ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: Promoting Innovation and Competition ISSUED BY THE U.S. DEPARTMENT OF JUSTICE AND THE FEDERAL TRADE COMMISSION APRIL 2007 This Report should be cited as: U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007). This Report can be accessed electronically at: www.usdoj.gov/atr/public/hearings/ip/222655.pdf www.ftc.gov/reports/index.shtm TABLE OF CONTENTS INTRODUCTION ................................................................. 1 CHAPTER 1: THE STRATEGIC USE OF LICENSING: UNILATERAL REFUSALS TO LICENSE PATENTS ................................................. 15 I. Introduction ......................................................... 15 II. The Kodak and CSU Decisions .......................................... 16 A. The Basic Facts and Holdings of the Cases .................. 16 B. Panelist Views on Kodak .................................. 17 C. Panelist Views on CSU ................................... 18 D. Ambiguity as to the Scope of the Patent Grant .............. 19 III. Policy Issues Relating to Unilateral Refusals to License ................... 20 A. Should Antitrust Law Accord Special Treatment to Patents? .. 21 B. Should Market Power Be Presumed with Patents? ........... 22 C. If an Antitrust Violation Were Found, Would There Be Workable Remedies for Unconditional, Unilateral Refusals to License Patents? .............................. 22 D. What Would Be the Effect of Liability for Refusals to License Patents on Incentives to Innovate? .................. 23 E. Competitive Effects of Refusals to License Patents ........... 24 IV. Legal Analysis of Unilateral Refusals to License Patents ................... 25 A. Does Section 271(d)(4) of Title 35 of the U.S. Code Create an Immunity for Unilateral Refusals to License Patents? ...... 25 B. When Do Refusals to License Patents Violate the Antitrust Laws? ......................................... 27 V. Conclusion .......................................................... 31 CHAPTER 2: COMPETITION CONCERNS WHEN PATENTS ARE INCORPORATED INTO COLLABORATIVELY SET STANDARDS ....................... 33 I. Background and Introduction .......................................... 33 iii iv TABLE OF CONTENTS II. Hold Up in the Context of Joint Standard Setting ......................... 37 III. Factors Other Than SSO Rules That May Mitigate Hold Up ................ 40 IV. Current SSO Methods to Avoid or Mitigate Hold Up ...................... 42 A. Use of Disclosure Rules to Deter Hold Up .................. 42 1. Benefits and Costs of SSO Disclosure Policies ................................... 42 2. FTC Challenges to Hold Ups Based on the Failure to Disclose IP Rights ................. 43 B. Use of Licensing Rules to Deter Hold Up ................... 45 1. Use of RAND Licensing ..................... 46 2. Royalty-Free Licensing Standards ............ 47 V. Using Ex Ante Licensing Negotiations to Mitigate Hold Up ................ 49 A. Practical Reasons for the Lack of Ex Ante Licensing Negotiations ............................................ 50 B. Antitrust Concerns About Ex Ante Licensing Negotiations .... 50 1. Naked Restraints of Trade by Intellectual Property Holders or SSO Members ........... 50 2. Group Buying Power ....................... 52 VI. Agency Policy Conclusions About Antitrust Concerns Associated with Ex Ante Licensing Negotiations ........................................ 53 CHAPTER 3: ANTITRUST ANALYSIS OF PORTFOLIO CROSS-LICENSING AGREEMENTS AND PATENT POOLS ................................ 57 I. Introduction ......................................................... 57 II. Portfolio Cross Licenses .............................................. 59 A. Efficiencies ............................................. 59 B. Competitive Concerns ................................... 61 C. Analysis ............................................... 62 III. Patent Pools ......................................................... 64 A. Efficiencies ............................................. 64 B. Competitive Concerns ................................... 66 C. Existing Agency Guidance on Patent Pools ................. 66 1. U.S. Department of Justice Business Review Letters ............................. 68 2. The Summit-VISX Pool ..................... 73 D. Specific Issues of Competitive Concern ..................... 74 1. Substitutes Within a Patent Pool ............. 74 2. Exclusive and Nonexclusive Licensing ........ 78 3. Grantbacks ................................ 80 4. Access to Information ...................... 81 TABLE OF CONTENTS v 5. Royalties for the Pool’s Patents ............... 82 6. Requests for Partial-Pool Licenses ............ 