Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Potential Patent Licensing “No-No” #4: Restricting the Licensee’s Ability to Deal in Products Outside the Scope of the Patent

Yes or No?

This post continues the series of posts regarding patent licensing and competition issues. The post prior to this one can be found here.

Patentees can, of course, offer either exclusive or non-exclusive licenses. In an exclusive license, the licensee receives the sole right to practice the patent in a field or fields. Under a non-exclusive license, the patentee retains the right to license others.

But there is another type of exclusivity: exclusive dealing in connection with a patent license may exist where express terms or incentives created by the license prevent or restrain the licensee from licensing, selling, distributing, or using competing technologies. Under the approach of the DOJ and the FTC, such exclusive dealing arrangements are evaluated under the Rule of Reason, meaning that in evaluating their legality, the Agencies will take into account the extent to which the arrangement (1) promotes the exploitation and development of the licensor’s technology and (2) anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing technologies.

According to the Agencies, “[t]he likelihood that exclusive dealing may have anticompetitive effects is related, inter alia, to the degree of foreclosure in the relevant market, the duration of the exclusive dealing arrangement, and other characteristics of the input and output markets, such as concentration, difficulty of entry, and the responsiveness of supply and demand to changes in price in the relevant markets.”

Note that some old cases talk about exclusivity requirements as per se patent misuse. However, this is not the approach of the Agencies, is generally inconsistent with modern economic theory, and is arguably at odds with the Patent Misuse Reform Act.

Bottom line: exclusive dealing in connection with a patent license is probably no longer per se unlawful. But that does not make exclusive dealing per se lawful, either. If exclusive dealing potentially causes significant market foreclosure in a technology or innovation market, then it could be subject to challenge.  In other words, the law on exclusive dealing in connection with patent licenses resembles the law on exclusive dealing more generally.

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  1. [...] This post continues the series of posts regarding patent licensing and competition issues.  The post prior to this one can be found here. [...]

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