In the United States, antitrust law and intellectual property (IP) law are two complementary bodies of law, each designed to promote innovation, market competition, and consumer welfare.2 However, holders of intellectual property rights (IPR) are not exempt from the application of US antitrust laws, and may not protect or enforce their rights in a manner that unfairly eliminates competition.3
Antitrust law in the United States is primarily federal law, codified in three main statutes under Title 15 of the United States Code (USC), namely: the Sherman Act, the Clayton Act and the Federal Trade Commission Act (the FTC Act).4 The Sherman Act prohibits agreements in restraint of trade and bars unilateral conduct that monopolises or constitutes an attempt to monopolise a given market.5 The Clayton Act, which governs mergers and acquisitions, prohibits mergers and acquisitions that substantially lessen competition or tend to create a monopoly.6 Finally, the FTC Act broadly prohibits the use of any unfair methods of competition and any unfair or deceptive acts or practices that affect commerce.7 In the United States, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) (together, the Agencies) share jurisdiction for enforcing federal antitrust law.8
In addition to the antitrust statutes and the case law interpreting them, the DOJ and FTC have released the Antitrust Guidelines for the Licensing of Intellectual Property to help IPR holders comply with their antitrust obligations when licensing IP (the Guidelines). In January 2017, the Agencies released an update to their original Guidelines, published in 1995, which included recent precedent cases and incorporated certain sections of the 2010 Horizontal Merger Guidelines.9 The 2017 Guidelines, like the original 1995 Guidelines, emphasise three main principles: (1) for antitrust purposes, the Agencies apply the same framework for analysing IP as they do for tangible property, (2) an IP right does not by itself confer market power on its recipient, within the meaning of antitrust law, and (3) licensing IP can enable firms to achieve more efficient production and is generally viewed as pro-competitive.10 However, the updated Guidelines do not address several important and controversial topics, such as the Agencies' approach to patent assertion entities (PAEs), standard-essential patents (SEPs) and the evaluation of fair, reasonable and non-discriminatory (FRAND) terms under the antitrust laws.
The federal antitrust statutes, their associated case law and the Agencies' Guidelines are the primary resources with which practitioners who operate at the intersection of US antitrust and IP law should be familiar. This chapter provides a high-level overview of those authorities and highlights some of the key issues specific to the juncture of antitrust and intellectual property law in the United States.
II YEAR IN REVIEW
The 2016 calendar year marked the final year of President Obama's administration and continued to be a busy one for both the courts and the Agencies with respect to antitrust and IP matters.
In August 2016, the DOJ and FTC announced their joint plan to update their 1995 IP Licensing Guidelines and officially released their proposed draft for public comment.11 Also in August 2016, the DOJ finalised its review of the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music Inc (BMI) consent decrees by determining that the consent decrees were not in need of amendment, as had been proposed by ASCAP, BMI and certain other interested parties.12 The ASCAP and BMI consent decrees have been in place for decades and were designed to guard against the possibility that the two entities would engage in unlawful conduct in connection with the collective licensing of the copyrighted works held by their members.13 In their 2014 request, ASCAP and BMI asked the DOJ to support amendment of the consent decrees to permit fractional (as opposed to full-work) licensing and to allow their members to withdraw from ASCAP, BMI or both, to separately negotiate with certain performers on an individualised basis.14
In October 2016, the FTC published a highly anticipated study whose purpose was to examine the activities of PAEs, businesses also sometimes referred to as ‘patent trolls', which do not manufacture products or provide services, but instead simply seek to monetise a patent.15 The FTC study was based on confidential business information collected from 2009 to 2014 from 22 PAEs and roughly 2,500 of their affiliates.16 The study found that PAEs generally fell into one of two categories: ‘portfolio PAEs', which negotiate high-value licences for large patent portfolios; and the more common ‘litigation PAEs', which rely on ‘nuisance' litigation over smaller patent portfolios to obtain licences in settlements.17 Underscoring the high value of the patents they hold, portfolio PAEs were found to have generated 80 per cent of the revenue in the study, despite being parties to only 9 per cent of the licences in the study.18 Litigation PAEs, by contrast, accounted for only 20 per cent of the revenue in the study despite being parties to 91 per cent of the reported licences and filing 96 per cent of the patent infringement suits.19
