In deciding whether to engage in intellectual property (IP) and technology licensing transactions, many companies overlook antitrust considerations. However, certain IP transactions and conduct can run afoul of federal antitrust laws. As an in-house lawyer, it is important to be aware of the relevant antitrust laws and advise your organization about the aspects of IP licensing transactions that could be challenged as anticompetitive.
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Overview of Antitrust Laws
While most of the U.S. antitrust laws do not pertain to IP transactions, there are a few relevant provisions in key antitrust legislation.
- Sherman Act: Section 1 of the Sherman Act prohibits unreasonable restraints of trade and Section 2 prohibits monopolies.
- Clayton Act: Section 7 of the Clayton Act prohibits acquisitions that substantially lessen competition or tend to create monopolies, which encompasses acquisitions of IP. Section 3 of the Clayton Act prohibits certain exclusive dealing arrangements involving the sale of goods, which also encompasses IP.
- Federal Trade Commission Act (FTC Act): Section 5 of the FTC Act prohibits unfair methods of competition, similar to Section 1 of the Sherman Act.
- Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR): The HSR Act imposes a waiting period for the parties to certain transactions, which can include IP licensing transactions. The statutory waiting period gives federal antitrust regulators a chance to determine whether the transaction violates federal antitrust laws.
Antitrust violations are investigated and enforced by two federal agencies—the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Both agencies have the power to seek civil and criminal penalties.
There are two principles that guide the antitrust legal analysis in an IP licensing transaction situation.
- Per se rule: This rule deems certain anticompetitive arrangements as inherently unlawful. Examples include clearly anticompetitive behaviors such as naked price-fixing, output restraints, and certain group boycotts.
- Rule of reason: This rule evaluates the various factors to determine whether the anticompetitive harm outweighs the benefits of the arrangement. Most IP licensing arrangements are analyzed under the rule of reason.
Evaluation of IP Licenses by Antitrust Agencies
The DOJ and FTC have jointly issued guidance that provides insight into their thought-process in analyzing IP licensing transactions. According to their jointly issued IP Guidelines, the DOJ and FTC adhere to certain principles in their evaluation of IP transactions. One of these guiding principles is to view IP licensing as generally promoting innovation. Another guiding principle entails applying the same antitrust analysis to conduct involving IP as to conduct involving other forms of property.
A key component of antitrust review involves an analysis of the market power of the parties in in a particular market. The market power analysis involves looking at whether the parties have the ability to profitability maintain prices above, or output below, competitive levels for a sustained time period.
In order to provide more regulatory certainty to parties in a potential IP licensing transaction, the DOJ and FTC have established the concept of “safety zones.” The particular safety zones for licensing arrangements depend on the relevant markets that may be impacted. However, IP transactions with certain characteristics are unlikely to be challenged and therefore are referred to as safety zones. Examples include:
- In a goods or services market, the licensor and licensees collectively affect less than 20% of the relevant market
- In an R&D market, there are four or more independently controlled entities that engage in R&D considered a close substitute to the R&D activities of the parties to the licensing arrangement
- In a technology market, there are four or more independently controlled technologies that provide close substitutes to users at a comparable cost
Antitrust Challenges to IP Licensing Arrangements
Certain types of IP licensing arrangements are more likely to attract scrutiny or enforcement actions by U.S. antitrust regulators. These include tying arrangements, patent pools, grantbacks of licensee improvements, exclusive licenses, exclusive dealing, pricing restraints, and joint R&D collaborations.
Tying arrangements involve one seller agreeing to sell a product or service (the tying product) to a buyer only if certain conditions are met. A typical condition is that the buyer must also purchase a different product or service (the tied product) from the seller. Physically bundled products or technological only compatible with each other are some common examples.
While many pooling arrangements promote healthy competition and reduce costs, some pooling arrangements that involve collective price or output restraints cause competitive harm. Antitrust regulators evaluate pooling arrangements under the rule of reason.
Grantbacks involve requiring the licensee to grant the licensor rights to use the licensee’s improvements to the licensed technology. Certain types of exclusive grantback arrangements may be deemed anticompetitive by regulators. Grantbacks are also evaluated under the rule of reason.
Research and development (R&D) joint ventures that involve cross-licensing and sharing of technology can sometimes face antitrust scrutiny. While many R&D collaborations promote innovation and enhance competition, some R&D joint ventures increase market power to the point of adversely affecting competition in the relevant market.