Patent Baristas

This is the first of a series of articles on IP and Antitrust issues. This article introduces the topic and the governing laws and guidelines. The next few articles will deal with intellectual property licensing practices, patent pooling and cross-licensing, antitrust/anti-competitive issues in the field of licensing, effects of restrictions in intellectual property licenses and the antitrust consequences of the bundling of various types of intellectual property rights.

We live in a rapidly evolving world where intellectual property is fast replacing physical, real property as assets of a corporation. This means that laws existing for traditional business operations must be stretched to encompass this new form of property. Antitrust laws starting with the Sherman Act, Clayton Act and terminating into the Federal Trade Commission Act must be interpreted in light of their application to intellectual property.

Within intellectual property, as we know there exist several branches. However, we confine ourselves to patents specifically, as this is a dominant form of assets for most corporations. Discussing patents and antitrust laws in the same topic is quite ironic. While antitrust laws prohibit any contract in restraint of trade (See Section 1 of the Sherman Act below), patents on the other hand grant the patent holder unlimited, albeit negative rights of excluding competitors from making, using, selling or otherwise exploiting the invention. The Supreme Court in the Standard Oil Case interpreted Section 1 as prohibiting only restraints of trade that unreasonably restrict competition.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court. 15  U.S.C. § 1

So how does one bridge the gap between antitrust laws and patent laws? Is one to understand that patent laws are inherently monopolistic in nature? In which case, the Congressional intent in enacting the Sherman, Clayton and FTC Acts is questionable. Is it that patent laws are divest from the purview of antitrust laws or can they be viewed as two sides of the same coin- aiding and abetting one another in enhancing consumer welfare and promoting innovation?  “[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 and competition.” Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576.  One may seek recourse to case laws, old and new, in addition to the various FTC reports in order to make sense of this conundrum.

If one is to subscribe to Judge Posner’s view, then one can arrive at a conclusion immediately as he held that exercise of monopoly power, including setting up monopolistic prices is not in contravention to antitrust laws as long as such monopoly was acquired by lawful means.

FTC’s last report on antitrust and patents addresses a number of issues such as refusals to license patents, collaborative standard setting, patent pooling, intellectual property licensing, the tying and bundling of intellectual property rights, and methods of extending market power conferred by a patent beyond the patent’s expiration.

Patents as discussed above grant exclusive rights to inventors to exclude others from exploiting the patented invention without appropriate license. These laws thus promote innovation, commercialization and further improvements by making public disclosure of the inventive steps mandatory.

Antitrust laws, for their part, ensure that new technologies, products and services are bought, sold, traded in a competitive environment. They also make sure that all commercial transactions are free from collusions, anticompetitive mergers and monopolistic tendencies.

The intellectual property laws and antitrust laws share a common goal in that they both promote innovation and consumer welfare by prohibiting actions such as imitation without compensation, monopolistic prices and an oligopoly, which inhibits a fair market. The two are thus wedded to each other.

The Antitrust-IP Guidelines have been an indispensable part of the Agencies’ analysis of intellectual property and antitrust issues. In brief, the guidelines emphasize three general principles:

1. Antitrust rules apply to intellectual property agreements as they would apply to agreements involving any other form of property.
2.  Possession of any form of intellectual property does not by itself create a market power. The presence of substitutes for the patented product or process prevents exercise of market power and
3.  That intellectual property licensing is not in contravention to competition issues as it allows firms to combine intellectual property rights with other complementary rights of production such as manufacturing and production facilities and workforces.  Antitrust-IP Guidelines §2-1

We end this segment with the analysis of a landmark care of Image Technical Services, Inc., v. Eastman Kodak Co., 125 F.3d 1195, which clarifies the concept of market power. Kodak manufactures and sells photocopiers and micrographic equipment as well as replacement parts for its equipment. Kodak began restricting plaintiffs’ access to its photocopier and micrographic parts. Kodak also secured agreements from their equipment manufacturers not to sell parts to the plaintiffs.

Section 2 of the Sherman Act reads inter alia, “Every person who shall monopolize, or attempt to monopoloze, or combine or conspire with any other persons, to monopolize any part of the trade or commerce…[commits a felony].”  15 U.S.C. §2

Market power can be shown to exist via circumstantial evidence or direct evidence. Circumstantial evidence must: “(i) define the relevant market, (ii) show that the defendant owns a dominant share of that market, and (iii) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run.” Rebel Oil Co. Inc., v. Atlantic Richfield Co., 51 F.3d 1421, 1434.

In this case, the court held that Kodak had held monopolies over the photocopier parts market as well as the micrographic parts market. Kodak tried to argue (unsuccessfully) that each part constituted a separate market and that the plaintiffs should demonstrate that they could not obtain nonpatented parts and that the failure to obtain that particular part was a result of Kodak’s monopoly over service.

However, it seems obvious that each of the numerous parts of equipment is required for functioning of the photocopier or micrograph. Therefore, the individual parts cannot be bifurcated into as many markets.

The second element of market share is thus calculated. A dominant share of the market carries with it the power to control the output across the market and thereby control prices. Id. at 1437.  Since Kodak controls nearly 100% of the parts market and 80-95% of the service market, with no readily available substitutes, it suffices to assume that Kodak controls the market.

The third factor of monopoly power is in regards to barriers to market entry and barriers to expansion. Common entry barriers include patents or other licenses, control of essential or superior resources, entrenched buyer preferences, high capital entry costs and economies of scale. United States v. Syufy Enterprises, 903 F.2d 659, 663. The court found Kodak to hold 220 patents, control of its designs and tools, brand name power and manufacturing capability. Kodak was also found to control its own original-equipment manufacturers through various contract arrangements. Court found a high barrier to entry to new manufacturers.

The Court also sought to harmonize antitrust principles with those of intellectual property. Despite the tension between the two, it is clear that –

1.  patent holders are not immune from antitrust liability and
2.  patent holders may refuse to sell or license protected work.

A monopolist who acquires a dominant position through obtaining intellectual property rights may violate §2 of Sherman Act if the monopolist exploits the dominant position to enhance monopoly in another market. Thus intellectual property rights do not confer an absolute immunity from antitrust liabilities.

In conclusion, the general understanding is that refusal on part of the patent holder to grant a license does not in itself create antitrust liabilities. It is only conditional refusals to grant licenses that create barrier to entry or future growth that give rise to antitrust claims.

Today’s post is by Guest Barista Shalini Menezes of ::O.bi:t.er: D:ic.t:um.