IP Licensing and Antitrust Law – What Companies Have to Consider When Doing Business in the U.S. and the EU

by Morrison & Foerster LLP
Contact

Morrison & Foerster LLP

In both the U.S. and the EU, it is generally acknowledged that the enforcement and commercialization of IP rights must comply with the applicable antitrust laws. This is particularly true for IP licensing. While the majority of provisions in license arrangements will not be problematic from an antitrust perspective, some restrictions may raise antitrust concerns (particularly due to a potential violation of the respective cartel bans). Both the U.S. and the EU have set up a legal framework of IP-related antitrust legislation, varying in structure and content, but featuring a common core of overall principles. It is the common view in both regimes that IP rights and antitrust laws “share the common purpose of promoting innovation and enhancing consumer welfare.”[1] Nonetheless, where it is applicable, antitrust law poses a potential threat to void relevant clauses or even an entire agreement, and undertakings run the risk of being fined for any violation of antitrust law. Thus, it is indispensable to take into account relevant antitrust law when drafting and negotiating licensing agreements. In the following paragraphs we will discuss the key antitrust concepts that need to be borne in mind when licensing IP in transatlantic business.[2]

Territorial Scope of U.S. and EU Antitrust Law

Both the U.S. and the EU antitrust law follow the effects doctrine. According to this doctrine, antitrust regulations apply to anticompetitive actions taken entirely outside the relevant jurisdiction (i.e., the U.S. or the EU), if these actions have an effect on the competition within that jurisdiction. Hence, both antitrust regimes claim extensive competence, resulting in the applicability of both the U.S. and the EU antitrust legislation even for licensing agreements concluded outside the two jurisdictions.

Basic Legal Framework in the U.S. and the EU

IP-related antitrust legislation, in both the U.S. and the EU, was recently subject to a series of modifications. As IP licensing is generally understood to be procompetitive, it is therefore subject to preferential legal assessment.

In order to promote predictability, EU antitrust law provides for several block exemptions which create a safe harbor by establishing exemptions for specific areas from the EU cartel ban (Article 101 TFEU)3. In the field of licensing arrangements, the Technology Transfer Block Exemption Regulation (TTBER),[3] which was last revised in March 2014, frames the EU antitrust regime with respect to the licensing of patents, utility models, design rights and software copyrights. The TTBER covers technology transfer agreements up to certain market share thresholds (not more than 20% combined market shares in case the undertakings are competitors and individual market shares of not more than 30% of each undertaking if they are not competitors). These market share thresholds apply to the licensing market and the market where the products with the licensed technology are sold. If these market share thresholds are met, the TTBER follows the principle that every restriction is admissible if not (explicitly) prohibited by the TTBER. The TTBER, however, also contains a number of provisions with restrictions that are not exempted. The TTBER distinguishes between so-called black-listed clauses (hardcore restrictions) and grey-listed clauses. If agreements fall outside the scope of the block exemption, they are generally subject to the standard antitrust analysis, according to which it needs to be assessed – on case-by-case basis (i.e., no presumption of illegality) – whether the agreements restrict competition by object or by effect and whether the agreements are exempted from the cartel ban (Art. 101(3) TFEU). In order to give further guidance in that respect, the EU Commission issued Technology Transfer Guidelines[4] dealing with specific problems and specifying the aspects that need to be considered in the assessment. These guidelines indicate that black-listed clauses typically violate EU antitrust law, whereas grey-listed clauses can be exempted.

The U.S.-equivalent is the Antitrust Guidelines for the Licensing of Intellectual Property (“U.S. Guidelines”),[5] which the U.S. Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) (collectively, the U.S. agencies) revised in January 2017. The U.S. Guidelines maintain the concept of antitrust “safety zones”. Pursuant to this, the U.S. agencies will not contest a restraint if (i) it is not facially anticompetitive; and (ii) the joint market share of licensor and licensee does not exceed 20% in the affected relevant markets. When assessing admissibility, the U.S. agencies generally make use of the rule of reason or the per se rule. Whereas the former obliges the U.S. agencies to inquire whether a 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, the latter holds that the nature of certain restraints is so plainly anticompetitive that they shall be treated as unlawful per se. To this extent, naked price-fixing, output restraints, market division among horizontal competitors and certain group boycotts have been held per se unlawful. However, the vast majority of restraints in intellectual property licensing arrangements are evaluated under the rule of reason.

It is important to keep in mind that legal principles that are not antitrust laws may also impose restrictions on certain licensing terms and practices in the U.S.  This is particularly true for the patent misuse doctrine and public policy principles under intellectual property law.  Those principles could result in the unenforceability of contractual provisions or licensing practices that are not, in and of themselves, problematic from a pure antitrust point of view.

