Distribution, Competition, and Antitrust / IP Law

Potential Patent Licensing “No-No” #7: Royalty Provisions Not Reasonably Related to the Licensee’s Sales

Yes or No?

This is the seventh in a series on potential licensing “no-nos.” You can find the previous installment here.

Even monopolists are entitled to engage in business and earn a profit. Hence, as a general rule, patentees – even assuming that they have a monopoly (and as I’ve noted repeatedly, just having a patent does not mean that a patentee is a monopolist) – can charge what this wish for their patents.

Often, a patentee will charge royalties based on the number of units of product sold, or that equal a percentage of licensee revenues. If the license is conditioned on royalties on products “which do not use the teaching of the patent,” then it may be unlawful as a matter of patent law. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969). “[J]ust as the patent’s leverage may not be used to extract from the licensee a commitment to purchase, use, or sell other products according to the desires of the patentee, neither can that leverage be used to garner as royalties a percentage share of the licensee’s receipts from sales of other products; in either case, the patentee seeks to extend the monopoly of his patent to derive a benefit not attributable to use of the patent’s teachings.” Id. at 136.

But this rule is probably no longer per se.  Under the Patent Misuse Reform Act of 1988, 35 U.S.C. § 271(d)(5), a patentee can condition a patent license on the purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product.  If a patentee has the greater power to condition purchase on a non-patented product, it would seem to have the lesser power to charge royalties based on purchases of non-patented products.

Despite the general Zenith rule, royalties can be calculated according to sales of non-patented goods when the “convenience of the parties rather than patent power dictates the total-sales royalty provision.” Id. at 138. If the licensee is given the option of paying only for patented goods, but for convenience’s sake chooses to pay a fee calculated according to all goods sold, the arrangement is permissible.  However, determining when a royalty is “conditioned” as opposed to when it is “convenient” can be difficult to do in practice.

The Supreme Court in Zenith was addressing patent misuse doctrine. There is a separate inquiry as to whether “metered tying” – where a patentee charges a relatively low price for a patented product, and then ties the product to non-patented products (usually parts or supplies) – should be viewed as an antitrust violation. I covered that issue in a series of three posts here, here, and here.  Under current tying law, such a tie could indeed violate the antitrust laws. I won’t repeat the full tying analysis here.  Feel free to check out my recent presentation on tying law and avoiding liability, which is available in the downloads section.  However, a broad royalty base — one which includes non-patented products — doesn’t really amount to a tie; the element of forced purchases from the patentee seems to be lacking.

Instead, the potential antitrust danger with a broad royalty base is that it could, at least in theory, curtail competition in the non-patented product market, because if a licensee is already paying a royalty on non-patented products, it may have a disincentive to purchase or use competing products.  In that connection, I should note the Microsoft case (United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)). There, the government challenged operating system license fees paid by OEMs calculated according to the number of computers shipped, regardless of whether the computers were loaded with Microsoft’s OS. In other words, Microsoft licensed the OEMs on a “per processor” basis.  Since OEMs had to pay Microsoft for each computer shipped, they were arguably less likely to pay to install a competing OS on their computers. Microsoft agreed in a consent decree to charge the OEMs license fees only for computers actually loaded with the Microsoft OS. The precedential value of a consent decree is of course quite limited.

From an economics point of view, a broad royalty base may have no significance if the non-patented product and the patented product are used in fixed proportions.  For example, if for some strange reason a patentee had a patent on a type of left shoe, and charged royalties on left shoes and right shoes, the royalties would not affect competition for right shoes (assuming left and right shoes are always sold together).

Nine Potential Patent Licensing “No-Nos”

Check the List of "No Nos"

We’re two-thirds of the way through this series. So far we’ve covered:

1. Patent/Product Tying

2. Requiring the Licensee to Assign Back Subsequent Patents

3. Restricting the Right of the Purchaser of the Product in the Resale of the Product

4. Restricting the Licensee’s Ability to Deal in Products Outside the Scope of the Patent

5. A Licensor’s Agreement Not to Grant Further Licenses

6. Mandatory Package Licenses

Up next, over the next few weeks, I’ll finish by looking at:

7. Royalty Provisions Not Reasonably Related to the Licensee’s Sales

8. Restrictions on a Licensee’s Use of a Product Made by a Patented Process

9. Minimum Resale Price Provisions for the Licensed Products

Please stay tuned.

Potential Patent Licensing “No-No” # 6: Mandatory Package Licenses

Yes or No?

According to the federal enforcement agencies’ antitrust/IP guidelines:

Package licensing – the licensing of multiple items of intellectual property in a single license or in a group of related licenses – may be a form of tying arrangement if the licensing of one product is conditioned upon the acceptance of a license of another, separate product. Package licensing can be efficiency enhancing under some circumstances. When multiple licenses are needed to use any single item of intellectual property, for example, a package license may promote such efficiencies. If a package license constitutes a tying arrangement, the Agencies will evaluate its competitive effects under the same principles they apply to other tying arrangements.

