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Navigating the antitrust minefield

and therefore prevent from The patent auction and obtaining any part of it outright. That is a Google’s proposed takeover of collective acquisition of competing patents, Motorola Mobility have attracted the and the winning bid might or might not be attentions of US competition deemed anti-competitive, depending on how the portfolio ends up being used.” regulators. With several other high- Licensing deals are also at risk from stakes patent transactions on the claims of being anti-competitive. “At one cards, chief IP officers need to time, companies could simply follow the know the dangers of violating government’s list of ‘Nine No-Nos’ when antitrust law and the steps they can licensing IP,” says M Howard Morse, an antitrust partner at Cooley in Washington take to avoid costly consequences DC. The “Nine No-Nos” were a set of rules which per se prohibited practices such as By Jack Ellis mandatory package licensing, mandatory grant-backs, tying unpatented supplies into patent licences and compulsory payment of The huge sums involved in the Nortel unreasonable royalties. “Today, life is more auction and Google’s subsequent purchase complicated, as practices once condemned – of Motorola Mobility have changed the way from tying to grant-backs – are now often that patents are seen. Suddenly, portfolios recognised to be pro-competitive,” continues have gained the attention of chief executives Morse. “But this is not to say that we are and investors like never before. The now in the world of ‘No No-Nos’. The US excitement created has thrust future patent Department of Justice (DoJ) and Federal sales into the limelight, with Kodak and Trade Commission (FTC) believe it is their InterDigital, and perhaps Research In job to ensure that when intellectual property Motion, now considering their options. is at issue, competition is not thwarted With patents driving multibillion-dollar through what they believe is misuse or illegal transactions, yet another dimension has extension. At the moment, they have high- been added to the smartphone wars. The tech industries in their sights.” fast-moving, fast-innovating wireless The US government is currently device industry is dominated by companies investigating both the winning bid for of massive influence in the marketplace, and Nortel and Google’s acquisition of Motorola unfair competition concerns have been Mobility under federal antitrust laws. raised. Robert A Skitol, antitrust partner at Antitrust is a complex and often confusing Drinker Biddle & Reath in Washington DC area; but it is one that IP owners need to be and a member of the board of directors of aware of. Only then can they avoid costly the American Antitrust Institute, explains mistakes which could see them heavily that the outcome of the Nortel auction penalised or even missing out on a game- raises classic concerns: “Once Apple joined changing patent acquisition. the Rockstar consortium, basically all of Google’s competitors in the mobile Competing and complementary patents operating system world had joined forces to The notion of competing and acquire the entirety of the Nortel portfolio complementary patents is an important one

