In review: licensing and antitrust issues in USA

An extract from The Intellectual Property and Antitrust Review, 6th Edition

Licensing and antitrust

Because patents confer the right to exclude others from practising an invention, licensing those rights is generally pro-competitive in that it increases the opportunities for others to make, sell or use technology, thereby creating competition where none might otherwise exist, clearing blocking positions that could otherwise restrain innovation, creating efficiencies in production and thus increasing consumer welfare.⁶¹ The Antitrust Guidelines for the Licensing of Intellectual Property reflect the Agencies' acknowledgement that licensing and cross-licensing frequently offer substantial pro-competitive efficiencies, promote innovation and enhance competition.⁶² To provide businesses with a degree of certainty and thus encourage pro-competitive licensing activities, the Agencies established an antitrust 'safety zone' pursuant to which they ordinarily will not challenge a restraint in an IP licensing arrangement if (1) the restraint is not facially anticompetitive; and (2) the licensor and its licensees collectively account for no more than 20 per cent of each relevant market significantly affected by the restraint.⁶³ Facially anticompetitive restraints generally include price-fixing, the allocation of markets or customers, agreements to reduce output, and certain group boycotts, which may merit condemnation under the per se rule without an elaborate inquiry into the restraint's likely anticompetitive effects.⁶⁴ However, in light of the benefits and efficiencies created through licensing, licensing agreements are generally scrutinised under a rule of reason analysis rather than a per se rule of illegality.⁶⁵

Although the Agencies recognise the pro-competitive benefits of licensing, the US Supreme Court has warned that licensors cannot hide behind these benefits to conceal anticompetitive conduct.⁶⁶ If terms embedded in the licensing arrangement are blatantly anticompetitive, have clear anticompetitive effects or are not reasonably necessary to achieve the efficiencies gained, the agreement could very well be analysed as a per se restraint.⁶⁷ The Agencies will assess whether licences impose horizontal or vertical restraints on competition, with agreements drawing heightened scrutiny where a licensor and licensee (or two or more licensees) would have been actual or likely horizontal competitors absent the challenged licensing arrangement.⁶⁸

Horizontal licensing arrangements may be challenged in the United States when they include output restraints, territorial restrictions, and field-of-use licensing.⁶⁹ Territorial restraints assign exclusive territories or regions to each competitor, which eliminates competition between parties that would have occurred but for the licensing agreement.⁷⁰ These arrangements raise antitrust concerns when they involve competitors that possess market power in the aggregate or are a part of a larger scheme of restraints.⁷¹ As the Supreme Court held in US v. Sealy, territorial restrictions that are part of 'an aggregation of trade restraints including unlawful price-fixing and policing' are unlawful under Section 1 of the Sherman Act.⁷² Fitting into the Sealy framework, the recent in re Blue Cross Blue Shield Antitrust Litigation case likewise involved allegations of both territorial restraints and output restrictions. Plaintiffs alleged that Blue Cross Blue Shield (BCBS) imposed territorial restrictions in members' licensing agreements as well as rules that limited how much revenue each member could derive from other lines of business outside of those using BCBS's trademark (a form of output restriction). In effect, this meant that while members could compete in others' territories with brands that did not include the BCBS trademark, there was a cap on the amount of business that could be generated this way, which plaintiffs alleged reduced competition among members. The Northern District of Alabama determined that BCBS's overall scheme, including the territorial and output restrictions, must be analysed under the per se rule, which precipitated a large settlement of US$2.67 billion among the parties in 2020.⁷³

Vertical licensing arrangements can also raise antitrust concerns in the United States, such as those that implicate tying and exclusive dealing. Tying may violate the antitrust laws as well as constitute patent misuse when the licensor conditions the licensing of intellectual property on the purchase of another good, service or IP right.⁷⁴ Exclusive dealing may also raise antitrust concerns where a licensing agreement prevents a licensee from selling, distributing, licensing, or using competing technologies from another licensor.⁷⁵

Recently, several cases have focused on a licensor's decision to license exclusively at one level of the supply chain, particularly in the context of SEPs subject to FRAND commitments.⁷⁶ In the United States, however, the Supreme Court has repeatedly held that competitors have no general antitrust duty to aid their rivals and can generally choose with whom to deal.⁷⁷ In 2020, the Ninth Circuit explicitly extended this doctrine to the licensing context in FTC v. Qualcomm.⁷⁸ While licensing at the end product level of the supply chain may enable the patentee to charge higher prices, as opposed to licensing at the component level, the Ninth Circuit held that profit-seeking behavior alone is insufficient to support antitrust liability.⁷⁹ Indeed, absent contractual commitments to the contrary, a patentee may ordinarily set a royalty however high the market will bear provided it is set unilaterally.⁸⁰ Exclusive licensing arrangements, however, should be entered with care because numerous factors bearing on exclusivity may be considered and the applicable rule of reason analysis is highly fact-specific. While exclusivity sometimes has recognised pro-competitive benefits, exclusive licensing may violate the antitrust laws, particularly where it substantially forecloses competition or access to markets or suppliers, raises competitors' costs of inputs, or facilitates anticompetitive pricing or other collusive conduct.⁸¹

Patent pools, portfolios, and cross-licensing arrangements, which involve agreements with or between patent owners in order to license patents to one another or to third parties, are also subjected at times to antitrust scrutiny in the United States.⁸² Pool and portfolio licensing have been repeatedly recognised by courts and the DOJ as pro-competitive due to the many benefits and efficiencies created by reducing transaction costs, creating economies of scale, integrating complementary technologies and avoiding costly patent infringement litigation, and thus are typically analysed under the more permissive rule of reason.⁸³ In extraordinarily rare circumstances, however, these arrangements may be subject to the per se rule where the 'only apparent purpose is naked price fixing'.⁸⁴ Litigation in this area has focused in recent years on whether the pool restrains the ability to obtain individual licences directly from the patent holders themselves. Courts have repeatedly held that a patent pool or portfolio licence does not restrain trade in violation of the Sherman Act if the plaintiff had a realistic opportunity to license independently from individual owners of patent rights available through the pool because the pool licence in such a case merely provides an alternative competitive option.⁸⁵ In 2020, the Northern District of Texas followed this trend in dismissing an antitrust challenge to a portfolio licensing agreement that allows participating licensors to independently license SEPs outside the platform.⁸⁶

Finally, while intersection litigation frequently focuses on patents, antitrust scrutiny can also arise in the context of software and trademark licensing. In the software industry, monopolisation is a significant antitrust concern because of network effects, a form of demand-side economies of scale by which the value of a piece of software (such as an operating system) rises with the number of end users who ultimately use the software.⁸⁷ In contrast, antitrust claims rarely arise in connection with trademark licensing because trademarks greatly differ from patents in that they only provide the right to use a particular designation (symbol, name and so on), and thus are unlikely to confer monopoly or market power over a product.⁸⁸