83 IV. Conclusion .......................................................... 84 CHAPTER 4: VARIATIONS ON INTELLECTUAL PROPERTY LICENSING PRACTICES ............................................ 87 I. Introduction ......................................................... 87 II. Non-Assertion Clauses ................................................ 88 A. Efficiencies of Non-Assertion Clauses ...................... 89 B. Competitive Concerns Regarding Non-Assertion Clauses .... 90 III. Grantbacks .......................................................... 91 A. Efficiencies of Grantbacks ................................ 92 B. Competitive Concerns Associated with Grantbacks .......... 92 IV. Reach-Through Licensing Agreements .................................. 93 A. Efficiencies of Reach-Through Licensing Agreements ........ 94 B. Competitive Concerns About Reach-Through Licensing Agreements ................................... 95 V. Perspectives on Antitrust Analysis of Licensing Practices .................. 97 VI. The Agencies’ Competitive Concerns and Analyses ....................... 99 VII. Conclusion ......................................................... 102 CHAPTER 5: ANTITRUST ISSUES IN THE TYING AND BUNDLING OF INTELLECTUAL PROPERTY RIGHTS ............................... 103 I. Introduction ........................................................ 103 II. Legal Analyses of Tying and Bundling ................................ 105 III. Tying and Bundling Involving Intellectual Property ..................... 106 A. The Economics of Bundling Involving Intellectual Property .............................................. 107 B. Legal Issues Relevant to Intellectual Property Bundling ..... 108 C. Practical Issues Regarding Intellectual Property Bundling ... 111 D. Suggested Approaches to Improving the Law on Intellectual Property Bundling ........................... 112 IV. Conclusion ......................................................... 114 vi TABLE OF CONTENTS CHAPTER 6: COMPETITIVE ISSUES REGARDING PRACTICES THAT EXTEND THE MARKET POWER CONFERRED BY A PATENT BEYOND ITS STATUTORY TERM ................................... 115 I. Collecting Royalties Beyond the Statutory Term ......................... 116 II. Long Term Contracts Involving Exclusivity ............................. 119 III. Bundling Patents with Trade Secrets ................................... 120 IV. The Agencies’ Analysis .............................................. 122 APPENDICES A. Hearings Participants ................................................ 125 B. Hearings Submissions ............................................... 147 C. Public Comments ................................................... 161 D. Hearings Transcripts ................................................ 167 E. United States Code .................................................. 171 F. Cited Cases and Supporting Documents ................................ 179 G. Publications Cited ................................................... 187 INDEX ......................................................................... 199 ACKNOWLEDGMENTS ......................................................... 210 INTRODUCTION Over the past several decades, rights promote innovation by allowing antitrust enforcers and the courts have intellectual property owners to prevent come to recognize that intellectual others from appropriating much of the property laws and antitrust laws share value derived from their inventions or the same fundamental goals of enhancing original expressions. These rights also consumer welfare and promoting can facilitate the commercialization of innovation. This recognition signaled a these inventions or expressions and significant shift from the view that encourage public disclosure, thereby prevailed earlier in the twentieth century, enabling others to learn from the when the goals of antitrust and protected property. intellectual property law were viewed as incompatible: intellectual property law’s Antitrust laws, in turn, ensure that grant of exclusivity was seen as creating new proprietary technologies, products, monopolies that were in tension with and services are bought, sold, traded, and antitrust law’s attack on monopoly licensed in a competitive environment. In power. Such generalizations are today’s dynamic marketplace, new relegated to the past. Modern technological improvements are understanding of these two disciplines is constantly replacing those that came that intellectual property and antitrust before, as competitors are driven to laws work in tandem to bring new and improve their existing products or better technologies, products, and introduce new products in order to services to consumers at lower prices. maintain their market share.