BACKGROUND DISCUSSION

The Antitrust Guidelines for Intellectual Property (hereinafter “IP”) Licensing (hereinafter “the Guidelines”), issued jointly by the Justice Department and the FTC (hereinafter collectively referred to as “the Agencies”) on April 6, 1995, will undoubtedly have a significant impact on the drafting, negotiation, and subsequent scrutiny, by the government and private citizens, of domestic licensing arrangements, as well as multinational licenses having an impact upon U.S. commerce.3 In theory, the Guidelines should provide a set of clear benchmarks to enable the licensing lawyer to avoid subsequent enforcement pitfalls. In practice, however, the Guidelines are not always unambiguous and will undoubtedly be subject to extensive clarification and interpretation by the Agencies during their review of intellectual property licensing agreements and other IP licensing arrangements (hereinafter collectively referred to as “IP arrangements”), as well as during subsequent enforcement proceedings under the antitrust laws.

The Guidelines build off of the basic premise that IP arrangements are procompetitive, and the Agencies will not assume the existence of market power merely by virtue of an intellectual property right (hereinafter “IP right”). The Guidelines also set forth the general principle that a standard antitrust analysis applies to the scrutiny of IP arrangements, but notes that intellectual property possesses important differences, 4 such as ease of misappropriation, that distinguish it from many other forms of property. That said, the Guidelines then describe a standard of analysis to be applied in examining IP arrangements.

THE TRIPARTITE STANDARD OF ANALYSIS

Under the Guidelines, either of the Agencies may review an IP arrangement for compliance with the antitrust laws by performing a market analysis, presumably in sequential order of (1) goods markets, (2) technology markets, and (3) innovation markets. Although the basic analytical methodology used for these analyses is apparently conceptually analogous, the technology markets analysis appears capable of raising concerns for transactions that pass muster on a goods markets analysis, and the innovation markets approach appears to cast a still wider net. However, not all transactions lend themselves to all three markets analyses. Consider the following distinctions:

1. Goods Markets – In conducting a goods markets analysis, one or both of the Agencies apparently will rely upon well-established methodology to delineate the relevant market and the measurement of market share (in dollars or quantities of goods) attributable to the parties to the IP arrangement being examined. The reviewing Agency will then look for any likely anticompetitive effects (also called “structural effects”) in that market attributable to the subject IP arrangement. To complete the “balancing test” of the goods markets analysis under a Rule of Reason approach, the reviewing Agency will then look for, and evaluate, efficiency justifications for the IP arrangement.
2. Technology Markets – The development of the technology markets mode of analysis appears to be a matter of convenience for the Agencies. More specifically, an IP arrangement containing no direct linkage between the technology being licensed and quantifiable product being manufactured, on either a price or numbers-based approach, is difficult for the Agencies to properly assess to determine the relevant market, market share, and market power associated with the technology being licensed. Moreover, despite the conceptual analogy drawn in Footnote 20 of the Guidelines, the practical difficulty of making a price or numbers-based assessment of the value of a transaction for technology markets arguably makes transactions within these markets not proper subjects for conventional priced-based analysis under the 1992 Horizontal Merger Guidelines. In fact, some courts have come to the conclusion that transactions in technology markets are not conducted in a “line of commerce” for antitrust purposes.6 As a prelude to a technology markets analysis, a threshold question is posed as to whether IP rights are being marketed under the IP arrangement separately from the products in which the IP rights are used. If the answer is “no,” then a technology markets analysis under the Guidelines is inappropriate. In defining a relevant market 7 under a technology markets analysis, the Agencies will look not only to the technology being licensed, but also to close substitutes for that technology or goods in the marketplace. Conceivably then, a technology markets analysis can involve a hybridized goods market analysis with respect to goods in the marketplace that are closely -substitutable for goods not demarcated in the IP arrangement itself. The technology markets approach imposes substantial uncertainty on parties to IP arrangements since it is not even clear whether this mode of analysis is applicable beyond the underlying technology to markets for the IP rights themselves.8 Moreover, from the licensee(or)’s standpoint, defining and evaluating closely substitutable products and technologies presages an administrative and cost nightmare.
3. Innovation Markets – This mode of analysis has its underpinnings in the challenge posed to the Agencies in assessing the likely impact of transactions involving research and development on new technology before the new technology has any actual market impact since the goods that result from the use of the technology may not yet exist. Although the concept of innovation markets conjures up visions of high technology applications, past use of this mode of analysis by the Agencies has included application to improvements in conventional technology.9As a prelude to an innovation markets analysis, there is a threshold question as to whether or not there are at least tour, independently controlled entities that possess comparable capabilities and incentives to undertake R&D for the products produced in accordance with the IP arrangement, or close substitutes thereof. Unfortunately, this threshold question presupposes that a relevant innovation market has been defined, a step that is easier said than done where “cutting-edge” R&D is concerned. Moreover, as alluded to above, there is no certainty that the Agencies will limit application of the concept of innovation markets analysis only to cutting-edge technologies.

