Developments in antitrust law that impact intellectual property licensing transactions.

• Author: Nelson, James D.

INTELLECTUAL property law has always been in tension with antitrust law. Intellectual property law protects monopolies; antitrust law disfavors them. Since the early years of the Sherman Act, the pendulum of antitrust law has swung back and forth between treating patentees leniently and disfavoring them. In the early years under the Sherman Act, a patent was essentially a "get out of jail free card" as far as the Sherman Act was concerned; patent licensees openly leveraged their rights to evade antitrust restrictions. Then courts overcorrected and began to treat all patent holders with suspicion. That suspicion lasted from 1912 to at least the 1960s. During those decades, the law presumed every patentee enjoys market power, rendering a whole laundry list of license uses per se illegal.

Now the pendulum has swung back in favor of owners of intellectual property. Today, antitrust laws have relaxed considerably. In fact, there is even some question as to whether classic patent tying arrangements are still actually (not just technically) per se illegal. Federal courts, the Department of Justice, and the Federal Trade Commission now take a gentler, more nuanced approach to determining whether any particular intellectual property license triggers antitrust concerns.

This paper will provide a brief history of the tension between antitrust law and intellectual property law. It will then discuss how courts today treat a variety of intellectual property licenses.

1. A Brief History

There have been three major periods in the development of the relationship between antitrust law and intellectual property law. In the first period, lasting for the first two decades following the passage of the Sherman Act, patent holders who wanted to license their rights enjoyed virtual immunity from the antitrust laws. In Bement v. National Harrow Co., the Supreme Court stated "the general rule" of absolute freedom in the use or sale of rights under the patent laws of the United States. The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts" keep up the monopoly or fix prices does not render them illegal. (1)

In short, patents were the Sherman Act's kryptonite in those first two decades.

Or, to be more precise, it was not patents that allowed the dodge around the young Sherman Act, but rather, patent license pools that could cleverly leverage patents and extend them beyond their original purpose of protecting the commendable ingenuity of the inventor. Licensed and pooled, patent rights could be alienated from inventors and collected by corporations whose purpose was to abuse market power. One commenter describes these early license pools as "unconditional shelter for collusion." (2)

The Supreme Court caught on, however, and it put teeth in the Sherman Act in 1912 with Standard Sanitary Manufacturing. Standard Sanitary broke up a patent pool that required licensees to fix resale prices and to deal only with jobbers that sold to licensed manufacturers. In a dramatic reversal of its previous attitude of total deference to patent licenses, the Standard Sanitary court described the licenses as having "evil consequences." (3) The Court continued to crimp patent poolers' style with Morton Salt v. Suppiger Co., a patent misuse case, in 1942. Morton Salt involved a pool that required licensees of a canning invention to buy their unpatented salt from Morton Salt. (4) The Supreme Court held that Morton Salt was attempting "to secure an exclusive right or limited monopoly not granted by the Patent Office and which it is contrary to public policy to grant." (5)

There is nothing shocking about Morton Salt itself; it makes sense that no one should be able to leverage his rights in new technology to restrict commerce in salt, the world's most ancient and commonplace good. But what is surprising is that Morton Salt's apparently common sense holding was later taken to mean that for antitrust purposes, market power (6) is presumed from mere possession of a patent. (7) In other words, under Morton Salt and its progeny, a penniless inventor toiling away nobly in his garage, who has never sold a thing in his life, was legally presumed to have market power the minute the government gives his patent a number. No doubt many a holder of a worthless patent only wished the law could work such capitalist magic as to render that presumption meritorious.

Over time, the pendulum had swung close to 180 degrees. Patent license pools went from being nearly always immune to antitrust law, to nearly always facing enhanced antitrust scrutiny:

By the late 1960s, the DOJ's attitude toward patent licensing was hostile. The [DOJ] applied a presumption of market power to the grant of a patent, and therefore gave no consideration to the structural characteristics of the market in which patented products competed. Moreover, it afforded little weight to efficiency considerations of licensing restrictions. (8) It is surprising to look back and realize that as recently as the 1960s, the DOJ could take such a crude position. After all, license pools can be used to thwart the Sherman Act, but they can also obviously benefit competition by allowing intellectual property to migrate to its highest use. Yet the DOJ seemed unaware of such fairly obvious efficiencies, and ultimately identified what have come to be known as the "Nine No-Nos." The "Nine No-Nos" are nine license uses to be treated as per se violations of the antitrust laws. (9) Predictably, the use of patent pools and cross licensing arrangements declined during this period. (10)

The judicial pendulum began to swing back in the 1980s, as "skepticism towards patent licensing provisions was quickly replaced by skepticism towards the doctrine of patent misuse." (11) In a celebrated 1986 patent misuse case, the Federal Circuit overruled the presumption that a patent confers market power on its holder in favor of a "rule of reason" analysis in Windsurfing Int'l, Inc. v. AMF, Inc. (12) Under the rule of reason, nothing is presumed. Instead, the procompetitive benefits of a particular restraint are painstakingly balanced against its anticompetitive costs in a carefully defined market to determine whether the challenged practice unreasonably restrains trade. (13) In 2006, the Supreme Court put the final judicial nail in the coffin of the presumption, dating back to Morton Salt, that a patent confers market power on its holder. The days of judicial hostility to patent licenses were officially over. (14)

The legislative branch joined the pro-license bandwagon in 1988, when Congress passed the Patent Misuse Reform Act and formally eliminated the patent law presumption that a...