Antitrust Guidelines
for the Licensing of Intellectual Property
Issued by the
U.S. Department of Justice(1)
and the
Federal Trade
Commission
April 6, 1995
TABLE OF CONTENTS
1. Intellectual property protection and the antitrust
laws
2. General
principles
2.1
Standard antitrust analysis applies to intellectual property
2.2 Intellectual property and
market power
2.3
Procompetitive benefits of licensing
3. Antitrust concerns and modes of analysis
3.1 Nature of the
concerns
3.2 Markets
affected by licensing arrangements
3.2.1 Goods markets
3.2.2 Technology
markets
3.2.3 Reseach and development: Innovation markets
3.3 Horizontal and vertical
relationships
3.4
Framework for evaluating licensing restraints
4. General principles concerning the Agencies'
evaluation of licensing arrangements
4.1 Analysis of anticompetitive
effects
4.1.1
Market structure, coordination, and foreclosure
4.1.2 Licensing arrangements
involving exclusivity
4.2 Efficiencies and justifications
4.3 Antitrust "safety zone"
5. Application of general
principles
5.1
Horizontal restraints
5.2 Resale price maintenance
5.3 Tying arrangements
5.4 Exclusive dealing
5.5 Cross-licensing and pooling
arrangements
5.6
Grantbacks
5.7
Acquisition of intellectual property rights
6. Enforcement of invalid intellectual property
rights
1. Intellectual property
protection and the antitrust laws
1.0 These Guidelines state the antitrust enforcement policy of the
U.S. Department of Justice and the Federal Trade Commission (individually, "the
Agency," and collectively, "the Agencies") with respect to the licensing of
intellectual property protected by patent, copyright, and trade secret law, and
of know-how.(2) By stating their
general policy, the Agencies hope to assist those who need to predict whether
the Agencies will challenge a practice as anticompetitive. However, these
Guidelines cannot remove judgment and discretion in antitrust law enforcement.
Moreover, the standards set forth in these Guidelines must be applied in
unforeseeable circumstances. Each case will be evaluated in light of its own
facts, and these Guidelines will be applied reasonably and flexibly.(3)
In the United States, patents confer rights to exclude
others from making, using, or selling in the United States the invention claimed
by the patent for a period of seventeen years from the date of issue.(4) To gain patent protection, an
invention (which may be a product, process, machine, or composition of matter)
must be novel, nonobvious, and useful. Copyright protection applies to original
works of authorship embodied in a tangible medium of expression.(5) A copyright protects only the expression, not
the underlying ideas.(6) Unlike a
patent, which protects an invention not only from copying but also from
independent creation, a copyright does not preclude others from independently
creating similar expression. Trade secret protection applies to information
whose economic value depends on its not being generally known.(7) Trade secret protection is conditioned upon
efforts to maintain secrecy and has no fixed term. As with copyright protection,
trade secret protection does not preclude independent creation by
others.
The intellectual property laws and the antitrust laws
share the common purpose of promoting innovation and enhancing consumer
welfare.(8) The intellectual
property laws provide incentives for innovation and its dissemination and
commercialization by establishing enforceable property rights for the creators
of new and useful products, more efficient processes, and original works of
expression. In the absence of intellectual property rights, imitators could more
rapidly exploit the efforts of innovators and investors without compensation.
Rapid imitation would reduce the commercial value of innovation and erode
incentives to invest, ultimately to the detriment of consumers. The antitrust
laws promote innovation and consumer welfare by prohibiting certain actions that
may harm competition with respect to either existing or new ways of serving
consumers.
2. General
principles
2.0 These
Guidelines embody three general principles:
- for the purpose of antitrust analysis, the Agencies regard intellectual
property as being essentially comparable to any other form of property;
- the Agencies do not presume that intellectual property creates market power
in the antitrust context; and
- the Agencies recognize that intellectual property licensing allows firms to
combine complementary factors of production and is generally
procompetitive.
-
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 tangible or intangible property. That is not to say
that intellectual property is in all respects the same as any other form of
property. Intellectual property has important characteristics, such as ease of
misappropriation, that distinguish it from many other forms of property. These
characteristics can be taken into account by standard antitrust analysis,
however, and do not require the application of fundamentally different
principles.(9)
Although there are clear and important differences in
the purpose, extent, and duration of protection provided under the intellectual
property regimes of patent, copyright, and trade secret, the governing antitrust
principles are the same. Antitrust analysis takes differences among these forms
of intellectual property into account in evaluating the specific market
circumstances in which transactions occur, just as it does with other particular
market circumstances.
Intellectual property law bestows on the owners of
intellectual property certain rights to exclude others. These rights help the
owners to profit from the use of their property. An intellectual property
owner's rights to exclude are similar to the rights enjoyed by owners of other
forms of private property. As with other forms of private property, certain
types of conduct with respect to intellectual property may have anticompetitive
effects against which the antitrust laws can and do protect. Intellectual
property is thus neither particularly free from scrutiny under the antitrust
laws, nor particularly suspect under them.
The Agencies recognize that the licensing of
intellectual property is often international. The principles of antitrust
analysis described in these Guidelines apply equally to domestic and
international licensing arrangements. However, as described in the 1995
Department of Justice and Federal Trade Commission Antitrust Enforcement
Guidelines for International Operations, considerations particular to
international operations, such as jurisdiction and comity, may affect
enforcement decisions when the arrangement is in an international
context.
2.2 Intellectual property and market
power
Market power is the ability profitably to maintain
prices above, or output below, competitive levels for a significant period of
time.(10) The Agencies will not
presume that a patent, copyright, or trade secret necessarily confers market
power upon its owner. Although the intellectual property right confers the power
to exclude with respect to the specific product, process, or work in
question, there will often be sufficient actual or potential close substitutes
for such product, process, or work to prevent the exercise of market power.(11) If a patent or other form of
intellectual property does confer market power, that market power does not by
itself offend the antitrust laws. As with any other tangible or intangible asset
that enables its owner to obtain significant supracompetitive profits, market
power (or even a monopoly) that is solely "a consequence of a superior product,
business acumen, or historic accident" does not violate the antitrust laws.(12) Nor does such market power
impose on the intellectual property owner an obligation to license the use of
that property to others. As in other antitrust contexts, however, market power
could be illegally acquired or maintained, or, even if lawfully acquired and
maintained, would be relevant to the ability of an intellectual property owner
to harm competition through unreasonable conduct in connection with such
property.
2.3 Procompetitive benefits of
licensing
Intellectual property typically is one component among
many in a production process and derives value from its combination with
complementary factors. Complementary factors of production include manufacturing
and distribution facilities, workforces, and other items of intellectual
property. The owner of intellectual property has to arrange for its combination
with other necessary factors to realize its commercial value. Often, the owner
finds it most efficient to contract with others for these factors, to sell
rights to the intellectual property, or to enter into a joint venture
arrangement for its development, rather than supplying these complementary
factors itself.
Licensing, cross-licensing, or otherwise transferring
intellectual property (hereinafter "licensing") can facilitate integration of
the licensed property with complementary factors of production. This integration
can lead to more efficient exploitation of the intellectual property, benefiting
consumers through the reduction of costs and the introduction of new products.
Such arrangements increase the value of intellectual property to consumers and
to the developers of the technology. By potentially increasing the expected
returns from intellectual property, licensing also can increase the incentive
for its creation and thus promote greater investment in research and
development.
Sometimes the use of one item of intellectual property
requires access to another. An item of intellectual property "blocks" another
when the second cannot be practiced without using the first. For example, an
improvement on a patented machine can be blocked by the patent on the machine.
Licensing may promote the coordinated development of technologies that are in a
blocking relationship.
Field-of-use, territorial, and other limitations on
intellectual property licenses may serve procompetitive ends by allowing the
licensor to exploit its property as efficiently and effectively as possible.
These various forms of exclusivity can be used to give a licensee an incentive
to invest in the commercialization and distribution of products embodying the
licensed intellectual property and to develop additional applications for the
licensed property. The restrictions may do so, for example, by protecting the
licensee against free-riding on the licensee's investments by other licensees or
by the licensor. They may also increase the licensor's incentive to license, for
example, by protecting the licensor from competition in the licensor's own
technology in a market niche that it prefers to keep to itself. These benefits
of licensing restrictions apply to patent, copyright, and trade secret licenses,
and to know-how agreements.
EXAMPLE 1(13)
Situation:
ComputerCo develops a new,
copyrighted software program for inventory management. The program has wide
application in the health field. ComputerCo licenses the program in an
arrangement that imposes both field of use and territorial limitations. Some of
ComputerCo's licenses permit use only in hospitals; others permit use only in
group medical practices. ComputerCo charges different royalties for the
different uses. All of ComputerCo's licenses permit use only in specified
portions of the United States and in specified foreign countries.(14) The licenses contain no
provisions that would prevent or discourage licensees from developing, using, or
selling any other program, or from competing in any other good or service other
than in the use of the licensed program. None of the licensees are actual or
likely potential competitors of ComputerCo in the sale of inventory management
programs.