The FTC concluded that since the vast majority of suits settled within 18 months for less than $300,000, many of the infringement actions filed by litigation PAEs were instituted purely for their nuisance value.20 In light of this, the FTC also included several policy recommendations designed to limit the prevalence of nuisance infringement suits. These recommendations included amending the rules of discovery to better equalise the costs and burdens between PAE plaintiffs and defendants, and requiring greater disclosure from PAEs as to the financial interest of their affiliate companies in any given litigation.21 While these recommendations have not yet been adopted by Congress, in earlier legislation, the Leahy-Smith America Invents Act (AIA), Congress enacted several measures to address litigation instituted by non-practising entities such as PAEs. As part of the AIA, which was passed in September 2011, Congress included an anti-joinder provision that effectively raised the joinder standard by prohibiting patent owners (including PAEs) from joining multiple unrelated defendants in the same suit.22 As a consequence of that provision, PAEs and other patent holders may not join accused infringers solely based on the allegation that they have each infringed the same patent or patents, but instead must file separate suits against each alleged infringer, which raises the costs of such litigation for PAEs.
III LICENSING AND ANTITRUST
Licensing intellectual property can help lead to efficient combinations of inputs and thereby benefit both licensees and consumers, who gain access to new products and less costly goods and services.23 Notwithstanding its pro-competitive virtues, the process of licensing intellectual property can, however, also be exploited to harm competition; for instance, by eliminating actual or potential competitors who would have existed if not for a restrictive licensing arrangement.24 While the Agencies and courts have held that a firm's unilateral refusal to license IP to a competitor is not by itself a violation of the antitrust laws (noting that such a rule could sharply diminish the incentives firms have to invest in ex ante research and development), IPR holders are not exempt from the application of the antitrust laws and thus must avoid engaging in conduct that may have anticompetitive effects.25
In January 2017, the DOJ and FTC issued a modest refresh to their original 1995 IP Licensing Guidelines to reflect intervening developments in statutory and case law.26 The Guidelines emphasise that, in evaluating licensing agreements, the Agencies adopt an effects-based framework with a focus on the actual or likely effects the licence will have on competition.27 Since licensing is generally viewed as pro-competitive, most restrictions in licensing arrangements are evaluated under the ‘rule of reason' (simplified, a balancing between the pro-competitive and anticompetitive effects of the alleged conduct)28 rather than the ‘per se' rule (under which the conduct at issue is deemed anticompetitive without proof that the conduct had an adverse effect on competition). Perhaps the most notable change in the 2017 Guidelines was to reflect the Supreme Court's June 2007 holding in Leegin Creative Leather Products v. PSKS that minimum resale price maintenance, the practice of setting a minimum price at which a good can be resold, is not per se illegal (as had been reflected in the 1995 Guidelines), but must instead be analysed under the rule of reason.29
The 2017 Guidelines also clarified the parameters of the antitrust ‘safety zone', a doctrine intended to aid business planning. The safety zone provides that, in the absence of ‘extraordinary circumstances', the Agencies will not challenge a restraint contained in an IP licence provided (1) the restraint is not anticompetitive on its face (for instance, one that facilitates price-fixing or output restrictions), and (2) the licensor and the licensee's combined shares for the relevant affected market is below 20 per cent.30 Practitioners should be aware that, while particular licence conditions or restraints may not necessarily run afoul of the antitrust laws, these licence provisions must also be evaluated under other doctrines such as the judicial doctrine (in the case of patents) or the statutory provisions (in the case of copyright) governing exhaustion.
