In 1995, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) (collectively, the Agencies) published guidelines that delineated how and when the Agencies would evaluate intellectual property licensing and other activities under the antitrust laws. In addition to the advances in intellectual property and antitrust law that post-dated the guidelines, several recent trends in IP license agreements have raised antitrust concerns. First, the number of standard essential patent (SEP) license agreements has exploded with the increase of technology that is dependent on interoperability standards, including cell phones and the internet. Antitrust litigation surrounding SEP license agreements has become commonplace, with several suits being filed against major companies just in the past two months. Second, patent litigation settlements—particularly when dealing with generic pharmaceuticals—have faced antitrust challenges.

After receiving input from industry participants, legal scholars and the America Bar Association, the Agencies released the final guidelines on January 13, 2017, and substantively, the updated guidelines do little more than conform the Agencies’ joint policy to some—but not all—major antitrust and IP licensing developments since 1995. However, the updated guidelines remain silent on SEP licenses and litigation settlement agreements. SEP holders and implementers and parties to settlement agreements will need to consult the guidelines and multiple other references to determine the antitrust implications of their agreements.

DOJ and FTC Guidance on IP Licensing and Antitrust Law

Since 1995, the DOJ and the FTC adhered to antitrust guidelines that provided guidance on “the licensing of intellectual property protected by patent, copyright, and trade secret law, and of know-how” to “be applied in unforeseeable circumstances.” The guidelines reflected three core principles:

• First, IP is treated like any other property for the purpose of the antitrust laws, requiring parties to apply general antitrust principles while taking into account the difference in purpose and extent of protection in assessing market circumstances and conditions. That is, the Agencies generally analyzed IP licenses under a rule of reason. Further, the Agencies reviewed the impact of a license mainly in the relevant goods markets, but could also examine the relevant technology markets and research and development markets.
• Second, IP is not presumed to create market power in the antitrust context because there may be substitutes, and even if an IP right does confer market power, that by itself does not violate the antitrust laws.
• Third, IP licenses are generally procompetitive because they can lead to combining complementary goods, innovation, lower costs and new products.

While generally pro-competitive, the Agencies explained that IP licenses can raise antitrust concerns when they adversely affect competition. For example, a license agreement that restrains trade by dividing the market among competitors can raise antitrust concerns. Further, an IP holder is not required “to create competition in its own technology,” but when a licensing arrangement “harms competition among entities that would have been actual or likely potential competitors” in the absence of the license, the Agencies may evaluate the antitrust implications of the license. Importantly, the Agencies established a safe harbor when a restraint in an IP license is not facially anticompetitive, and the licensor and licensee collectively account for less than 20 percent of the relevant markets.[1]

New Developments Reflected in DOJ and FTC Updates to IP Licensing Guidelines

On August 12, 2016, the Agencies published proposed updated guidelines in light of developments in the relevant law and changes to the agencies’ related enforcement policies. The Agencies received twenty-four comments from industry participants, trade groups and law professors. While some commenters praised the Agencies’ “efforts to maintain the relevance of the IP Guidelines” in light of developing law and policy and its reaffirmation of the three core principles noted above, others expressed concern that their efforts were not expansive enough. Specifically, some commenters focused on the lack of guidance to entities licensing SEPs in a centralized location and to litigation settlements.

While the difference between the updated guidelines and the 1995 version is largely stylistic, the new guidelines adopt policies consistent with recent precedent in five areas:

• First, the guidelines now affirm that “antitrust laws generally do not impose liability” upon a firm for its “unilateral refusal to assist[] competitors” because an IP owner’s ability to exclude others from its property promotes competition by offering “incentives for investment and innovation.”[2]
• Second, the guidelines also abandon the per se prohibition on vertical price maintenance agreements for a rule of reason analysis, consistent with Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).[3]
• Third, the guidelines make clear that in assessing a tying arrangement, the Agencies will not presume market power merely because the tying product is patented or is itself a patent, copyright or trade secret, consistent with Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006).[4]
• Fourth, where a restraint appears facially reasonable or unreasonable, the guidelines evince the Agencies’ willingness to employ a “sliding scale” analysis, wherein the Agencies will forgo an “elaborate analysis” of market power—alleged justifications for a restraint or particular industry circumstances—and, instead, accept a lesser quality of proof supporting their initial reasonableness assessment.
• Finally, while not a policy sea change, the guidelines clarify the Agencies’ position on invalid and unenforceable intellectual property rights. It achieves this by incorporating the U.S. Court of Appeals for the Federal Circuit’s heightened standards for finding inequitable conduct and by distinguishing potentially pro-competitive deferred royalty payment schemes from the enforcement of invalid IP generally.[5]

