Justice Department � Antitrust Division by dix06N


									Justice Department – Antitrust Division

Intellectual Property Licensing Guidelines

The guidelines state antitrust enforcement policy of US Justice Department and the FTC
with respect to the licensing of intellectual property protected by:
    Patents
    Copyright
    Trade secret law
    Know how

Note: the guidelines do not cover antitrust treatment of trademarks
    The guidelines presented here deal with technology transfer and innovation-
        related issues that arise with patents, copyrights, trade secrets, and know how
        rather than product differentiation issues arising with trademarks.

Guidelines assist those who need to predict whether the Agency will challenge a practice
as anti-competitive.

Licensing of intellectual property protected by:

       1) Patent: confers the right to exclude others from making, using, or selling in
          the US the invention claimed by the patent for a period of 17 years from date
          of issue.
               To gain protection, an invention, which must be a product, process,
                  machine, or composition of matter, must be novel, non-obvious, and

       2) Copyright: protection applies to original works of authorship embodied in a
          tangible medium of expression.
               The protection lasts for the author’s life plus 50 years, or 75 years
                  from first publication or 100 years from creation, whichever expires
                  first, for works made for hire.
               The protection also applies to protection of mask works fixed in a
                  semi-conductor chip product, which is analogous to copyright
                  protection for works of authorship.
               A copyright protects only the expression, not the underlying ideas.
               Unlike a patent, which protects an invention not only from copying
                  but also from independent creation, a copyright does not preclude
                  others from independently creating similar expression.

       3) Trade Secrets protection: Applies to information whose economic value
          depends on its not being generally known (protection derives from state law).
              Trade secret protection is conditioned upon efforts to maintain secrecy
                and has no fixed term
              The protection does not preclude independent creation by others.
Standard Antitrust Analysis Applies to Intellectual Property

      Intellectual property has important characteristics, such as ease of
       misappropriation, that distinguish it from many other forms of property.

      Intellectual property bestows on owners certain rights to exclude others.

          o IP rights help owners to profit from the use of their property.
          o The right to exclude is similar to rights enjoyed by owners of private
          o As with other forms of private property, certain types of conduct with
            respect to IP may have anti-competitive effects: against which anti-trust
            laws can and do protect.

Intellectual Property and Market Power

      Market power is the ability to profitably maintain prices above, or output below,
       competitive levels for a significant period of time.
      The Agency does not presume that a patent, copyright or trade secret necessarily
       confers market power upon its owner.
          o There are often sufficient, actual or potential, close substitutes for such
              product, process, or work to prevent the exercise of market power.
          o Market power that is solely “a consequence of a superior product, business
              acumen, or historic accident” does not violate antitrust law. {US v Alcoa,
              1945; US v Grinnell Corp., 1966}.
          o Nor does such market power impose on intellectual property owners an
              obligation to license use of that property to others.
          o However, market power could be illegally acquired or maintained, or,
              even if lawfully acquired and maintained, would be relevant if the owner
              of the IP used it to harm competition through unreasonable conduct.

Pro-Competitive Benefits of Licensing

      IP is one component among many in a production process and derives value from
       its combination with complementary factors, which include manufacturing and
       distribution facilities, workforces, and other items of IP.
      Licensing, cross-licensing, or otherwise transferring IP (called “licensing from
       here on) can facilitate integration of the licensed property with
       complementary factors of production.
            o This is efficient, benefiting consumers through reduction in costs and
               introduction of new products.
            o Licensing can also increase incentive for the creation of IP and promote
               greater investment in R & D (research and development).
          o Field-of-use, territorial, and other limitations on IP licenses may serve
            pro-competitive ends
                 They allow a licensor to exploit its property efficiently
                 Various forms of exclusivity can give the licensee an incentive to
                    invest in the commercialization and distribution of products
                    embodying the licensed IP and to develop additional applications
                    for the IP.
                 Restrictions also protect licensee from free riding on licensee’s
                    investments by other licensees or by the licensor.
          o Licensing increases the licensor’s incentive to license by protecting
            licensor from competition in the licensor’s own technology in a market
            niche it prefers to keep to itself.