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Private antitrust suits

What about companies that suspect that they may be the victim of anti-competitive practices? Under US antitrust law, it is not only the federal government that can bring antitrust suit against a party. Attorneys general of the individual states, consumers and competitors can bring antitrust complaints against a company and can ask the DoJ and the FTC to investigate. This is important not just for companies acquiring or licensing patent portfolios, but also for those which feel they are being forced out of the market by anti-competitive practices. In all of these situations, the claimant must provide solid evidence that some antitrust harm has been created if they want to have any chance of bringing a case. “Simply presenting a theory that prices in the industry will go up because of some company’s conduct, and that a competitor should benefit from those higher prices, is not enough to bring an antitrust case,” says Howard Morse. “But if a competitor can prove that it has been or is very likely to be foreclosed from the marketplace by that company’s conduct, then it will likely be able to bring a case.” All potentially anti-competitive uses of intellectual property that could form the basis of federal government antitrust action could also lead to a private antitrust suit. If such a suit succeeds, the penalties for the defendant can be costly. “The remedies would include an award of triple the demonstrated damages from the illegal activity plus attorneys’ fees,” says Robert Skitol, “as well as cost of suit plus injunctive relief aimed at preventing any continuation of the M Howard Morse illegal conduct.” A licensee subjected to patent “hold-up”, or a demand for excessive royalties in Partner, Cooley LLP return for a licence to standards-essential IP, would also have grounds for an antitrust complaint. “The intersection of intellectual property and antitrust law is very much about looking at the combination that is brought about by an for IP owners to keep in mind. If all of the problem surrounding the Nortel purchase is acquisition or IP licence.” competing technologies in a particular that by acquiring an extensive trove of market come under the ownership of one patents covering a wide array of company, then that company will no longer technologies, including a considerable face competition and will effectively be a number of Long-Term Evolution patents, monopoly. Morse explains: “The the Rockstar members will occupy a intersection of intellectual property and dominant position in the wireless device antitrust law is very much about looking at market that could all but totally exclude the combination that is brought about by an their main competitors, such as Google, acquisition or IP licence. A key historical from competing against them. If this is seen example of this is Xerox’s acquisitions of to be the case, then Rockstar could be a the Battelle Memorial Institute’s patents buyer’s cartel, creating a monopsony and relating to copying technology. The Battelle opening itself up to penalties. patents may have been sufficiently strong so The Rockstar members have two main as to create a dominant market power, but options on how to manage their new as long as Xerox didn’t have a strong acquisition to avoid such an eventuality, showing in copying technology patents each with varying degrees of antitrust before making that acquisition, the transfer exposure. The first option is for the didn’t create a larger market power. It consortium members jointly to own and merely shifted the existing market power enforce all of the acquired patents through a from Battelle to Xerox.” patent holding company or a patent pool. The agglomeration of market power over This would come in for obvious antitrust time, Morse says, could also be considered scrutiny, as it could be viewed as a anti-competitive in certain circumstances: concerted attempt to shut out their key “For instance, if one firm has a strong competitor. The second option is for the position in an existing technology, but that consortium members to divide up control of existing technology is going to disappear the portfolio and make separate and and be replaced by some new technology, individual determinations on enforcement then you wouldn’t necessarily be concerned and licensing. with the firm acquiring that new “The latter course would seem a lot technology. On the other hand, if there is safer and a lot easier to defend from an going to be a battle lasting for some time antitrust standpoint,” suggests Skitol. “The between the existing and the new DoJ could impose conditions that enable technologies, then you don’t want to put Google or any other competitor to license them both in the hands of the same firm.” any part of the Nortel portfolio that it needs This monopoly principle applies not in order to compete.” These conditions, he only to single companies, but also to groups explains, could include a stipulation that of companies that team up to achieve the the patents be allocated in such a way that same effects. The potential antitrust each consortium member would get sole

