CHAPTER IV. INTELLECTUAL PROPERTY AND COMPETITION LAWS

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1 CHAPTER IV. INTELLECTUAL PROPERTY AND COMPETITION LAWS Intellectual property (IP) law poses serious challenges for antitrust policy. Competition law undermines the concept of IP law. This is because IP laws differ from competition laws in both, their goals and function. IP laws are designed to create exclusive rights that sometimes rise to the level of monopolies in order to encourage innovation and creativity. 1 The main function of IP law is to assign and defend property rights that might have economic value. Intellectual property rights (IPRs) can be used to prevent competition. They may give undertakings the power to price goods and technology above prevailing market rates. Competition laws are designed to foster competition and to prevent the formation of monopolies. The main function of competition law is to regulate the use of IPRs when these rights are sources of market power. 2 A traditional antitrust approach might condemn the exercise of market power (in some circumstances the exercise of IPRs) that may result in a more monopolistic or oligopolistic market structure. Does the exercise of IPRs necessarily violate competition laws? To what extent can IP law doctrines coexist with the antitrust policies? 1. History of the Relationship: U.S. Experience IP and antitrust law doctrines have significantly evolved over time. In the U.S. the relationship between IP and competition law should be understood in three periods: 1) the early years after passage of the Sherman Act in 1890; 2) the period from 1912 to the mid-1970s; and 3) the modern period starting with the 1995 U.S. Department of Justice and the Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property. In the first twenty years after the enactment of the Sherman Act in 1890, the courts tended to resolve disputes in favor of the IPRs holders. IPRs were understood as private property and monopoly rights. This view is illustrated by the Supreme Court s 1 Gifford D. J., The Antitrust/Intellectual Property Interface: An Emerging Solution to an Intractable Problem, 31 Hofstra Law Review 365 (2002). 2 Regibeau P. and Rockett K., The Relationship Between Intellectual Property Law and Competition Law: An Economic Approach, University of Essex and CEPR (2004)

2 decision in E. Bement & Sons v. National Harrow Co. (1902), a case that arose from a patent pooling arrangement. 3 E. Bement & Sons v. National Harrow Co. (1902). Manufacturers of floatspring tooth harrows assigned all of their spring tooth harrow patents to the National Harrow Company and obtained a license to make, use, and sell harrows made with patents of the National Harrow. Agreement included obligations of pool members to adhere to uniform price schedules for the sale of all products manufactured under the National Harrow license. The National Harrow sued Bement, one of the pool members, for selling below the scheduled prices. Bement argued that the pooling agreement violates the Sherman Act. The Supreme Court disagreed and ruled in favor of the National Harrow, explaining that [T]he general rule is absolute freedom in the use or sale of rights under the patent laws of the United States. Beginning with the Bathtub (1912) 4 and the Motion Picture Patent (1917) 5 cases, the Supreme Court recognized that IPRs are subject to the general law, including provisions of the Sherman Act. Since then until the mid-1970s, there was a perceived tension between these two bodies of law. 6 Antirust and IP law were understood as separate spheres of law. There was a presumption that the ownership of IP confers upon the IP holder a monopoly which was understood to be the purpose of IP law. The separate spheres model may be illustrated by the following leading cases: International Salt Co. v. United States (1947) 7 and United States v. Line Material Co. (1948) 8. In International Salt, the Supreme Court stated that International Salt had stepped outside the protected sphere when it attempted to extend its power to salt and salt tablets: The appellant s patents confer a limited monopoly of the invention they reward. From them appellant derives a right to restrain others from making, 3 E. Bement & Sons v. National Harrow Co., 186 U.S. 70 (1902). 4 Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1912). 5 Motion Picture Patents Co. v. Universal Film Mfg. Co. 243 U.S. 502, 513 (1917). 6 Tom W. K. and Newberg J. A., Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 Antitrust Law Journal 170 (1997). 7 International Salt Co. v. United States, 332 U.S. 392 (1947). Northern Pacific Railway v. United States, 356 U.S. 1 (1958). 8 United States v. Line Material Co., 333 U.S. 287 (1948)

