FTC and DOJ Issue Updated Antitrust Guidelines for IP Licensing

The Federal Trade Commission (FTC) and Department of Justice (DOJ) issued updated antitrust guidelines for intellectual property (IP) licensing. Among other things, the guidelines address exclusive licenses, patent tying, patent pools, grantbacks, and cross-licensing, and establish safety zones for certain kinds of licensing arrangements.

Practical Law Antitrust

On January 12, 2017, the FTC and DOJ issued new antitrust guidelines for intellectual property (IP) licensing of patents, copyrights, and trade secrets. The guidelines focus on technology transfer and innovation-related issues that arise in these types of IP license arrangements and do not cover trademark licensing. The updates reflect changes in antitrust law since the last guidelines were issued in 1995, such as the adoption of the 2010 Horizontal Merger Guidelines, new case law, and statutory changes. For example, the updates include:

  • Acknowledgement that ownership of an IP right does not necessarily confer market power.

  • More robust discussion of technology and research and development (R&D) markets.

  • Discussion of the current legal approach to minimum resale price maintenance agreements.

The agencies stated that they will continue to analyze antitrust IP licensing issues under an effects-based analysis to:

  • Protect competition as a whole, and not individual competitors.

  • Promote innovation through IP licensing.

The agencies urged the business community to consult the new guidelines, agency decisions, statements, and reports to determine whether the agencies may challenge different IP-related conduct as anticompetitive, including actions taken by standard-setting organizations (SSOs) and conduct involving standard-essential patents (SEPs). For more on SSOs and SEPs, see Practice Note, Antitrust Risks in Standard-Setting Organizations ( www.practicallaw.com/5-503-0259) and Participation in a Standard-Setting Organization Checklist ( www.practicallaw.com/3-503-0260) .


Guideline Principles

The agencies explain that under the guidelines, they will:

  • Analyze IP the same as other forms of property, taking into account:

    • the specific market circumstances for licensing patents, copyrights, and trade secrets; and

    • the global reach and implications of the IP licensing issues, including that international comity might weigh against taking action.

  • Not assume that IP confers antitrust market power or that the possession of market power violates antitrust law, as:

    • there are often close substitutes for the IP at issue; or

    • the market power may have been achieved organically.

  • Acknowledge that IP licensing may allow companies to combine production factors to promote competition by reducing costs and introducing new products.


Antitrust Concerns

The agencies acknowledge that IP licensing arrangements are often procompetitive but state that antitrust concerns arise in IP licensing if, for example, a licensing arrangement:

  • Restrains a licensee from competing using different technology.

  • Results in price-fixing or market division.

  • Merges competitor research and development, decreasing development of new products.

Under the guidelines, licensing arrangements may invite antitrust scrutiny if they adversely affect goods' and services':

  • Price.

  • Quantity.

  • Quality.

  • Variety.

If the agencies suspect an arrangement is likely to have anticompetitive effects, they will apply standard antitrust principles and analysis, including:

  • Identifying the relevant market.

  • Analyzing the competitive effect of licensing arrangements within that market.

The guidelines acknowledge that IP has certain characteristics that distinguish it from other types of property, such as ease of misappropriation. However, the guidelines contend that standard antitrust analysis can accommodate these special characteristics.

The agencies note that a relevant market in which they may analyze anticompetitive effects may be related to:

  • Goods and services. IP licensing arrangements may have competitive effects in downstream markets for goods made using the IP or in upstream markets for goods that are used as inputs along with the IP.

  • Technology. A technology market consists of the IP itself and its close substitutes. The guidelines note that the agencies may analyze a technology market when IP is marketed separately from the products in which it is used.

  • Research and development. An R&D market is composed of the assets relating to identifying a commercial product or to developing new or improved goods or processes and the close substitutes for that R&D. Close substitutes may be other firms' similar R&D efforts or other existing goods that would compete with the goods under development. The guidelines note that the agencies will only consider R&D markets where the R&D is associated with specialized assets or characteristics of specific firms.


Horizontal and Vertical Licenses

The agencies will analyze IP licensing in both horizontal and vertical arrangements. Vertical licensing is the most common and affects complementary activities, such as when a licensor engages in R&D and the licensee manufactures items using the licensor's technology.

The agencies note that they will only consider a licensing arrangement to have a horizontal component when the parties would have been actual or potential competitors absent the license. However, a horizontal relationship will not automatically indicate that a licensing arrangement is anticompetitive.


Evaluating Licensing Restraints: Per Se versus Rule of Reason

The guidelines state that the agencies will typically evaluate restraints in IP licensing arrangements under the rule of reason, inquiring whether the restraint is:

  • Likely to have anticompetitive effects.

  • Reasonably necessary to achieve procompetitive benefits that outweigh anticompetitive effects.

Arrangements that will typically be analyzed under the rule of reason include:

  • Minimum resale price maintenance (RPM) agreements, unless they constitute a horizontal cartel (which is considered per se illegal).

  • Tying. The agencies may challenge arrangements where the seller has market power in the tying product market, the arrangement has an adverse effect on competition in the tying or tied product market, and efficiencies do not outweigh anticompetitive effects. The guidelines note that package licensing may be a form of tying.

  • Exclusive dealing. In evaluating exclusive dealing, the agencies will evaluate the extent to which the licensing arrangement promotes the development of the licensor's technology and anticompetitively forecloses the development of competing technologies.

  • Cross-licensing. The agencies may consider these joint arrangements anticompetitive unless they involve efficiency-enhancing economic integration between the participants. When cross-licensing is used to settle litigation and involves horizontal competitors, the agencies will consider whether the settlement diminishes competition.

