Dispatches from the West Coast: Federalism, Competition, and Comments on the United States' Proposed Update to the Antitrust Guidelines for Licensing Intellectual Property

• Jurisdiction: United States,Federal,California
• Author: By Emilio Varanini and Cheryl Johnson
• Publication year: 2016
• Citation: Vol. 25 No. 2

DISPATCHES FROM THE WEST COAST: FEDERALISM, COMPETITION, AND COMMENTS ON THE UNITED STATES' PROPOSED UPDATE TO THE ANTITRUST GUIDELINES FOR LICENSING INTELLECTUAL PROPERTY1

By Emilio Varanini² and Cheryl Johnson³

I. INTRODUCTION

The United States Department of Justice and the Federal Trade Commission (the "Agencies") issued in August of this year the Proposed Update to the Antitrust Guidelines for Licensing Intellectual Property (the "Proposed Update") and sought comments from the public.⁴ Though the official comment period closed on September 26, 2016, it is anticipated that the finalization of the Proposed Update will take some time.

States like California are on the front lines in finding the appropriate mix between intellectual property ("IP") and antitrust so as to continue the unprecedented growth of industries in their states, such as the high-technology industry, the biotech industry, and the creation of new content and services.⁵ It is therefore important for states that the balance be struck true in rewarding innovation through the grant of IP rights without allowing the anticompetitive leveraging of those rights to create entrenched monopolies and cartels that hinder competition.⁶ States like California have brought important cases in the areas of pharmaceuticals and high-technology involving the intersection of IP and antitrust.⁷ And as guardians of federalism and the resulting split of sovereignty in the U.S. Constitution,⁸ states like California have a strong interest in reconciling and harmonizing the workings of IP laws with other laws and doctrines, including state and federal antitrust law.⁹ As antitrust enforcers for the State of California with a substantial background in IP, we set out our own personal views on this Proposed Update against this backdrop.

II. AN OVERVIEW OF THE PROPOSED UPDATE: SETTING OUT WHERE IT ADVANCES THE BALL AND WHERE ADDITIONAL THINKING WOULD BE HELPFUL TO STRIKING THE TRUE BALANCE BETWEEN IP AND ANTITRUST

We support substantial aspects of the Proposed Update, including: the importance of closely reviewing acquisitions or transfers of IP; the application of a rule of reason analysis in Sherman Act Section 2 monopoly cases;¹⁰ and, within the rule of reason framework for Sherman Act Section 1 joint conduct and Section 2 monopoly cases, the need for the determination not just of a restraint's "fit" but also whether practical and significantly less restrictive alternatives exist.¹¹ Our comments focus on the following issues:

Overbroad presumption that IP licensing agreements are procompetitive. The Proposed Update presumes that all IP licensing agreements are procompetitive such that the first step for the Agencies will be to rule out plausible efficiencies for those agreements before proceeding with a more in-depth analysis. Such a presumption may be appropriate in certain instances, such as a vertical IP licensing agreement in which an IP rights holder licenses its property to a product using that IP absent concerns about foreclosure or raising a rival's costs.¹² The presumption, however, should not apply when the licensing agreement (1) sweeps beyond the scope of the IP grant; or (2) involves a horizontal arrangement between competitors. Although there are certain horizontal licensing agreements, such as patent pools, that may be procompetitive, the Agencies should insist, as they historically have, that the participants provide safeguards to avoid possible anticompetitive effects.

The failure to spell out how IP licensing conduct such as fixing resale prices (known as resale price maintenance or "RPM") and tying can be likely anticompetitive under certain circumstances. The Proposed Update would better serve the public interest and the business community by delineating those circumstances under which IP licensing conduct is likely anticompetitive. Given that RPM can be used, for example, to evade the first sale or exhaustion doctrines, it should be presumed to be anti-competitive when used in an IP licensing agreement at least when RPM restraints cover more than 50% of a market, are imposed by dominant firm, or were initiated by licensees.

The failure to address licensing arrangements when the licensor has monopoly power. The Agencies need to set out a more specific inquiry under the rule of reason of licensing-related conduct that present special concerns of anticompetitive effects in the context of Section 2. For example, the Agencies may wish to infer anticompetitive effects under the rule of reason in Section 2 cases involving tying/bundling and exclusive dealing and neither assume actual efficiencies nor reject practical, significantly less restrictive alternatives absent adequate explanations supplied by the licensor.