3 vending or using the patented machines. But the patents confer no right to restrain use of, or trade in, unpatented salt. By contracting to close this market for salt against competition, International has engaged in a restraint of trade for which its patents afford no immunity from the antitrust laws. In United States v. Line Material Co., the issue was whether the patent laws provided defendants with the immunity from the Sherman Act. The Court ruled that there was no such immunity: The possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly. In United States v. Line Material Co., the Supreme Court reviewed an arrangement between Line Material Company and Southern States Equipment Corporation. Two patent owners entered into a cross-licensing agreement. They agreed to sublicense their combined patents to several licensees and to fix minimum price levels for the sale of products made with their patents. The Court held that the parties violated the Sherman Act by engaging in price fixing. The model of separate spheres was substantially eroded in the 1970s by a number of scholars whose works influenced the 1995 Antitrust Guidelines for the Licensing of Intellectual Property. In his book Patent & Antirust Law: a Legal and Economic Appraisal Professor W. Bowman disagreed that IP and antirust laws were in tension: Antitrust law and patent law are frequently viewed as standing in diametric opposition. How can there be compatibility between antitrust law, which promotes competition, and patent law, which promotes monopoly? In terms of the economic goals sought, the supposed opposition between these laws is lacking. Both antitrust law and patent law have a common central economic goal: to maximize wealth by producing what consumers want at the lowest cost. 9 This opinion was reflected in court decisions in the 1980s and 1990s. In Atari Games Corp. v. Nintendo of Am., Inc., the Court ruled: 9 Bowman W. S., Patent & Antirust Law: A Legal and Economic Appraisal, U. Chi. Press (1973)

4 The aims and objectives of patent and antitrust law may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition. 10 In 1995, the U.S. Department of Justice and the Federal Trade Commission issued Antitrust Guidelines for the Licensing of Intellectual Property (Guidelines) which stated: The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare. The intellectual property laws provide incentives for innovation and its dissemination and commercialization by establishing enforceable property rights for the creators of new and useful products, more efficient processes, and original works of expression The antitrust laws promote innovation and consumer welfare by prohibiting certain actions that may harm competition with respect to either existing or new ways of serving consumers. The Guidelines established the following three principles: 1) For antitrust purposes, IP is essentially comparable to any other form of property. 2) The antitrust enforcement agencies will not presume the existence of market power from the mere possession of IPRs. 3) IP licensing allows firms to combine complementary factors of production and is generally procompetitive. According to the Guidelines, for antitrust law to be violated, there must be an anticompetitive effect determined depending on the economic context in which it occurs. The Guidelines recognize that cross-licensing and pooling arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. Thus, the Guidelines established that the same general antitrust principles must be applied to conduct involving IP that they apply to conduct involving any other form of tangible or intangible property. At the same time IP has important characteristics which should be taken into account by standard antitrust analysis. Since the beginning of the XXth century, scholars and practitioners have actively discussed the relationship between the IP and antitrust laws. Many researchers are 10 Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990)

5 seeking to reconcile IP and antitrust law by focusing on the core IPRs and examining their effect on antitrust policies. 11 These academic inquires focus upon conflicts between patent and antitrust law. In 1984, L. Kaplow developed a cost and benefit approach to the patent-antitrust interface. He argues that restrictive agreements or other behavior should be subject to antitrust condemnation depending upon the ratio of patentee reward to the social cost of the restriction. If the ratio is sufficiently high, the practice should be upheld on the rationale that the patent law goals predominate. If the ratio is very low, then the practice should be condemned because in those situations antitrust goals predominate over patent goals. Professor M. Patterson has illustrated his approach to the relationship between IP and antitrust laws by distinguishing between the invention protected by patent law and the product in which the invention is embodied. Patterson agrees that patentee must have exclusive rights to make, use and sell the patented invention. However, he argues that from the standpoint of antitrust policy the patentee should be deprived of exclusive rights over the product in which the invention is embodied. 2. Licensing Arrangements IP licensing arrangements are typically welfare-enhancing and procompetitive. Nevertheless, antitrust concerns may arise. Licensing arrangements raise concerns under the antitrust laws if they are likely to affect adversely the prices, quantities, qualities, or varieties of goods and services either currently or potentially available. The competitive effects of licensing arrangements often can be adequately assessed with the relevant markets for the goods affected by the arrangements. Analysis may require the delineation of goods markets and, in some cases, markets for technology or markets for research and development. 12 For goods markets affected by the licensing arrangement, the authorized organs may approach the delineation of relevant market and the measurement of market share 11 For discussions of the relationships between IP and antitrust laws, see Kaplow L., The Patent-Antitrust Intersection: A Reappraisal, 97 Harvard Law Review (1984); McGowan D., Networks and Intention in Antitrust and Intellectual Property Law, 24 Journal of Corporate Law 485 (1999); Patterson M. R., When Is Property Intellectual? The Leveraging Problem, 73 S. California Law Review 1133 (2000). 12 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep (CCH), 3.2 (1995)

