Patent Licensing in Connection with a Standard: Avoiding Antitrust Violations

Patent and Antitrust: Appreciating Their Similarities and Differences

Antitrust laws are designed to protect consumers' rights. The Department of Justice (“DOJ”), the Federal Trade Commission (“FTC”) and private parties may take legal action against businesses that gain an unfair business advantage through the use of a monopolistic market power or other agreements that unfairly restrain trade. In other words, antitrust laws deter unfair advantages gained by businesses due to monopolistic market power.

Patent laws, on the other hand, protect the owner of the patent rights. A patent owner has a cause of action against businesses that make, use, sell, offer to sell or import products or services covered by the patent. The purpose behind such protection, as set forth in the Constitution, is “to promote the Progress of Science and useful Arts.”

Despite the apparent conflict, both antitrust law and patent law complement one another in encouraging innovation, industry, and competition. On occasion, patent owners abuse their rights in the marketplace to such an extent that the antitrust laws are invoked to constrain the misconduct. One area where the intersection of the policies behind our patent and antitrust laws has become more complicated is in connection with standards setting organizations.

Antitrust Issues Involving Industry Standards

In this article, we use the term “standards setting organization” broadly to refer to any organization that is substantially open to participation by industry, with the purpose of encouraging interoperability of products or services through the promulgation of standards. While each standards organization has its own rules and regulations, virtually all have some form of intellectual property rights (“IPR”) obligations. Because there is industry collaboration and patents are involved, such organizations have fallen under the scrutiny of the DOJ and FTC. For example, at the Joint DOJ-FTC Hearings on Competition and Intellectual Property Law and Policy in Knowledge-Based Economy held in Feb. 2002, the Assistant Attorney General of the Antitrust Division of the DOJ identified the practice of requiring grantbacks, refusals to license a patent, and operations of standards setting organizations as topics of particular interest.

Standards Setting Organizations

Because standards often incorporate the patents of one or more companies, the only way for the standard to be successful is if the companies holding any IPR agree to license the their patents to those seeking to implement the standard. Recent events suggest members of these standards setting organizations should take steps to ensure that their IPR policy is clear and that their patent pooling arrangement requires full disclosure of relevant patents. An ambiguous patent disclosure policy could lead to expensive litigation between its members down the road. The recent example involving Rambus, Inc. is illustrated in the article by Jonathan Caplan in this issue of PS&M.

Ensuring an Unambiguous Patent Standards Policy

Unfortunately, not all standards setting organizations have unambiguous IPR policies. To avoid antitrust issues, companies involved in standards setting activity should review the standards setting body's patent disclosure policy in light of Rambus. For example, a standards body should mandate the disclosure of any ownership of patents relating to the standard-setting subject matter and the timing for such disclosure. This would ensure that all members are fully aware of the disclosing party's interests in the technology at hand, and minimize problems after a standard has been adopted. Without complete clarity in the standards setting organization's IPR policies, one runs the risk of having the patents involved in the standard being subjected to a fraud or antitrust claim.

Ensuring Licensing to All ' Not Refusing to Deal

As a general rule, a patent holder is allowed to unilaterally choose with whom it wants to conduct business when licensing patents and other intellectual property. However, once patents are involved in a standard, the company or companies owning such patents should be prepared to license such patents to those seeking to implement the standard. The reason is that antitrust laws may prohibit a company from unilaterally refusing to license its IPR where such a refusal results in the company securing or maintaining monopoly power. Since a standard may be viewed as encompassing a given market, refusing to deal, especially after participating in the standard setting process, has a high potential of arousing antitrust issues. Consequently, a company involved in a standards setting organization that has relevant IPR should be prepared to license such IPR to all comers.

Grantback Clauses

Even though a patent owner may meet its disclosure requirements to a standards organization, other activities in licensing may incur the wrath of antitrust laws. One such clause that is increasingly being seen in patent license agreements is a grantback to the licensor. A grantback is an arrangement in which a licensee agrees to extend to the licensor the right to use certain of the licensee's IPR, most often in the form of improvements to the licensed technology. There are two issues here: first, whether this type of arrangement is permissible at all, and second, whether it is permissible when the licensor's patent is relevant to a standard in which the licensor participated in the standards setting process.

Grantbacks do raise potential antitrust issues. An exclusive grantback arrangement may smell like an illegal tying arrangement to antitrust regulators, especially if the products covered in the grantback are not related to those of the original license. Generally, however, a nonexclusive grantback license is less likely to raise antitrust issues than the requirement of an exclusive grantback. Similarly, a grantback that is limited to any improvements the licensee may make to the licensed technology is much less likely to violate antitrust laws than one that is not so limited. The reason is that an exclusive grantback license is more likely to adversely affect competition, since requiring the licensee to share the improvement technology only with the licensor tends to reduce the licensee's incentive to invest in researching improvements.

