Clearing the Air

It's a long-standing legal conflict that in recent years has gotten much worse.

On one side is patent law, which provides limited, government-sanctioned monopolies on inventions. On the other is antitrust law, which seeks to stamp out monopolies and other anticompetitive practices. Stuck in the middle are patent owners. They're uncertain how much they can use their patents to ward off competitors and gain market share without violating antitrust law.

This legal conflict has become more pointed in recent years, as patent rights have become increasingly important to companies' bottom lines. And not surprisingly, many companies have clamored for the government to provide greater certainty about what they can and can't do with their patents under antitrust law.

The government's latest response came in April 2007, when the Federal Trade Commission and Department of Justice released a 210-page report--Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition--that clarifies the agencies' position on a variety of issues. The report hands IP owners a victory by giving them greater leeway to use their IP rights to their best

commercial advantage.

"It lays out the FTC's and DOJ's position on a whole host of relatively important IP issues," says Craig Waldman, an antitrust and litigation attorney in the San Francisco office of Cooley Godward Kronish. "It provides a pretty good road map for in-house counsel and business executives who wish to exploit their IP without running afoul of the antitrust laws."

1995 Guidelines

This isn't the first time the FTC and DOJ have tried to explain how patentees can comply with antitrust law. In 1995 the agencies released a joint report, Antitrust Guidelines for the Licensing of Intellectual Property, which broadly laid out which types of patent licensing activities were acceptable and which might run afoul of antitrust law.

Soon after the report's release, however, rapid technological advances seemed to put patents everywhere. They were in computers, digital cameras, cell phones, Blackberries, iPods and other technological innovations that consumers and businesses eagerly embraced. Business methods became patentable thanks to a 1998 Federal Circuit ruling, and these patents quickly garnered lots of interest in the corporate world.

"It was apparent that IP was becoming an important part of the economy and was overlapping more and more with antitrust law," says William Cohen, the FTC's deputy general counsel for policy studies. "IP assets were increasingly key assets of companies involved in antitrust questions."

So in 2002 the FTC held a series of hearings to gather comments from businesses, academics and attorneys about the tensions between patents and antitrust law. The agency subsequently teamed up with the DOJ to create the 2007 report, which expands and modifies the 1995 guidelines.

"This report makes relatively small adjustments to the 1995 guidelines," says Jonathan Rubin, an antitrust litigator in the Washington, D.C., office of Patton Boggs. "But even small adjustments in this area can create big shifts in incentives and behavior."

Breaking the Law

For instance, the report adopts a new position on refusals to license. Both the Federal and 9th Circuits have ruled that a company can violate antitrust law simply by refusing to license its patents to competitors. However, these courts have set very different standards for determining when a violation exists, so the legal situation is quite muddled.

The report firmly opposes both rulings. The FTC and DOJ state that unilateral, unconditional refusals to license patents cannot create liability under the antitrust laws, period.

According to the DOJ and FTC, liability can exist for conditional refusals to license (such as denying a license for one type of invention unless the licensor also purchases a license for a different invention). Such conditional refusals, however, are not per se illegal; the agencies will evaluate such refusals under the rule of reason, which considers both the economic efficiencies of an action as well as its anticompetitive effects. So long as the economic efficiencies outweigh the anticompetitive harms, the activity is legal under antitrust law, according to the agencies.

The report also takes issue with the courts over the duration of patent royalties. "The case law says extending royalties beyond a patent's term is an antitrust violation," Cohen says. In the report, however, the DOJ and FTC argue it can make good economic sense for a license to extend beyond a patent's term: "[T]hat practice may permit licensees to pay lower royalty rates over a longer period of time, which ?? 1/2 allows the patent holder to recover the full value of the patent, thereby preserving innovation incentives." Such licensing arrangements may thus be allowed under the rule of reason test.

Ex Ante Negotiations

The report makes it easier for patent owners to work with standard-setting organizations. Such organizations play key roles in promoting interoperability and competition in a wide variety of high-tech products. But when the major players in an industry sit down in a room and agree to collaborate, it can look suspiciously anticompetitive.

This has complicated efforts to use patented inventions in technical standards. Best practice would require all applicable patent licenses be negotiated before finalizing a standard, but both patentees and standard-setting organizations have feared this could violate antitrust law.

Such ex ante licensing talks can serve a legal economic purpose, according to the report. If a standard would bestow market power on a patent, for instance, it makes economic sense to conduct the licensing negotiations before the standard is set, rather than after. Thus, the FTC and DOJ concluded that ex ante licensing negotiations are not per se unlawful, but will be analyzed under the rule of reason.

The report also eases antitrust concerns for many other aspects of

IP licensing.

"It gives patent owners greater latitude in their licensing agreements," Rubin says. "It says no licensing provisions are per se unlawful--even though some provisions may be difficult to defend under the rule of reason."

The report, of course, cannot rewrite antitrust law. It merely provides the FTC's and DOJ's interpretation of existing law. Still, businesses that comply with these new guidelines can feel confident the main antitrust enforcers, the FTC and DOJ, will not take action against them.

Moreover, the guidelines offer ammunition to patentees that want to overturn more stringent judicial antitrust standards. "The report provides a basis for challenging the older law, saying it is not economically viable," Cohen says.

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Steven Seidenberg

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