Discussion:
The key competitive issue
raised by the licensing arrangement is whether it harms competition among
entities that would have been actual or likely potential competitors in the
absence of the arrangement. Such harm could occur if, for example, the licenses
anticompetitively foreclose access to competing technologies (in this case, most
likely competing computer programs), prevent licensees from developing their own
competing technologies (again, in this case, most likely computer programs), or
facilitate market allocation or price-fixing for any product or service supplied
by the licensees. (See section 3.1.) If the license agreements
contained such provisions, the Agency evaluating the arrangement would analyze
its likely competitive effects as described in parts 3-5 of these Guidelines. In
this hypothetical, there are no such provisions and thus the arrangement is
merely a subdivision of the licensor's intellectual property among different
fields of use and territories. The licensing arrangement does not appear likely
to harm competition among entities that would have been actual or likely
potential competitors if ComputerCo had chosen not to license the software
program. The Agency therefore would be unlikely to object to this arrangement.
Based on these facts, the result of the antitrust analysis would be the same
whether the technology was protected by patent, copyright, or trade secret. The
Agency's conclusion as to likely competitive effects could differ if, for
example, the license barred licensees from using any other inventory management
program.
3. Antitrust
concerns and modes of analysis
3.1 Nature of the concerns
While intellectual property licensing arrangements are
typically welfare-enhancing and procompetitive, antitrust concerns may
nonetheless arise. For example, a licensing arrangement could include restraints
that adversely affect competition in goods markets by dividing the markets among
firms that would have competed using different technologies. See, e.g.,
Example 7. An arrangement that effectively merges the research and development
activities of two of only a few entities that could plausibly engage in research
and development in the relevant field might harm competition for development of
new goods and services. See section 3.2.3. An acquisition of
intellectual property may lessen competition in a relevant antitrust market.
See section 5.7. The Agencies will focus on the actual effects of an
arrangement, not on its formal terms.
The Agencies will not require the owner of
intellectual property to create competition in its own technology. However,
antitrust concerns may arise when a licensing arrangement harms competition
among entities that would have been actual or likely potential competitors(15) in a relevant market in the
absence of the license (entities in a "horizontal relationship"). A restraint in
a licensing arrangement may harm such competition, for example, if it
facilitates market division or price-fixing. In addition, license restrictions
with respect to one market may harm such competition in another market by
anticompetitively foreclosing access to, or significantly raising the price of,
an important input,(16) or by
facilitating coordination to increase price or reduce output. When it appears
that such competition may be adversely affected, the Agencies will follow the
analysis set forth below. See generally sections 3.4 and
4.2.
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(17) either currently or potentially available. The
competitive effects of licensing arrangements often can be adequately assessed
within the relevant markets for the goods affected by the arrangements. In such
instances, the Agencies will delineate and analyze only goods markets. In other
cases, however, the analysis may require the delineation of markets for
technology or markets for research and development (innovation
markets).
3.2.1 Goods markets
A number of different goods markets may be relevant to
evaluating the effects of a licensing arrangement. A restraint in a licensing
arrangement may have competitive effects in markets for final or intermediate
goods made using the intellectual property, or it may have effects upstream, in
markets for goods that are used as inputs, along with the intellectual property,
to the production of other goods. In general, for goods markets affected by a
licensing arrangement, the Agencies will approach the delineation of relevant
market and the measurement of market share in the intellectual property area as
in section 1 of the U.S. Department of Justice and Federal Trade Commission
Horizontal Merger Guidelines.(18)
3.2.2 Technology markets
Technology markets consist of the intellectual
property that is licensed (the "licensed technology") and its close
substitutes--that is, the technologies or goods that are close enough
substitutes significantly to constrain the exercise of market power with respect
to the intellectual property that is licensed.(19) When rights to intellectual property are
marketed separately from the products in which they are used,(20) the Agencies may rely on technology markets to
analyze the competitive effects of a licensing arrangement.
EXAMPLE 2
Situation:
Firms Alpha and Beta
independently develop different patented process technologies to manufacture the
same off-patent drug for the treatment of a particular disease. Before the firms
use their technologies internally or license them to third parties, they
announce plans jointly to manufacture the drug, and to assign their
manufacturing processes to the new manufacturing venture. Many firms are capable
of using and have the incentive to use the licensed technologies to manufacture
and distribute the drug; thus, the market for drug manufacturing and
distribution is competitive. One of the Agencies is evaluating the likely
competitive effects of the planned venture.
Discussion:
The Agency would analyze
the competitive effects of the proposed joint venture by first defining the
relevant markets in which competition may be affected and then evaluating the
likely competitive effects of the joint venture in the identified markets.
(See Example 4 for a discussion of the Agencies' approach to joint
venture analysis.) In this example, the structural effect of the joint venture
in the relevant goods market for the manufacture and distribution of the drug is
unlikely to be significant, because many firms in addition to the joint venture
compete in that market. The joint venture might, however, increase the prices of
the drug produced using Alpha's or Beta's technology by reducing competition in
the relevant market for technology to manufacture the drug.
The Agency would delineate a technology market in
which to evaluate likely competitive effects of the proposed joint venture. The
Agency would identify other technologies that can be used to make the drug with
levels of effectiveness and cost per dose comparable to that of the technologies
owned by Alpha and Beta. In addition, the Agency would consider the extent to
which competition from other drugs that are substitutes for the drug produced
using Alpha's or Beta's technology would limit the ability of a hypothetical
monopolist that owned both Alpha's and Beta's technology to raise its
price.
To identify a technology's close substitutes and thus
to delineate the relevant technology market, the Agencies will, if the data
permit, identify the smallest group of technologies and goods over which a
hypothetical monopolist of those technologies and goods likely would exercise
market power--for example, by imposing a small but significant and nontransitory
price increase.(21) The Agencies
recognize that technology often is licensed in ways that are not readily
quantifiable in monetary terms. (22) In such circumstances, the Agencies will
delineate the relevant market by identifying other technologies and goods which
buyers would substitute at a cost comparable to that of using the licensed
technology.
In assessing the competitive significance of current
and likely potential participants in a technology market, the Agencies will take
into account all relevant evidence. When market share data are available and
accurately reflect the competitive significance of market participants, the
Agencies will include market share data in this assessment. The Agencies also
will seek evidence of buyers' and market participants' assessments of the
competitive significance of technology market participants. Such evidence is
particularly important when market share data are unavailable, or do not
accurately represent the competitive significance of market participants. When
market share data or other indicia of market power are not available, and it
appears that competing technologies are comparably efficient,(23) the Agencies will assign each technology the
same market share. For new technologies, the Agencies generally will use the
best available information to estimate market acceptance over a two-year period,
beginning with commercial introduction.
3.2.3 Research and development: innovation markets
If a licensing arrangement may adversely affect
competition to develop new or improved goods or processes, the Agencies will
analyze such an impact either as a separate competitive effect in relevant goods
or technology markets, or as a competitive effect in a separate innovation
market. A licensing arrangement may have competitive effects on innovation that
cannot be adequately addressed through the analysis of goods or technology
markets. For example, the arrangement may affect the development of goods that
do not yet exist.(24)
Alternatively, the arrangement may affect the development of new or improved
goods or processes in geographic markets where there is no actual or likely
potential competition in the relevant goods.(25)
An innovation market consists of the research and
development directed to particular new or improved goods or processes, and the
close substitutes for that research and development. The close substitutes are
research and development efforts, technologies, and goods(26) that significantly constrain the exercise of
market power with respect to the relevant research and development, for example
by limiting the ability and incentive of a hypothetical monopolist to retard the
pace of research and development. The Agencies will delineate an innovation
market only when the capabilities to engage in the relevant research and
development can be associated with specialized assets or characteristics of
specific firms.
In assessing the competitive significance of current
and likely potential participants in an innovation market, the Agencies will
take into account all relevant evidence. When market share data are available
and accurately reflect the competitive significance of market participants, the
Agencies will include market share data in this assessment. The Agencies also
will seek evidence of buyers' and market participants' assessments of the
competitive significance of innovation market participants. Such evidence is
particularly important when market share data are unavailable or do not
accurately represent the competitive significance of market participants. The
Agencies may base the market shares of participants in an innovation market on
their shares of identifiable assets or characteristics upon which innovation
depends, on shares of research and development expenditures, or on shares of a
related product. When entities have comparable capabilities and incentives to
pursue research and development that is a close substitute for the research and
development activities of the parties to a licensing arrangement, the Agencies
may assign equal market shares to such entities.
EXAMPLE 3
Situation:
Two companies that
specialize in advanced metallurgy agree to cross-license future patents relating
to the development of a new component for aircraft jet turbines. Innovation in
the development of the component requires the capability to work with very high
tensile strength materials for jet turbines. Aspects of the licensing
arrangement raise the possibility that competition in research and development
of this and related components will be lessened. One of the Agencies is
considering whether to define an innovation market in which to evaluate the
competitive effects of the arrangement.
