Patent Licenses That Restrain Price: New Wrinkles and Old Doctrine

Price fixing arrangements have been held to be clear violations of the antitrust laws for many years. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940) (“Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se“). Whether a creative patent license agreement that impacts price constitutes a price fixing arrangement is, however, often less than clear. This article discusses the Supreme Court and Courts of Appeals cases that set the stage for the types of patent licensing arrangements that will be seen as price fixing, and provides an overview of the Department of Justice's take on patent licensing arrangements and how it will scrutinize such arrangements under the antitrust laws. Finally, this article reviews recent case law discussing the intersection of patent and antitrust law.

Background

The Supreme Court has addressed an array of alleged price fixing scenarios, generally concluding that a patent licensing agreement that sets the resale price for which the licensee may sell the patented product is unlawful price fixing and thus a violation of antitrust law. Interestingly, these cases have had to reconcile themselves with early precedent set by the Court, which found a price fixing provision in a patent licensing agreement acceptable.

In United States v. General Electric Co., 272 U.S. 476 (1926), the Supreme Court held that a patent owner may require its licensee to sell a patented product at a price set by the licensor. General Electric (“GE”), owned three patents directed to electric lights with tungsten filaments, which it manufactured and sold. GE licensed a competitor, Westinghouse, under the condition that it sell lamps at prices set by GE. In reaching its conclusion, the Court noted that “[w]hen the patentee licenses another to make and vend and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods.” Id. at 490. The Court further commented that in licensing a product, a patentee should not have to worry about the licensee destroying the patentee's profits. Id. Thus, a key fact in this case seems to be that the patentee continued to manufacture and sell its own patented product.

Twenty-two years after General Electric, the Supreme Court decided two cases on the same day dealing with patent licensing arrangements, this time finding certain restrictions clearly to be price fixing in violation of antitrust law. In United States v. United States Gypsum Co., 333 U.S. 364, 401 (1948), the Court held the acts of a patent licensor and its licensees, which constituted all the former competitors in the industry, to violate the Sherman Act. Gypsum was a dominant player in the gypsum industry and had acquired the most significant patents covering gypsum board manufacturing. Gypsum licensed its patents to several gypsum manufacturers, with each license agreement containing a provision that Gypsum would fix the minimum price at which the licensee could sell the patented products. The Court held that Gypsum and the licensees violated the antitrust laws by acting in concert in entering the licensing agreements and the result of the concerted action was eliminating competition by price fixing. One distinguishing fact between Gypsum and General Electric was that in Gypsum there were multiple licensees; the Court later stressed that the conspiracy among the licensor and licensees to restrain trade was integral to their finding of antitrust violations. United States v. United States Gypsum Co., 340 U.S. 76, 84 (1950).

On the same day as Gypsum, the Supreme Court in United States v. Line Materials Co., 333 U.S. 287, 314-15 (1948), condemned an arrangement between two patentees owning blocking patents to combine them and fix prices on all devices produced under their patents. In this case, manufacturers needed to use both patents in order to obtain the full benefits of the inventions. The owners of the two patents thus entered into royalty-free cross-licensing agreements and bound themselves to maintain prices as long as other licensees were required to maintain prices as well. While cross-licensing in and of itself was not an issue, the use of cross-licensing to effectively fix prices violated the antitrust laws. Id. at 314-15.

The Court reaffirmed Gypsum and Line Materials in United States v. New Wrinkle, Inc., 342 U.S. 371 (1952), and emphasized that General Electric stood for a narrow proposition. In New Wrinkle, the patent owners, manufacturers in the wrinkle finish industry, formed a new corporation whereby each patentee assigned its patents to the corporation in return for stock. The corporation was to grant patent licenses including provisions to fix minimum prices at which all licensed manufacturers could sell, including the original patentees. The price-fixing provisions were not to become operative until 12 of the principal manufacturers of wrinkle finishes had agreed to the minimum prices prescribed. The Court did not see any material difference between this situation and that in Gypsum or Line Material. This was an arrangement between patent holders to pool their patents and fix prices for themselves and their licensees, and the Court held that “[t]he purpose and result plainly violate the Sherman Act.” Id. at 380.

