrust Guidelines for Licensing of Intellectual Property, � 2.0(a), reprinted in 49 Patent, Trademark & Copyright J. (BNA) 714, 722 (April 13, 1995)(“the Agencies regard intellectual property as being essentially comparable to any other form of property.”; id. � 2.1, 49 Patent, Trademark & Copyright J. (BNA) at 715 (“same general antitrust” principles apply to intellectual property as to “any other form of tangible of intangible property[;]” its distinguishing characteristics, such as ease of misappropriation, can be considered in standard antitrust analysis); id. (“Intellectual property is thus neither particularly free from scrutiny under the antitrust laws, nor particularly suspect under them”). FN13This point is discussed in detail in � 7.01[1][d][ii] infra. For discussion of the antitrust “exception” for intellectual property protection, see generally: �� 6.02[2], 6.04[2], [3] supra. FN14 See6.04[1] supra. FN15Courts try to avoid overly stringent rules in the antitrust field for fear of discouraging robust competition through the threat of treble damage liability. See e.g., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578, 2588, 125 L.Ed.2d 168, (1993), citing Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990) (prices that are “predatory” although above cost are “beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price-cutting”)(Other citation omitted.); Matsushita Electric Industrial Co. v. Zenith Radio Corp.475 U.S. 574, 594, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)(“mistaken inferences” regarding price cutting “are especially costly, because they chill the very kind of conduct the antitrust laws are designed to protect”). (Citation omitted.) See also, Berkey Photo, Inc. v. Eastman Kodak Co.603 F.2d 263, 285 (2d Cir. 1979), cert. denied444 U.S. 1093 (1980)(refusing to require innovating monopolist to pre-disclose new products to competitors, for fear of chilling incentive to innovate). This concern is particular evident in the field of vertical restraints. See, e.g.: Business Electronics Corp. v. Sharp Electronics Corp.485 U.S. 717, 728, 108 S.Ct. 1515, 99L.Ed.2d 808 (1988)(if rules precluding vertical price fixing were so strict as to call into question reasonable vertical nonpricerestraints, “[m]anufacturers would be likely to forgo legitimate and competitively useful conduct rather than risk treble damages and perhaps even crminal penalties”); Monsantao Co. v. Spray-Rite Service Corp., 465 U.S. 752, 763-764, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984)(permitting inference of price-fixing conspiracy from mere fact that manufacturer had terminated distributor in response to other distributors’ complaints of price cutting would discourage reasonable vertical nonprice restraints and impair interbrand competition.) FN16This rationale vanishes if the restraint is imposed from the bottom up, at the behest of licensees. Bottom-up restraints, however, are suspect not only under the analysis suggested here, but under traditional antitrust rules of thumb, because they are likely to have horizontal effects. See� 6.05[2][a][ii] infra.

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