Antitrust Analysis Of Intellectual Property Agreements

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CHAPTER II

ANTITRUST ANALYSIS OF

INTELLECTUAL PROPERTY AGREEMENTS

Agreements involving intellectual property have drawn more

attention as high-technology and pharmaceutical companies settle high-

profile litigation or buy patents from bankrupt innovators such as Kodak

and Nortel. Their continuing importance has led to a renewed focus on

how these agreements license intellectual property, settle intellectual

property disputes, and transfer intellectual property rights.

In some circumstances the highest value of intellectual property may

only be realized when the property is combined with complementary

resources. A patent covering a new device, for example, is worthless

unless combined with the manufacturing capacity to produce it. Because

intellectual property holders sometimes lack the resources to exploit their

property, they often integrate their intellectual property with the

appropriate complementary resources through agreements between firms.

In other words, agreements involving intellectual property can be

markedly procompetitive. Yet such agreements may also include terms

that produce anticompetitive effects and therefore raise antitrust

concerns. This chapter explores the line between procompetitive and

anticompetitive intellectual property agreements.

A.General Antitrust Principles Applied to Intellectual Property

Agreements

The Antitrust Guidelines for the Licensing of Intellectual Property,1

issued by the Department of Justice and the Federal Trade Commission

1. U.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,ANTITRUST GUIDELINES

FOR THE LICENSING OF INTELLECTUAL PROPERTY (April 1995), available

at http://www.justice.gov/atr/public/guidelines/0558.htm [hereinafter

1995IPGUIDELINES]. The agencies have issued several additional reports

that provide further insight into the analytical framework to be applied

and reflect the continuing development of the agencies’ approach. See,

e.g., U.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,ANTITRUST

ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS:PROMOTING

INNOVATION AND COMPETITION (April 2007) [hereinafter 2007 IP

54 Intellectual Property and Antitrust Handbook

in 1995 (1995 IP Guidelines), provide the starting point for guidance

regarding the antitrust principles applicable to intellectual property

agreements. The 1995 IP Guidelines set forth a well-accepted analytical

framework for these types of agreements. The following sections

therefore focus on the Guidelines, supplemented by case law and the

enforcement agencies’ subsequent analyses and policy statements.

The 1995 IP Guidelines reflect the principle that standard antitrust

analysis applies to intellectual property, and that intellectual property is

“neither particularly free from scrutiny under the antitrust laws, nor

particularly suspect under them.”2 Standard antitrust analysis under the

Sherman Act encompasses more than 100 years of standards, burdens,

and presumptions that have waxed and waned with developing legal and

economic theories and experience.3

In assessing restraints in licensing arrangements, it is also important

to consider intellectual property misuse doctrines. In 1969, the Supreme

Court noted in Zenith Corp. v. Hazeltine Research4 that patent misuse

does not necessarily embody “the ingredients of a violation of either § 1

or § 2 of the Sherman Act.”5 But since the Zenith case, courts have

tended to require a showing of adverse effects on competition in a

relevant market to establish misuse, blurring the distinctions between

antitrust and misuse.6 Case law involving misuse defenses therefore has

REPORT], available at http://www.justice.gov/atr/public/hearings/ip/

222655.pdf.

2. 1995IPGUIDELINES. supra note 1, § 2.1.

3. This chapter addresses intellectual property agreements that raise antitrust

concerns. Unilateral conduct raising antitrust concerns is addressed in

Chapter III. Nevertheless, license agreements, naturally subject to § 1 of

the Sherman Act because they are “agreements,” may also raise antitrust

concerns that may be addressed by § 2 of the Sherman Act depending on

the circumstances. See, e.g., United States v. Microsoft Corp., 253 F.3d

34 (D.C. Cir. 2001) (Section 2 violation found and upheld on appeal

based on exclusive dealing, even where § 1 claim with respect to the

same conduct failed).

4. 395 U.S. 100 (1969).

5. Id. at 140.

6..See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992);

Windsurfing Int’l v. AMF, Inc., 782 F.2d 995, 1001-02 (Fed. Cir. 1986)

(“To sustain a misuse defense involving a licensing arrangement not held

to have been per se anticompetitive by the Supreme Court, a factual

determination must reveal that the overall effect of the license tends to

restrain competition unlawfully in an appropriately defined relevant

market.”); USM Corp. v. SPS Techs., 694 F.2d 505, 510-14 (7th Cir.

Analysis of Intellectual Property Agreements 55

become important in evaluating potential antitrust issues. The misuse and

antitrust doctrines nevertheless remain distinct, with distinct elements

and different remedies.7 This case law is discussed in later sections—in

addition to antitrust case law and the 1995 IP Guidelines—when relevant

to specific types of licensing arrangements.

1.Distinguishing Between Vertical and Horizontal Arrangements

In analyzing whether an agreement unlawfully restrains trade, the

enforcement agencies, courts, and economists distinguish between

vertical and horizontal restraints.8 The characterization of a restraint as

horizontal or vertical generally depends on the relationship of the parties

to the agreement imposing the restraint.9

As described in the 1995 IP Guidelines, the agencies’ antitrust

analysis of intellectual property licensing arrangements “examines

whether the relationship among the parties to the arrangement is

primarily horizontal or vertical in nature, or whether it has substantial

aspects of both.”10 Distinguishing between vertical (complementary) and

horizontal (competitive) relationships can be more difficult for

intellectual property licensing arrangements than for those involving the

manufacture and distribution of other goods.

1982) (analyzing discriminatory royalties under antitrust principles and

holding that there was no patent misuse).

7. See Virginia Panel Corp. v. Mac Panel Co.,133 F.3d 860, 872 (Fed. Cir.

1997) (“[V]iolation of the antitrust laws, in this case Section 2 of the

Sherman Antitrust Act, . . . requires more exacting proof than suffices to

demonstrate patent misuse.”); cf. Nobelpharma AB v. Implant

Innovations, Inc., 141 F.3d 1059, 1068-71 (Fed. Cir. 1998) (discussing

the distinctions between equitable defense in infringement action of

inequitable conduct and Walker Process “fraud” that might support an

affirmative antitrust claim).

8. See, e.g., Leegin Creative Leather Prods. v. PSKS, Inc. 551 U.S. 877, 888

(2007) (“Our recent cases formulate antitrust principles in accordance

with the appreciated differences in economic effect between vertical and

horizontal agreements.”).

9. See Business Elecs. v. Sharp Elecs., 485 U.S. 717, 730 (1988)

(“Restraints imposed by agreement between competitors have

traditionally been denominated as horizontal restraints, and those

imposed by agreement between firms at different levels of distribution as

vertical restraints.”).

10. 1995IPGUIDELINES, supra note 1, § 3.3.