The Courts of Appeals have also confronted price fixing cases covering a variety of patent licensing scenarios. In Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646 (5th Cir. 1944), the Fifth Circuit held that a licensor may not set the prices at which a licensee sells an unpatented product of a patented process. In this case, the patentee had a patent on a basket-making machine and attempted to set the minimum price a manufacturer could sell a basket made using the patented machine. The court distinguished General Electric, noting that where a patentee who manufactures and also licenses his product may not set the licensee's minimum selling price for his own protection, licensors of patented machines have no right to interfere with free competition in the sale of unpatented products. Id. at 647.

In Newburgh Moire Co. v. Superior Moire Co., 237 F.2d 283 (3rd Cir. 1956), the Third Circuit held that granting a plurality of licensing agreements incorporating price fixing clauses violates antitrust laws. This was the issue the Supreme Court did not reach in Gypsum. In Newburgh, Newburgh sued Superior for infringing patents related to improvements in moire finishing production. Superior counterclaimed for invalidity and violation of antitrust laws. Superior's antitrust claim was based on licenses containing price fixing provisions that Newburgh granted to three of the only five moire finishers in the United States. The court stated there was no Supreme Court authority as to whether such a degree of price fixing licenses within an industry violates the antitrust laws, noting that this issue was reserved by the Supreme Court in Gypsum. Id. at 291, 293. In reaching its decision, the Third Circuit stated: “At worst, we think that the patent laws were not intended to empower a patentee to grant a plurality of licenses, each containing provisions fixing the price at which the licensee might sell the product or process to the company, and that, if a plurality of licenses are granted, such provisions therein are prohibited by the antitrust laws.” Id. at 293-94.

The Department of Justice Guidelines

Against the background of the Supreme Court precedent, the Department of Justice (“DOJ”) promulgated the Antitrust Guidelines for the Licensing of Intellectual Property (“Guidelines”) in 1995. According to the Guidelines, patents, copyrights, or trade secrets do not create a presumption of market power, and even where a patent or other form of intellectual property does confer market power, that power does not by itself offend the antitrust laws. (Section 2.2, p. 4). These principles have been approved by the courts. See, e.g., Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999) and Independent Ink, Inc. v. Illinois Tool Works, Inc., 396 F.3d 1342, 1350 n.10 (Fed. Cir. 2005). In general, restraints in intellectual property licensing arrangements are evaluated under the rule of reason, inquiring “whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects.” (Section 3.4, p. 16). The DOJ notes, however, that certain restraints are so plainly anticompetitive that, consistent with the courts' treatment over the years, they will treat the agreement as per se unlawful. The examples given include price fixing and resale price maintenance.

Intellectual property licensing arrangements are to be evaluated under the rule of reason, unless the restraint involves price fixing, in which case it will be evaluated under the per se rule. (Section 5.1, p. 24). The Guidelines give the following example as meriting per se treatment: Two leading manufacturers of a consumer electronics product hold complementary patents and assign their patents to a separate corporation wholly owned by the two firms, responsible for licensing the right to use the patents and establishing the royalties. The Guidelines state that the right of each patent owner to exclude others from using its patent does not extend to the agreement to assign rights jointly and such a restraint would likely be seen as constituting price fixing and thus would be challenged as per se unlawful. (Id. at 25). Along these lines, the Guidelines also state that resale price maintenance will be treated as per se unlawful. The Guidelines do note General Electric, seemingly as an exception to this general rule. (Section 5.2, p. 25). Finally, regarding cross-licensing and pooling arrangements, the Guidelines state that those containing collective price or output restraints such as the joint marketing of pooled intellectual property rights with collective price setting would most likely be seen as per se unlawful. (Section 5.5, p. 28).

