In 2010 the Japan Fair Trade Commission (JFTC), which oversees enforcement of the Japan Antimonopoly Act, set a record high for total fines imposed – in excess of US$875 million – more than double the total fines imposed in 2009, and nearly triple the fines imposed in 2008. Although the most significant violations involved public works bid-rigging and price-fixing cartels, JFTC’s increased enforcement activities are expected to continue their upward trend, and license agreements (which are one of the most common forms of agreements in cross-border transactions1) can expect to come under heightened scrutiny in the coming years
The JFTC’s Guidelines for the Use of Intellectual Property under the Antimonopoly Act (IP Guidelines) provide a comprehensive overview of the types of arrangements or agreements involving IP rights that are permissible or impermissible under the Antimonopoly Act. The Guidelines describe varying degrees of restrictions based on, for example, their impact or effect on competition within the market, and theoretically can be divided into three categories3: (1) Level 3 Restrictions which have a major impact on competition, or have a high likelihood of being deemed anticompetitive and would very likely to trigger JFTC scrutiny; (2) Level 2 Restrictions which may or may not be deemed anticompetitive depending on the facts and circumstances of each case; and (3) Level 1 Restrictions which are the least problematic types of restrictions. Common examples within these categories are set forth below. 4
Level 3 Restrictions:
- Restrictions on a licensee’s sale, resale, or export price of products incorporating licensed technology;
- Restrictions on a licensee’s R&D activities;
- Restrictions on a licensee’s adoption and use of alternative forms of technologies; and
- Licensee’s compulsory assignment or grant of an exclusive license to licensor for any improvements to licensed technology.
Level 2 Restrictions:
- No-challenge or non-assertion clauses that prohibit a licensee from challenging the validity of licensed technology or asserting IP rights against the licensor;
- Cross licenses or patent pool arrangements whereby the contracting parties agree to restrict licenses to certain third parties, or otherwise agree to limit the price or quantity of products incorporating licensed technology, or the scope of licensable technology;
- Horizontal or vertical arrangements that prohibit sales to certain customers, limit sources for raw materials or restrict exportation;
- License fees that are not related to the utilization of the licensed technology; and
- Requirements for payment of license fees even after bases for the licensed technology (e.g., patent rights) are extinguished.
Level 1 Restrictions:
- Restrictions on the scope of use of licensed technology;
- Geographical or territorial restrictions;
- Restrictions on the license period;
- Restrictions on sublicenses;
- Minimum quantity requirements for products that use, incorporate or are sold applying licensed technology; and
- Requirements that licensees grant licensors a non-exclusive license to any improvement in the licensed technology.
Of the three types of restrictions, the Level 2 Restrictions pose the thorniest problems, including whether such restrictions will be deemed anticompetitive or, worse, come under JFTC scrutiny. Recently, the most notable prosecution of a non-Japanese company by the JFTC involved a Level 2 Restriction – a non-assertion clause found in Microsoft’s standard software license agreements. In that case, the JFTC found that Microsoft’s large market share and superior bargaining position effectively “forced” licensees to accept a standard license agreement, which included a non-assertion clause, and that this non-assertion clause materially disincentivized licensees from pursuing R&D activities in the PC audio-visual technology field, which in turn adversely affected competition in that market.5 JFTC’s findings were highly fact specific, and its 143-page ruling was issued following an investigation spanning over four years. More recently, another US-based licensor’s (Qualcomm) non-assertion clause (in its license agreements with Japanese licensees) has come under JFTC review, resulting in a cease and desist order for rescission of all such provisions in the applicable license agreements, among other things. The matter, however, is still pending final decision before the JFTC.
The restrictions discussed above are relevant even if none of the contracting parties is a Japanese company. So long as an agreement or arrangement pertains to IP rights and has a material effect on the Japanese market, 6 the Antimonopoly Act and IP Guidelines apply, and the JFTC’s increased enforcement is likely to result in additional scrutiny of not only licensing activities, but also other activities relating to IP rights in or affecting the Japanese market.