The Agencies will consider “close substitutes” for the technology being licensed in an innovation markets assessment, in much the same manner as is done in the technology markets assessment. For an innovation markets analysis, however, the close substitutes include research and development efforts, technologies, and goods that significantly constrain the exercise of market power with respect to the relevant research and development being conducted pursuant to the IP arrangement.

The Agencies will then define the relevant market, evaluate the likelihood and extent of any anticompetitivte effects attributable to the IP arrangement, look for efficiency justifications, and examine collateral restraints related to the IP arrangement. Footnote 25 of the Guidelines points out that a licensor of R&D may be constrained in its conduct not only by competing research and development efforts, but also by the competition imposed by existing goods in the marketplace.

It appears that the Agencies will employ a full tripartite analysis of an IP arrangement when the transaction lends itself to this analysis, since Example 3 of the Guidelines notes that an innovation markets analysis may be employed as an aid in analyzing competitive effects in the relevant technology or goods markets.

OTHER CONSIDERATIONS AND CONCLUSION

Although the Guidelines provide for a 20% market share safety zone as a means of providing some degree of certainty that a transaction is outside of the purview of scrutiny under the Guidelines, this number is very low, and the market share can vary significantly among the modes of analysis under the tripartite test. Moreover, in a newly developing technology, the definition of the relevant market becomes a moving target as the technology evolves and the market develops. Therefore, a transaction can conceivably be within the safety zone during the early stages of the development of a technology, but at risk after a successful introduction to the marketplace.

Exclusive licenses, whereby the licensor does not retain rights to practice the technology being licensed, are subject to the 1992 Horizontal Merger Guidelines and apparently not entitled to the benefit of a haven under the safety zone. This result is unfair since, unlike an outright grant or sale of technology, an exclusive license is typically for a term of years, followed by reversion of the technology to the licensor after the term. In any event, a licensor can retain the benefit of the safety zone by specifically reserving rights for itself to practice the technology being licensed in the IP agreement.

The above-discussed uncertainties relating to the tripartite analysis, and the sheer complexity of carrying out such an analysis, together with the challenge of defending a transaction under scrutiny based upon this uncertain and complex analysis, will make the licensing of IP rights more challenging in the days ahead.

ENDNOTES

1. This article was prepared to accompany a presentation by the authors before the Connecticut Bar Association made on November 1, 1995. The views expressed herein am solely those of the authors.
2. Robert M. Langer and Mary R. Norris are Partners and Dale L. Carlson is Counsel with Wiggin & Dana, located in New Haven, Hartford and Stamford, CT. Mr. Langer was formerly Assistant Attorney General for the State of Connecticut, and Mr. Carlson was formerly Senior Counsel with Olin Corporation. Ms. Norris is head of the Intellectual Property Section at Wiggin & Dana.
3. See generally, United States v. S. C. Johnson & Son, Inc. and Bayer, U.S.D.C. N.D. of Illinois, C.A. No. 94-C50249, 59 Fed. Reg. 43,859 (Aug. 25, 1994), regarding a consent order relating to an agreement dividing territories and having an “effect on U.S. commerce”. See also, the U.S. Department Of Justice and Federal Trade Commission, Antitrust Enforcement Guidelines for International Operations (1995).
    
4. Illustrative of one of these differences, as relates to patents, is the patent statute which states, in pertinent part, that “No patent owner … shall be … deemed guilty of misuse or illegal extension of the patent right by reason of his having … refused to license or use any rights to the patent…” (see 35 U.S.C. 271 (d) (4)). Trademarks are specifically excluded from the IP rights subject to the Guidelines.
    
5. The market share “can be expressed either in dollar terms through measurement of sales, shipments, or production, or in physical terms through measurement of sales, shipments, production, capacity or reserves.” See section 1.41 of the U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, herein the “1992 Horizontal Merger Guidelines”.
    
6. See, for example, Babcock & Wilcox Co.v. United Tech. Corp., 435 F. Supp. 1249,1275 (N.D. Ohio 1977).
    
7. In making this determination, the Agencies will, if possible, “identify the smallest group of technologies and goods over which a hypothetical monopolist of those technologies and goods likely would exercise market power.” See Section 3.2 and Footnote 20 of the Guidelines.
    
8. See comments by L. Kastriner, AIPLA Subcommittee Chair, The Antitrust News, A Publication of the American Intellectual Property Law Association Committee on Antitrust Law, Vol. IV, No. 1, p. 5 (October 1994).
    
9. By way of illustration, the Justice Department challenged a proposed merger between two “automatic truck transmission” producers using an “innovation market” claim based upon scarce specialized assets necessary for market entry where two other causes of action were based upon “narrow product markets”. See U.S. v. General Motors, U.S.D.C. District of Delaware, Civil Action No. 93-530 (dismissed Dec. 3, 1993). As another illustration, the Justice Department challenged a proposed acquisition relating to waterjet pumps that allegedly would result in elimination of actual and potential competition for innovation in waterjet pumps. See U.S. v. Flow Int’l Corp. and Ingersoll-Rand, U.S.D.C. E.D. of Michigan, Civil Action No. 94-CV-71320 (dismissed April 29, 1994).

[Reprinted with permission from The Law Works Volume 2, No. 12 (December, 1995) p. 6.]