IV STANDARD-ESSENTIAL PATENTS
Collaboratively setting standards for technologies is important to a variety of industries, as the practice facilitates the creation of follow-on inventions while promoting future innovation and interoperability of products.31 However, standard setting may also raise antitrust issues, such as when a patent gains additional market power when the patented technology becomes adopted as part of an industry standard and the patent becomes a SEP. In such an event, the patent's value may increase because it can be used to block implementation of the standard and the patent owner may attempt to exploit this newly acquired leverage by refusing to license the standard-essential technology unless licensees agree to excessively high royalties (a practice commonly referred to as ‘patent holdup').32 In essence, the adoption of patented technology into a standard may confer market power on the patent holder that would otherwise not have existed, and that market power may then be abused if not constrained. If many holders of SEPs engage in patent holdup, the aggregate royalties for patents essential to a given standard may actually be greater than the value of the actual feature, or indeed the product incorporating the feature.33
In response to these issues, and to minimise exploitative licensing, many standards-setting organisations (SSOs) ask that patent holders who wish to have their technology considered for incorporation into the industry standard voluntarily pledge to license their patents on fair, reasonable and non-discriminatory (FRAND) terms. FRAND commitments serve several salutary purposes: linking patent holders with those who incorporate and implement patented technologies; ensuring royalties more closely reflect the actual value of the patent by minimising the surplus attributable solely to adoption of the patented technology into the standard; and incentivising patent holders to put forth their best technology to be standardised. Of course, SSO participation is voluntary and SSO FRAND principles address only the constraints on participating patentees. Other doctrines, including the fact that the patent statute allows for damages in an amount of a ‘reasonable' royalty, have been used to curtail royalty demands based on factors other than the actual value of the patented technology to the allegedly infringing device.
SSOs typically do not ‘set' a FRAND rate or other terms. In most cases, the SEP holder and licensee attempt to agree on what would constitute FRAND terms and then execute a licence agreement reflecting those terms after successful negotiations. However, the FRAND commitment to the SSO generally is considered a binding commitment that runs with the patent, and may be enforced by a prospective licensee as a third-party beneficiary of the SSO commitment. A breach of a commitment to license on FRAND terms may constitute grounds for an antitrust suit by one injured as a result of the breach. When it comes to policing compliance with FRAND commitments, US antitrust law operates more as a backstop than a primary check on SEP licensing, with the Agencies primarily acting as competition advocates that assist SSOs through a variety of Agency programmes to craft clear guidance for patent holders. Indeed, the Agencies generally refrain from intervention in private licence negotiations unless a patent holder's failure to honour its FRAND commitment is deliberate and rises to the level of an antitrust violation under Section 2 of the Sherman Act.34 Indeed, former Assistant Attorney General Bill Baer in a September 2015 speech at the 19th Annual International Bar Association Competition Conference emphasised that the Agencies, in line with their European counterparts, will not intervene in basic commercial disputes over royalty rates in the absence of bad conduct by the patent holder or improper use of market power.35
Exactly what ‘fair, reasonable and non-discriminatory' means in the licensing context, however, remains sometimes controversial and largely unsettled. Although jurists and agencies in Europe have been more active in defining both what constitutes a FRAND rate and the process parties should engage in to get there, currently there is less guidance in the United States. While several district courts and one appellate court have addressed the issue, determinations of FRAND terms are highly case sensitive. Thus, the Agencies have been mostly silent on what specifically constitutes FRAND licensing, and the courts have avoided applying bright-line tests. Instead, US courts defining FRAND have considered the rates in licences for similar technologies and patents, the rates for patent pools with respect to standards, the objective value of the patent to the standard, the availability of alternatives and their quality, whether the patent covers the core features of the standard and, to a certain extent, the possibility of royalty stacking, and the number of essential patents that may read on a particular standard.