6 in the IP area. Technology markets consist of the IP that is licensed and its close substitutes (technologies or goods that are close enough substitutes significantly to constrain the exercise of market power with respect to the IP that is licensed). A licensing arrangement may affect the development of goods that do not yet exist and new or improved goods or processes in geographic markets where there is no actual or likely potential competition in the relevant goods. Thus, competition authorities may analyze how the licensing agreement adversely affects competition to develop new or improved goods or processes. Such an impact may be estimated as a separate competitive effect in relevant goods or technology markets, or in a separate innovation market. An innovation market consists of the research and development directed to particular new or improved goods or processes, and the close substitutes for that research and development. 13 The tension between IPRs and competition law is illustrated in a number of cases where dominant undertakings refuse to grant a license of its IPRs. Such refusal may be assessed by competition authorities in a manner consistent with the policy on vertical restraints. In the EU, for example, a refusal to license IPRs to a downstream competitor would be deemed unlawful if the patent holder has significant market power in both the upstream and downstream markets. As a remedy for an abuse of dominant position in area of IPRs, the compulsory licensing has emerged in the U.S. and the European case law. In Europe it has developed in the context of Article 82 of the EC Treaty (now Article 102 TFEU) and started from the case of Volvo (AB) v. Erik Veng (1989). 14 In Volvo (AB) v. Erik Veng, Volvo had alleged that the importation and sale in the UK by Veng of front wing components for Volvo cars infringed Volvo s UK registered design. Defendant argued that the plaintiff was abusing its dominant position on the spare parts markets by refusing to grant Veng a license to permit defendant to sell the components. In Volvo the European Court held that any obligation imposed by competition law on the owner of IPRs to grant a license would take away the very substance of the exclusive monopoly right. It was ruled that if a dominant company owns IPRs which 13 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep (CCH), (1995). 14 Case 238/87 Volvo (AB) v. Erik Veng [1989] 4 CMLR

7 enable it to prevent competitors from producing directly competing products, it was not an abuse under Article 82 (now Article 102 TFEU) for it to refuse to grant licenses. Dominant undertaking would only commit an abuse of a dominant position within the meaning of Article 82 by refusing to license their IPRs if they did something more than merely exercise those rights to prevent the monopoly given to them from being infringed. 15 In 1995, the European Court of Justice (ECJ) introduced the concept of the compulsory license in area of IPRs. In Magill, an Irish publisher Mr. Magill wished to create a new periodical containing the broadcasting timetables of all the various broadcasters in Ireland. The broadcasters held a copyright in their respective timetables, which they declined to license to the publisher. The publisher complained to the Commission, which ordered the broadcasters to grant the necessary licenses. The ECJ rejected the broadcasters' appeal, enunciating the conditions constituting "exceptional circumstances described above. The ECJ's 1995 Magill judgment found there were "exceptional circumstances" where a refusal to license prevented the appearance of a new product, there was customer demand for the new product, the refusal was not objectively justified, and the effect was to reserve to the right holder a "secondary market." Thus, the Court held that the exercise of an exclusive right such as copyright may in exceptional circumstances infringe Article 82. The 2004 judgment of the ECJ in IMS Health 16 marks an important new phase in the developing EU case law concerning the relation between competition law and IP. In IMS Health the ECJ established a rule determining whether Article 82 (now Article 102 TFEU) would apply when a competitor seeks to bring to market not just a new product but a different product that infringes the IPRs of a dominant undertaking. In the IMS Health case, a dominant undertaking in the pharmaceuticals database market, had refused to license its weaker competitor, NDC, to use a database in which copyright subsisted, despite an offer to pay valuable remuneration for the license. 15 Curley D., Innovation, Intellectual Property and Competition A Legal and Policy Perspective, Stockholm Network (2006). 16 Case C-418/01 IMS Health v. NDC Health [2004]