Discussion:
If the firms that have
the capability and incentive to work with very high tensile strength materials
for jet turbines can be reasonably identified, the Agency will consider defining
a relevant innovation market for development of the new component. If the number
of firms with the required capability and incentive to engage in research and
development of very high tensile strength materials for aircraft jet turbines is
small, the Agency may employ the concept of an innovation market to analyze the
likely competitive effects of the arrangement in that market, or as an aid in
analyzing competitive effects in technology or goods markets. The Agency would
perform its analysis as described in parts 3-5.
If the number of firms with the required capability
and incentive is large (either because there are a large number of such firms in
the jet turbine industry, or because there are many firms in other industries
with the required capability and incentive), then the Agency will conclude that
the innovation market is competitive. Under these circumstances, it is unlikely
that any single firm or plausible aggregation of firms could acquire a large
enough share of the assets necessary for innovation to have an adverse impact on
competition.
If the Agency cannot reasonably identify the firms
with the required capability and incentive, it will not attempt to define an
innovation market.
EXAMPLE 4
Situation: Three of the largest
producers of a plastic used in disposable bottles plan to engage in joint
research and development to produce a new type of plastic that is rapidly
biodegradable. The joint venture will grant to its partners (but to no one else)
licenses to all patent rights and use of know-how. One of the Agencies is
evaluating the likely competitive effects of the proposed joint venture.
Discussion:
The Agency would analyze
the proposed research and development joint venture using an analysis similar to
that applied to other joint ventures. (27) The Agency would begin by defining the
relevant markets in which to analyze the joint venture's likely competitive
effects. In this case, a relevant market is an innovation market--research and
development for biodegradable (and other environmentally friendly) containers.
The Agency would seek to identify any other entities that would be actual or
likely potential competitors with the joint venture in that relevant market.
This would include those firms that have the capability and incentive to
undertake research and development closely substitutable for the research and
development proposed to be undertaken by the joint venture, taking into account
such firms' existing technologies and technologies under development, R&D
facilities, and other relevant assets and business circumstances. Firms
possessing such capabilities and incentives would be included in the research
and development market even if they are not competitors in relevant markets for
related goods, such as the plastics currently produced by the joint venturers,
although competitors in existing goods markets may often also compete in related
innovation markets.
Having defined a relevant innovation market, the
Agency would assess whether the joint venture is likely to have anticompetitive
effects in that market. A starting point in this analysis is the degree of
concentration in the relevant market and the market shares of the parties to the
joint venture. If, in addition to the parties to the joint venture (taken
collectively), there are at least four other independently controlled entities
that possess comparable capabilities and incentives to undertake research and
development of biodegradable plastics, or other products that would be close
substitutes for such new plastics, the joint venture ordinarily would be
unlikely to adversely affect competition in the relevant innovation market
(cf. section 4.3). If there are fewer than four other independently
controlled entities with similar capabilities and incentives, the Agency would
consider whether the joint venture would give the parties to the joint venture
an incentive and ability collectively to reduce investment in, or otherwise to
retard the pace or scope of, research and development efforts. If the joint
venture creates a significant risk of anticompetitive effects in the innovation
market, the Agency would proceed to consider efficiency justifications for the
venture, such as the potential for combining complementary R&D assets in
such a way as to make successful innovation more likely, or to bring it about
sooner, or to achieve cost reductions in research and development.
The Agency would also assess the likelihood that the
joint venture would adversely affect competition in other relevant markets,
including markets for products produced by the parties to the joint venture. The
risk of such adverse competitive effects would be increased to the extent that,
for example, the joint venture facilitates the exchange among the parties of
competitively sensitive information relating to goods markets in which the
parties currently compete or facilitates the coordination of competitive
activities in such markets. The Agency would examine whether the joint venture
imposes collateral restraints that might significantly restrict competition
among the joint venturers in goods markets, and would examine whether such
collateral restraints were reasonably necessary to achieve any efficiencies that
are likely to be attained by the venture.
3.3 Horizontal and vertical relationships
As with other property transfers, 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. A licensing
arrangement has a vertical component when it affects activities that are in a
complementary relationship, as is typically the case in a licensing arrangement.
For example, the licensor's primary line of business may be in research and
development, and the licensees, as manufacturers, may be buying the rights to
use technology developed by the licensor. Alternatively, the licensor may be a
component manufacturer owning intellectual property rights in a product that the
licensee manufactures by combining the component with other inputs, or the
licensor may manufacture the product, and the licensees may operate primarily in
distribution and marketing.
In addition to this vertical component, the licensor
and its licensees may also have a horizontal relationship. For analytical
purposes, the Agencies ordinarily will treat a relationship between a licensor
and its licensees, or between licensees, as horizontal when they would have been
actual or likely potential competitors in a relevant market in the absence of
the license.
The existence of a horizontal relationship between a
licensor and its licensees does not, in itself, indicate that the arrangement is
anticompetitive. Identification of such relationships is merely an aid in
determining whether there may be anticompetitive effects arising from a
licensing arrangement. Such a relationship need not give rise to an
anticompetitive effect, nor does a purely vertical relationship assure that
there are no anticompetitive effects.
The following examples illustrate different competitive
relationships among a licensor and its licensees.
EXAMPLE 5
Situation: AgCo, a manufacturer of
farm equipment, develops a new, patented emission control technology for its
tractor engines and licenses it to FarmCo, another farm equipment manufacturer.
AgCo's emission control technology is far superior to the technology currently
owned and used by FarmCo, so much so that FarmCo's technology does not
significantly constrain the prices that AgCo could charge for its technology.
AgCo's emission control patent has a broad scope. It is likely that any improved
emissions control technology that FarmCo could develop in the foreseeable future
would infringe AgCo's patent.
Discussion:
Because FarmCo's emission
control technology does not significantly constrain AgCo's competitive conduct
with respect to its emission control technology, AgCo's and FarmCo's emission
control technologies are not close substitutes for each other. FarmCo is a
consumer of AgCo's technology and is not an actual competitor of AgCo in the
relevant market for superior emission control technology of the kind licensed by
AgCo. Furthermore, FarmCo is not a likely potential competitor of AgCo in the
relevant market because, even if FarmCo could develop an improved emission
control technology, it is likely that it would infringe AgCo's patent. This
means that the relationship between AgCo and FarmCo with regard to the supply
and use of emissions control technology is vertical. Assuming that AgCo and
FarmCo are actual or likely potential competitors in sales of farm equipment
products, their relationship is horizontal in the relevant markets for farm
equipment.
EXAMPLE 6
Situation: FarmCo develops a new
valve technology for its engines and enters into a cross-licensing arrangement
with AgCo, whereby AgCo licenses its emission control technology to FarmCo and
FarmCo licenses its valve technology to AgCo. AgCo already owns an alternative
valve technology that can be used to achieve engine performance similar to that
using FarmCo's valve technology and at a comparable cost to consumers. Before
adopting FarmCo's technology, AgCo was using its own valve technology in its
production of engines and was licensing (and continues to license) that
technology for use by others. As in Example 5, FarmCo does not own or control an
emission control technology that is a close substitute for the technology
licensed from AgCo. Furthermore, as in Example 5, FarmCo is not likely to
develop an improved emission control technology that would be a close substitute
for AgCo's technology, because of AgCo's blocking patent.
Discussion:
FarmCo is a consumer and
not a competitor of AgCo's emission control technology. As in Example 5,
their relationship is vertical with regard to this technology. The
relationship between AgCo and FarmCo in the relevant market that includes engine
valve technology is vertical in part and horizontal in part. It is vertical in
part because AgCo and FarmCo stand in a complementary relationship, in which
AgCo is a consumer of a technology supplied by FarmCo. However, the relationship
between AgCo and FarmCo in the relevant market that includes engine valve
technology is also horizontal in part, because FarmCo and AgCo are actual
competitors in the licensing of valve technology that can be used to achieve
similar engine performance at a comparable cost. Whether the firms license their
valve technologies to others is not important for the conclusion that the firms
have a horizontal relationship in this relevant market. Even if AgCo's use of
its valve technology were solely captive to its own production, the fact that
the two valve technologies are substitutable at comparable cost means that the
two firms have a horizontal relationship.
As in Example 5, the relationship between AgCo and
FarmCo is horizontal in the relevant markets for farm equipment.
3.4 Framework for evaluating licensing
restraints
In the vast majority of cases,
restraints in intellectual property licensing arrangements are evaluated under
the rule of reason. The Agencies' general approach in analyzing a licensing
restraint under the rule of reason is to inquire whether the restraint is likely
to have anticompetitive effects and, if so, whether the restraint is reasonably
necessary to achieve procompetitive benefits that outweigh those anticompetitive
effects. See Federal Trade Commission v. Indiana Federation of
Dentists, 476 U.S. 447 (1986); NCAA v. Board of Regents of the
University of Oklahoma, 468 U.S. 85 (1984); Broadcast Music, Inc. v.
Columbia Broadcasting System, Inc., 441 U.S. 1 (1979); 7 Phillip E. Areeda,
Antitrust Law � 1502 (1986). See also part 4.