Anti-Trust Concerns and Modes of Analysis

      Anti-trust concerns may arise when a licensing arrangement harms competition
       among entities that would have been actual or potential competitors in the
       relevant market in absence of the license (horizontal relationship entities).
      A restraint in a licensing arrangement may harm competition if it facilitates
       market division, price fixing, coordinated action to increase price or decrease
       output. – Confers or increases market power.

Markets affected by Licensing Arrangements

      The competitive effects of licensing arrangements often can be assessed within
       relevant markets for goods affected by arrangements; in other cases, analysis may
       require delineation of technology markets or markets for R & D (Called
       innovation markets).
               1) Goods Markets: Markets for final or intermediate goods using the IP
               or upstream in markets for goods used as inputs. The Agency will
               delineate the relevant market the same as in the Guidelines for Horizontal

              2) Technology Markets: consist of IP that is licensed (“the licensed
              technology”) and its close substitutes.
                      Technologies or goods that are close enough substitutes to
                        significantly constrain the exercise of market power with
                        respect to IP that is licensed.
                      When rights to IP are marketed separately from the
                        products in which they are used, the Agency relies on
                        technology markets to analyze the anti-competitive effects of
                        the licensing arrangement.
                      Note: the IP is often licensed, sold, or transferred as an integral
                        part of a marketed good; therefore there is no need for a
                        separated analysis of the technology market.
            3) Innovation Markets: Research and Development: If a licensing
            arrangement may adversely affect competition to develop new or
            improved goods or processes, then the Agency will analyze such impact as
            a separate competitive effect in the relevant goods or technology markets
            or as a competitive effect in a separate innovation market.
                     An innovation market consists of R & D directed to
                        particular new or improved goods or processes and the close
                        substitutes for that R & D.
                            o Close substitutes are R & D efforts, technologies and
                                goods that significantly restrain the exercise of market
                                power with respect to the relevant R & D.
                            o The Agency’s threshold is four- four other
                                independently controlled entities that possess
                                comparable capabilities and incentives to undertake R
                                & D.
                            o Note: Joint Ventures: these grant to partners of venture
                                the licenses to all patent rights and use of know-how
                                     The relevant market is an innovation market (R
                                        & D) and the Agency will seek to identify other
                                        entities that would be actual or potential
                                        competitors with the joint venture in the
                                        relevant market.

Framework for Evaluating Licensing Arrangements

                      In the vast majority of cases, restraints in intellectual property
                       licensing arrangements are evaluated under the rule of reason.
                           o Under the rule of reason: the Agency inquires whether
                               the restraint is likely to have anticompetitive effects and
                               if so, whether the restraint is reasonably necessary to
                               achieve pro-competitive benefits that outweigh those
                               anti-competitive effects.
                      In some cases, the courts conclude that a restraint’s “nature
                       and necessary effect are so plainly anti-competitive” that it
                       should be treated as unlawful per se, without elaborate inquiry
                       into the restraints likely competitive effect.
                           o Among restraints that have been held per se
                               unlawful are naked price fixing, output restraints, and
                               market division among horizontal competitors, group
                               boycotts, and resale price maintenance.
                         To determine whether per se or rule of reason is applied
                             o The Agency assesses whether the restraint in question
                                 can be expected to contribute to an efficiency-
                                 enhancing integration of economic activity.
                             o Licensing arrangements promote such integration by
                                 aligning the incentives of the licensor and licensee to
                                 promote development and marketing of licensed
                                 technology and by reducing transaction costs.
                             o If no such efficiency-enhancing integration occurs and
                                 if the type of restraint is one accorded per se treatment,
                                 the Agency will challenge the restraint.
                             o Similarly, if a restraint is facially anti-competitive
                                 (restraints that always or almost always tend to increase
                                 price and decrease output) it will be challenged.