  • Pooling arrangements. As a joint venture, IP pools may be challenged unless they involve efficiency-enhancing economic integration between the participants. The guidelines note that excluding firms from a pool is usually not anticompetitive unless the excluded firms cannot effectively compete without access to the pool's technologies and the pool participants collectively possess market power. Pools may also be anticompetitive if they deter participants from engaging in R&D.

  • Grantbacks. The guidelines note that non-exclusive grantbacks are unlikely to raise competitive concerns. Exclusive grantbacks may harm competition by reducing the licensees' incentives to invest in improving the licensed technology, particularly if the licensor has market power in a relevant technology or R&D market.

Where a restraint is plainly anticompetitive, it may be evaluated using per se analysis, without consideration of the likely competitive effects. Arrangements that have been considered unlawful per se include:

  • Price-fixing.

  • Output limitations.

  • Market division.

  • Some group boycotts.

In determining whether to use a rule of reason or per se analysis, the agencies will consider whether a license restraint is expected to enhance efficiency through integration by, for example:

  • Promoting development of the licensed technology.

  • Substantially reducing transaction costs.

If the agencies do not find efficiency-enhancing integration and the restraint has been treated as per se unlawful, the agencies will apply per se analysis. Otherwise, the agencies will apply the rule of reason. The guidelines note that most licensing arrangements promote efficiency-enhancing integration and would be analyzed under the rule of reason.

Under a rule of reason analysis, if the agencies believe that a restraint has no likely anticompetitive effects, it will be considered reasonable without a detailed market analysis. If, however, the restraint is on its face one that tends to reduce output or increase prices, and has no obvious efficiencies, the agencies will challenge the restraint without a detailed market analysis.


Licensing Arrangements Under the Rule of Reason

In analyzing the anticompetitive effects of a particular licensing restraint, the agencies will assess:

  • Market structure, including the market's:

    • concentration;

    • ease of entry; and

    • responsiveness of supply and demand to price changes.

  • Whether a vertical licensing arrangement will harm competition between horizontal competitors at either the licensor or licensee level by:

    • foreclosing access to or raising costs of obtaining important inputs; or

    • facilitating coordination on prices or outputs.

Exclusive Licensing and Exclusive Dealing

Exclusive Licensing

Exclusive licensing involves a license that limits, fully or partially, the ability of the licensor to license others or to use the technology itself. Exclusive licensing arrangements may attract antitrust scrutiny if there is a horizontal relationship between:

  • Licensors.

  • Licensees.

  • The licensor and its licensee.

The type of exclusive license may involve:

  • A cross-license by competitors that together possess market power.

  • Grantbacks.

  • Acquisitions of IP rights.

The agencies note that non-exclusive licenses do not typically attract antitrust scrutiny, even if the parties are in a horizontal relationship.

Exclusive Dealing

Arrangements that prevent the licensee from licensing, selling, distributing, or using competing technologies are considered exclusive dealing arrangements and may raise antitrust concerns if they:

  • Foreclose access to or increase competitors' cost of obtaining important inputs.

  • Facilitate price or output coordination.

In evaluating the reasonableness of any potentially problematic exclusive dealing arrangement, the agencies will consider any procompetitive effects, and focus on the effects of the arrangement rather than the formal terms. For example, the agencies may find that a license formally described as non-exclusive may nonetheless be structured to create de facto exclusivity.

Efficiencies and Justifications

If the agencies determine that a restraint has an anticompetitive effect, they will assess whether the restraint is reasonably necessary to achieve any procompetitive efficiencies, and weigh the anticompetitive effect with the procompetitive efficiencies. In determining whether a restraint is reasonably necessary, the agencies will consider:

  • Whether any practical and significantly less restrictive alternative exists.

  • The duration of the restraint.


Safety Zones

The guidelines create three antitrust safety zones for IP licensing arrangements. If licensing conduct falls under a safety zone, the agencies will not challenge the licensing arrangement absent extraordinary circumstances. The safety zones are intended to provide some degree of certainty to IP holders. The agencies explain that parties should not feel compelled to tailor their conduct to the safety zone requirements, as arrangements that fall outside the safety zone do not necessarily present antitrust issues.

First, for licensing arrangements that affect markets for goods or services, the agencies will not challenge restraints where:

  • The restraint is not facially anticompetitive (meaning it does not involve conduct that is per se illegal).

  • The licensor and licensees make up no more than 20% of each relevant market significantly affected by the restraint.

The agencies note that the safety zone does not apply to the transfer of IP rights that are subject to a merger analysis.

Second, for licensing arrangements that involve a technology market, the agencies will not challenge restraints where:

  • The restraint is not facially anticompetitive.

  • There are four or more independently controlled, substitutable technologies in addition to the technologies involved in the licensing arrangement.

Finally, for licensing arrangements that involve an R&D market, the agencies will not challenge restraints where:

  • The restraint is not facially anticompetitive.

  • There are four or more independently controlled entities in addition to the parties to the licensing arrangement that are able to engage in similar R&D activities.


Invalid or Unenforceable IP Rights

The guidelines note that the agencies may challenge actual or attempted enforcement of invalid IP rights as a violation of antitrust law under:

  • Section 2 of the Sherman Act, if there are elements of fraud.

  • Section 5 of the FTC Act, for conduct that falls short of fraud.

In addition, sham litigation to enforce IP rights may be an element of a Sherman Act violation.

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