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ownership over those which best The agencies may request additional time to complement its existing portfolio. Granted investigate, as well as more in-depth that the Nortel patents are worth as much information following the initial report. as we have been led to believe, this would Henry C Su, an attorney adviser at the have the effect of strengthening each FTC (speaking to IAM on his own behalf, member’s portfolio in areas where it is and not on behalf of the FTC or its currently lacking. This would also ensure commissioners), explains: “The Hart-Scott- that each member is not given ownership Rodino Act requires the reporting of over competing patents in areas of acquisitions of voting securities, non- technology where it already holds corporate interests or assets. The reporting considerable market power, and would requirement is triggered if the parties to the protect them from accusations of transaction exceed a certain size, or if the monopolism. transaction itself exceeds a certain value.” There is a precedent for such an The thresholds that trigger the reporting arrangement. CPTN Holdings is a requirement are laid down in legislation and consortium created by , Apple, are adjusted periodically to account for Oracle and EMC to acquire 882 patents from factors such as inflation. Novell Corporation. These patents are According to the most recent Robert A Skitol apparently essential to Linux. Accordingly, thresholds, any transaction valued at more Partner, Drinker Biddle & Reath LLP Novell had made open source commitments than US$263.8 million must be reported “Once Apple joined the Rockstar regarding the portfolio. Competitors and prior to closing. Any transaction valued at consortium, basically all of Google’s end users were anxious that the acquisition between US$66 million and US$263.8 competitors in the mobile operating system of these patents by CPTN Holdings could million is subject to the “size of parties” world had joined forces.” stifle ongoing open source development of test, and must be reported if one party to Linux-related technology. The deal was the transaction has total assets or net sales approved by the authorities after CPTN’s of at least US$131.9 million and the other members clarified that the acquired patents has total assets or net sales of at least would remain subject to any open source US$13.2 million. This puts into context the licences that were applicable to them. DoJ’s continuing analysis of Google’s Further, the consortium members made proposed US$12.5 billion takeover of commitments to divide ownership of the Motorola Mobility. patents among themselves rather than It is not just companies that are looking owning them in common, and individually to acquire part or all of a business that need not to acquire certain parts of the portfolio to keep the Hart-Scott-Rodino Act in mind. relevant to areas in which they already Companies entering into IP licensing individually held significant market power. agreements can also be subject to its provisions. “I think that in some licensing Hart-Scott-Rodino reporting deals, those involved may not be thinking requirements about the need to report them under the Two agencies of the US government have Hart-Scott-Rodino Act,” says Morse. “This the authority to carry out antitrust is probably because people who are putting investigations and bring antitrust lawsuits: together a licence agreement are not the Antitrust Division of the DoJ and the thinking of it in terms of an acquisition. But FTC. Which of the two agencies undertakes in effect, they are acquiring rights to use IP the investigation is a historical matter based which will presumably have an impact on on the market or industry that particular their position in the market.” By entering agency has experience in investigating. into such an agreement, a company is Sometimes both will investigate a potential expanding its patent portfolio, and if the violation, particularly in the case of a value of the deal exceeds the Hart-Scott- significantly large merger or acquisition, or Rodino threshold, then it may be anti- high public interest. competitive. Therefore, companies need to A key requirement for IP owners is to look at the value of patents involved assess whether any proposed transaction – something which introduces the should be reported prior to completion contentious issue of IP valuation to an under the Hart-Scott-Rodino Antitrust already complicated area. “IP owners Improvements Act. The legislation requires involved in an acquisition or exclusive those entering into a transaction to file a licence of IP assets should pay attention to notification with the DoJ and the FTC any valuations of their IP, because that where certain thresholds are exceeded. A could trigger the size of the transaction 30-day waiting period ensues, during which threshold,” says Su. “The valuation of IP the relevant investigative agency decides could come from the gross amount of the whether the transaction should go ahead. royalties, or it could be based on fair market

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value of the IP assets. There are lots of ways Global smartphone operating system market Q3 2011 to look at that, but what is important is to Microsoft pay attention to how the IP is being valued.” Bada (Samsung) Others 1% Failure to report a transaction can result in a fine of up to US$16,000 per day. 3% However, there are ways to resolve this 2% situation, even after the transaction has gone through. “The parties can certainly go Research In Motion ahead and make a corrective filing, but that 11% does not necessarily foreclose the possibility of a civil penalty,” says Su. “When deciding on an appropriate penalty, the authorities will look at the totality of Apple the circumstances. They will be looking at 15% Android (Google) factors such as wilfulness, the parties’ 53% knowledge of the reporting requirement and so on. So there is some discretion involved in the amount of the penalty; it depends on Symbian (Nokia) how egregious the violation is.” 17% Looking at the longer term, there may be situations in which the DoJ or FTC decides to review a completed transaction and finds it to be anti-competitive. “This is not altogether uncommon,” says Su. “From time to time, the FTC investigates mergers or Source: Gatner acquisitions after their consummation. If the parties go forward with such a transaction without voluntarily submitting it for agency review, they still could run the whether the licence as structured could be risk of having to divest certain assets – or considered exclusive or not,” suggests Su. unscramble the eggs, so to speak – if the Rockstar’s recently acquired patent transaction is deemed unlawful.” booty may have to be made available to Google and other competitors on a Exclusive and non-exclusive licensing reasonable and non-discriminatory basis; It is fairly intuitive as to why certain otherwise, the winners of the Nortel mergers and acquisitions will attract auction could well find themselves on the antitrust scrutiny. In the context of patent receiving end of a visit from the DoJ or the licensing, however, only certain types of FTC. As the smartphone wars rage on, agreement could prove problematic. cross-licensing deals appear to be an “Exclusive licences under which the whole increasingly common response to threats of bundle of rights in IP is transferred to the litigation. licensee could raise competitive concerns Microsoft has entered into a number of under antitrust law,” Su elaborates. “In an such deals recently with manufacturers of antitrust context, an exclusive licence to IP Android-based handsets, and the Redmond looks very similar to an outright purchase company’s approach to those it believes are of IP, and has therefore been viewed as infringing its rights has met with reportable under the Hart-Scott-Rodino disapproval from some quarters, including Act if the thresholds are met.” claims of anti-competitive behaviour. As Under a non-exclusive licence these licence deals involve an agreement agreement, the licensor retains certain between two or more leading competitors rights to the IP and third parties can enter from the same industry, antitrust concerns into an agreement with it. Morse explains: about collusion could be raised. Signatories “Any agreement that opens competition to to deals could find themselves facing others is going to raise less concern than an accusations of cartel-like behaviour if agreement that limits competition.” Of certain safeguards are not created when course, there is some overlap in the putting an agreement together. “There could interpretation of what constitutes an be circumstances where two patent owners exclusive and a non-exclusive licence. The that compete in some spaces agree to cross- intricacies of this definition could be the license. That in itself is fine and would difference between a deal being approved or normally allow both parties to continue to not. “One thing that IP owners should do is compete while at the same time avoiding hire antitrust counsel to provide advice on infringing on each other’s patents,” says

