Even after significant shocks to the "new economy", the creation of intellectual property remains an essential part of the U.S. market. Studies from as recently as two years ago indicate that the U.S. generated the most patents per capita in the world and conducted far more research and development than any other country. Given the key role of intellectual property, providing practical advice on intellectual property arrangements while steering clear of antitrust pitfalls remains an important and often challenging exercise.

This column is the first in a series that provides practical advice while examining the main points of convergence, divergence, and continuing uncertainty that exist at the intersection of intellectual property and antitrust law.

The tension between these two areas of the law is not surprising given their history. Congress, in establishing the patent system, was acting on its power to "promote the progress of science and the useful arts" through establishing legally sanctioned monopolies of limited duration. Antitrust, on the other hand, was based on a profound distrust of concentrations of economic power. Even with the modern recognition in antitrust law that a patent monopoly does not automatically equate to an antitrust monopoly, the underlying tension remains. Intellectual property law is specifically designed to limit some amount of competition, even at the risk of giving rise to actual monopolies. Antitrust law, on the other hand, focuses on preserving competition and leveling the competitive field, even at the risk of putting the actions of lawful monopolists under close scrutiny and possibly discouraging innovation.

Fortunately, intellectual property and antitrust are no longer poles apart. One needs to look no further than how far the United States Department of Justice has come from its 1970’s "Nine No No’s". Intellectual property arrangements on this list were deemed to be per se unlawful, rendering them automatically illegal without any consideration of their procompetitive effects. Per se invalidation is meant to be reserved for only the most clearly anticompetitive practices, while all others are judged under the "rule of reason." That test allows a defendant to show that a challenged arrangement’s procompetitive features outweigh any anticompetitive effects.

Among the types of arrangements treated as per se unlawful were:

  • Mandatory package licensing/patent pools
  • Tying of unpatented supplies
  • Compulsory royalty payments not reasonably related to the sales of the patented item
  • Mandatory grantbacks; and
  • A range of vertical restraints, including resale restrictions extending to purchasers of patented products and tie-outs (meaning restrictions on a licensee’s ability to sell products competitive with the patented product).

An address in January 2003 by R. Hewitt Pate, then the Acting Assistant Attorney General of the Antitrust Division of the Department of Justice, underscores how dramatically things have changed. As Mr. Pate stated, the "introduction of economic rigor into antitrust analysis in the late 1970’s and 1980’s led to the abandonment of almost all of these per se rules and to a more consistent inquiry into the likely competitive effects of certain conduct or business arrangements." An illustration of the shift was the changed treatment of patent pools. Because they are now understood to offer procompetitive benefits in many circumstances, (e.g., reducing transaction costs, removing different parties’ blocking positions, and lessening litigation expenses), they are typically analyzed under the role of reason.

The antitrust enforcers of the Federal Trade Commission and the Department of Justice have been a powerful force in the convergence of intellectual property and antitrust. Publication in April 1995 of the Joint FTC/DOJ Antitrust Guidelines for the Licensing of intellectual property was a major step in this direction. Among its key pronouncements, intellectual property was deemed to be "essentially comparable to any other form of property," there was no presumption that intellectual property gave rise to market power, and licensing was deemed to be generally procompetitive.

However, intellectual property and antitrust have not entirely converged. For instance, patent misuse, an intellectual property defense against claims of patent infringement, was heavily influenced by antitrust concepts before antitrust had become more grounded in economic theory. So, while antitrust law (even as it relates to intellectual property matters) has substantially progressed, patent misuse law is still drawing inspiration from outdated approaches. With patent misuse, any action deemed to extend the scope of a patent puts the enforcement of that patent at risk, at least temporarily, even if a parallel antitrust claim would not succeed.

In navigating the tricky ground between intellectual property and antitrust, it is clear that complications are not just a result of their different core goals. Even when the two doctrines attempt to effectively coexist, they sometimes do so in ways that can place the doctrines at odds. In the upcoming series, we’ll explore this arena and focus on intellectual property/antitrust topics as diverse as patent accumulation, exclusive license arrangements, Walker Process claims and patent misuse. Although the ultimate analysis for each differs, some common issues provide a useful analytical starting point for all:

  • Efficiency Rationale: Why is your company undertaking the particular transaction or licensing program? Do you have compelling justifications that will enable your company to compete more effectively? Are the justifications supported by the evidentiary record?

Assuming the conduct does not fall within one of the categories of conduct that is per se unlawful (e.g., price fixing, market allocation), it will be critical to explain and support the procompetitive rationale for the transaction.
  • The Relationship of the Contracting Parties: Does your company compete with the other party in the technology that is the subject of the transaction (not merely generally)?

As will be discussed further in subsequent articles, transactions between competing entities typically raise more concerns than transactions between vertically related entities. In most industries, companies that interact with one another alternatively wear the hats of customer and competitor, so understanding the precise relationship in the circumstances at hand is critical to performing an accurate risk assessment.
  • Market Power: What is the relative power and importance of the patents, products and technologies involved? Do viable competitive alternatives exist? If the product or technology is already on the market, what is its market share? If the product or technology is not on the market, are you aware of competitive R&D programs? How closely competitive are they, and how far along are they versus your program?

Absent a per se violation, low market shares typically mean lower risk. However, what at first blush might seem like an easy exercise frequently ends up being more complicated, with tough questions regarding market definition and the intensity of competition often emerging. Given the factual disputes common to this leg of the analysis, it is often hazardous to base an antitrust risk assessment solely on market definition and market share.
  • Practical Considerations: What do the key businesspeople’s documents indicate regarding the above issues? Have the antitrust agencies previously investigated the industry? What is the likely reaction of licensees, customers and competitors? Are they likely to sue over it? What are the policies and practices of the potential plaintiffs?

In order to precisely gauge the antitrust risk, it is important to understand what is reflected in the business documents surrounding the transaction or agreement. They will be front and center in any investigation or litigation. If the agencies have investigated the particular industry, they have expertise and a pre-existing investment of time and thus tend to track the industry even after their investigation closes. The reaction of industry participants sheds light on the likelihood that they would attempt to stir up a government investigation or sue on their own behalf, which would be less likely if those industry participants have comparable transactions or licensing programs that would be exposed in a government or court proceeding.

The intellectual property arena is fertile ground for antitrust claims. That is an unfortunate reality for companies trying to manage antitrust exposure. Such claims are fact intensive and typically will survive early dispositive motions. Moreover, at times it can be difficult to stay antitrust claims pending resolution of the intellectual property issues (more on this later). Risk management is further complicated by the fact that the legal boundaries of the intellectual property/antitrust interface are evolving in real time.

Although the antitrust risk cannot be fully eliminated, companies can take specific steps to mitigate exposure depending on the nature of the intellectual property transaction. Stay tuned for future articles.

Craig Waldman is a Partner and Francis M. Fryscak is a Special Counsel in the Antitrust & Trade Regulation practice group of Cooley Godward LLP in Palo Alto, California.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.