8 In this case, the ECJ stated that the refusal to grant a license for IPRs is abusive under Article 82 when three cumulative conditions are met: 1) The refusal prevents the emergence of a new product for which there is a potential consumer demand. 2) The refusal to license is not justified by objective considerations. 3) The refusal is such as to exclude any competition on a secondary market. 3. Horizontal and Vertical Restraints As with other property transfers, antitrust analysis of IP licensing arrangements examines whether the relationship among the parties is primarily horizontal or vertical in nature, or whether it has aspects of both. IP licensing transactions typically have a vertical component meaning that they usually affect activities that are in a complementary relationship. Vertical restraints can have efficiency-enhancing characteristics. They do not necessarily eliminate competition. 17 Vertical restraint is harmful if it facilitates collusion among horizontal competitors or confers on a firm power over price by raising the costs of that firm s competitors. 18 Arrangements involving IP rights can also contain a horizontal component. The Guidelines define a horizontal relationship as one in which the parties would have been actual or likely potential competitors in a relevant market in the absence of the license. The existence of a horizontal relationship between a licensor and its licensees does not, in itself, indicate that the arrangement is anticompetitive. The identification of a horizontal element, as well as of the restrained competition, does not necessarily mean that a restraint on that competition is unlawful. A restraint might be justified if it is reasonably necessary in order to achieve efficiencies. Horizontal restraints are often evaluated under the rule of reason. Some restraints, however, may be treated under the per se rule (for example, horizontal price fixing, allocation of markets or customers, and certain group boycotts). 17 Landes W. and Posner R., Market Power in Antitrust Cases, 94 Harvard Law Review 937 (1981). 18 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property,

9 The arrangement in United States v. Arnold, Schwinn & Co. (1967) is an example of the vertical territorial restraint. 19 In United States v. Arnold, Schwinn & Co., Schwinn instructed his wholesale distributors to sell only to Schwinn franchisees in the specific territories. The Supreme Court held that these vertical territorial and customer restraints are beyond the power of the manufacturer to impose upon its vendees, and thus are violations of the Sherman Act. Interaction of vertical and horizontal elements in licensing arrangements may be illustrated by the Pilkington and General Electric cases described below. In the 1930s Pilkington, a British company, developed a process for making sheet glass by floating molten glass on a molten metal bath. It became the dominant technology for making sheet glass. Pilkington licensed its technology and gave its licensees exclusive sales territories. Sixty years later Pilkington s basic patents had long since expired, but the exclusive territories persisted. Although Pilkington still asserted trade secrets, most of the related know-how had become publicly known, so that Pilkington did not actually possess any IP rights of significant value. This arrangement was partially vertical. The license transferred a patented technology and associated know-how to licensees whose principal assets were complements, not substitutes (the licensees supplied compliments for the glass-making business such as manufacturing capacity, not substitute technologies competing with Pilkington s technology). However, the arrangement was not entirely vertical, since there were competitors in the glass-making business having no license from Pilkington. The arrangement was also partially horizontal because, even without the licensing, there would by now likely be competition among some or all of the firms using own glass technology or technology that was in the public domain. 20 Another case illustrating interaction of vertical and horizontal elements in licensing agreements is United States v. General Electric Company described below. 19 United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967). 20 Tom W. K. and Newberg J. A., Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 Antitrust Law Journal 170 (1997), at