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Global mobile handset market Q3 2011 relevant to the licensing of patents which are used in industry standards. The advantages for an IP owner in getting its patents included in an industry standard are obvious, as competitors will be keen to enter into agreements with it to secure use of the technology. But the leverage that such Nokia 24% a situation affords the IP owner could Others attract intense scrutiny from the antitrust 34% authorities if misused to discourage competition in the relevant industry. “I think that it is important for the IP owner to have as clear an idea as possible of what is expected or required by the standards Samsung setting body,” says Su. “They should 18% properly understand the standards setting body’s rules regarding disclosure of IP. They 2% should also recognise whether the body has 2% RAND [reasonable and non-discriminatory] or FRAND [fair, reasonable and non- 2% HTC LG 3% ZTE Apple 5% discriminatory] obligations in terms of 3% Motorola Mobility 3% 5% licensing, and they should comply with those obligations, if applicable. IP owners Research In Motion should also understand that the question of what exactly RAND and FRAND are is Source: Gatner relatively unsettled, but should be cognisant if there is such an expectation or obligation and seek advice where necessary on what Skitol. “But if the parties go beyond that sorts of terms would be considered and their agreement entails that neither will reasonable.” license to third parties, the deal could be Any grant-back clauses included in a highly vulnerable to antitrust attack. Such licence agreement must also be carefully an arrangement would be a concerted structured to avoid claims of anti- refusal to deal with third parties; so one competition. Grant-backs require the needs to be careful about the terms of licensee to divulge any improvements in the cross-licensing deals to ensure that the licensed technology or the know-how right of each party to license independently surrounding that technology to the licensor. of the other is preserved.” If the licensor already wields considerable strength in the market, particularly broad Tied and bundled licences, industry grant-backs could be considered as monopoly standards and grant-backs behaviour and could discourage licensors and Another related topic that IP owners must licensees from engaging in innovation. If keep in mind is the issue of tying or grant-back clauses are kept non-exclusive, bundling licences. In these cases, the licensors can lessen their antitrust exposure, licensor imposes certain conditions on the as such arrangements could be seen as pro- licensee that may be considered anti- competitive by disseminating technology competitive. “Such conditions could include throughout the market. forcing the licensee to purchase specified products, services or extraneous IP from the Patent pools licensor, or requiring the payment of As the smartphone market evolves, it is royalties after the patent has expired,” says moving towards standardising and cross- Skitol. “Another anti-competitive tying licensing the industry’s key patented practice would be conditioning the licence technologies. A format for this that has deal on the licensee’s agreement not to worked in several other industries and on compete against the licensor by varying scales is the patent pool. independently developing competing (and “An example might be where there is non-infringing) technology,” he adds. interest on the part of some large group of However, a tying arrangement can avoid third parties in acquiring licences to an antitrust attack if the tie is technologically entire group of patents, each with different necessary for the licensed patents to be of owners – perhaps because those patents optimal use to the licensee. are necessary to practise an industry The issue of tying is particularly standard,” says Skitol. “In such a situation, it