Comparison of Dealing with Certain Restrictions

Although the general frameworks feature several similarities, it is worthwhile to compare both jurisdictions on the admissibility of particular licensing restraints which are widespread in practice.

Resale Price Maintenance (RPM)

Minimum RPM refers to clauses through which the licensee agrees to sell the product incorporating the licensed technology at or above a specified minimum price.

U.S.: Following the U.S. Supreme Court’s ruling,[6] the U.S. Guidelines revised the U.S. agencies’ position on RPM, allowing IP license agreements to contain provisions on resale pricing which are subject to a rule of reason analysis. Agreements constituting horizontal agreements between competitors (i.e., a cartel), however, will be per se inadmissible.

EU: Under the TTBER, minimum RPM constitutes a black-listed clause and is thus generally inadmissible, regardless of whether this is achieved through direct or indirect means (such as intimidation, warning or linking the sales price to the price of a competitor). Imposing a maximum sale price or recommending a sale price is, however, admissible in cases where licensor and licensee are not competing undertakings (provided that it does not lead to a fixed or minimum selling price by other means).

Exclusivity

License agreements can grant the exclusive right to the licensee to exploit the licensed technology. Such an exclusive license has the effect that the licensor is not able to license the licensed technology rights to third parties or practice the licensed technology rights itself.

EU: The TTBER prohibits exclusive cross-licensing between competitors (black-listed clause), but exempts non-reciprocal[7] exclusive licenses between competitors with a combined market share of up to 20%. Exclusive licenses between non-competitors are also typically admissible, and in fact irrespective of the territorial scope of the license.

U.S.: The U.S. agencies will in general evaluate the reasonableness of an exclusive license arrangement. It is pointed out that cross-licensing by competitors who collectively possess market power may give rise to antitrust concerns. Irrespective of the formal terms, the U.S. agencies will assess the exclusiveness of an arrangement on the actual practice and its effects.

Sales Restrictions on the Licensee

In some instances, the licensor imposes restrictions on the licensee with respect to sales in other territories or to certain customer groups. These sales restrictions can have anticompetitive effects.

EU: The TTBER therefore prohibits such sales restrictions if contained in reciprocal[8] licensing agreements between competitors (black-listed clause). However, in case of non-reciprocal licensing agreements between competitors, such restrictions are – under certain prerequisites – admissible. Sales restrictions in agreements between non-competitors are, apart from certain exemptions, typically[9] only problematic if so-called passive sales of the licensee are restricted (black-listed clause). Passive sales “mean[s] responding to unsolicited requests from individual customers including delivery of goods or services to such customers” (for instance by general advertising in the Internet and in the press).

U.S.: The U.S. agencies do not differentiate between active and passive sales restrictions and evaluate both under the rule of reason, but tend to view sales restrictions as admissible.

Non-Challenge Clauses

License agreements frequently contain so-called non-challenge clauses. These clauses prohibit the licensee from challenging the validity of the licensor’s IP rights during the term of the license agreement.

EU: As the licensee is usually in the best position to determine whether an IP right is invalid or not, these non-challenge clauses are not exempted by the TTBER and thus can be problematic from an EU perspective (grey-listed clause), regardless of whether the license agreement is exclusive or non-exclusive. Such non-challenge clauses typically violate the cartel ban where the licensed technology is valuable and therefore creates a competitive disadvantage for undertakings that are prevented from using it or are only able to use it against payment of royalties. On the other hand, non-challenge clauses do not generally violate the cartel ban if the licensed technology is related to a technically outdated process or if parties agree on these in settlement agreements. In the context of non-exclusive licenses, the same principles apply to clauses granting the right to the licensor to terminate the agreement (grey-listed clause) if the licensee challenges the validity of the IP right. The EU Commission has therefore decided in the Motorola case[10] that a termination right in cases where the licensee challenges the validity of the IP right violates the cartel ban. The EU Commission identified two anticompetitive effects, namely the limitation of the licensee’s ability to influence the level of royalties it will have pay to the licensor, and the fact that it may lead other potential licensees of the IP right to also pay royalties for an invalid IP right.

U.S.: The U.S. Guidelines do not address non-challenge clauses. While these licensing restraints generally do not give rise to antitrust concerns in the U.S., courts generally consider prohibitions on challenging the validity of licensed intellectual property rights to be unenforceable under other legal principles, except under very narrow circumstances.[11]

Grant-Backs

Oftentimes a licensee agrees to extend to the licensor the right to use the developed improvements to the licensed technology. These arrangements, usually referred to as grant-backs, may hinder the licensee from further engaging in research and development, as the outcome falls back to the licensor.