Cross-Licensing and Patent-Pooling for Standards

It is not unusual for more than one company to have IPR related to a particular standard. At such times, companies may consider forming patent pools of the necessary technology (often called “essential patents”) for a particular industry standard. Although patent-pooling was at one time proscribed by antitrust regulators, it is now permissible due to its significant procompetitive benefits. For example, in approving the cross-licensing and pooling arrangements relating to the MPEG standard in 1997, and the DVD standards in 1998 and 1999, the DOJ stated that the following factors were indicative of allowable agreements: 1) the patents in the pool are valid and not expired; 2) there is no aggregation of competitive technologies and setting a single price for them; 3) the agreement did not disadvantage competitors in downstream product markets; and 4) there is no collusion among pool participants on downstream products. Nonexclusive cross-licensing and patent pooling arrangements are almost always permissible, because they allow the distribution of new technology, not only to the licensor, but to others as well, hence increasing competition in the marketplace.

However, if a pooling agreement grants an exclusive right to certain members, and those patents dominate the product market, then the pooling agreement may violate the Sherman Act. For example, antitrust regulators opposed the patent pooling arrangement between Summit and VISX, because these two companies owned the patents to the only FDA-approved method for laser surgery. This allowed Summit and VISX to charge a $250 fee per procedure performed with their equipment, hence reaping what the FDA charged was more than $30 million in ill-gotten profits in 1997. Generally, a union between the only two potential competitors in a given market is a red flag for antitrust regulators. However, as the number of competitors in the market increases, this becomes less of a concern to antitrust regulators.

One way to ensure that a patent pooling agreement does not violate antitrust laws is to involve only essential patents in the agreement. The DOJ has indicated that since essential patents have no substitutes, then pooling these patents together does not violate antitrust laws.

Conclusion

The discussion above is by no means exhaustive of the antitrust concerns involved in licensing patents related to standards. There are other activities that one should be concerned with in negotiating a patent or other intellectual property license where a standard is involved, and other issues related to disclosing IPR, licensing, grantbacks and patent pooling. The point is that a company should have a healthy respect for the antitrust laws, especially in connection with participation in a standards setting organization. Otherwise, a favorable patent position can be turned into a liability.

Patent and Antitrust: Appreciating Their Similarities and Differences

Antitrust laws are designed to protect consumers' rights. The Department of Justice (“DOJ”), the Federal Trade Commission (“FTC”) and private parties may take legal action against businesses that gain an unfair business advantage through the use of a monopolistic market power or other agreements that unfairly restrain trade. In other words, antitrust laws deter unfair advantages gained by businesses due to monopolistic market power.

Patent laws, on the other hand, protect the owner of the patent rights. A patent owner has a cause of action against businesses that make, use, sell, offer to sell or import products or services covered by the patent. The purpose behind such protection, as set forth in the Constitution, is “to promote the Progress of Science and useful Arts.”

Despite the apparent conflict, both antitrust law and patent law complement one another in encouraging innovation, industry, and competition. On occasion, patent owners abuse their rights in the marketplace to such an extent that the antitrust laws are invoked to constrain the misconduct. One area where the intersection of the policies behind our patent and antitrust laws has become more complicated is in connection with standards setting organizations.

Antitrust Issues Involving Industry Standards

In this article, we use the term “standards setting organization” broadly to refer to any organization that is substantially open to participation by industry, with the purpose of encouraging interoperability of products or services through the promulgation of standards. While each standards organization has its own rules and regulations, virtually all have some form of intellectual property rights (“IPR”) obligations. Because there is industry collaboration and patents are involved, such organizations have fallen under the scrutiny of the DOJ and FTC. For example, at the Joint DOJ-FTC Hearings on Competition and Intellectual Property Law and Policy in Knowledge-Based Economy held in Feb. 2002, the Assistant Attorney General of the Antitrust Division of the DOJ identified the practice of requiring grantbacks, refusals to license a patent, and operations of standards setting organizations as topics of particular interest.

Standards Setting Organizations

Because standards often incorporate the patents of one or more companies, the only way for the standard to be successful is if the companies holding any IPR agree to license the their patents to those seeking to implement the standard. Recent events suggest members of these standards setting organizations should take steps to ensure that their IPR policy is clear and that their patent pooling arrangement requires full disclosure of relevant patents. An ambiguous patent disclosure policy could lead to expensive litigation between its members down the road. The recent example involving Rambus, Inc. is illustrated in the article by Jonathan Caplan in this issue of PS&M.

