Intersection of Intellectual Property and Antitrust: Where Do We Go From Here

"We’re bringing cases and that obviously indicates that we feel there are some areas where there are real problems, where we see abuse of intellectual property regimes." Federal Trade Commissioner Mozelle Thompson, July 14, 2002.

Intellectual property has entered an era in which concerns over monopolistic behavior and assertions that intellectual property protections are anticompetitive have, once again, come to the foreground. All types of protection, such as securing a patent on an invention or a copyright on a piece of music, limit or preclude competition for a certain period of time. The role of antitrust law and the extent to which it can regulate the use of IP presents an interesting and somewhat unpredictable question, particularly since protection of IP is critical to innovation.

IP protection and antitrust are both fundamental policies in the legal structure of the United States. Finding a balance between these two regimes can be a daunting task and a satisfactory balance has never been struck. The economy cannot thrive and diversify if the power to control ideas and products is used to inhibit competition unnecessarily. Yet it is essential to protect competition from excesses that can from time to time emerge through improper use of IP rights.

This article will discuss the intersection between antitrust and IP. It will further focus on the Federal Trade Commission and Department of Justice hearings entitled, "Competition and Intellectual Property Law and Policy in the Knowledge Based Economy." In these hearings, the Commission and the DOJ asked experts in antitrust and IP to express their views in an effort to educate the government on the issues affecting antitrust and IP policy in the 21st century. The antitrust agencie's goal is to once again try to determine the proper balance between these fundamental legal regimes.

Patent "misuse" - the exercise of the power conferred by the legal monopoly of a patent to affect competition improperly - has fuelled much of the development of antitrust law in this complicated area. Legal monopoly became confused with economic monopoly and populist notions substituted for rational analysis. Thus, by the early 1940s, courts were generally unsympathetic to patent owners and enforced the antitrust laws at the expense of IP protection.

Simplistic antitrust enforcement led to the Patent Act of 1952, which made clear that certain acts, such as authorizing another to perform acts that without consent would constitute infringement or seeking to enforce patent rights against infringement, did not constitute patent misuse. That statutory clarification struck a new balance for only a short period. By the 1960s, new simplistic antitrust theories had come into use that served once again to constrict the rights of IP owners.

As a part of this enforcement regime, the DOJ developed what has become well known as the ‘Nine No-No’s." These nine guidelines viewed the following IP arrangement,s as illegal per se:

(1) tying arrangements of unpatented materials,

(2) tying arrangements of future license requirements,

(3) restricting the resale of a patented material,

(4) restricting a license’s powers over unpatented materials,

(5) agreements where the patentee must gain a licensee’s consent to
enter future license agreements with others,

(6) mandatory packaging license,

(7) royalties based on unpatented materials,

(8) restricting licensee’s sale of product made using a patented
process, and

(9) price-fixing.

The Nine No-No’s were a high point of aggressive and often mindless antitrust enforcement in the IP arena.

By the late 1970s, the pendulum began to swing again. In Berkey Photo v. Eastman Kodak, Kodak was hit with a $87,091,309.47 jury verdict for, among other things, allegedly misusing its monopoly power, causing Berkey Photo to lose sales in the camera and photofinishing markets. A large part of the plaintiff’s case centered around its claim that Kodak, as a monopolist by virtue of IP, was required to predisclose information regarding its technological processes to competitors. Kodak appealed the jury verdict, which the second Circuit reversed and remanded to the lower court for further review and determination. With respect to the predisclosure issue, the second Circuit held that Kodak had no duty to predisclose information about its system to competing camera manufacturers. Recognizing a right to maintain confidential innovative ideas and thoughts, the court acknowledged that a business typically keeps its innovations secret from competitors and emphasized that success achieved through "the process of innovation" is something that is clearly tolerated by the antitrust laws. Further indication of judicial recognition of an individual’s IP rights was reflected in the Supreme Court’s 1980 decision in Dawson Chemical v. Rhom & Haas Co. There, the Court recognized a patent holder’s right to refuse to grant a license to a competitor, holding that such refusal did not constitute patent misuse or an antitrust violation.

