By Kevin E. Noonan —

On Tuesday, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) released an extensive (218 page) report on their analysis of the relationship between antitrust law and patent law (see "Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition").  And in what may come as a surprise to many patent practitioners, the report contains mostly good news.

From the beginning of the Introduction to the Report, the tone is positive for patent holders.  The Report acknowledges that in the past, antitrust law and patent law were seen as being in conflict, but that the more enlightened view is to consider them both to be concerned with encouraging innovation and enhancing consumer welfare.  The Report states that patent "monopolies" are not inherently antithetical to the antitrust regime, and that "it is well understood that exercise of monopoly power, including the charging of monopoly prices, through the exercise of a lawfully gained monopoly position will not run afoul of the antitrust laws," citing Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).  Further, "antitrust doctrine does not presume the existence of market power from the mere presence of an intellectual property right."  Ill. Tool Works Inc. v. Indep. Ink, Inc., 126 S. Ct. 1281, 1284 (2006).

The Report focuses on patent licensing behaviors, including unilateral, unconditional refusals to license;   extracting increased licensing royalties as the result of standard-setting and patent-pooling; grantbacks and reach-through royalties; and tying arrangements.  The Report opines that refusal to license, without more, is not an antitrust violation.  The Report expressly rejects the Ninth Circuit’s reasoning in Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), which focused on the patentees’ subjective intent, as being impractical and "out of step" with antitrust analyses based on "objective economic evidence."  However, the Report also rejects the view that 35 U.S.C. § 271(d)(4) provides an exemption from antitrust liability for refusal to license.  Conditional refusals, i.e., refusals containing a condition that can be met vel non and influence the decision to license, may implicate antitrust liability when coupled with market power and competitive harm.

With regard to standard-setting situations, the Report acknowledges that such standards can have pro-competitive and pro-consumer effects.  However, the Report acknowledged the Scylla and Charybdis of anticompetitive activities of standard-setting organizations (SSOs) in standard setting and the anticompetitive activities of patent holders whose intellectual property has increased value due to coverage of the standards set.  The Report encourages transparency from patent holders participating in standard setting, and ex ante agreements to license under reasonable and non-discriminatory terms.  The Report recommends that activities of both SSOs and patent holders be evaluated under the rule of reason.  Specifically, unilateral announcement of licensing terms or price terms would not violate the Sherman Act, nor would bilateral licensing negotiations raise antitrust concerns without additional indicia of anticompetitive behavior.

The Report also recognized the value of patent pools in overcoming "patent thicket" problems, but cautioned against "anticompetitive effects if the arrangements result in price fixing, coordinated output restrictions among competitors, or foreclosure of innovation."  Patent pooling requires more antitrust scrutiny than portfolio cross-licensing, based on increased potential for collusion and collective pricing.  Patent pools were characterized as being generally pro-competitive, although the Agencies will evaluate them under the rule of reason on a case-by-case basis.

Licensing restraints generally received less positive consideration, due to the higher likelihood of anticompetitive effects.  The Repoort recommends that non-assertion clauses, grantbacks, and reach-through royalty arrangements be reviewed under the rule of reason to determine whether the pro-competitive effects outweigh any anticompetitive effects.

Tying and bundling arrangements were also viewed as raising (or being more likely to raise) antitrust concerns due to anticompetitive effects.  The Report recommends continued surveillance of these arrangements, and to consider them illegal when the patent holder has market power, the arrangement has an anticompetitive effect on the market for the tied product, and justification of the tying arrangement on efficiency grounds do not outweigh the anticompetitive effects.

Surprisingly, the Report did not condemn outright agreements that extended the term of patent royalty payments to periods after expiration of the underlying patents.  The Report recognized that such arrangements could have pro-competitive effects, such as requiring lower royalties over a more extended period of time.  The Report also noted that such arrangements themselves only implicate antitrust concerns when the patent confers market power.

In sum, the Report reaffirmed the Agencies’ approval of and continued reliance on the Intellectual Property Antitrust Guidelines while affirming the pro-competitive effects of the current patent regime.  The Report’s recommendations suggest that the "rule of reason" has now extended to these agencies the recognition of the positive effects that patents have on innovation and U.S. competitiveness, features that have been recognized elsewhere.  See "Science Fiction in The New York Times" and "The Continuing Value of Biotech Patenting."