In 2015, the US Court of Appeals for the Federal Circuit decided Commonwealth Science and Industry Research Organisation (CSIRO ) v. Cisco Systems, a case involving certain technologies incorporated into the IEEE 802.11 Wi-Fi standard.36 The Federal Circuit held that, while the smallest saleable patent-practising unit is one appropriate base for calculating damages, it is not the exclusive method for apportioning the value of a patent to the allegedly infringing product, especially if the record indicates that the parties actually negotiated a different base in reality.37 The CSIRO decision also emphasised that, in determining whether a given royalty is excessive, the actual cumulative royalty paid by the implementer must be proven and the implementer may not rely on abstract recitations alleging royalty stacking or qualitative assertions of the value of inventions without some quantitative evidence.38 The CSIRO decision's focus on actual quantitative evidence is thus consistent with the Federal Circuit's 2014 decision in Ericsson v. D-Link. D-Link involved the adjudication of whether Ericsson had complied with its obligation to license a patent essential to the IEEE 802.11 Wi-Fi standard on FRAND terms, and held that in determining FRAND damages, concerns about patent holdup must be proven using specific facts from the case, rather than on the basis of theory or general probability.39
V INTELLECTUAL PROPERTY AND MERGERS
In the United States, all mergers and acquisitions, whether or not they involve transfers of IP rights, must comply with Section 7 of the Clayton Act, which prohibits mergers and acquisitions that substantially lessen competition or tend to create a monopoly.40 In addition, practitioners need to be aware that certain transactions that exceed a certain minimum dollar amount in value must be reported to the FTC and the Antitrust Division of the DOJ before consummation, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act).41 The HSR Act establishes a waiting period before acquisitions that exceed the threshold may close to give the Agencies sufficient time to scrutinise more closely mergers of a certain size.
Furthermore, the Guidelines state the Agencies' position that complete sales of intellectual property rights and transfers of exclusive IP licences will be treated as analogous to mergers and thus are subject to the guidance contained in the 2010 Horizontal Merger Guidelines (another DOJ and FTC joint release).42 Importantly, such ‘mergers' will not be eligible for treatment under the safety zone for licensing restraints set out in Section 4.3 of the Guidelines.
As for substantive evaluations of acquisitions, the Guidelines again emphasise that in evaluating conduct, the Agencies adopt an effects-based framework with a focus on the actual or likely effects on competition and not the potential harms to any individual competitor. For example, the Agencies have approved certain acquisitions subject to certain conditions aimed at restoring the competition eliminated as a result of the transaction, such as requiring the acquirer to agree to divest certain IP rights. In March 2009, in connection with the 2007 acquisition of Wild Oats by Whole Foods, the FTC agreed to a settlement with Whole Foods that required Whole Foods to sell 32 Wild Oats stores and divest related Wild Oats IP, such as the rights to the Wild Oats brand.43 Similarly, in July 2016, the DOJ agreed to a settlement with Anheuser-Busch InBev (ABI) as part of ABI's acquisition of SABMiller, requiring ABI to, among other things, divest itself of SABMiller's US business and the worldwide brand rights to Miller beer.44
VI OTHER ABUSES
Sham litigation and pay-for-delay cases in the pharmaceutical industry continued to gain the attention of the Agencies and courts in 2016. Given the different marketing approval processes for brand-name and generic drugs in the United States, brand-name drug manufacturers have a government-granted monopoly in the market for their drug until a generic competitor is eligible to receive FDA approval and actually receives it. Both private parties and the Agencies have alleged that certain brand-name drug companies from time to time seek to limit the onset of generic competition; for example, by offering generic competitors payments to delay filing their Abbreviated New Drug Application for their generic (reverse payments) or by filing sham patent infringement lawsuits and citizen petitions in an effort to delay the onset of generic competition.45
In March 2016, the FTC filed a complaint against Endo Pharmaceuticals Inc and others, alleging the companies violated antitrust laws on a pay-for-delay theory, which had the effect of blocking consumers' access to lower-cost generics.46 Specifically, the complaint alleges that Endo not only paid Impax Laboratories and Watson Laboratories - which market Opana ER and Lidoderm respectively - not to file for FDA approval of their generic equivalents, but also agreed as consideration not to market their own generic (known as an authorised generic, or AG) to compete with Opana and Lidoderm, once the generic versions finally did hit the market.47 The case is notable not only because Impax and Watson were the first generic companies to file for marketing approval, but also because it marked the first time the FTC has sought to challenge a ‘no-AG commitment' as an anticompetitive reverse payment.48
As a general matter, any payments to generic manufacturers by brand-name producers are evaluated under the rule of reason because this conduct can have pro-competitive effects. While petitioning the government to enforce one's patents is generally considered to be ‘speech', protected by the US Constitution under the Noerr-Pennington doctrine, infringement litigation can lose this protection and become subject to antitrust scrutiny when the asserted patents are obtained by fraud, or the litigation claims are objectively baseless and asserted to protect a monopoly.49
VII OUTLOOK AND CONCLUSIONS
With the recent election of Donald Trump and a high number of vacancies in the relevant Agencies, it is too early to predict with any reasonable certainty the extent to which the new administration will vigorously enforce antitrust law with respect to IP rights. Many pundits, however, predict that the Trump administration will be less active in enforcing the antitrust laws and will adopt a more favourable position than previous administrations did in relation to patent holders. It may very well be that these pundits overemphasise the impact any single administration can have on existing law and enforcement objectives.