The Appeals Court for the Federal Circuit, created in 1982 to hear all patent appeals, promoted this evolutionary swing. The Federal Circuit was cognizant of the necessity to enforce antitrust laws while still furthering innovation through the protection of IP rights. Refusing to adopt the claim that mere fraudulent procurement of a patent, without any proof of intent, should be classified as a per se violation of the antitrust laws, the Federal Circuit in Am. Hoist & Derrick Co. v. Sowa & Sons, Inc. held that a showing of specific intent to defraud the patent office is necessary to establish a possible violation of §2 of the Sherman Act. This would necessarily require the moving party to set forth sufficient facts to satisfy its burden of proving a §2 violation.

Congress continued this so-called IP protection reform by passing the Patent Misuse Reform Act in 1988. 35 U.S.C. §§271(d){4),(5). Subsections (4) and (5) specifically provide that a patent owner’s refusal to license or use any rights to the patent (§271(d)(4)) or a patent owners conditioning the license of any rights to the patent on the acquisition of a license to rights in another patent, with minor exceptions (§271(d)(5)), shall not constitute "misuse" of the patent right. These provisions were intended to, and did, clearly make it more difficult to invoke "misuse" as the basis of an antitrust violation. The 1990s also saw the Department of Justice issue new Antitrust Guidelines for the Licensing of IP, which are widely considered to be far more deferential to IP rights than the DOJ’s 1970s "nine no-no’s".

Since 1995, the Commission and DOJ have pursued several claims involving the interplay between antitrust and IP, ranging from alleged price-fixing among patent holders to alleged anti-competitive settlements of infringement litigation. However, during that time, no one case has received greater attention that U.S. v. Microsoft, which has single-handedly begun another balance change.

Microsoft is widely known for creating a user-friendly operating system that quickly became the market leader in home and business technology. It is Microsoft’s tough business practices in the operating system market that have caused the government to pay close attention to how Microsoft conducts business.

Government oversight of Microsoft dates as far back as 1990; the interested agency at that time was not the DOJ but instead the Federal Trade Commission. During the FTC investigation, Microsoft competitors Sun, Lotus, Novell, Borland, Taligent, and Wordperfect all testified for the government about ways in which Microsoft’s business practices allegedly violated the antitrust laws. Solicited testimony highlighting these alleged anti-competitive practices included claims of exclusive dealing, predatory pricing, tying schemes, predatory disparagement of competitors, exercise of monopolistic leverage, predatory pre-announcement of products, and discriminatory access to information about operating systems features. Despite this testimony, the FTC deadlocked on whether or not to bring a case. The DOJ then unexpectedly decided to step in and continue the antitrust investigation against Microsoft.

In 1995 Microsoft agreed to a consent decree covering a capsule of the allegations initially asserted against Microsoft. Specifically, Microsoft was precluded from imposing licenses longer than one year on computer vendors or OEMs but could still renew annual agreements (with the same or different terms) for an unlimited number of years; and was precluded from imposing certain non-disclosure obligations that lasted more than one year; was precluded from continuing its practice of requiring computer vendors to pay a license fee for every PC shipped that contains a particular microprocessor. The consent decree also provided for a parallel settlement with the European Commission.

The DOJ declared a victory with the consent decree. But public response, particularly from Microsoft’s competitors, was that Microsoft had dodged a legal bullet by settling the matter short of litigation and that the terms of the consent decree were at most a minimal penalty that would have little effect on Microsoft’s business.

In 1998, the DOJ renewed its attack on Microsoft, claiming that Microsoft violated the Sherman Act by:

(1) maintaining a monopoly in the market for Intel-compatible PC
operating systems,

(2) attempting to gain a monopoly over internet browsers, and

(3) illegally tying the Windows operating system with its
Internet Explorer.

In a much publicized and controversial decision, the district court found in favor of the government and ordered Microsoft to split its company into separate operating systems and applications businesses. Microsoft appealed and remained steadfast in its efforts to defend its IP rights. In particular, the company vigorously defended its right to improve the functionality of its operating system by enhancing its features – specifically to bundle its Internet Explorer web-browsing software with its popular Windows operating system. The D.C. Circuit agreed and partially reversed the district court. The court of appeals specifically held that Microsoft did not violate the antitrust laws and was within its rights to incorporate its Internet browser into the operating system rather than price it separately. Microsoft, however, was not completely vindicated. The court of appeals did find Microsoft’s marketing strategy of negotiating exclusive contracts with internet service providers to violate the Sherman Act. Microsoft’s business practice had been to insist on exclusive contracts with providers, which resulted in exclusive deals with fourteen out of fifteen leading Internet service providers. The agreements prevented each provider from offering other competing browsers. With its mixed findings, the appellate court vacated the district court’s divesture order and remanded the case for further review to determine a proper remedy.