This principle is fairly straightforward in theory, if not in actual practice. All things being equal, exclusively offering patent licenses through a package carries more risk than offering them as a package but also offering them separately. As the Agencies note, an exclusive offer can look like tying, potentially enabling the licensor to “leverage” market power over some patents to force a licensee to take a license to other patents. (Note that under Illinois Tool Works, a patent no longer presumptively confers market power; such power must be proven.)

Sometimes package licenses are issued by two or more separate companies.  The practice of multiple defendants’ pooling patents in a mandatory package license becomes even more problematic when the pooled patents contain technology necessary to practice a technological standard.  In essence, these situations may present a potential package license issue wrapped inside a horizontal price-fixing agreement or agreement not to compete issue.  Both patent misuse doctrine and antitrust doctrine may be implicated.

For example, in the Princo case (Princo Corp. v. International Trade Commission, 563 F.3d 1301 (Fed. Cir. 2009)), Philips and Sony independently created two different and technologically incompatible methods of solving the same problem presented by recording address space on a blank compact disc. Instead of choosing one solution to the problem and including the associated patents in the patent pool Sony and Philips created, they put patents relating to both of the solutions in the pool but allowed licensees to use only one solution (the Philips solution), which became the industry standard. The possible or arguable consequence was to prevent Sony’s alternative technology (protected by one Sony patent) from ever being tested (and possibly developed) in a commercial setting.

Princo in fact argued that Sony and Philips had unlawfully and in an anticompetitive manner agreed to pool competing alternative technologies in a patent pool and did so in a manner preventing one of the technologies from being developed. The International Trade Commission (“ITC”) rejected Princo’s argument and its patent misuse defense. The Federal Circuit determined that the allegedly nonessential patent could qualify as essential if a license to practice it “could be viewed as reasonably necessary” to practice the industry standard at the time the licenses were executed. This standard is fairly loose and flexible, and informed by the basic principle that package licensing is usually procompetitive. Because the Sony patent met this standard, there was no illegal tying arrangement.

The court, however, did send the case back to the ITC, requiring the ITC to make key findings on pivotal issues. Primary among these was whether Philips and Sony had agreed not to license the Sony patent in a manner allowing the further development of its technology and the possibility of competition between that technology and the Philips technology. Although the court determined that a package license of blocking patents is not patent misuse as a form of tying, an agreement that prevents the development of alternative technologies could constitute misuse under a theory of elimination of competition or price fixing.

Because Princo contended that Philips and Sony agreed from the outset to license the Sony patent in a way that would necessarily prevent it from ever becoming a commercially viable alternative technology that might compete with the standard Philips technology, the court held that Princo’s misuse claim should not have been dismissed. “It is one thing to offer a pooled license to competing technologies; it is quite another to refuse to license the competing technologies on any other basis. In contrast to tying arrangements, there are no benefits to be obtained from an agreement between patent holders to forego separate licensing of competing technologies . . . .” Id. at 1315-16.

However, on rehearing, the Federal Circuit reversed again, holding that when a patentee offers a license to a patent, the patentee does not misuse the patent by inducing a third party not to license its separate, competitive technology.  That is because any such agreement would not have the effect of increasing the physical or temporal scope of the patent in suit, and it therefore would not fall within the rationale of the patent misuse doctrine.  However, the court did note, possibly in dicta, that such an agreement might be vulnerable to challenge under the antitrust laws.

Moral of the story: package licenses – especially non-exclusive ones – are usually pro-competitive, but they do not necessarily confer an antitrust immunity to enter into horizontal agreements to suppress competitive technologies.

Patent Licensing “No-Nos”

I have not forgotten about the series, which will continue in the very near future.  As you can see from recent posts, other case developments have pushed the schedule back just a bit.

SanDisk’s Flash Memory Patent Licenses and Royalties Do Not Support Antitrust Claims

In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 YGR (April 20, 2012) (Gonzalez Rogers, J.), the court dismissed (with leave to amend) PNY’s antitrust claims against SanDisk Corp. The case again demonstrates the vital necessity of alleging exactly how a defendant dominates which market, and how its activity has allegedly harmed competition in each relevant market. Absent such allegations, complaints will fail.

At issue in the case is computer flash memory. Flash memory is developed by licensors of flash technology (such as SanDisk). Device manufacturers make the flash memory chips. “Aggregators” purchase component parts and assemble usable products. Finally, resellers purchase finished products for resale. SanDisk is vertically integrated, and both owns an extensive patent portfolio and produces its own branded consumer products.

PNY, an aggregator, challenged SanDisk’s licensing and royalty practices. It alleged that SanDisk used the specter of expensive and endless patent infringement litigation to coerce competitors into signing (under the guise of a settlement) its uniform, non-negotiable license, “which gives SanDisk control over the pricing of flash memory technology and products sold to its competitors and, ultimately, to consumers.” Specifically, PNY alleged that SanDisk required licensees to:

  1. Pay multiple royalties on the same product as it is sold downstream through the distribution chain;
  2. Pay a royalty on worldwide sales (including in countries where SanDisk does not have any patent rights);
  3. License an omnibus patent portfolio, rather than specific individual patents; and
  4. Grant back to SanDisk a worldwide, royalty-free cross-license to future flash memory-related technological innovations within the scope of the portfolio.

