IP acquisitions and antitrust

How the DOJ analyzes patent acquisitions

Over the past several years, the technology industry has seen a sharp increase in patent-related litigation. The patent wars have in turn spurred a rise in patent portfolio acquisitions because those portfolios can be and are used as weapons in such litigation.

Patent portfolio acquisitions, like all other acquisitions, are subject to antitrust review by the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) whenever they meet the threshold tests for pre-merger notification. The DOJ recently concluded its investigations of several acquisitions involving significant transfers of intellectual property rights, including:

  1. Google’s acquisition of Motorola Mobility
  2. The acquisition by the Rockstar consortium (consisting of Apple, Microsoft, Research in Motion, Ericsson and Sony) of Nortel Network’s patent portfolio
  3. The acquisition of Novell’s patents by Microsoft, Apple and others in the CPTN consortium

While the DOJ ultimately approved the transactions, it extracted concessions from many of the acquiring parties that will potentially limit their ability to use the “essential” patents they acquired – and the other essential patents already in their portfolios—to enjoin competitors from selling infringing products in the U.S.

More importantly, the DOJ’s scrutiny of these transactions demonstrates that future acquisitions of significant patent portfolios are likely to receive a thorough antitrust review, particularly as the purchase prices for strategic patent acquisitions continue to skyrocket.

The Rockstar transaction is illustrative of the recent trend in patent acquisitions. Nortel’s bankruptcy proceeding last summer included an auction of Nortel’s patent portfolio, which included approximately 6,000 patents covering a range of technologies from wireless telecommunications standards to Internet search. Google reportedly started the bidding with an offer of $900 million. The Rockstar consortium ultimately won the auction with a $4.5 billion bid—five times the initial bid and greatly exceeding the predicted purchase price.

While Google lost the Nortel auction, it was able to acquire a significant wireless patent portfolio by agreeing to purchase Motorola Mobility for $12.5 billion. The transaction involved Motorola Mobility’s entire asset portfolio, including its handset and set-top box businesses, but Google’s primary interest was Motorola’s strong collection of more than 17,000 patents. Google executives used the word “patent” at least 24 times in Google’s Aug. 15, 2011 press conference announcing the deal.

The DOJ reviewed the Rockstar and Google transactions simultaneously along with an acquisition of Novell patents by Apple as part of the CPTN consortium. The DOJ’s analysis focused on standard essential patents (SEPs), which are patents that are essential in implementing or using a standard such as 4G wireless technology. In particular, the DOJ considered whether the acquiring firms could use these patents to reduce competition in two ways.

  1. The DOJ assessed whether the patents could be used to raise rivals’ costs by charging supracompetitive royalty rates. This would make competing products more expensive and therefore less competitive on price.
  2. The DOJ analyzed whether the patents could be used to foreclose competition by enjoining competing products that employ the relevant standard.

The DOJ based its decision on the current competitive landscape and on the fact that the acquirers would not likely be able to use their SEPs to reduce competition. For instance, the DOJ found that the Google transaction was not likely to alter the competitive playing field because Motorola already had a “long and aggressive history of seeking to capitalize on its intellectual property.” The DOJ also determined that Research in Motion and Microsoft’s smaller market shares in the downstream handset market would make a foreclosure strategy unprofitable for them.

Finally, the DOJ also found important the acquirers’ public commitments about how they would use the SEPs. Apple and Microsoft issued statements in which they committed to license all of their SEPs on fair, reasonable and nondiscriminatory (FRAND) terms, and promised not to seek injunctions in disputes involving SEPs. Google also committed to FRAND licensing and not to seek injunctions in many cases.

The DOJ cleared the transactions based in part on these commitments, but its closing statement admonished the acquirers (and others) that the DOJ would “monitor how competitors are exercising their patent rights” to “ensure that competition and innovation are unfettered in this important industry.”

The patent acquisition trend shows no signs of abating. On April 9, Microsoft announced that it had agreed to pay AOL more than $1 billion for approximately 800 patents. Other companies are likely to put more patents on the auction block as they (and their investors) realize that their portfolios might have significantly more value than previously thought.

This exponential increase in patent valuations will likely bring additional antitrust scrutiny because one possible explanation for the high valuations of recent portfolio sales is that the patents could be used to block competitors and raise prices.

While the DOJ’s resolution of the Rockstar and Motorola transactions was instructive in many ways, there are many unanswered questions, including: how does the DOJ assess whether a foreclosure strategy would be unprofitable, and what does “FRAND” really mean? Moreover, patents that are not SEPs generally are not subject to FRAND commitments, so acquisitions of such patents may be even more difficult to analyze.

If a patent portfolio empowers an acquirer to raise some rivals’ costs, but also enables the acquirer to compete more successfully against other rivals, how will the DOJ define the relevant technology market or deal with this competitive conundrum? The DOJ is likely to continue its in-depth reviews of significant patent acquisitions, so the answers to these questions may be just around the corner.

Contributing Author

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Logan Breed

Logan Breed is a partner in the Washington D.C. office of Hogan Lovells, concentrating on antitrust clearance of mergers and acquisitions, antitrust litigation, and non-merger...

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Contributing Author

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Corey Roush

Corey Roush is a partner in the Washington D.C. office of Hogan Lovells, where he focuses on antitrust litigation, white collar criminal defense, corporate governance...

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Contributing Author

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Leigh Oliver

Leigh Oliver is an associate in the Washington D.C. office of Hogan Lovells, with a focus on antitrust and trade regulation law

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