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NPEs, defensive aggregators and antitrust law

Non-practising entities (NPEs) are often accused of stifling But the antitrust agencies are watching the situation. The FTC competition. But they lack the typical attributes associated with anti- released a report earlier this year looking at patent notice and patent competitive companies. Since an NPE does not practise on the remedies. This report analysed the concern that NPEs have a lot of patents it owns, it cannot be said to be a direct competitor to leverage against operating companies. The absence of effective operating companies. Similarly, as their business model is based on patent notice can leave operating companies unaware of ownership licensing their IP, it cannot be said that they are trying to create a rights asserted by NPEs, and current patent remedies can provide a monopoly to force other firms out of the market. An operating weapon for NPEs because they can threaten to enjoin operating company would therefore have difficulty claiming that an NPE has companies and even shut them down. A lot of operating companies caused it antitrust injury. To date, the federal antitrust authorities have feel that they have no choice but to accede to the demands of NPEs not investigated any NPEs for antitrust violations. However, there are and pay what NPEs ask to get these entities off their backs. But the conceivable scenarios whereby an NPE could attract the interest of FTC has another statutory weapon at its disposal in Section 5 of the the antitrust investigators in the not-too-distant future. Federal Trade Commission Act, which prohibits methods of unfair The larger NPEs commonly own diverse portfolios, whose patents competition. That may be an area where the FTC might proceed in could have applications across numerous technologies and markets. the future to try and address some of these concerns.” The obvious example would be Intellectual Ventures, which licenses “Defensive patent aggregators are a different story,” points out patents to several leading handset manufacturers and which recently Robert Skitol. “They can appear more like market participants whose initiated litigation against Motorola Mobility, indicating its commitment concerted activity in collectively acquiring and collectively enforcing to its position in that market. As Howard Morse points out: “If an NPE patents against their competitors can much more easily lead to doesn’t own patents in a particular field, then its first foray into that serious antitrust liability.” Indeed, defensive aggregator Allied Security field shouldn’t raise antitrust concerns. But as NPEs acquire larger Trust (AST) and some of its members were unsuccessfully sued for and larger patent portfolios, they certainly need to consider antitrust anti-competitive behaviour in 2010. “In addition to the kinds of issues issues that may be raised from the combination of patents that they already discussed in other contexts, concerted buying up of patents already own, and patents that they may acquire in a transaction.” by a group of companies that would or might otherwise be competing NPEs need to make sure that their portfolios do not consist of too buyers or bidders for those patents can lead to liability for engaging in many competing patents. Further, although NPEs don’t practise on a buyer’s cartel,” explains Skitol. “If the aggregation includes an their patents to create products, it could be argued that they provide undue number or percentage of the universe of available competing a product or service in licensing out their portfolios to operating buyers, the group could be challenged for unlawful concerted action companies. If patent licensing itself comes to be seen as something to force down the price of available patents below the competitive like a competitive market, NPEs will have to take note of the way that level.” This echoes the claims made by the plaintiff in the AST case. they interact with other NPEs and the operating companies which, in On the other hand, the defensive aggregation model could be effect, are the downstream consumers of their patents. considered as pro-competitive. “Concerted buying among a group of “NPEs are a new frontier for antitrust law,” says Henry Su. “Firstly, companies, each of which is too small to be able to buy or bid on its they don’t make products, so they don’t really compete in any own, could be seen as pro-competitive as it increases rather than traditional goods or service market; and secondly, they are generally decreases the number of competing buyers or bidders for the patents not big enough to be considered monopolists in a traditional sense. available for sale to the aggregator,” says Skitol.