Enduring many years of government oversight, Microsoft has maintained to this day its strong presence in computer operating systems and applications worldwide. The DOJ’s vigorous pursuit of Microsoft sent a strong message about its view on the intersection between IP and antitrust enforcement. It is clear that antitrust enforcers intend to put limits on the extent to which IP rights can be used to enhance market position. That new-found aggressiveness is causing another shift in the pendulum.

Some believe that there is an inherent conflict between antitrust and IP and that antitrust should take a back seat to innovation-protection. Others view the pendulum as having swung too far toward protection and that competition-enforcement must take predominance.

On November 15, 2001, Federal Trade Commission Chairman Timothy J. Muris announced that the Commission and the Department of Justice intended to host public hearings designed to develop a better understanding of this intersection between antitrust and IP. The hearings were focused on the implications of competition and patent law and policy for innovation and other aspects of consumer welfare.

The balance between the IP and antitrust laws has never been more important considering the significant increase in issued patents. The number of patents issued annually has increased substantially, jumping from 66,0110 in 1980 to 175,000 in 2000. Other points of interest, in addition to coming to terms with the increase in patents issued, are the scope and breadth of patents, which some say are overbroad. If overbroad, then some allege that innovation could be inhibited rather than encouraged since persons would be less likely to explore areas that may be covered by an overbroad patent. Others contend that broad patents are critical to encourage innovators to conduct high-risk research and break through into entirely new fields. Refusals to deal and the role of the Federal Circuit are also topics that Chairman Muris views as important.

The hearings were intended to receive valuable input from business, consumer, and government representatives; the antitrust and IP bars; economists; and academics. While the results of the hearing are not binding on the Commission or DOJ, Commissioner Muris notes that the Commission has conducted and relied on such important hearings in the past to improve its understanding of these issues.

On February 6, 2002, Charles James, the Assistant Attorney General of the Antitrust Division of the U.S. Department of Justice, at the time, echoed Chairman Muris’ views in his comments commemorating the hearings' opening day. James acknowledged the increased recognition on the part of antitrust enforcers that antitrust and IP share the common goal of promoting competition. Intellectual property provides certain incentives to innovate by eliminating imitation and unauthorized use for a proscribed time period, says James. Antitrust law promotes competition by prohibiting certain conduct by market participants that unreasonably constrains the competitive process. Importantly, James recognizes the significance of protecting ideas and encouraging use and disclosure of ideas through patents, and that IP is truly the "engine driving economic growth and consumer satisfaction." Accordingly, the Antitrust Division must be particularly careful when reviewing the competitive implications of conduct involving IP to ensure the maintenance of proper incentives for innovation and creativity "on which our national economy depends."

Recognizing that antitrust law must be interpreted to promote rather than limit an individual’s IP rights is not familiar territory for the Antitrust Division. Generally speaking, the Division has in the past been mainly concerned with vigorously enforcing the antitrust laws, with secondary considerations being just that - secondary. The joint hearings appear extremely important and could affect the Antitrust Division and the Commission’s views of future investigations involving such issues as licensing practices. Companies should be aware of these hearings. The Joint DOJ-FTC hearings consisted of several multi-day hearings addressing a broad range of issues, including trends and patent law analysis, jurisdiction, choice of law, and competition policy perspectives. Up-to-date information on the hearings can be found at the DOJ website at http://www.usdoj.gov/ or the FTC website at http://www.ftc.gov/.

It is clear that the struggle for primacy between antitrust and IP will continue for as long as society values both. Antitrust and IP are both important to a market economy. They are necessary for innovation to occur. And, as history dictates, the balance has shifted between competition and protection. The joint DOJ/FTC hearings indicate that government antitrust enforcers recognize the importance of IP policy in the 21st century and that the government wants to make sure it understands these underlying policies before enforcing competition at the expense of IP rights. This seems particularly important since, with the increase of patents and IP in general, protecting competition appears on the ascendancy once again.

This 2002 article is reprinted from the publication "Building and Enforcing Intellectual Property Value: An International Guide For The Boardroom 2003."

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