Globally, there has been a trend in recent years towards harmonisation of competition laws as they are applied to IP. For example, in April 2017, the American Bar Association (ABA) sections of Antitrust Law, Intellectual Property Law, and International Law submitted their joint comments on China's draft Anti-Monopoly Guidelines on Abuse of Intellectual Property Rights. The comments noted that the proposed framework in China with respect to intellectual property largely mirror the US approach, and encouraged even more coalescence. In particular, the ABA noted its approval that China is proposing to adopt the same analysis for intellectual property as it does for other forms of property, with a focus on the impact on actual and potential competition.50
In January 2017, the FTC filed a complaint against Qualcomm alleging that the company, the world's largest supplier of baseband processors for cellular devices, violated the Federal Trade Commission Act by, among other things, requiring its customers to pay royalties under a licence agreement with Qualcomm before Qualcomm would agree to sell processors to device manufacturers (known as the ‘no licence, no chips' policy), refusing to license SEPs to its competitors, and requiring Apple to agree that it would exclusively source processors from Qualcomm in exchange for reduced royalties.51 The complaint has since spurred numerous follow-on suits against Qualcomm from Samsung, Intel and others.
In the year ahead, we look forward to continued development of the law at the intersection of antitrust and IP, either through agency guidance and litigation, private litigation or both.
1 Garrard Beeney and Renata Hesse are partners at Sullivan & Cromwell LLP. The authors wish to acknowledge the valuable contribution to this chapter by Franklin Liu.
2 Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); Antitrust Guidelines for the Licensing of Intellectual Property Section 1.0, Dept. of Justice and Fed. Trade Commission (2017), available at www.justice.gov/atr/IPguidelines/download.
3 Antitrust Guidelines for the Licensing of Intellectual Property Section 2.1, Dept. of Justice and Fed. Trade Commission (2017), available at www.justice.gov/atr/IPguidelines/download.
4 The Antitrust Laws, Fed. Trade Commission, www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.
5 Sherman Act, 15 U.S.C. Sections 1-2.
6 Clayton Act, 15 U.S.C. Section 18.
7 Federal Trade Commission Act (the FTC Act), 15 U.S.C. Section 45.
8 The Enforcers, Fed. Trade Commission, www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/enforcers.
9 DOJ and FTC Issue Updated Antitrust Guidelines for the Licensing of Intellectual Property, Dept. of Justice, www.justice.gov/opa/pr/doj-and-ftc-issue-updated-antitrust-guidelines-licensing
10 Antitrust Guidelines for the Licensing of Intellectual Property, Dept. of Justice and Fed. Trade Commission (2017) at 2, available at www.justice.gov/atr/IPguidelines/download; see Illinois Tool Works v. Independent Ink, Inc., 547 U.S. 28, 45-46 (2006).