In some cases, however, the courts conclude that a
restraint's "nature and necessary effect are so plainly anticompetitive" that it
should be treated as unlawful per se, without an elaborate inquiry into the
restraint's likely competitive effect. Federal Trade Commission v. Superior
Court Trial Lawyers Association, 493 U.S. 411, 433 (1990); National
Society of Professional Engineers v. United States, 435 U.S. 679, 692
(1978). Among the restraints that have been held per se unlawful are naked
price-fixing, output restraints, and market division among horizontal
competitors, as well as certain group boycotts and resale price maintenance.
To determine whether a particular restraint in a
licensing arrangement is given per se or rule of reason treatment, the Agencies
will assess whether the restraint in question can be expected to contribute to
an efficiency-enhancing integration of economic activity. See
Broadcast Music, 441 U.S. at 16-24. In general, licensing arrangements
promote such integration because they facilitate the combination of the
licensor's intellectual property with complementary factors of production owned
by the licensee. A restraint in a licensing arrangement may further such
integration by, for example, aligning the incentives of the licensor and the
licensees to promote the development and marketing of the licensed technology,
or by substantially reducing transactions costs. If there is no
efficiency-enhancing integration of economic activity and if the type of
restraint is one that has been accorded per se treatment, the Agencies will
challenge the restraint under the per se rule. Otherwise, the Agencies will
apply a rule of reason analysis.
Application of the rule of reason generally requires a
comprehensive inquiry into market conditions. (See sections 4.1-4.3.)
However, that inquiry may be truncated in certain circumstances. If the Agencies
conclude that a restraint has no likely anticompetitive effects, they will treat
it as reasonable, without an elaborate analysis of market power or the
justifications for the restraint. Similarly, if a restraint facially appears to
be of a kind that would always or almost always tend to reduce output or
increase prices,(28) and the
restraint is not reasonably related to efficiencies, the Agencies will likely
challenge the restraint without an elaborate analysis of particular industry
circumstances.(29) See
Indiana Federation of Dentists, 476 U.S. at 459-60; NCAA, 468
U.S. at 109.
EXAMPLE 7
Situation: Gamma, which manufactures
Product X using its patented process, offers a license for its process
technology to every other manufacturer of Product X, each of which competes
world-wide with Gamma in the manufacture and sale of X. The process technology
does not represent an economic improvement over the available existing
technologies. Indeed, although most manufacturers accept licenses from Gamma,
none of the licensees actually uses the licensed technology. The licenses
provide that each manufacturer has an exclusive right to sell Product X
manufactured using the licensed technology in a designated geographic area and
that no manufacturer may sell Product X, however manufactured, outside the
designated territory.
Discussion: The manufacturers of
Product X are in a horizontal relationship in the goods market for Product X.
Any manufacturers of Product X that control technologies that are substitutable
at comparable cost for Gamma's process are also horizontal competitors of Gamma
in the relevant technology market. The licensees of Gamma's process technology
are technically in a vertical relationship, although that is not significant in
this example because they do not actually use Gamma's technology.
The licensing arrangement restricts competition in the
relevant goods market among manufacturers of Product X by requiring each
manufacturer to limit its sales to an exclusive territory. Thus, competition
among entities that would be actual competitors in the absence of the licensing
arrangement is restricted. Based on the facts set forth above, the licensing
arrangement does not involve a useful transfer of technology, and thus it is
unlikely that the restraint on sales outside the designated territories
contributes to an efficiency-enhancing integration of economic activity.
Consequently, the evaluating Agency would be likely to challenge the arrangement
under the per se rule as a horizontal territorial market allocation scheme and
to view the intellectual property aspects of the arrangement as a sham intended
to cloak its true nature.
If the licensing arrangement could be expected to
contribute to an efficiency-enhancing integration of economic activity, as might
be the case if the licensed technology were an advance over existing processes
and used by the licensees, the Agency would analyze the arrangement under the
rule of reason applying the analytical framework described in this section.
In this example, the competitive implications do not
generally depend on whether the licensed technology is protected by patent, is a
trade secret or other know-how, or is a computer program protected by copyright;
nor do the competitive implications generally depend on whether the allocation
of markets is territorial, as in this example, or functional, based on fields of
use.
4. General
principles concerning the Agencies' evaluation of licensing arrangements under
the rule of reason
4.1 Analysis of anticompetitive effects
The existence of anticompetitive effects resulting
from a restraint in a licensing arrangement will be evaluated on the basis of
the analysis described in this section.
4.1.1 Market structure, coordination, and
foreclosure
When a licensing arrangement affects parties in a
horizontal relationship, a restraint in that arrangement may increase the risk
of coordinated pricing, output restrictions, or the acquisition or maintenance
of market power. Harm to competition also may occur if the arrangement poses a
significant risk of retarding or restricting the development of new or improved
goods or processes. The potential for competitive harm depends in part on the
degree of concentration in, the difficulty of entry into, and the responsiveness
of supply and demand to changes in price in the relevant markets. Cf.
1992 Horizontal Merger Guidelines 壯 1.5, 3.
When the licensor and licensees are in a vertical
relationship, the Agencies will analyze whether the licensing arrangement may
harm competition among entities in a horizontal relationship at either the level
of the licensor or the licensees, or possibly in another relevant market. Harm
to competition from a restraint may occur if it anticompetitively forecloses
access to, or increases competitors' costs of obtaining, important inputs, or
facilitates coordination to raise price or restrict output. The risk of
anticompetitively foreclosing access or increasing competitors' costs is related
to the proportion of the markets affected by the licensing restraint; other
characteristics of the relevant markets, such as concentration, difficulty of
entry, and the responsiveness of supply and demand to changes in price in the
relevant markets; and the duration of the restraint. A licensing arrangement
does not foreclose competition merely because some or all of the potential
licensees in an industry choose to use the licensed technology to the exclusion
of other technologies. Exclusive use may be an efficient consequence of the
licensed technology having the lowest cost or highest value.
Harm to competition from a restraint in a vertical
licensing arrangement also may occur if a licensing restraint facilitates
coordination among entities in a horizontal relationship to raise prices or
reduce output in a relevant market. For example, if owners of competing
technologies impose similar restraints on their licensees, the licensors may
find it easier to coordinate their pricing. Similarly, licensees that are
competitors may find it easier to coordinate their pricing if they are subject
to common restraints in licenses with a common licensor or competing licensors.
The risk of anticompetitive coordination is increased when the relevant markets
are concentrated and difficult to enter. The use of similar restraints may be
common and procompetitive in an industry, however, because they contribute to
efficient exploitation of the licensed property.
4.1.2 Licensing arrangements involving
exclusivity
A licensing arrangement may involve exclusivity in two
distinct respects. First, the licensor may grant one or more exclusive
licenses, which restrict the right of the licensor to license others and
possibly also to use the technology itself. Generally, an exclusive license may
raise antitrust concerns only if the licensees themselves, or the licensor and
its licensees, are in a horizontal relationship. Examples of arrangements
involving exclusive licensing that may give rise to antitrust concerns include
cross-licensing by parties collectively possessing market power (see
section 5.5), grantbacks (see section 5.6), and acquisitions of
intellectual property rights (see section 5.7).
A non-exclusive license of intellectual property that
does not contain any restraints on the competitive conduct of the licensor or
the licensee generally does not present antitrust concerns even if the parties
to the license are in a horizontal relationship, because the non-exclusive
license normally does not diminish competition that would occur in its
absence.
A second form of exclusivity, exclusive
dealing, arises when a license prevents or restrains the licensee from
licensing, selling, distributing, or using competing technologies. See
section 5.4. Exclusivity may be achieved by an explicit exclusive dealing
term in the license or by other provisions such as compensation terms or other
economic incentives. Such restraints may anticompetitively foreclose access to,
or increase competitors' costs of obtaining, important inputs, or facilitate
coordination to raise price or reduce output, but they also may have
procompetitive effects. For example, a licensing arrangement that prevents the
licensee from dealing in other technologies may encourage the licensee to
develop and market the licensed technology or specialized applications of that
technology. See, e.g., Example 8. The Agencies will take into
account such procompetitive effects in evaluating the reasonableness of the
arrangement. See section 4.2.
The antitrust principles that apply to a licensor's
grant of various forms of exclusivity to and among its licensees are similar to
those that apply to comparable vertical restraints outside the licensing
context, such as exclusive territories and exclusive dealing. However, the fact
that intellectual property may in some cases be misappropriated more easily than
other forms of property may justify the use of some restrictions that might be
anticompetitive in other contexts.
As noted earlier, the Agencies will focus on the
actual practice and its effects, not on the formal terms of the arrangement. A
license denominated as non-exclusive (either in the sense of exclusive licensing
or in the sense of exclusive dealing) may nonetheless give rise to the same
concerns posed by formal exclusivity. A non-exclusive license may have the
effect of exclusive licensing if it is structured so that the licensor is
unlikely to license others or to practice the technology itself. A license that
does not explicitly require exclusive dealing may have the effect of exclusive
dealing if it is structured to increase significantly a licensee's cost when it
uses competing technologies. However, a licensing arrangement will not
automatically raise these concerns merely because a party chooses to deal with a
single licensee or licensor, or confines his activity to a single field of use
or location, or because only a single licensee has chosen to take a
license.