New Developments

In Applera Corp. v. MJ Research Inc., No. 3:98VB1201 (JBA), 2004 WL 2935820, at *1 (D. Conn., Dec. 16, 2004), the district court of Connecticut was faced with a claim of horizontal price fixing in the context of a patent license agreement. MJ Research alleged that Applera's Supplier Authorization Program (“SAP”) coordinated the pricing of the thermal cyclers of each supplier in an effort to raise prices and restrain competition in the market for thermal cyclers. The SAP did not set the prices at which the suppliers were permitted to sell their thermal cyclers, but inevitably, because of the licensing fee, the minimum price at which participating suppliers could profitably sell their thermal cyclers increased. Id. at *3.

While addressing the price-fixing allegation, the court discussed the Supreme Court precedents mentioned above such as General Electric, Gypsum, and New Wrinkle in reviewing the law concerning when licensing agreements may turn into illegal price fixing agreements. Id. at *7-9. Ultimately, the court rejected the price-fixing allegation, noting that “[t]he preceding authority in no way suggests, however, that the mere imposition of a licensing fee covering only the patented technology is unlawful.” Id. at *10.

Other cases, while not dealing directly with price fixing allegations, have applied the Supreme Court precedent in this field to analogous arrangements. In Valley Drug Co. v. Geneva Pharm., Inc., the Federal Circuit was faced with a claim that certain non-compete agreements among drug manufacturers violated antitrust laws. The court cited New Wrinkle to support its statement that a patentee's exclusionary right cannot be exploited in every way, but held that the district court erred in finding the exclusionary agreements in this case to be per se violations of the antitrust laws. 344 F.3d 1294, 1304-06 (Fed. Cir. 2003). See also In re Terazosin Hydrochloride Antitrust Litigation, 352 F. Supp. 2d 1279, 1313-14 (S.D. Fla. 2005) (citing Line Material, which held a patent pooling agreement that fixed prices to be per se illegal).

Conclusion

The case law and the current DOJ Guidelines make clear that price fixing attempts will be analyzed as per se unlawful when determining whether they are violations of antitrust laws. Accordingly, in the case of patent licensing arrangements, licensors must be careful not to set restraints that look like, or have the effect of, price fixing arrangements. At the same time, merely charging a licensing fee, even in a convoluted manner, should continue to be well within a patent owner's rights.

Price fixing arrangements have been held to be clear violations of the antitrust laws for many years. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940) (“Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se “). Whether a creative patent license agreement that impacts price constitutes a price fixing arrangement is, however, often less than clear. This article discusses the Supreme Court and Courts of Appeals cases that set the stage for the types of patent licensing arrangements that will be seen as price fixing, and provides an overview of the Department of Justice's take on patent licensing arrangements and how it will scrutinize such arrangements under the antitrust laws. Finally, this article reviews recent case law discussing the intersection of patent and antitrust law.

Background

The Supreme Court has addressed an array of alleged price fixing scenarios, generally concluding that a patent licensing agreement that sets the resale price for which the licensee may sell the patented product is unlawful price fixing and thus a violation of antitrust law. Interestingly, these cases have had to reconcile themselves with early precedent set by the Court, which found a price fixing provision in a patent licensing agreement acceptable.

In United States v. General Electric Co., 272 U.S. 476 (1926), the Supreme Court held that a patent owner may require its licensee to sell a patented product at a price set by the licensor. General Electric (“GE”), owned three patents directed to electric lights with tungsten filaments, which it manufactured and sold. GE licensed a competitor, Westinghouse, under the condition that it sell lamps at prices set by GE. In reaching its conclusion, the Court noted that “[w]hen the patentee licenses another to make and vend and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods.” Id. at 490. The Court further commented that in licensing a product, a patentee should not have to worry about the licensee destroying the patentee's profits. Id. Thus, a key fact in this case seems to be that the patentee continued to manufacture and sell its own patented product.