11 FTC and DOJ Seek Views on Proposed Update of the Antitrust Guidelines for Licensing of Intellectual Property, Fed. Trade Commission, www.ftc.gov/news-events/press-releases/2016/08/ftc-doj-seek
12 Statement of the Department of Justice on the Closing of the Antitrust Division's Review of the ASCAP and BMI Consent Decrees, Dept. of Justice, 4 August 2016, www.justice.gov/atr/file/882101/download.
15 Patent Assertion Entity Activity: An FTC Study, Fed. Trade Commission, October 2016, available at
16 Id. at 3.
17 Id. at 3-4.
18 Id. at 3.
19 Patent Assertion Entity Activity: An FTC Study at 4.
20 Id. at 9.
21 Id. at 9-13.
22 35 U.S.C. Section 299.
23 Antitrust Guidelines for the Licensing of Intellectual Property Section 2.3, Dept. of Justice and Fed. Trade Commission (2017), available at www.justice.gov/atr/IPguidelines/download.
24 United States v. Paramount Pictures, 334 U.S. 131, 144 (1948).
25 Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407-08 (2004).
26 Antitrust Guidelines for the Licensing of Intellectual Property, Dept. of Justice and Fed. Trade Commission (2017), available at www.justice.gov/atr/IPguidelines/download.
27 Id. at Section 3.1.
28 Id. at Section 3.4.
29 Id. at Section 5.2, see Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).
30 Antitrust Guidelines for the Licensing of Intellectual Property at Section 4.3.
31 Reflections on the Role of Competition Agencies When Patents Become Essential, Assistant Attorney General Bill Baer, 11 September 2015, 19th Annual International Bar Association Competition Conference, available at www.justice.gov/opa/speech/assistant-attorney-general-bill-baer-delivers-remarks
32 Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014).
34 Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007).
35 Supra note 31.
36 Commonw. Sci. and Indus. Research Organisation v. Cisco Sys., Inc., 809 F.3d 1295 (Fed Cir. 2015).
39 Ericsson v. D-Link, 773 F.3d 1201, 1234 (Fed. Cir. 2014).
40 Clayton Act, 15 U.S.C. Section 18.
41 15 U.S.C. Section 18a.
42 Antitrust Guidelines for the Licensing of Intellectual Property at Section 5.7.
43 FTC Consent Order Settles Charges that Whole Foods Acquisition of Rival Wild Oats was Anticompetitive, Fed. Trade Commission, 6 March 2009, www.ftc.gov/news-events/press-releases/2009/03/ftc-consent-order-settles-charges-whole-foods-acquisition-rival.
44 Justice Department Requires Anheuser-Busch InBev to Divest Stake in MillerCoors and Alter Beer Distributor Practices as Part of SABMiller Acquisition, 20 July 2016, www.justice.gov/opa/pr/justice
45 See Apotex Inc. v. Acorda Therapeutics, Inc., 823 F.3d 51(2d Cir. 2016).
46 FTC Sues Endo Pharmaceutical Inc. and Others for Illegally Blocking Lower-Cost Generic Versions of the Branded Drugs Opana ER and Lidoderm, Federal Trade Commission Bureau of Competition, 31 March 2016, www.ftc.gov/news-events/press-releases/2016/03/ftc-sues-endo-pharmaceuticals-inc
49 Enforcement Perspectives on the Noerr-Pennington Doctrine: An FTC Staff Report, Fed. Trade Commission (2006), available at www.ftc.gov/sites/default/files/documents/reports/ftc-staff-report-concerning-enforcement-perspectives-noerr-pennington-doctrine/p013518enfperspectnoerr-penningtondoctrine.pdf.
50 Comments of the American Bar Association Sections of Antitrust Law, Intellectual Property Law, and International Law on the Draft Anti-Monopoly Guidelines on Abuse of Intellectual Property Rights of the People's Republic of China (20 April 2017), available at www.americanbar.org/content/dam/aba/administrative/antitrust_law/at_comments_salsipsil_20170420.authcheckdam.pdf.
51 Complaint, FTC v. Qualcomm Inc., No. 5:17-cv-00220 (N.D. Cal. 17 January 2017).