EXAMPLE 8
Situation: NewCo, the inventor and
manufacturer of a new flat panel display technology, lacking the capability to
bring a flat panel display product to market, grants BigCo an exclusive license
to sell a product embodying NewCo's technology. BigCo does not currently sell,
and is not developing (or likely to develop), a product that would compete with
the product embodying the new technology and does not control rights to another
display technology. Several firms offer competing displays, BigCo accounts for
only a small proportion of the outlets for distribution of display products, and
entry into the manufacture and distribution of display products is relatively
easy. Demand for the new technology is uncertain and successful market
penetration will require considerable promotional effort. The license contains
an exclusive dealing restriction preventing BigCo from selling products that
compete with the product embodying the licensed technology.
Discussion:
This example illustrates
both types of exclusivity in a licensing arrangement. The license is exclusive
in that it restricts the right of the licensor to grant other licenses. In
addition, the license has an exclusive dealing component in that it restricts
the licensee from selling competing products.
The inventor of the display technology and its
licensee are in a vertical relationship and are not actual or likely potential
competitors in the manufacture or sale of display products or in the sale or
development of technology. Hence, the grant of an exclusive license does not
affect competition between the licensor and the licensee. The exclusive license
may promote competition in the manufacturing and sale of display products by
encouraging BigCo to develop and promote the new product in the face of
uncertain demand by rewarding BigCo for its efforts if they lead to large sales.
Although the license bars the licensee from selling competing products, this
exclusive dealing aspect is unlikely in this example to harm competition by
anticompetitively foreclosing access, raising competitors' costs of inputs, or
facilitating anticompetitive pricing because the relevant product market is
unconcentrated, the exclusive dealing restraint affects only a small proportion
of the outlets for distribution of display products, and entry is easy. On these
facts, the evaluating Agency would be unlikely to challenge the
arrangement.
4.2 Efficiencies and justifications
If the Agencies conclude, upon an evaluation of the
market factors described in section 4.1, that a restraint in a licensing
arrangement is unlikely to have an anticompetitive effect, they will not
challenge the restraint. If the Agencies conclude that the restraint has, or is
likely to have, an anticompetitive effect, they will consider whether the
restraint is reasonably necessary to achieve procompetitive efficiencies. If the
restraint is reasonably necessary, the Agencies will balance the procompetitive
efficiencies and the anticompetitive effects to determine the probable net
effect on competition in each relevant market.
The Agencies' comparison of anticompetitive harms and
procompetitive efficiencies is necessarily a qualitative one. The risk of
anticompetitive effects in a particular case may be insignificant compared to
the expected efficiencies, or vice versa. As the expected anticompetitive
effects in a particular licensing arrangement increase, the Agencies will
require evidence establishing a greater level of expected
efficiencies.
The existence of practical and significantly less
restrictive alternatives is relevant to a determination of whether a restraint
is reasonably necessary. If it is clear that the parties could have achieved
similar efficiencies by means that are significantly less restrictive, then the
Agencies will not give weight to the parties' efficiency claim. In making this
assessment, however, the Agencies will not engage in a search for a
theoretically least restrictive alternative that is not realistic in the
practical prospective business situation faced by the parties.
When a restraint has, or is likely to have, an
anticompetitive effect, the duration of that restraint can be an important
factor in determining whether it is reasonably necessary to achieve the putative
procompetitive efficiency. The effective duration of a restraint may depend on a
number of factors, including the option of the affected party to terminate the
arrangement unilaterally and the presence of contract terms (e.g., unpaid
balances on minimum purchase commitments) that encourage the licensee to renew a
license arrangement. Consistent with their approach to less restrictive
alternative analysis generally, the Agencies will not attempt to draw fine
distinctions regarding duration; rather, their focus will be on situations in
which the duration clearly exceeds the period needed to achieve the
procompetitive efficiency.
The evaluation of procompetitive efficiencies, of the
reasonable necessity of a restraint to achieve them, and of the duration of the
restraint, may depend on the market context. A restraint that may be justified
by the needs of a new entrant, for example, may not have a procompetitive
efficiency justification in different market circumstances. Cf. United
States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa. 1960),
aff'd per curiam, 365 U.S. 567 (1961).
4.3 Antitrust "safety zone"
Because licensing arrangements often promote
innovation and enhance competition, the Agencies believe that an antitrust
"safety zone" is useful in order to provide some degree of certainty and thus to
encourage such activity.(30)
Absent extraordinary circumstances, the Agencies will not challenge a restraint
in an intellectual property licensing arrangement if (1) the restraint is not
facially anticompetitive(31) and
(2) the licensor and its licensees collectively account for no more than twenty
percent of each relevant market significantly affected by the restraint. This
"safety zone" does not apply to those transfers of intellectual property rights
to which a merger analysis is applied. See section 5.7.
Whether a restraint falls within the safety zone will
be determined by reference only to goods markets unless the analysis of goods
markets alone would inadequately address the effects of the licensing
arrangement on competition among technologies or in research and
development.
If an examination of the effects on competition among
technologies or in research development is required, and if market share data
are unavailable or do not accurately represent competitive significance, the
following safety zone criteria will apply. Absent extraordinary circumstances,
the Agencies will not challenge a restraint in an intellectual property
licensing arrangement that may affect competition in a technology market
if (1) the restraint is not facially anticompetitive and (2)
there are four or more independently controlled technologies in addition to the
technologies controlled by the parties to the licensing arrangement that may be
substitutable for the licensed technology at a comparable cost to the user.
Absent extraordinary circumstances, the Agencies will not challenge a restraint
in an intellectual property licensing arrangement that may affect competition in
an innovation market if (1) the restraint is not facially
anticompetitive and (2) four or more independently controlled entities in
addition to the parties to the licensing arrangement possess the required
specialized assets or characteristics and the incentive to engage in research
and development that is a close substitute of the research and development
activities of the parties to the licensing agreement.(32)
The Agencies emphasize that licensing arrangements are
not anticompetitive merely because they do not fall within the scope of the
safety zone. Indeed, it is likely that the great majority of licenses falling
outside the safety zone are lawful and procompetitive. The safety zone is
designed to provide owners of intellectual property with a degree of certainty
in those situations in which anticompetitive effects are so unlikely that the
arrangements may be presumed not to be anticompetitive without an inquiry into
particular industry circumstances. It is not intended to suggest that parties
should conform to the safety zone or to discourage parties falling outside the
safety zone from adopting restrictions in their license arrangements that are
reasonably necessary to achieve an efficiency-enhancing integration of economic
activity. The Agencies will analyze arrangements falling outside the safety zone
based on the considerations outlined in parts 3-5.
The status of a licensing arrangement with respect to
the safety zone may change over time. A determination by the Agencies that a
restraint in a licensing arrangement qualifies for inclusion in the safety zone
is based on the factual circumstances prevailing at the time of the conduct at
issue.(33)
5. Application of general
principles
5.0 This
section illustrates the application of the general principles discussed above to
particular licensing restraints and to arrangements that involve the
cross-licensing, pooling, or acquisition of intellectual property. The
restraints and arrangements identified are typical of those that are likely to
receive antitrust scrutiny; however, they are not intended as an exhaustive list
of practices that could raise competitive concerns.
5.1 Horizontal restraints
The existence of a restraint in a licensing
arrangement that affects parties in a horizontal relationship (a "horizontal
restraint") does not necessarily cause the arrangement to be anticompetitive. As
in the case of joint ventures among horizontal competitors, licensing
arrangements among such competitors may promote rather than hinder competition
if they result in integrative efficiencies. Such efficiencies may arise, for
example, from the realization of economies of scale and the integration of
complementary research and development, production, and marketing
capabilities.
Following the general principles outlined in section
3.4, horizontal restraints often will be evaluated under the rule of reason. In
some circumstances, however, that analysis may be truncated; additionally, some
restraints may merit per se treatment, including price fixing, allocation of
markets or customers, agreements to reduce output, and certain group
boycotts.
EXAMPLE 9
Situation: Two of the leading
manufacturers of a consumer electronic product hold patents that cover
alternative circuit designs for the product. The manufacturers assign their
patents to a separate corporation wholly owned by the two firms. That
corporation licenses the right to use the circuit designs to other consumer
product manufacturers and establishes the license royalties. None of the patents
is blocking; that is, each of the patents can be used without infringing a
patent owned by the other firm. The different circuit designs are substitutable
in that each permits the manufacture at comparable cost to consumers of products
that consumers consider to be interchangeable. One of the Agencies is analyzing
the licensing arrangement.
