As the Obama Administration drew to a close, its antitrust enforcers took two actions of note for those involved in intellectual property (IP) licensing. The first, the joint release by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) of updated Antitrust Guidelines for the Licensing of Intellectual Property, describes how the antitrust enforcement agencies evaluate various IP licensing issues and reaffirms the agencies' views that IP licensing is generally procompetitive. The second, a lawsuit brought by the FTC against Qualcomm, reveals the views of at least the Obama Administration's FTC about the licensing of standard-essential patents (SEPs) – those embodying technology that has been incorporated by a standard-setting organization into an industry standard. While the antitrust agencies generally applaud the licensing of IP rights and believe that the antitrust and IP laws work in tandem to promote innovation and enhance consumer welfare, IP owners should be aware of the limits – revealed in these two recent actions and other enforcement activities – that antitrust law can place on IP licensing.
Updated IP Guidelines
The DOJ and FTC on Jan. 13, 2017 released the new Antitrust Guidelines for the Licensing of Intellectual Property, updating the Guidelines' original version issued by the agencies in 1995. The Guidelines articulate general enforcement policies of the agencies with respect to the licensing of patents, copyrights, trade secrets and know-how "to assist those who need to predict whether the [a]gencies will challenge a practice as anticompetitive."
The Guidelines first address the agencies' overarching principles and analytical framework in evaluating IP licensing activities, and then explain how those principles apply to particular licensing practices. Because IP licensing allows firms to combine "complementary factors of production," the antitrust agencies recognize that licensing is "generally procompetitive," and "in the vast majority of cases" they evaluate licensing practices under the "rule of reason," taking into account both the benefits and potential harms from the practices. The agencies do not presume that IP rights confer antitrust market power and, even when an IP owner possesses market power, the Guidelines state that that alone does not offend the antitrust laws or impose upon the owner an obligation to license the use of its technology to others. Field-of-use, territorial or other licensing restrictions often allow the IP owner to exploit its property as efficiently and effectively as possible and are often procompetitive.
The Guidelines identify examples of conduct that might attract significant scrutiny from the agencies and result in potential antitrust liability. One example is the joint licensing by owners of patents over competing technologies. Because the owners would, in the absence of the joint licensing arrangement, compete on price and other dimensions in the licensing of their patents, an agreement to license their rights jointly would extinguish that competition and likely constitute a per se antitrust violation. On the other hand, if the owners held patents over complementary technologies, licenses to both of which are necessary to produce a particular product, then the joint licensing would be regarded to be procompetitive and raise no issues under the antitrust laws. Cross licenses between firms that compete in the sale of products incorporating their technologies would also be per se illegal if they contained territorial restrictions that ended head-to-head competition between them in the sale of their products.
The Guidelines also identify a number of other licensing practices that the agencies would evaluate under the less-stringent "rule of reason." For example, the agencies would evaluate licenses containing resale price maintenance provisions – under which the licensor conditions a license on the licensee selling the product incorporating the technology at more than a specified price – under the rule of reason, considering the competitive benefits and harms from that agreement. Although conditioning the purchase of one product on the purchase of another can constitute per se illegal "tying," the Guidelines state that the agencies would, in the exercise of their prosecutorial discretion, consider the benefits and harms of such a provision in the IP licensing context under the rule of reason. Similarly, while "exclusive dealing" agreements, in which the licensee commits not to use competing technologies, can under some circumstances foreclose competition from competing technologies, they also can help promote the use of the licensor's technology and be procompetitive. The agencies will consider the benefits and harms of exclusive dealing arrangements under the rule of reason.
Finally, the Guidelines establish a "safety zone" to give certain IP owners confidence that their licensing activities would not draw the attention of the enforcement agencies. Licenses that are not "facially anticompetitive" (such as a per se illegal agreement to jointly license competing technologies) would fall in the safety zone if (a) the licensor and licensee collectively account for no more than 20 percent of each market affected by the restraint, or (b) there are four or more independently controlled technologies that may be substitutable for the licensed technology at comparable cost.
FTC v. Qualcomm
One significant subject that the revised Guidelines do not address is the question of how the agencies will seek to apply the antitrust laws to the licensing of SEPs. Although there is general consensus that a patent holder acquires significant hold-up power when the technology covered by its patent becomes part of an industry standard, there remains some uncertainty and controversy concerning the obligations that the antitrust laws impose on the owners of SEPs. The DOJ and FTC did not attempt in their Guidelines to bring additional clarity to this area.
Only days after the Guidelines release, however, the FTC revealed its enforcement intentions in this area – or at least those of the Obama Administration's FTC – when it brought a lawsuit challenging Qualcomm's maintenance of a monopoly in baseband processors used for cellular communications through its SEP licensing.
The FTC alleges that Qualcomm has maintained a monopoly in baseband processors principally through its "no license-no chips" practice of insisting, as a condition of Qualcomm's supply of any of its baseband processors, that cellphone manufacturers license its patents. According to the FTC's complaint, Qualcomm's practice distinguishes it from all other suppliers of mobile-handset components, which sell their components without requiring a separate patent license, and from all other owners of SEPs. By withholding its essential baseband processors until a manufacturer licenses its SEPs, the FTC alleges that Qualcomm effectively denies licensees the opportunity to challenge the royalties Qualcomm demands as inconsistent with the commitments that Qualcomm made to standards bodies that it would license its patents on fair, reasonable, and nondiscriminatory (FRAND) terms. Further, by insisting that mobile-handset manufacturers license its SEPs, for which Qualcomm demands a royalty on each handset sale, regardless of whether the manufacturer uses a Qualcomm baseband processor or one supplied by one of Qualcomm's competitors, the FTC alleges that Qualcomm imposes an anticompetitive "tax" on its competitors' sales. Finally, the FTC alleges that Qualcomm obtained from Apple, in return for reduced fees for a license to its patents, a commitment to purchase Qualcomm baseband processors exclusively, denying competitors an opportunity to sell their competing processors to an important manufacturer and further entrenching Qualcomm's dominant position.
Past FTC cases – as well as other litigation concerning standard-essential patents –largely have focused on efforts on the part of patent holders to deceive standard-setting organizations1 or on efforts by SEP owners to deny licenses to its SEPs and seek injunctions against willing licensees.2 The FTC's Qualcomm case pushes the envelope in the application of the antitrust laws to SEP licensing by looking not at how Qualcomm acquired its market power or whether it is withholding licenses, but instead at how Qualcomm has chosen to license its lawfully obtained SEPs.
It appears likely, however, that the Qualcomm case represents a high-water mark in FTC enforcement aggressiveness, a position from which its enforcement will recede quickly. The FTC brought the Qualcomm case over the objection and dissent of the lone Republican Commissioner, Maureen Ohlhausen, who criticized the case as "an enforcement action based on a flawed legal theory . . . that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide." Under the Trump Administration, Republican Commissioners will hold a majority position at the FTC, potentially under the leadership of Commissioner Ohlhausen. A Republican-majority FTC potentially could dismiss the Qualcomm case voluntarily, but almost certainly will not pursue further actions on similar grounds against holders of SEPs.
Considerations for IP Owners
Owners of IP, particularly SEPs, should be aware that certain licensing activities can raise issues under the antitrust laws. Holland & Knight can help clients understand whether licensing practices might implicate antitrust concerns and how to approach licensing in ways that minimize the likelihood that competition issues will interfere with a client's ability to achieve its goals.
1 See Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008)
2 See In the Matter of Robert Bosch GmbH, FTC Dkt. No. C-4377, Apr. 24, 2013