Analysis of Anti-Competitive Effects (Agencies evaluation of licensing arrangements
under the rule of reason)

      When licensing affects parties in a horizontal relationship, a restraint in that
       arrangement may:
          o Increase the risk of coordinated pricing, output restrictions, or the
              acquisition or maintenance of market power.
          o Harm competition if the arrangement poses risk of retarding or restricting
              development of new or improved goods and processes.
          o The potential for competitive harm depends in part on the degree of
              concentration in, the difficulty of entry into, and the responsiveness of
              demand and supply to price changes in relevant markets.
          o Examples: if owners of competing technologies impose similar restraints
              on their licensees, the licensors may find it easier to coordinate actions;
              similarly, licensees that are competitors may find it easier to coordinate
              their pricing if they are subject to common restraints in licensing.
      Licensing arrangements involving exclusivity
          o A licensing arrangement may involve exclusivity in two ways:
                   Exclusive licenses: restricts the right of the licensor to license
                      others and possibly also to use the technology itself
                            Licensees or licensees/licensor in horizontal relationship,
                               so anti-trust concerns.
                   Exclusive dealing: a license prevents or protects the licensee from
                      licensing, selling, distributing, or using competing technologies
                            Such restraints foreclose access to, increase competitors’
                               costs, or facilitate coordination.
          o Pro-competitive effects: a licensing arrangement that prevents the
              licensee from dealing in other technologies may encourage the licensee to
              develop and market the licensed technology or specialized applications.
           o The fact that IP may be misappropriated more easily than other forms
             of property may justify use of some restrictions.
                  The focus, therefore, is on the actual practice and its effects
                    rather than on the formal terms of the arrangement.

Efficiencies and Justifications

The Agency balances anti-competitive effects against whether restraint is necessary to
achieve pro-competitive efficiencies.
    As the anti-competitive effects increase, the Agency requires greater levels of
       expected efficiencies.
    If it is clear that the parties could have achieved similar efficiencies that were
       significantly less restrictive, the Agency will give no weight to the efficiencies

The Anti-trust “Safety Zone”

The Agency will not challenge restraint in an IP licensing arrangement if:
          The restraint is not facially anti-competitive
          The licensor and its licensees collectively account for no more than 20%
            of each relevant market significantly affected by restraint.
                 o The great majority of licenses falls within the safety zone and are
                     lawful and pro-competitive.

Application of General Principles

      Horizontal Restraints: In absence of evidence of efficiency-enhancing
       integration from joint assignment of patent rights, the Agency might view joint
       marketing of competing patent rights as horizontal price fixing and challenge the
       restraints as per se violation.

      Resale Price Maintenance: Held illegal per se for licensor of an IP right in a
       product to fix licensee’s resale price of that product.

      Tying Arrangements: Defined as “an agreement by a party to sell one
       product…on the condition that the buyer also purchases a different (or tied)
       product, or at least agrees that he will not purchase that (tied) product from any
       other supplier”.

           o Agency will challenge if:
                 The seller has market power in tying product.
                 The arrangement has an adverse effect on competition in the
                   relevant market for the tied competition.
                 Efficiency justifications do not outweigh anti-competitive effects.
                 Package licensing, the licensing of multiple items of IP in a single
                   license or group of related licenses, may be a tying arrangement.
      Exclusive Dealing: This occurs when a license prevents the licensee from
       licensing, selling, distributing, or using competing technologies (evaluated under
       the rule of reason).
           o The likelihood that exclusive dealing may have anti-competitive effects is
               related to:
                    The degree of foreclosure in the relevant market.
                    The duration of arrangements.
                    The difficulty of entry.
                    The responsiveness of demand and supply to relevant market price
      Cross Licensing or Pooling Arrangements: Agreements of two or more owners
       of different items of IP to license one another or 3rd parties.
           o Pro-competitive benefits: integrating complementary technologies,
               reducing transaction costs, clearing blocking positions, and avoiding
               costly infringement litigation.
           o Anti-competitive: if the mechanisms to accomplish agreements were
               naked price fixing or market division (here subject to the per se rule).

      Grantbacks: Arrangements under which the licensee agrees to extend to licensor
       of IP the right to use the licensee’s improvements to the licensed technology.
           o Pro competitive: Especially if non-exclusive (which leaves licensee free to
               license improvements in technology to others), it is a means for licensee
               and licensor to share risks.
           o A grantback rewards the licensor for possible further innovation based on
               a licensed technology.

Acquisition of Intellectual Property

      Certain transfers of IP rights are analyzed by applying the principles and
       standards used to analyze mergers.
      Apply merger analysis to outright sale by IP owner of all its rights to IP and to
       transaction in which person obtains through grant, sale, or transfer of exclusive
       license for IP.

The End

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