Exceptions to the Rule: Considering the Impact of Non-practicing Entities and Cooperative Regulatory Processes in the Update to the Antitrust Guidelines for the Licensing of Intellectual Property

• Publication year: 2016
• Author: By Robin Feldman

EXCEPTIONS TO THE RULE: CONSIDERING THE IMPACT OF NON-PRACTICING ENTITIES AND COOPERATIVE REGULATORY PROCESSES IN THE UPDATE TO THE ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY

By Robin Feldman¹

The Department of Justice (DOJ) and Federal Trade Commission (FTC) released a proposed update to the 1995 Antitrust Guidelines for the Licensing of Intellectual Property on August 12, 2016.² The following comments were submitted to the DOJ and FTC in response to the proposed update.

My primary comments pertain to the basic principle underlying the Guidelines and Update, that intellectual property licensing "is generally procompetitive.''³ While this premise is sound when analyzing traditional intellectual property markets, there is now a large secondary market for patents, populated by non-practicing entities (NPEs), for which the intensity of that statement no longer holds true and which requires a more nuanced approach. In that context, a stark statement of general procompetitiveness, without qualification, can hamper efforts by states and market actors to grapple with modern manifestations of anticompetitive behavior.

As explained in greater depth below, I recommend the following amplifications to the language in Sections 2.0 and 3.2 of the Update to take into account a secondary market in which intellectual property licenses may not serve procompetitive ends. The suggested language is italicized below:

• 2.0 General Principles

(c) [T]he Agencies recognize that intellectual property licensing . . . is generally procompetitive because it leads to competition in the marketplace and to the creation of new and useful products. Not all licensing, however, serves procompetitive ends, and its impact must be examined in the particular market context.

• 3.2 Markets Affected by Licensing Arrangements

Licensing arrangements raise concerns under the antitrust laws if they are likely to affect adversely the prices, quantities, qualities or varieties of goods and services either currently or potentially available . . . . The Agencies will typically analyze the competitive effects of licensing arrangements within the relevant markets for the goods affected by the arrangements. In other cases, however, the Agencies may analyze the effects within a market for technology or a market for research and development.

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In light of modern secondary markets for intellectual property and the existence of entities whose core activity does not involve products, an entity could adversely affect prices in a product, technology, or research and development market without necessarily holding a monopoly in that market. The following hypothetical is illustrative:

An entity that aggregates patents approaches an automobile manufacturer, asking that the manufacturer buy a license for a patent related to the production of shoes. The automobile manufacturer demurs, and the patent holder reveals 100 more patents for technology markets unrelated to automobiles. The automobile manufacturer agrees to pay for a license to the portfolio, given that the risks and costs of litigation—even for unrelated or invalid patents—may be higher than the cost of the license. Others in the automobile manufacturing industry agree to license the portfolio, following similar logic. The cost of such licensing may be passed on to the consumer in the form of higher prices. Thus, the price of automobiles may be raised through increased production costs, notwithstanding the fact that the patent portfolio holder did not hold any patents validly related to automobile production.

Finally, as also explained below, I suggest a short addition to the language related to refusals to deal. The new language, italicized below, relates to circumstances in which pharmaceutical companies refuse to cooperate with generics or other competitors on approval or on safety plans required by the Food and Drug Administration (FDA).

• 2.1 Standard Antitrust Analysis Applies to Intellectual Property

The Agencies apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of property. . . . The antitrust laws generally do not impose liability upon a firm for a unilateral refusal to assist its competitors, in part because doing so may undermine incentives for investment and innovation. Regulatory processes that require interaction with or cooperation among competitors, however, may present special circumstances.

Background Discussion:

The basic principle that intellectual property licensing is generally procompetitive is sound when analyzing traditional intellectual property markets. Different dynamics apply, however, in the extensive secondary markets for intellectual property that have expanded rapidly over the last decade.

I. LICENSING IN THE SECONDARY MARKETS DOES NOT NECESSARILY SERVE PROCOMPETITIVE ENDS

A. Power Operates Differently in the Secondary Markets

Market power, as understood in the three traditional markets,⁴ has the potential to operate differently in the secondary markets. Traditionally, market power is measured in relationship to a...