is efficient and desirable for the patent antitrust safeguard whenever a group of owners to get together and negotiate a companies is forming a patent pool is that it pooling of the patents, where they jointly should be made clear that each patent create a licensing entity that will have the owner whose patents are contributed into authority to issue packaged licences the pool remains free to individually license covering all of the relevant patents. as it sees fit. Otherwise, there could be Generally speaking, that situation will charges of unlawful tying arrangements, and survive antitrust scrutiny if any package a conspiracy on the part of all the parties licence offered by the patent pool is involved to refuse to license their available to all comers on reasonable terms individually owned patents separately. So, and the royalties paid into they system are the idea is that the package licence that the allocated among the patent owners in some pool offers is not in lieu of individual reasonable manner.” licensing for any third party that might The patent pool could even be an option want that. Rather, it is in addition to for the Rockstar consortium, provided that individual patent availability.” the Nortel patents will be made available to As with other scenarios involving the Google and other competitors on reasonable transfer, acquisition or licensing of patents, terms. However, patent pools can be abused Skitol continues, patent owners need to be and can run into antitrust trouble. For aware of the dichotomy between competing patent owners, patent pooling shares similar and complementary technologies: antitrust risks to other forms of licence “Companies coming together to form a agreement. Skitol explains: “A critical patent pool should make sure that the

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Action plan A

In a number of US industries, patent-related and defensive licence termination rights. deals are increasingly raising antitrust • In joining or forming a patent pool, ensure concerns. As a result, IP owners involved in that you and other participants are free to transactions need to bear in mind a number license your own patents independently, of points: and that the patent pool and licences to • Before completing any acquisition or it are independently administrated by a patent licensing deal, consider whether third party. the value of the transaction and the • In any activity aimed at encouraging a size of the parties involved will need standards setting organisation to to be reported under the Hart-Scott- incorporate your patented technology, be Rodino Act. as transparent as possible during the • Check the IP antitrust guidelines process and before decisions are made established by the Department of Justice to adopt the technology about the and the Federal Trade Commission for existence of your patents and the licence information regarding transactions, terms you will offer on a reasonable and Henry C Su licensing and Hart-Scott-Rodino Act non-discriminatory basis. Attorney adviser, Federal Trade Commission notification. • In all situations where patents are being “In an antitrust context, an exclusive licence • Avoid joint purchasing activity or acquired, licensed or pooled, ensure that to IP looks very similar to an outright collaborations with others to acquire they are complementary rather than purchase of IP.” patents in circumstances vulnerable to competing, and appoint an expert to charges of forming a buyers' cartel, and determine this if necessary. avoid agreements with competitors to • Run antitrust training programmes within refuse or limit licences to third parties. your organisation so business executives • In devising a licence agreement, avoid know when they have a thorny issue and exclusive licences, tied or bundled should call an antitrust specialist. licences that are difficult to justify, Periodic antitrust audits could also be excessively broad grant-back clauses a consideration.

patents contributed into the pool are intellectual property behave in a responsible complementary rather than competing. A manner towards competitors and consumers patent pool that is made up of competing alike. By including antitrust considerations technologies might break antitrust law, as it at the heart of their IP strategy, companies could amount to a group of competitors can avoid penalties and continue to agreeing not to compete.” maximise the value of their intellectual It is for the benefit of all parties property. involved that an independent licensing authority be set up to administer the pool. This can reassure licensees that the patents are being fairly priced and that they are getting reasonable and non-discriminatory terms common to all other licensees. “An independent third-party administrator can be jointly retained to operate the pool so that competitively sensitive information is not improperly exchanged among the patent owners,” adds Skitol.

With power comes responsibility On the evidence of the past year, patents are increasingly seen as a valuable investment. The fact that the US government’s competition watchdogs are paying such close attention to patent acquisitions and licences is testament to the growing recognition of the market power that IP can bring to a business. With power comes responsibility, and antitrust laws are in place to ensure that the owners of Jack Ellis reporter, IAM magazine

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