Trinko¹³ does not compel the Agencies to recognize an extremely wide scope for IP holders to condition access to their IP even when those firms have market power. While we certainly agree that a firm can refuse to license its IP in the first instance, it is another matter whether Trinko can or should be read for the broader proposition that a firm has a wide scope in how it conditions access to its IP¹⁴—even when it has market power.¹⁵ Actavis¹⁶ and Microsoft¹⁷ do not support such an expansive view on access. Moreover, Trinko itself was a narrow decision involving competitor access in a highly regulated industry. We believe that these proposed clarifications would signal to the business community the kind of licensing conduct they should avoid in highly concentrated and cartelized markets.¹⁸

III. THE AGENCIES SHOULD ONLY PRESUME LICENSING AGREEMENTS ARE PROCOMPETITIVE UNDER LIMITED CIRCUMSTANCES

At multiple points in both the Proposed Update and the original Guidelines, licensing agreements are presumed to be procompetitive. The Proposed Update could be clarified to state that this presumption does not apply if the IP licensing agreement sweeps beyond the scope of the IP grant or if the IP licensing agreement involves competitors.

A. Licensing Agreements Cannot Be Assumed to Be Procompetitive When They Sweep Beyond the Scope of the Underlying IP Grant

IP rights encourage and safeguard innovation and further competition in the development of new technologies and products by affording a government grant of exclusivity.¹⁹ But the extent of the IP grant must be carefully respected to prevent entrenching monopolies that restrain competition and innovation.²⁰ A trade secret can be protected forever—as long as reasonable steps are taken to ensure its confidentiality—but may be subject to reverse engineering.²¹ A copyright can only protect an expression of an idea rather than the underlying idea itself——and is subject to an exception for fair use.²² And under the first sale doctrine in copyright law as well as the doctrine of exhaustion in patent law, a purchaser of a product containing an already-licensed IP right may resell that product freely without running afoul of IP laws.²³

Patents themselves can be found to be invalid if they patent laws of nature, natural phenomenon, or abstract ideas.²⁴ Because of concerns over the validity and quality of patent grants²⁵—not to mention difficulties in ascertain the existence and scope of patents reading on a potential product prior to its manufacture—patents can be subject to post hoc challenge not just in court but via a new statutory administrative process.²⁶

The Supreme Court has repeatedly signaled its concern about exceeding the scope of IP grants, most recently by rejecting the argument that a firm can charge royalties for the use of a patent that exceeded the underlying term of the patent, finding such an arrangement to be an impermissible extension of the underlying grant.²⁷ Similarly, the Proposed Update should expressly recognize that a licensing agreement can be used to extend an IP right past the terms of a government grant, such as, but not limited to, the following circumstances: (1) barring challenges to a patent's validity; (2) requiring an overbroad reciprocal grant of other IP rights; or (3) by using the IP right to engage in anticompetitive bundling or discrimination against rivals.

Such agreements can be anticompetitive when a firm has market power.²⁸ And it can't be assumed in these circumstances, under either economic teaching or case law, that licensing agreements which extend the scope of a government grant of IP are presumptively procompetitive and thus exempt from the antitrust laws.²⁹

B. Licensing Agreements Cannot Be Presumed to Be Procompetitive When Between Competitors

The Proposed Update suggests that IP licensing agreements between competitors will be presumed to be procompetitive.³⁰ Historically, they were viewed in the same fashion as other horizontal agreements between competitors. Patent pools, for example, could be used to implement per se illegal price-fixing and market allocation cartels.³¹ And patent pools can otherwise still be anticompetitive when (1) an excluded firm from a pool cannot compete absent access; (2) limitations on access to the pool are not a reasonable fit; or (3) the net competitive effects are negative.³² But pool participants could show that their patent pool deserved to be treated as being procompetitive, and subject to a rule of reason analysis, only if they provided facts to explain how the pool was designed to accomplish procompetitive ends based on market realities and only if they explained how they planned to institute safeguards against anticompetitive ends.³³

The Proposed Update appears to depart from this practice in two ways. First, it starts from the premise—that must then be disproven—that such pools all serve procompetitive ends. Second, it states that the presence or absence of safeguards may be of no moment in focusing prosecutorial resources on those pools that are the most problematic. That approach is not supported by economic teaching or prior experience³⁴ and is in considerable tension with Supreme Court case law on the review of joint...