10 United States v. General Electric Company. General Electric (GE) is the world s leading manufacturer of medical equipment, such as CT scanners, magnetic resonance imaging (MRI), and ultrasound machines. GE also serves and repairs medical imaging equipment. For that purpose it had developed advanced diagnostic software and licensed it to hospitals, so that they could maintain their imaging machines. Since 1988, the license for GE diagnostic software had required hospitals to agree that they would not compete with GE in servicing imaging machines at other hospitals. The Justice Department challenged the noncompete provision of the diagnostic software licenses. The hospitals did not compete with GE in the manufacture and sale of medical imaging equipment. Moreover, GE argued that it had lawfully chosen to license its IP rights for the software not to all who seek it, but only to customers who were not competitors to GE. The guidelines analysis, however, revealed that the challenged licensing agreement had significant horizontal elements. The main argument of the complaint of the Justice Department was that the non-compete provision in the GE diagnostic software license restricted not only competition in the service and repair of the medical imaging equipment to which the software relates, but competition in the service and repair of any medical imaging equipment. Thus, the restraint restricted horizontal competition. The Department also believed that [b]y reducing the number of high-quality, low-cost service providers, these [GE software licensing] agreements have raised the costs of purchasing and using imaging equipment manufactured by some GE competitors. 21 Guidelines agreed, saying that license restrictions with respect to one market may harm competition in another market by anticompetitively foreclosing access to, or significantly raising the price of, an important input. 22 The Justice Department argued that the noncompete provision of the GE software licensing arrangement is per se unlawful and is an unreasonable restraint of trade. 21 Complaint, United States v. General Elec. Co., CV No M-CCL, 6 Trade Reg. Rep. (CCH 1996). 22 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, at

11 4. Tying Arrangements In the U.S. earliest cases addressing patent tying agreements, after the Sherman Act was passed in 1890, the Supreme Court tended to favor the exclusionary statutory rights granted to patentees over the restraints imposed by antitrust law. The general rule was that patentees could legally impose any restrictions on the use of their patent. In Henry v. A. B. Dick Co. (1912), the Court s decision favored the owner of IP rights who established a tying arrangement. 23 In 1912, A.B. Dick Co. brought an action for the infringement of two patents covering a stencil-duplicating machine known as the Rotary Mimeograph. This machine was sold by the A.B. Dick Co. with the license restriction that it may be used only with the stencil paper, ink, and other supplies made by A.B. Dick Co. The defendant argued that the tying agreement was a misuse of the plaintiff s patent. The Court found that the patentee merely had chosen to take his profit through the sale of accessories rather than by charging a high purchase price for the mimeograph machines. A. B. Dick Co. won. Later, in Motion Picture Patents Co. v. Universal Film Manufacturing Co. (1917), the Supreme Court overruled its earlier holdings and explained that patent law granted only the exclusionary rights to the patented device and nothing more. 24 In Motion Picture Patents Co. v. Universal Film Manufacturing Co., the license agreement contained restrictions including the condition that the machines shall be used solely with the motion pictures of the patentee. The Court held that the restriction was invalid because the motion pictures were not any part of the invention of the patent and because it was an attempt to improperly extend the patent monopoly outside the scope of patent law. This trend away from absolute protection of the patentee in patent tying cases continued for many years with numerous cases holding that the patent privilege had been extended in violation of the Sherman Act (including International Salt Co. v. United States, United States v. Loew s 25 and United States v. Singer Mfg. Co. 26 ) 23 Henry v. A. B. Dick Co., 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645 (1912). 24 Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S., 502, 518 (1917). 25 United States v. Loew s, 371 U.S. 38 (1962). 26 United States v. Singer Mfg. Co., 374 U.S. 174 (1963)

12 In United States v. Loew s individual distributors of copyrighted films were held to have illegally conditioned the sale (license) of one copyrighted film on the sale of another, non-copyrighted, film. In United States v. Singer Mfg. Co. (1963), the Court held: [B]eyond the limited monopoly which is granted, the arrangements by which the patent is utilized are subject to the general law, and it is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly. By aggregating patents in one control, the holder of the patents cannot escape the prohibitions of the Sherman Act. That Act imposes strict limitations on the concerted activities in which patent owners may lawfully engage 27 Tying arrangements are usually considered as per se unlawful. However, judicial decisions have long interpreted that rule in ways that share some features with rule of reason analysis. Thus, the courts have required a showing of market power in order to establish a violation under the per se rule. In United States v. Jerrold Elecs. Corp. (1960) and Will v. Comprehensive Accounting Corp. (1985), the Court has been willing to consider justifications in defense of a tying arrangement and required proof of anticompetitive effect in the tied market. 28 In United States v. Jerrold Electronics Corp., the company, a pioneer in the community television antenna industry, both sold an antenna and required buyers to secure servicing only from the company. The Court approved, noting that without such tying the new product might fail and the market for it vanish. When antitrust law is applied to IP practices an important question to be answered is whether tying agreements fall within the scope of privileges granted by the IPRs holder s legal monopoly. The courts lack a clear method for resolving this inquiry. In 1997, in Image Technical Servs., Inc. v. Eastman Kodak Co. (1997), the Court held: 27 United States v. Singer Mfg. Co., 374 U.S. 174, (1963). 28 United States v. Jerrold Elecs. Corp., E.D. Pa, 187 F. Supp. 545 (1960). Will v. Comprehensive Accounting Corp., 776 F.2d 665, 674 (7 th Cir. 1985)