Discussion:
In this example, the
manufacturers are horizontal competitors in the goods market for the consumer
product and in the related technology markets. The competitive issue with regard
to a joint assignment of patent rights is whether the assignment has an adverse
impact on competition in technology and goods markets that is not outweighed by
procompetitive efficiencies, such as benefits in the use or dissemination of the
technology. Each of the patent owners has a right to exclude others from using
its patent. That right does not extend, however, to the agreement to assign
rights jointly. To the extent that the patent rights cover technologies that are
close substitutes, the joint determination of royalties likely would result in
higher royalties and higher goods prices than would result if the owners
licensed or used their technologies independently. In the absence of evidence
establishing efficiency-enhancing integration from the joint assignment of
patent rights, the Agency may conclude that the joint marketing of competing
patent rights constitutes horizontal price fixing and could be challenged as a
per se unlawful horizontal restraint of trade. If the joint marketing
arrangement results in an efficiency-enhancing integration, the Agency would
evaluate the arrangement under the rule of reason. However, the Agency may
conclude that the anticompetitive effects are sufficiently apparent, and the
claimed integrative efficiencies are sufficiently weak or not reasonably related
to the restraints, to warrant challenge of the arrangement without an elaborate
analysis of particular industry circumstances (see section
3.4).
5.2 Resale price maintenance
Resale price maintenance is illegal when "commodities
have passed into the channels of trade and are owned by dealers." Dr. Miles
Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911). It
has been held per se illegal for a licensor of an intellectual property right in
a product to fix a licensee's resale price of that product. United
States v. Univis Lens Co., 316 U.S. 241 (1942); Ethyl Gasoline Corp. v.
United States, 309 U.S. 436 (1940).(34) Consistent with the principles set forth in
section 3.4, the Agencies will enforce the per se rule against resale price
maintenance in the intellectual property context.
5.3 Tying arrangements
A "tying" or "tie-in" or "tied sale" arrangement has
been defined as "an agreement by a party to sell one product . . . on the
condition that the buyer also purchases a different (or tied) product, or at
least agrees that he will not purchase that [tied] product from any other
supplier." Eastman Kodak Co. v. Image Technical Services, Inc., 112 S.
Ct. 2072, 2079 (1992). Conditioning the ability of a licensee to license one or
more items of intellectual property on the licensee's purchase of another item
of intellectual property or a good or a service has been held in some cases to
constitute illegal tying.(35)
Although tying arrangements may result in anticompetitive effects, such
arrangements can also result in significant efficiencies and procompetitive
benefits. In the exercise of their prosecutorial discretion, the Agencies will
consider both the anticompetitive effects and the efficiencies attributable to a
tie-in. The Agencies would be likely to challenge a tying arrangement if: (1)
the seller has market power in the tying product,(36) (2) the arrangement has an adverse effect on
competition in the relevant market for the tied product, and (3) efficiency
justifications for the arrangement do not outweigh the anticompetitive
effects.(37) The Agencies will
not presume that a patent, copyright, or trade secret necessarily confers market
power upon its owner.
Package licensing--the licensing of multiple items of
intellectual property in a single license or in a group of related licenses--may
be a form of tying arrangement if the licensing of one product is conditioned
upon the acceptance of a license of another, separate product. Package licensing
can be efficiency enhancing under some circumstances. When multiple licenses are
needed to use any single item of intellectual property, for example, a package
license may promote such efficiencies. If a package license constitutes a tying
arrangement, the Agencies will evaluate its competitive effects under the same
principles they apply to other tying arrangements.
5.4 Exclusive dealing
In the intellectual property context, exclusive
dealing occurs when a license prevents the licensee from licensing, selling,
distributing, or using competing technologies. Exclusive dealing arrangements
are evaluated under the rule of reason. See Tampa Electric Co. v. Nashville
Coal Co., 365 U.S. 320 (1961) (evaluating legality of exclusive dealing
under section 1 of the Sherman Act and section 3 of the Clayton Act);
Beltone Electronics Corp., 100 F.T.C. 68 (1982) (evaluating legality of
exclusive dealing under section 5 of the Federal Trade Commission Act). In
determining whether an exclusive dealing arrangement is likely to reduce
competition in a relevant market, the Agencies will take into account the extent
to which the arrangement (1) promotes the exploitation and development of the
licensor's technology and (2) anticompetitively forecloses the exploitation and
development of, or otherwise constrains competition among, competing
technologies.
The likelihood that exclusive dealing may have
anticompetitive effects is related, inter alia, to the degree of foreclosure in
the relevant market, the duration of the exclusive dealing arrangement, and
other characteristics of the input and output markets, such as concentration,
difficulty of entry, and the responsiveness of supply and demand to changes in
price in the relevant markets. (See sections 4.1.1 and 4.1.2.) If the
Agencies determine that a particular exclusive dealing arrangement may have an
anticompetitive effect, they will evaluate the extent to which the restraint
encourages licensees to develop and market the licensed technology (or
specialized applications of that technology), increases licensors' incentives to
develop or refine the licensed technology, or otherwise increases competition
and enhances output in a relevant market. (See section 4.2 and Example
8.)
5.5 Cross-licensing and pooling
arrangements
Cross-licensing and pooling arrangements are
agreements of two or more owners of different items of intellectual property to
license one another or third parties. These arrangements may provide
procompetitive benefits by integrating complementary technologies, reducing
transaction costs, clearing blocking positions, and avoiding costly infringement
litigation. By promoting the dissemination of technology, cross-licensing and
pooling arrangements are often procompetitive.
Cross-licensing and pooling arrangements can have
anticompetitive effects in certain circumstances. For example, collective price
or output restraints in pooling arrangements, such as the joint marketing of
pooled intellectual property rights with collective price setting or coordinated
output restrictions, may be deemed unlawful if they do not contribute to an
efficiency-enhancing integration of economic activity among the participants.
Compare NCAA 468 U.S. at 114 (output restriction on college
football broadcasting held unlawful because it was not reasonably related to any
purported justification) with Broadcast Music, 441 U.S. at 23
(blanket license for music copyrights found not per se illegal because the
cooperative price was necessary to the creation of a new product). When
cross-licensing or pooling arrangements are mechanisms to accomplish naked price
fixing or market division, they are subject to challenge under the per se rule.
See United States v. New Wrinkle, Inc., 342 U.S. 371 (1952) (price
fixing).
Settlements involving the cross-licensing of
intellectual property rights can be an efficient means to avoid litigation and,
in general, courts favor such settlements. When such cross-licensing involves
horizontal competitors, however, the Agencies will consider whether the effect
of the settlement is to diminish competition among entities that would have been
actual or likely potential competitors in a relevant market in the absence of
the cross-license. In the absence of offsetting efficiencies, such settlements
may be challenged as unlawful restraints of trade. Cf. United States v.
Singer Manufacturing Co., 374 U.S. 174 (1963) (cross-license agreement was
part of broader combination to exclude competitors).
Pooling arrangements generally need not be open to all
who would like to join. However, exclusion from cross-licensing and pooling
arrangements among parties that collectively possess market power may, under
some circumstances, harm competition. Cf. Northwest Wholesale Stationers,
Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985)
(exclusion of a competitor from a purchasing cooperative not per se unlawful
absent a showing of market power). In general, exclusion from a pooling or
cross-licensing arrangement among competing technologies is unlikely to have
anticompetitive effects unless (1) excluded firms cannot effectively compete in
the relevant market for the good incorporating the licensed technologies and (2)
the pool participants collectively possess market power in the relevant market.
If these circumstances exist, the Agencies will evaluate whether the
arrangement's limitations on participation are reasonably related to the
efficient development and exploitation of the pooled technologies and will
assess the net effect of those limitations in the relevant market. See
section 4.2.
Another possible anticompetitive effect of pooling
arrangements may occur if the arrangement deters or discourages participants
from engaging in research and development, thus retarding innovation. For
example, a pooling arrangement that requires members to grant licenses to each
other for current and future technology at minimal cost may reduce the
incentives of its members to engage in research and development because members
of the pool have to share their successful research and development and each of
the members can free ride on the accomplishments of other pool members. See
generally United States v. Mfrs. Aircraft Ass'n, Inc., 1976-1 Trade Cas.
(CCH) � 60,810 (S.D.N.Y. 1975); United States v. Automobile Mfrs.
Ass'n, 307 F. Supp. 617 (C.D. Cal 1969), appeal dismissed sub nom. City
of New York v. United States, 397 U.S. 248 (1970), modified sub nom.
United States v. Motor Vehicle Mfrs. Ass'n, 1982-83 Trade Cas. (CCH)
� 65,088 (C.D. Cal. 1982). However, such an arrangement can have procompetitive
benefits, for example, by exploiting economies of scale and integrating
complementary capabilities of the pool members, (including the clearing of
blocking positions), and is likely to cause competitive problems only when the
arrangement includes a large fraction of the potential research and development
in an innovation market. See section 3.2.3 and Example 4.
EXAMPLE 10
Situation: As in Example 9, two of
the leading manufacturers of a consumer electronic product hold patents that
cover alternative circuit designs for the product. The manufacturers assign
several of their patents to a separate corporation wholly owned by the two
firms. That corporation licenses the right to use the circuit designs to other
consumer product manufacturers and establishes the license royalties. In this
example, however, the manufacturers assign to the separate corporation only
patents that are blocking. None of the patents assigned to the corporation can
be used without infringing a patent owned by the other firm.