Ensuring an Unambiguous Patent Standards Policy

Unfortunately, not all standards setting organizations have unambiguous IPR policies. To avoid antitrust issues, companies involved in standards setting activity should review the standards setting body's patent disclosure policy in light of Rambus. For example, a standards body should mandate the disclosure of any ownership of patents relating to the standard-setting subject matter and the timing for such disclosure. This would ensure that all members are fully aware of the disclosing party's interests in the technology at hand, and minimize problems after a standard has been adopted. Without complete clarity in the standards setting organization's IPR policies, one runs the risk of having the patents involved in the standard being subjected to a fraud or antitrust claim.

Ensuring Licensing to All ' Not Refusing to Deal

As a general rule, a patent holder is allowed to unilaterally choose with whom it wants to conduct business when licensing patents and other intellectual property. However, once patents are involved in a standard, the company or companies owning such patents should be prepared to license such patents to those seeking to implement the standard. The reason is that antitrust laws may prohibit a company from unilaterally refusing to license its IPR where such a refusal results in the company securing or maintaining monopoly power. Since a standard may be viewed as encompassing a given market, refusing to deal, especially after participating in the standard setting process, has a high potential of arousing antitrust issues. Consequently, a company involved in a standards setting organization that has relevant IPR should be prepared to license such IPR to all comers.

Grantback Clauses

Even though a patent owner may meet its disclosure requirements to a standards organization, other activities in licensing may incur the wrath of antitrust laws. One such clause that is increasingly being seen in patent license agreements is a grantback to the licensor. A grantback is an arrangement in which a licensee agrees to extend to the licensor the right to use certain of the licensee's IPR, most often in the form of improvements to the licensed technology. There are two issues here: first, whether this type of arrangement is permissible at all, and second, whether it is permissible when the licensor's patent is relevant to a standard in which the licensor participated in the standards setting process.

Grantbacks do raise potential antitrust issues. An exclusive grantback arrangement may smell like an illegal tying arrangement to antitrust regulators, especially if the products covered in the grantback are not related to those of the original license. Generally, however, a nonexclusive grantback license is less likely to raise antitrust issues than the requirement of an exclusive grantback. Similarly, a grantback that is limited to any improvements the licensee may make to the licensed technology is much less likely to violate antitrust laws than one that is not so limited. The reason is that an exclusive grantback license is more likely to adversely affect competition, since requiring the licensee to share the improvement technology only with the licensor tends to reduce the licensee's incentive to invest in researching improvements.

Cross-Licensing and Patent-Pooling for Standards

It is not unusual for more than one company to have IPR related to a particular standard. At such times, companies may consider forming patent pools of the necessary technology (often called “essential patents”) for a particular industry standard. Although patent-pooling was at one time proscribed by antitrust regulators, it is now permissible due to its significant procompetitive benefits. For example, in approving the cross-licensing and pooling arrangements relating to the MPEG standard in 1997, and the DVD standards in 1998 and 1999, the DOJ stated that the following factors were indicative of allowable agreements: 1) the patents in the pool are valid and not expired; 2) there is no aggregation of competitive technologies and setting a single price for them; 3) the agreement did not disadvantage competitors in downstream product markets; and 4) there is no collusion among pool participants on downstream products. Nonexclusive cross-licensing and patent pooling arrangements are almost always permissible, because they allow the distribution of new technology, not only to the licensor, but to others as well, hence increasing competition in the marketplace.

However, if a pooling agreement grants an exclusive right to certain members, and those patents dominate the product market, then the pooling agreement may violate the Sherman Act. For example, antitrust regulators opposed the patent pooling arrangement between Summit and VISX, because these two companies owned the patents to the only FDA-approved method for laser surgery. This allowed Summit and VISX to charge a $250 fee per procedure performed with their equipment, hence reaping what the FDA charged was more than $30 million in ill-gotten profits in 1997. Generally, a union between the only two potential competitors in a given market is a red flag for antitrust regulators. However, as the number of competitors in the market increases, this becomes less of a concern to antitrust regulators.

One way to ensure that a patent pooling agreement does not violate antitrust laws is to involve only essential patents in the agreement. The DOJ has indicated that since essential patents have no substitutes, then pooling these patents together does not violate antitrust laws.

Conclusion

The discussion above is by no means exhaustive of the antitrust concerns involved in licensing patents related to standards. There are other activities that one should be concerned with in negotiating a patent or other intellectual property license where a standard is involved, and other issues related to disclosing IPR, licensing, grantbacks and patent pooling. The point is that a company should have a healthy respect for the antitrust laws, especially in connection with participation in a standards setting organization. Otherwise, a favorable patent position can be turned into a liability.