13 The relevant market for determining the patent or copyright grant is determined under patent or copyright law The relevant markets for antitrust purposes are determined by examining economic conditions At the border of intellectual property monopolies and antitrust markets lies a filed of dissonance yet to be harmonized by statute or the Supreme Court. 29 In 2005, the United States Court of Appeals for the Federal Circuit decided the case of Independent Ink, Inc. v. Illinois Tool Works, Inc. 30 Independent Ink alleged that Trident, Inc. engaged in illegal tying by conditioning the lease of Trident s patented inkjet technology on the additional sale of Trident ink products. Independent Ink, Inc. v. Illinois Tool Works, Inc. Defendant Trident used its patented ink technology to manufacture print heads. Trident licensed this technology to other printer manufacturers. In addition, Trident sold ink for use with its patented technology. Independent Ink also produced ink that could be used in Trident s print heads. Initially, Independent Ink filed a suit seeking a declaratory judgment of non-infringement and invalidity against Trident s patents. Later, it amended its complaint to allege that Trident was engaged in illegal tying and monopolization in violation of the Sherman Act. The district court granted summary judgment in favor of Trident on both claims. On appeal, the Court considered whether a plaintiff has the burden of proving that a defendant s patent confers market power in the tying product market. The Court held that Independent Ink failed to prove that Trident held the market power. Although tying arrangements may have anticompetitive effects, such arrangements can sometimes result in significant efficiencies and procompetitive benefits. Guidelines illustrate this with the example of package licensing (the licensing of multiple items of IP in a single license or in a group of related licenses). It may be a form of tying arrangement if the licensing of one product is conditioned upon the acceptance of a license of another, separate product. Under some circumstances, a package license can be efficiency enhancing: 29 Image Technical Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, (9 th Cir. 1997). 30 Independent Ink, Inc. v. Ill. Tool Works, Inc., 396 F.3d 1342, 1344 (Fed. Cir. 2005)

14 When multiple licenses are needed to use any single item of intellectual property, for example, a package license may promote such efficiencies Patent Pools and Cross-Licensing A patent pool is an agreement among patent owners to license a set of their patents to one another or third parties. From the economic perspective, cross licensing agreements are very similar to patent pools. A distinct feature of patent pools is the conditions of access that they set for nonmembers. For example, refusal to grant access to third parties on terms available to members may harm competition (if the pool members have sufficient monopoly power). Another antitrust practice may be illustrated by offering access to the whole set of patents in the pool (they are charged a single price) rather than to one needed. Some companies file patent applications primarily to be able to cross license the resulting patents. In the 1990 s, for example, in response to the patent infringement lawsuits of the U.S. competitors Taiwanese original design manufacturers, such as Hon Hai, rapidly increased their patent filings. Patent pools and cross-licensing agreements often arise as part of litigation settlements eliminating a huge amount of litigation expense for their parties. According to J. P. Choi, most patent pools are formed in the shadow of patent litigation as an attempt to settle disputes in regard to conflicting infringement claims and the validity of patents. 32 In general, courts favor such settlements. However, agreements to settle patent litigation are often subject to antitrust scrutiny. In order to distinguish between anticompetitive and procompetitive settlements, C. Shapiro proposes to rely a principle of consumer neutrality: an agreement will be deemed to be procompetitive if it leaves consumers at least as well off as they would have been had the parties seen the litigation to its bitter end. 33 One of the first patent pools was formed in 1856, by sewing machine manufacturers Grover, Baker, Singer, Wheeler, and Wilson. They met in Albany, New York, to pursue their suits accusing each other of patent infringements. A lawyer and 31 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, Choi J.P., Patent Pools and Cross-Licensing In the Shadow of Patent Litigation (2003), available at 33 Shapiro C., Antitrust Limits to Patent Settlements, 34 Rand Journal of Economics 2, (2003)