U.S.: U.S. agencies evaluate grant-back provisions under the rule of reason. In this regard, it is of particular significance if the licensor has market power in a relevant technology or research and development market.

EU: Under EU law, exclusive grant-backs are not exempted by the block exemption and are therefore problematic from an EU perspective (grey-listed clause). They typically violate the cartel ban if there is no consideration for the exclusive grant-back and/or the licensor has a strong market position on the relevant technology market because it is important in these situations that the licensee remains an important source of innovation. Non-exclusive grant-back clauses, in contrast, are exempted by the TTBER and thus admissible.

Technology Pools

Through technology pools, a package of technology of two or more parties can be licensed not only to a contributor but also to third parties. This allows for one-stop licensing and can reduce transaction costs. However, the creation of a technology pool also implies joint selling of pooled technologies. Competition is reduced among the parties and innovation diminished if the technology pool supports an industry standard and forecloses on alternative technologies.

EU: Although not addressed in the TTBER, the accompanying guidelines[12] establish a safe harbor for technology pools, if (i) the participation is open to all interested rights owners; (ii) only essential technologies are pooled; (iii) exchange of sensitive information is restricted to a minimum; (iv) technologies are licensed non-exclusively on FRAND[13] terms; (v) the licensees are free to challenge the validity of an IP right; and (vi) all participants are free to develop competing products.

U.S.: U.S. agencies apply the rule of reason and tend to be a bit more flexible in that respect, stating that pooling arrangements among competing technologies are unlikely to have an anticompetitive effect unless (i) excluded competitors cannot effectively compete in the relevant market and (ii) the pool participants collectively possess market power. Furthermore, the U.S. agencies point out that if pool members are required to grant licenses to each other for current and future technology at a minimal cost, participants may be discouraged from engaging in further research and development.  Per the U.S. agencies, this arrangement may be anticompetitive when it includes a large fraction of the potential research and development in a research and development market.

Conclusion and Outlook

It becomes apparent that across the Atlantic competition authorities endeavor to bear in mind the procompetitive nature of licensing agreements and their importance to innovation and technological developments. By applying the rule of reason, U.S. agencies choose a more flexible approach and allow special characteristics of a case to determine the outcome of the respective analysis. EU legislation, in turn, provides for a solid legal framework of block exemptions which allow greater legal certainty and enhance predictability. Yet, when engaging in multilateral business activities, both antitrust regimes should be considered and complied with, as the same agreement can affect both jurisdictions.

In addition to the boundaries set by antitrust laws, in the U.S. the doctrine of patent misuse puts additional limits on licensing arrangements. The misuse doctrine and the corresponding EU law concepts will be the subject of a separate publication.


[1] 2017 U.S. Guidelines, page 2.

[2] Further restrictions that are relevant for license agreements may result from the U.S. doctrine of patent misuse. The patent misuse doctrine has been applied by the courts to practices seeking to extend the monopoly of a patent beyond its scope, including categories such as post-expiration royalties, package licensing, royalties on unpatented products, total sales royalties, among others.  We will discuss patent misuse in more detail in a separate alert.

[3] Commission Regulation (EU) No. 316/2014;  http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014R0316&from=EN.

[4] Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, 2014/C 89/03; http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52014XC0328(01)&from=EN.

[5] https://www.justice.gov/atr/IPguidelines/download.

[6] Leegin Creative Leather Products, Inc. v. PSKS, Inc.,551 U.S 877 (2007).

[7] Non-reciprocal agreement means an agreement “where one undertaking grants another undertaking a technology rights license, or where two undertakings grant each other such a license but where those licenses do not concern competing technologies and cannot be used for the production of competing products, cf. Art. 1(1)(e) TTBER.

[8] Reciprocal agreement means an agreement “where two undertakings grant each other, in the same or separate contracts, a technology rights license, and where those licenses concern competing technologies or can be used for the production of competing products,” cf. Art. 1(1)(d) TTBER.

[9] Please note that there are further limitations in cases of selective distribution systems.

[10] Case AT.39985 – MOTOROLA.

[11] See generally Lear Inc. v. Adkins, 395 U.S. 653 (1969).

[12] Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, 2014/C 89/03; http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52014XC0328(01)&from=EN.

[13] Fair, reasonable, non-discriminatory terms; see Huawei/ZTE ECJ C-170/13.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP | Attorney Advertising

Written by:

Morrison & Foerster LLP
Contact
more
less

Morrison & Foerster LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.