Twenty-two years after General Electric, the Supreme Court decided two cases on the same day dealing with patent licensing arrangements, this time finding certain restrictions clearly to be price fixing in violation of antitrust law. In United States v. United States Gypsum Co., 333 U.S. 364, 401 (1948), the Court held the acts of a patent licensor and its licensees, which constituted all the former competitors in the industry, to violate the Sherman Act. Gypsum was a dominant player in the gypsum industry and had acquired the most significant patents covering gypsum board manufacturing. Gypsum licensed its patents to several gypsum manufacturers, with each license agreement containing a provision that Gypsum would fix the minimum price at which the licensee could sell the patented products. The Court held that Gypsum and the licensees violated the antitrust laws by acting in concert in entering the licensing agreements and the result of the concerted action was eliminating competition by price fixing. One distinguishing fact between Gypsum and General Electric was that in Gypsum there were multiple licensees; the Court later stressed that the conspiracy among the licensor and licensees to restrain trade was integral to their finding of antitrust violations. United States v. United States Gypsum Co., 340 U.S. 76, 84 (1950).

On the same day as Gypsum , the Supreme Court in United States v. Line Materials Co., 333 U.S. 287, 314-15 (1948), condemned an arrangement between two patentees owning blocking patents to combine them and fix prices on all devices produced under their patents. In this case, manufacturers needed to use both patents in order to obtain the full benefits of the inventions. The owners of the two patents thus entered into royalty-free cross-licensing agreements and bound themselves to maintain prices as long as other licensees were required to maintain prices as well. While cross-licensing in and of itself was not an issue, the use of cross-licensing to effectively fix prices violated the antitrust laws. Id. at 314-15.

The Court reaffirmed Gypsum and Line Materials in United States v. New Wrinkle , Inc., 342 U.S. 371 (1952), and emphasized that General Electric stood for a narrow proposition. In New Wrinkle, the patent owners, manufacturers in the wrinkle finish industry, formed a new corporation whereby each patentee assigned its patents to the corporation in return for stock. The corporation was to grant patent licenses including provisions to fix minimum prices at which all licensed manufacturers could sell, including the original patentees. The price-fixing provisions were not to become operative until 12 of the principal manufacturers of wrinkle finishes had agreed to the minimum prices prescribed. The Court did not see any material difference between this situation and that in Gypsum or Line Material. This was an arrangement between patent holders to pool their patents and fix prices for themselves and their licensees, and the Court held that “[t]he purpose and result plainly violate the Sherman Act.” Id. at 380.

The Courts of Appeals have also confronted price fixing cases covering a variety of patent licensing scenarios. In Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646 (5th Cir. 1944), the Fifth Circuit held that a licensor may not set the prices at which a licensee sells an unpatented product of a patented process. In this case, the patentee had a patent on a basket-making machine and attempted to set the minimum price a manufacturer could sell a basket made using the patented machine. The court distinguished General Electric, noting that where a patentee who manufactures and also licenses his product may not set the licensee's minimum selling price for his own protection, licensors of patented machines have no right to interfere with free competition in the sale of unpatented products. Id. at 647.

In Newburgh Moire Co. v. Superior Moire Co., 237 F.2d 283 (3rd Cir. 1956), the Third Circuit held that granting a plurality of licensing agreements incorporating price fixing clauses violates antitrust laws. This was the issue the Supreme Court did not reach in Gypsum. In Newburgh, Newburgh sued Superior for infringing patents related to improvements in moire finishing production. Superior counterclaimed for invalidity and violation of antitrust laws. Superior's antitrust claim was based on licenses containing price fixing provisions that Newburgh granted to three of the only five moire finishers in the United States. The court stated there was no Supreme Court authority as to whether such a degree of price fixing licenses within an industry violates the antitrust laws, noting that this issue was reserved by the Supreme Court in Gypsum. Id. at 291, 293. In reaching its decision, the Third Circuit stated: “At worst, we think that the patent laws were not intended to empower a patentee to grant a plurality of licenses, each containing provisions fixing the price at which the licensee might sell the product or process to the company, and that, if a plurality of licenses are granted, such provisions therein are prohibited by the antitrust laws.” Id. at 293-94.