Discussion:
Unlike the previous
example, the joint assignment of patent rights to the wholly owned corporation
in this example does not adversely affect competition in the licensed technology
among entities that would have been actual or likely potential competitors in
the absence of the licensing arrangement. Moreover, the licensing arrangement is
likely to have procompetitive benefits in the use of the technology. Because the
manufacturers' patents are blocking, the manufacturers are not in a horizontal
relationship with respect to those patents. None of the patents can be used
without the right to a patent owned by the other firm, so the patents are not
substitutable. As in Example 9, the firms are horizontal competitors in the
relevant goods market. In the absence of collateral restraints that would likely
raise price or reduce output in the relevant goods market or in any other
relevant antitrust market and that are not reasonably related to an
efficiency-enhancing integration of economic activity, the evaluating Agency
would be unlikely to challenge this arrangement.
5.6 Grantbacks
A grantback is an arrangement under which a licensee
agrees to extend to the licensor of intellectual property the right to use the
licensee's improvements to the licensed technology. Grantbacks can have
procompetitive effects, especially if they are nonexclusive. Such arrangements
provide a means for the licensee and the licensor to share risks and reward the
licensor for making possible further innovation based on or informed by the
licensed technology, and both promote innovation in the first place and promote
the subsequent licensing of the results of the innovation. Grantbacks may
adversely affect competition, however, if they substantially reduce the
licensee's incentives to engage in research and development and thereby limit
rivalry in innovation markets.
A non-exclusive grantback allows the licensee to
practice its technology and license it to others. Such a grantback provision may
be necessary to ensure that the licensor is not prevented from effectively
competing because it is denied access to improvements developed with the aid of
its own technology. Compared with an exclusive grantback, a non-exclusive
grantback, which leaves the licensee free to license improvements technology to
others, is less likely to have anticompetitive effects.
The Agencies will evaluate a grantback provision under
the rule of reason, see generally Transparent-Wrap Machine Corp. v. Stokes
& Smith Co., 329 U.S. 637, 645-48 (1947) (grantback provision in
technology license is not per se unlawful), considering its likely effects in
light of the overall structure of the licensing arrangement and conditions in
the relevant markets. An important factor in the Agencies' analysis of a
grantback will be whether the licensor has market power in a relevant technology
or innovation market. If the Agencies determine that a particular grantback
provision is likely to reduce significantly licensees' incentives to invest in
improving the licensed technology, the Agencies will consider the extent to
which the grantback provision has offsetting procompetitive effects, such as (1)
promoting dissemination of licensees' improvements to the licensed technology,
(2) increasing the licensors' incentives to disseminate the licensed technology,
or (3) otherwise increasing competition and output in a relevant technology or
innovation market. See section 4.2. In addition, the Agencies will
consider the extent to which grantback provisions in the relevant markets
generally increase licensors' incentives to innovate in the first
place.
5.7 Acquisition of intellectual property
rights
Certain transfers of intellectual property rights
are most appropriately analyzed by applying the principles and standards used to
analyze mergers, particularly those in the 1992 Horizontal Merger Guidelines.
The Agencies will apply a merger analysis to an outright sale by an intellectual
property owner of all of its rights to that intellectual property and to a
transaction in which a person obtains through grant, sale, or other transfer an
exclusive license for intellectual property (i.e., a license that precludes all
other persons, including the licensor, from using the licensed intellectual
property).(38) Such transactions
may be assessed under section 7 of the Clayton Act, sections 1 and 2 of the
Sherman Act, and section 5 of the Federal Trade Commission Act.
EXAMPLE 11
Situation: Omega develops a new,
patented pharmaceutical for the treatment of a particular disease. The only drug
on the market approved for the treatment of this disease is sold by Delta.
Omega's patented drug has almost completed regulatory approval by the Food and
Drug Administration. Omega has invested considerable sums in product development
and market testing, and initial results show that Omega's drug would be a
significant competitor to Delta's. However, rather than enter the market as a
direct competitor of Delta, Omega licenses to Delta the right to manufacture and
sell Omega's patented drug. The license agreement with Delta is nominally
nonexclusive. However, Omega has rejected all requests by other firms to obtain
a license to manufacture and sell Omega's patented drug, despite offers by those
firms of terms that are reasonable in relation to those in Delta's
license.
Discussion:
Although Omega's license
to Delta is nominally nonexclusive, the circumstances indicate that it is
exclusive in fact because Omega has rejected all reasonable offers by other
firms for licenses to manufacture and sell Omega's patented drug. The facts of
this example indicate that Omega would be a likely potential competitor of Delta
in the absence of the licensing arrangement, and thus they are in a horizontal
relationship in the relevant goods market that includes drugs for the treatment
of this particular disease. The evaluating Agency would apply a merger analysis
to this transaction, since it involves an acquisition of a likely potential
competitor.
6. Enforcement of invalid intellectual property
rights
The Agencies may challenge the enforcement of invalid
intellectual property rights as antitrust violations. Enforcement or attempted
enforcement of a patent obtained by fraud on the Patent and Trademark Office or
the Copyright Office may violate section 2 of the Sherman Act, if all the
elements otherwise necessary to establish a section 2 charge are proved, or
section 5 of the Federal Trade Commission Act. Walker Process Equipment,
Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) (patents);
American Cyanamid Co., 72 F.T.C. 623, 684-85 (1967), aff'd sub.
nom. Charles Pfizer & Co., 401 F.2d 574 (6th Cir. 1968), cert.
denied, 394 U.S. 920 (1969) (patents); Michael Anthony Jewelers, Inc.
v. Peacock Jewelry, Inc., 795 F. Supp. 639, 647 (S.D.N.Y. 1992)
(copyrights). Inequitable conduct before the Patent and Trademark Office will
not be the basis of a section 2 claim unless the conduct also involves knowing
and willful fraud and the other elements of a section 2 claim are present.
Argus Chemical Corp. v. Fibre Glass-Evercoat, Inc., 812 F.2d 1381,
1384-85 (Fed. Cir. 1987). Actual or attempted enforcement of patents obtained by
inequitable conduct that falls short of fraud under some circumstances may
violate section 5 of the Federal Trade Commission Act, American Cyanamid
Co., supra. Objectively baseless litigation to enforce invalid
intellectual property rights may also constitute an element of a violation of
the Sherman Act. See Professional Real Estate Investors, Inc. v. Columbia
Pictures Industries, Inc., 113 S. Ct. 1920, 1928 (1993) (copyrights);
Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282, 1289 (9th Cir. 1984),
cert. denied, 469 U.S. 1190 (1985) (patents); Handgards, Inc. v.
Ethicon, Inc., 601 F.2d 986, 992-96 (9th Cir. 1979), cert. denied,
444 U.S. 1025 (1980) (patents); CVD, Inc. v. Raytheon Co., 769 F.2d 842
(1st Cir. 1985) (trade secrets), cert. denied, 475 U.S. 1016
(1986).
FOOTNOTES
1. These Guidelines supersede section 3.6 in
Part I, "Intellectual Property Licensing Arrangements," and cases 6, 10, 11, and
12 in Part II of the U.S. Department of Justice 1988 Antitrust Enforcement
Guidelines for International Operations. [back]
2. These Guidelines do not cover the antitrust treatment
of trademarks. Although the same general antitrust principles that apply to
other forms of intellectual property apply to trademarks as well, these
Guidelines deal with technology transfer and innovation-related issues that
typically arise with respect to patents, copyrights, trade secrets, and know-how
agreements, rather than with product-differentiation issues that typically arise
with respect to trademarks. [back]
3. As is the case with all guidelines, users should
rely on qualified counsel to assist them in evaluating the antitrust risk
associated with any contemplated transaction or activity. No set of guidelines
can possibly indicate how the Agencies will assess the particular facts of every
case. Parties who wish to know the Agencies' specific enforcement intentions
with respect to any particular transaction should consider seeking a Department
of Justice business review letter pursuant to 28 C.F.R. � 50.6 or a Federal
Trade Commission Advisory Opinion pursuant to 16 C.F.R. 壯 1.1-1.4. [back]
4. See 35 U.S.C. � 154 (1988). Section
532(a) of the Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809,
4983 (1994) would change the length of patent protection to a term beginning on
the date at which the patent issues and ending twenty years from the date on
which the application for the patent was filed. [back]
5. See 17 U.S.C. � 102 (1988 & Supp. V
1993). Copyright protection lasts for the author's life plus 50 years, or 75
years from first publication (or 100 years from creation, whichever expires
first) for works made for hire. See 17 U.S.C. � 302 (1988). The
principles stated in these Guidelines also apply to protection of mask works
fixed in a semiconductor chip product (see 17 U.S.C. � 901 et seq.