The guidelines also provide examples of how the Agencies will define technology and R&D (formerly referred to as innovation) markets:

• With respect to technology markets, the guidelines’ examples are citations to court opinions analyzing market definition.[6] For example, the U. S. Court of Appeals for the Third Circuit accepted a Sherman Act Section 2 claim asserting that Qualcomm monopolized the wideband code division multiple access (WCDMA) technology market by promising to license the patented technology on FRAND terms, only to raise the price when the technology became part of an industry standard.[7]
• In the research and development market context, the guidance introduces numerous factors the Agencies may consider when determining “close substitutes” for the R&D activity at issue. In assessing the ability of other entities to refocus research efforts to the technology at issue, and thereby constrain the alleged anticompetitive activity, the Agencies seek out those currently practicing “close substitute” activities. What constitutes a “close substitute” activity is a function of: the other entities’ “access to financial support,” current “intellectual property,” “skilled personnel” and their ability to “successfully commercialize innovations.”[8]

Updated Guidelines Do Not Address Several Critical Issues for Licensors and Licensees

While making great strides to reconcile the guidelines with current law, the Agencies did not take the opportunity to address several issues facing IP holders and implementers in a single resource. Instead, the Agencies refer individuals and companies to their business review letters, other policy statements and litigation approaches. First, the Agencies did not describe how they would assess the antitrust impact of SEP licenses. Second, the Agencies were silent on how settlement agreements would be analyzed under the guidelines.

SEP agreements facilitate the adoption of interoperability standards. Yet, there is a risk that SEP agreements may have anticompetitive effects. The updated guidelines did not provide any specific insights into how the Agencies will analyze the antitrust implications of SEP agreements. Instead, parties must piece together how the Agencies will enforce the antitrust laws by referring to the guidelines, speeches, policy statements, business review letters, litigation strategy and recent SEP infringement cases. For example, the DOJ and the Patent and Trademark Office noted that the owner of a SEP “may gain market power and potentially take advantage of it by engaging in patent hold-up.” Parties will need to add these statements to the guidelines to determine the antitrust risks of SEP agreements. Some commenters on the draft revisions considered this a missed opportunity, while others applauded the omission. At a minimum, the omission provides the Agencies with maximum flexibility, as evidenced by the FTC’s recent action against Qualcomm.

The guidelines also did not provide any insights into the antitrust implications of settlement agreements as it relates to reverse payment settlement agreements in the pharmaceutical industry. When adapting the guidelines to settlement agreements, parties should refer to recent cases dealing with IP settlement agreements, including F.T.C. v. Actavis, 133 S. Ct. 2223 (2013). Lastly, the parties should also consider the Agencies’ many policy statements, reports and lawsuits on reverse payment settlements. For example, parties should consider the guidelines in light of the FTC’s statement that compensation to delay entering a market includes “a brand manufacturer’s promise not to market an authorized generic” for a set period of time when deciding the antitrust risk associated with settlement agreements. Some commentators viewed the lack of a specific discussion about patent settlements as a missed opportunity to update the guidelines to reflect current economic thinking.

ENDNOTES

[1] Fed. Trade Comm’n & U.S. Dep’t of Justice, Antitrust Guidelines for the Licensing of Intellectual Property §§ 3.1, .4 (Apr. 15, 1995) available at https://www.justice.gov/sites/default/files/atr/legacy/2006/04/27/0558.pdf (the “1995 Guidelines”).

[2] U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property at §2.1 (Jan. 13, 2017), https://www.justice.gov/atr/IPGuidelines/download (the “2017 Guidelines”); see also Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407-08 (2004).

[3] 2017 Guidelines §3.4.

[4] Id. at § 5.3.

[5] Id. at § 6; see also Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1290-92 (Fed. Cir. 2011) (en banc) (standard for inequitable conduct); Kimble v. Marvel Entm’t, LLC, 135 S. Ct. 2401, 2408 (2015) (deferred royalty payments and invalid IP).

[6] 2017 Guidelines at § 3.2.2

[7] See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 315 (3d Cir. 2007).

[8] 2017 Guidelines § 4.3.

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