The Department of Justice Guidelines

Against the background of the Supreme Court precedent, the Department of Justice (“DOJ”) promulgated the Antitrust Guidelines for the Licensing of Intellectual Property (“Guidelines”) in 1995. According to the Guidelines, patents, copyrights, or trade secrets do not create a presumption of market power, and even where a patent or other form of intellectual property does confer market power, that power does not by itself offend the antitrust laws. (Section 2.2, p. 4). These principles have been approved by the courts. See, e.g., Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999) and Independent Ink, Inc. v. Illinois Tool Works, Inc., 396 F.3d 1342, 1350 n.10 (Fed. Cir. 2005). In general, restraints in intellectual property licensing arrangements are evaluated under the rule of reason, inquiring “whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects.” (Section 3.4, p. 16). The DOJ notes, however, that certain restraints are so plainly anticompetitive that, consistent with the courts' treatment over the years, they will treat the agreement as per se unlawful. The examples given include price fixing and resale price maintenance.

Intellectual property licensing arrangements are to be evaluated under the rule of reason, unless the restraint involves price fixing, in which case it will be evaluated under the per se rule. (Section 5.1, p. 24). The Guidelines give the following example as meriting per se treatment: Two leading manufacturers of a consumer electronics product hold complementary patents and assign their patents to a separate corporation wholly owned by the two firms, responsible for licensing the right to use the patents and establishing the royalties. The Guidelines state that the right of each patent owner to exclude others from using its patent does not extend to the agreement to assign rights jointly and such a restraint would likely be seen as constituting price fixing and thus would be challenged as per se unlawful. (Id. at 25). Along these lines, the Guidelines also state that resale price maintenance will be treated as per se unlawful. The Guidelines do note General Electric, seemingly as an exception to this general rule. (Section 5.2, p. 25). Finally, regarding cross-licensing and pooling arrangements, the Guidelines state that those containing collective price or output restraints such as the joint marketing of pooled intellectual property rights with collective price setting would most likely be seen as per se unlawful. (Section 5.5, p. 28).

New Developments

In Applera Corp. v. MJ Research Inc., No. 3:98VB1201 (JBA), 2004 WL 2935820, at *1 (D. Conn., Dec. 16, 2004), the district court of Connecticut was faced with a claim of horizontal price fixing in the context of a patent license agreement. MJ Research alleged that Applera's Supplier Authorization Program (“SAP”) coordinated the pricing of the thermal cyclers of each supplier in an effort to raise prices and restrain competition in the market for thermal cyclers. The SAP did not set the prices at which the suppliers were permitted to sell their thermal cyclers, but inevitably, because of the licensing fee, the minimum price at which participating suppliers could profitably sell their thermal cyclers increased. Id. at *3.

While addressing the price-fixing allegation, the court discussed the Supreme Court precedents mentioned above such as General Electric, Gypsum, and New Wrinkle in reviewing the law concerning when licensing agreements may turn into illegal price fixing agreements. Id. at *7-9. Ultimately, the court rejected the price-fixing allegation, noting that “[t]he preceding authority in no way suggests, however, that the mere imposition of a licensing fee covering only the patented technology is unlawful.” Id. at *10.

Other cases, while not dealing directly with price fixing allegations, have applied the Supreme Court precedent in this field to analogous arrangements. In Valley Drug Co. v. Geneva Pharm., Inc., the Federal Circuit was faced with a claim that certain non-compete agreements among drug manufacturers violated antitrust laws. The court cited New Wrinkle to support its statement that a patentee's exclusionary right cannot be exploited in every way, but held that the district court erred in finding the exclusionary agreements in this case to be per se violations of the antitrust laws. 344 F.3d 1294, 1304-06 (Fed. Cir. 2003). See also In re Terazosin Hydrochloride Antitrust Litigation, 352 F. Supp. 2d 1279, 1313-14 (S.D. Fla. 2005) (citing Line Material, which held a patent pooling agreement that fixed prices to be per se illegal).

Conclusion

The case law and the current DOJ Guidelines make clear that price fixing attempts will be analyzed as per se unlawful when determining whether they are violations of antitrust laws. Accordingly, in the case of patent licensing arrangements, licensors must be careful not to set restraints that look like, or have the effect of, price fixing arrangements. At the same time, merely charging a licensing fee, even in a convoluted manner, should continue to be well within a patent owner's rights.