15 president of the Grover and Baker Company, Orlando B. Potter, proposed that, rather than sue their profits out of existence, they pool their patents. Another example of a patent pool was creation of the Manufacturers Aircraft Association in It was established as a result of recommendation of a committee formed by of Franklin D. Roosevelt due to the U.S. entrance into the World War I. Such a patent pool was needed because two major patent holders for airplanes, the Wright Company and the Curtiss Company, had effectively blocked the building of new airplanes. E. Bement & Sons v. National Harrow Co. and United States v. Line Material Co., which were mentioned earlier in this chapter, are famous cases that arose from a pooling arrangement and cross-licensing. 34 In E. Bement & Sons v. National Harrow Co. (1902), manufacturers of floatspring tooth harrows assigned all of their patents to the National Harrow Company, in exchange for shares of the company and a license to make, use, and sell harrows made with patents licensed back to the manufacturers by National Harrow. The pool grew quickly to 22 firms accounting for over 90 percent of all manufacturing and sales of float-spring tooth harrows in the United States. The contractual obligations of the pool members included requirements to adhere to uniform price schedules for the sale of all products manufactured under the National Harrow license and to use the harrow manufacturing technology it had assigned to the patent pool. In E. Bement & Sons v. National Harrow Co., the National Harrow sued one of the pool members, Bement, for selling below the scheduled prices in violation of the license. Bement argued that the pooling agreement is unenforceable because it violated the Sherman Act. The Supreme Court ruled in favor of the plaintiff. In United States v. Line Material Co. (1948), the Supreme Court reviewed a crosslicensing arrangement between Line Material Company and Southern States Equipment Corporation. 34 E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S.Ct. 747, 46 L.Ed (1902). United States v. Line Material Co., 333 U.S. 287, 68 S.Ct.550, 92 L.Ed. 701 (1948)

16 In United States v. Line Material Co. (1948). Line Material Co. patented mechanism that could not be used without infringing Southern s patent. To resolve this, two patent owners entered into a cross-licensing arrangement and agreed to sublicense their combined patents to several third parties licensees. Line, Southern, and the parties to the sublease arrangements agreed to minimum price levels for the sale of products made with the patents Line and Southern had cross-licensed. The Court held that a cross-licensing agreement contained price fixing. Exclusion from a pooling arrangement or cross-licensing among parties that collectively possess market power may harm competition. In Cf. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co. (1985), the Court held that exclusion of a competitor from a purchasing cooperative is not per se unlawful absent a showing market power. 35 With respect to this matter, the Guidelines state: Exclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless: (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. 36 Pooling arrangements may have anticompetitive effect if they deter or discourage participants from engaging in research and development (for example, by requiring members to grant licenses to each other for future technology at minimal cost). This may be illustrated by the cases United States v. Mfrs. Aircraft Ass n, Inc. and United States v. Automobile Mfrs. Ass n. The Guidelines recognize that cross-licensing and pooling arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. 37 Such combinations usually establish vertical relationships. The example of a pure vertical pooling arrangement is the following. Two undertakings each possess patents that block the other from using its respective technologies, and it is not possible for either undertaking to invent around the other s position or challenge its validity or 35 Cf. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985). 36 U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, Id

17 scope. In such a situation, a pool or cross-license that permits innovation is likely to be procompetitive. In assessing the antitrust implications of a pool or cross-licensing, it is vital to determine whether the technologies involved are substitutes or complements. Technologies are substitutes if they compete or may potentially compete with each other. Technologies are complement if using them jointly enables a firm to improve the quality of its product or lower its cost of production. If the relationship between firms IP is clearly complementary or blocking, then they are not in horizontal relationship in a technology or goods market. As a rule, the pooling arrangement or cross-licensing of complementary technologies should escape antitrust scrutiny (in the absence of specific, competitive concern). The opposite principle applies to substitute technologies: they should generally be considered with suspicion. If the items of IP are clearly substitutes, then restraints in connection with the pooling arrangement or cross-licensing are horizontal and must be closely scrutinized