(1988)), which is analogous to copyright protection for works of
authorship. [back]
6. See 17 U.S.C. � 102(b) (1988). [back]
7. Trade secret protection derives from state law.
See generally Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). [back]
8. "[T]he aims and objectives of patent and
antitrust laws may seem, at first glance, wholly at odds. However, the two
bodies of law are actually complementary, as both are aimed at encouraging
innovation, industry and competition." Atari Games Corp. v. Nintendo of
America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990). [back]
9. As with other forms of property, the power to
exclude others from the use of intellectual property may vary substantially,
depending on the nature of the property and its status under federal or state
law. The greater or lesser legal power of an owner to exclude others is also
taken into account by standard antitrust analysis. [back]
10. Market power can be exercised in other economic
dimensions, such as quality, service, and the development of new or improved
goods and processes. It is assumed in this definition that all competitive
dimensions are held constant except the ones in which market power is being
exercised; that a seller is able to charge higher prices for a higher-quality
product does not alone indicate market power. The definition in the text is
stated in terms of a seller with market power. A buyer could also exercise
market power (e.g., by maintaining the price below the competitive level,
thereby depressing output). [back]
11. The Agencies note that the law is unclear on
this issue. Compare Jefferson Parish Hospital District No. 2 v. Hyde,
466 U.S. 2, 16 (1984) (expressing the view in dictum that if a product is
protected by a patent, "it is fair to presume that the inability to buy the
product elsewhere gives the seller market power") with id. at
37 n.7 (O'Connor, J., concurring) ("[A] patent holder has no market power in any
relevant sense if there are close substitutes for the patented product.").
Compare also Abbott Laboratories v. Brennan, 952 F.2d 1346, 1354-55
(Fed. Cir. 1991) (no presumption of market power from intellectual property
right), cert. denied, 112 S. Ct. 2993 (1992) with Digidyne
Corp. v. Data General Corp., 734 F.2d 1336, 1341-42 (9th Cir. 1984)
(requisite economic power is presumed from copyright), cert. denied,
473 U.S. 908 (1985). [back]
12. United States v. Grinnell Corp., 384
U.S. 563, 571 (1966); see also United States v. Aluminum Co. of
America, 148 F.2d 416, 430 (2d Cir. 1945) (Sherman Act is not violated by
the attainment of market power solely through "superior skill, foresight and
industry"). [back]
13. The examples in these Guidelines are
hypothetical and do not represent judgments about, or analysis of, any actual
market circumstances of the named industries. [back]
14. These Guidelines do not address the possible
application of the antitrust laws of other countries to restraints such as
territorial restrictions in international licensing arrangements. [back]
15. A firm will be treated as a likely potential
competitor if there is evidence that entry by that firm is reasonably probable
in the absence of the licensing arrangement. [back]
16. As used herein, "input" includes outlets for
distribution and sales, as well as factors of production. See, e.g.,
sections 4.1.1 and 5.3-5.5 for further discussion of conditions under which
foreclosing access to, or raising the price of, an input may harm competition in
a relevant market. [back]
17. Hereinafter, the term "goods" also includes
services. [back]
18. U.S. Department of Justice and Federal Trade
Commission, Horizontal Merger Guidelines (April 2, 1992) (hereinafter "1992
Horizontal Merger Guidelines"). As stated in section 1.41 of the 1992 Horizontal
Merger Guidelines, market shares for goods markets "can be expressed either in
dollar terms through measurement of sales, shipments, or production, or in
physical terms through measurement of sales, shipments, production, capacity or
reserves." [back]
19. For example, the owner of a process for
producing a particular good may be constrained in its conduct with respect to
that process not only by other processes for making that good, but also by other
goods that compete with the downstream good and by the processes used to produce
those other goods. [back]
20. Intellectual property is often licensed, sold,
or transferred as an integral part of a marketed good. An example is a patented
product marketed with an implied license permitting its use. In such
circumstances, there is no need for a separate analysis of technology markets to
capture relevant competitive effects. [back]
21. This is conceptually analogous to the analytical
approach to goods markets under the 1992 Horizontal Merger Guidelines.
Cf. � 1.11. Of course, market power also can be exercised in other
dimensions, such as quality, and these dimensions also may be relevant to the
definition and analysis of technology markets. [back]
22. For example, technology may be licensed
royalty-free in exchange for the right to use other technology, or it may be
licensed as part of a package license. [back]
23. The Agencies will regard two technologies as
"comparably efficient" if they can be used to produce close substitutes at
comparable costs. [back]
24. E.g., Sensormatic, FTC Inv.
No. 941-0126, 60 Fed. Reg. 5428 (accepted for comment Dec. 28, 1994); Wright
Medical Technology, Inc., FTC Inv. No. 951-0015, 60 Fed. Reg. 460 (accepted
for comment Dec. 8, 1994); American Home Products, FTC Inv. No.
941-0116, 59 Fed. Reg. 60,807 (accepted for comment Nov. 28, 1994);
Roche Holdings Ltd., 113 F.T.C. 1086 (1990); United States
v. Automobile Mfrs. Ass'n, 307 F. Supp. 617 (C.D. Cal. 1969), appeal
dismissed sub nom. City of New York v. United States, 397 U.S. 248 (1970),
modified sub nom. United States v. Motor Vehicles Mfrs. Ass'n, 1982-83
Trade Cas. (CCH) � 65,088 (C.D. Cal. 1982). [back]
25. See Complaint, United States v.
General Motors Corp., Civ. No. 93-530 (D. Del., filed Nov. 16, 1993). [back]
26. For example, the licensor of research and
development may be constrained in its conduct not only by competing research and
development efforts but also by other existing goods that would compete with the
goods under development. [back]
27. See, e.g., U.S. Department of Justice
and Federal Trade Commission, Statements of Enforcement Policy and Analytical
Principles Relating to Health Care and Antitrust 20-23, 37-40, 72-74 (September
27, 1994). This type of transaction may qualify for treatment under the National
Cooperative Research and Production Act of 1993, 15 U.S.C.A 壯 4301-05. [back]
28. Details about the Federal Trade Commission's
approach are set forth in Massachusetts Board of Registration in
Optometry, 110 F.T.C. 549, 604 (1988). In applying its truncated rule of
reason inquiry, the FTC uses the analytical category of "inherently suspect"
restraints to denote facially anticompetitive restraints that would always or
almost always tend to decrease output or increase prices, but that may be
relatively unfamiliar or may not fit neatly into traditional per se categories.
[back]
29. Under the FTC's Mass. Board approach,
asserted efficiency justifications for inherently suspect restraints are
examined to determine whether they are plausible and, if so, whether they are
valid in the context of the market at issue. Mass. Board, 110 F.T.C. at
604. [back]
30. The antitrust "safety zone" does not apply to
restraints that are not in a licensing arrangement, or to restraints that are in
a licensing arrangement but are unrelated to the use of the licensed
intellectual property. [back]
31. "Facially anticompetitive" refers to restraints
that normally warrant per se treatment, as well as other restraints of a kind
that would always or almost always tend to reduce output or increase prices.
See section 3.4. [back]
32. This is consistent with congressional intent in
enacting the National Cooperative Research Act. See H.R. Conf. Rpt. No.
1044, 98th Cong., 2d Sess., 10, reprinted in 1984 U.S.C.C.A.N. 3105,
3134-35. [back]
33. The conduct at issue may be the transaction
giving rise to the restraint or the subsequent implementation of the restraint.
[back]
34. But cf. United States v. General Electric
Co., 272 U.S. 476 (1926) (holding that an owner of a product patent may
condition a license to manufacture the product on the fixing of the first
sale price of the patented product). Subsequent lower court decisions have
distinguished the GE decision in various contexts. See, e.g., Royal
Indus. v. St. Regis Paper Co., 420 F.2d 449, 452 (9th Cir. 1969) (observing
that GE involved a restriction by a patentee who also manufactured the
patented product and leaving open the question whether a nonmanufacturing
patentee may fix the price of the patented product); Newburgh Moire Co. v.
Superior Moire Co., 237 F.2d 283, 293-94 (3rd Cir. 1956) (grant of multiple
licenses each containing price restrictions does not come within the GE
doctrine); Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d
646, 647 (5th Cir.) (owner of an intellectual property right in a process to
manufacture an unpatented product may not fix the sale price of that product),
cert. denied, 323 U.S. 726 (1944); Barber-Colman Co. v. National
Tool Co., 136 F.2d 339, 343-44 (6th Cir. 1943) (same). [back]
35. See, e.g., United States v. Paramount
Pictures, Inc., 334 U.S. 131, 156-58 (1948) (copyrights); International
Salt Co. v. United States, 332 U.S. 392 (1947) (patent and related
product). [back]
36. Cf. 35 U.S.C. � 271(d) (1988 &
Supp. V 1993) (requirement of market power in patent misuse cases involving
tying). [back]
37. As is true throughout these Guidelines, the
factors listed are those that guide the Agencies' internal analysis in
exercising their prosecutorial discretion. They are not intended to circumscribe
how the Agencies will conduct the litigation of cases that they decide to bring.
[back]
38. The safety zone of section 4.3 does not
apply to transfers of intellectual property such as those described in this
section. [back]
US Antitrust Guidelines
