Patent Baristas

This is the second of a series of articles on IP and Antitrust issues.  This article deals with the need for licensing of intellectual property, licensing in the past and present and the antitrust concerns associated with it.

Possession of intellectual property is just one step in a chain of production and manufacturing. Once the patent has been procured, the product has to be manufactured or the process has to be applied towards manufacture. In case of an independent inventor, he usually does not possess the resources to carry out large-scale production. And in case of R&D companies that are holder of the intellectual property, they either have subsidiary manufacturing units or outsource it to companies that do possess the requisite infrastructure to carry out large-scale production. In either case, the intellectual property must be properly licensed. Licensing, cross-licensing and other similar means of conveyance of  intellectual property facilitates integration of the licensed property with complementary factors of production. This type of arrangement proves beneficial to the inventor as well as the manufacturer and thereby consumers as it greatly reduces costs and provides incentives for inventions and improvements thereupon.

In the past, the approach toward licensing arrangements was quite unbending. The Department of Justice identified a list of forbidden practices (the “Nine No-Nos” of intellectual property licensing; first espoused by Bruce Wilson in “Patent and Know-How License Arrangements: Field of Use, Territorial, Price and Quantity Restrictions”). The Nine No-Nos consisted of the following:

1. Royalties not reasonable related to sales of the patented products;
2. Restraints on licensees’ commerce outside the scope of the patent (tie-outs);
3. Requiring the licensee to purchase unpatented materials from the licensor (tie-ins);
4. Mandatory package licensing;
5. Requiring the licensee to assign to the patentee patents that may be issued to the licensee after the licensing arrangement is executed (exclusive grant backs);
6. Licensee veto power over grants of further licenses;
7. Restraints on sales of unpatented products made with a patented process;
8. Post-sale restraints on resale; and
9. Setting minimum prices on resale of the patent products.

It was an attempt by patent holders to extend the boundaries of their monopolies over unpatented supplies and to gain control over improvements of their innovations, to determine resale prices of their patented products or to engage in market allocation. (Gilbert R., & Shapiro C., Antitrust Issues in the Licensing of Intellectual property: The Nine No-No’s Meet the Nineties)

Recent times have however witnessed the shrinking of this list of No-No’s to just one: illegal tying.  (In re Independent Servs. Orgs. Antitrust Litig. (“Xerox”), 203 F.3d 1322).

The Xerox case (with allegations similar to Kodak case discussed in the last post) held that in absence of any illegal tying, patent holder may exclude others from making, using, selling or licensing the claimed invention free from liabilities under the antitrust laws so long as the antitrust effect is not extended beyond the scope of patents.

There are a limited number of cause of action arising from unlawful licensing practices (after the shrinkage of the nine no-no’s to one). They are:

1. Government actions: FTC or DOJ can initiate investigations based on anticompetitive practices. In the U.S. v. Microsoft case, FTC sought to investigate the competitive practices of Microsoft based on an agreement between Microsoft and IBM. The object of investigation was Microsoft’s use of its market power in PC operating systems and its licensing practices with original equipment computer manufacturers. The DOJ took over the investigation and brought against Microsoft the complaint of  unlawfully maintaining monopoly and unreasonable restrained trade by using exclusionary licensing agreements with manufacturers and requiring independent applications to sign onerous NDAs. The relief sought may be injunctive or criminal penalties.
2. Private Actions: Private claims arising from unlawful licensing arrangements may cause courts to impose penalties via damages.
3. Patent and Copyright misuse: Unlawful licensing arrangements might be deemed misuse and render the patent or copyright unenforceable. (Patent misuse is grist for a separate article.)

Finally, whether a particular licensing agreement violates antitrust statute or not depends on whether the relationship between parties is horizontal or vertical and what test is applied.

Horizontal relationship is construed when parties could be considered as actual or potential competitors in a relevant market in absence of the license. Parties are considered to be in a vertical relationship when they are in a complementary relationship, in different stages in the chain or production/distribution. Neither does the presence of a horizontal relationship does not in itself indicate anticompetitive practice nor does a vertical relationship guarantee the absence of the same. The classifications merely raise the possibility of the existence of anticompetitive practices. One can ask the following questions to determine of the licensee could compete lawfully with the licensor:

1. Did the licensee have the technical capability and/or resources necessary to enter the relevant market without the licensing arrangement?
2. Is there any evidence that the licensee had any intention of entering the relevant market absent the licensing arrangement in question?
3. Would the licensee have been precluded from entering the relevant market by the licensor’s intellectual property?

(See Reference)

Having asked these questions, one proceeds to the tests to be applied to licensing restraint: Per Se v. Rule of Reason. An antitrust rule of reason basically involves an inquiry into whether the consequences of the license are anticompetitive in nature and if so, whether the final pro-competitive outcome of such restraints outweighs the anticompetitive effects.

A per se analysis is that the licensing arrangement is to be treated as per se unlawful without an inquiry into whether it has any competitive benefits. Generally horizontal relationships are analyzed by the per se rule- as conduct that is so plainly anticompetitive that no inquiry is necessary. Price-fixing, market allocation, tying arrangements, etc., are all practices which must be analyzed by the per se rule.

The next topic in this series deals with different types of licensing restrictions.

See part I here: Intellectual Property & Antitrust Issues: Market Power

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