The court accepted that PNY had adequately alleged monopoly power and barriers to entry in the upstream market for flash memory technology. However, as to the downstream markets for flash memory devices, systems, and products, PNY failed to allege monopoly power. Its allegation that SanDisk uses licenses to extract a royalty on the same patented technology on all downstream market sales did not establish that SanDisk has the power to control downstream prices, so PNY had not directly alleged market power. Nor did PNY adequately allege that SanDisk had the power to exclude downstream competitors.

As to indirect proof of market power, PNY alleged a 40% share of retail sales of flash memory products, but did not allege SanDisk’s market shares in other downstream markets. This left PNY with, at most, an attempted monopolization claim of the retail market. However, because it did not allege barriers to entry and expansion in the retail market (as opposed to the technology market), it had no retail market attempt claim, either.

Finally, the court also found that PNY had not alleged anticompetitive conduct. As to the technology market, where SanDisk owns patents, the complaint did not allege any willful acquisition of a monopoly. As to the other downstream markets, the complaint did not clearly allege the collection of “double royalties” outside the patent exhaustion doctrine, but rather suggested SanDisk was enforcing its patent rights by collecting a separate royalty for separate sets of patent rights. The complaint also did not adequately allege that the grantback provision was anticompetitive, because PNY did not allege that the provision actually has stifled innovation. And as to the licensed patent portfolio, “[t]he fact that PNY entered into a form license over which SanDisk was able to negotiate more favorable terms does not constitute anticompetitive conduct for antitrust purposes.”

Fruit of the Patented Tree?

In criminal law, we have the doctrine of the “fruit of the poisonous tree” — if the government obtains evidence illegally, then any evidence it discovers as a result is also inadmissible.

In the patent world, we have patents on seeds, which are “self-replicating,” and the question whether the next generation seeds from the plants that grow from those seeds are within the scope of the patent.  The Federal Circuit has so far sided with patentees on this question, but the Supreme Court may be preparing to consider the issue, as reported in Patently-O.

Here’s the genesis of the problem: Monsanto bioengineered a soybean that is resistant to Monsanto’s herbicide Roundup.  The soybean is patented, and is “Roundup Ready.”  Monsanto licenses(*) farmers to plant the patented soybeans, and to sell the resulting crops as food, but does not license the farmers to replant the beans.

Some farmers apparently realized that they could buy food beans and replant them, and the resulting crops would also be Roundup Ready (more or less — I believe there are a few complications here, but we’ll skip them).  Such unlicensed use violates the patent, the Federal Circuit held, but now on a petition for certiorari the Supreme Court has asked the Solicitor General to weigh in.  That means there’s a higher chance (though by no means a certainty) that the Court will take up the issue.

Bowman is arguing that the doctrine of patent exhaustion / first sale lets him use replanted beans.  I covered the exhaustion issue recently here.  Monsanto, of course, is arguing that its patent extends to each new generation of plants.

It’s an interesting question.  The problem is that these plants, by their very nature, are self-replicating.  If Monsanto has a valid patent, it may reasonably extend beyond at least one replication — otherwise, only the first patented soybean ever produced would be protected.  On the other hand, if each and every generation of seeds is within the exhaustion doctrine, then the patent (at least before it expires) will never be exhausted.

(*) Or so I understand (the seeds are provided under Technology Agreements that specify what farmers can do with them).  If that’s right, it may make application of the exhaustion doctrine more difficult, because there is no first sale.  But perhaps there is an argument that Monsanto sells seeds.  However, if it sells seeds, it sells particular seeds — not the next generation seeds, which are just a gleam in their parents’ eyes.  That fact again makes it difficult for the first sale doctrine to attach to subsequent generations which have not been sold yet.  This latter sort of logic seems to have persuaded the Federal Circuit.

Potential Patent Licensing “No-No” #5: A Licensor’s Agreement Not to Grant Further Licenses

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.

Here, we’re concerned with an exclusive license.  Under an exclusive license, the licensor agrees not to license others, and may agree not to practice the patent itself.

Generally speaking, an exclusive license — exclusive in the sense that no other licensee is granted rights — does not violate the antitrust laws.

However, an exclusive license

may raise antitrust concerns … if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship. Examples of arrangements involving exclusive licensing that may give rise to antitrust concerns include cross-licensing by parties collectively possessing market power (see section 5.5), grantbacks (see section 5.6), and acquisitions of intellectual property rights (see section 5.7).

DOJ/FTC Antitrust IP Guidelines Section 4.1.2.  In short, if the licensor and licensee are actual or potential competitors, and an exclusive license serves to create or enhance the exercise of market power, the license may raise antitrust concerns.

This is a good time to remind everyone about this blog’s obvious general disclaimer: I try to write these posts to be informative and (hopefully) interesting, but they don’t constitute advice.  Every fact pattern is different, and you shouldn’t take action based merely on a blog post.  Of course.

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.

Potential Patent Licensing “No-No” #3: Restricting the Right of the Purchaser of the Product in the Resale of the Product

Yes or No?

This post continues a series of posts on nine potential “no-nos” of patent licensing. The last post in the series can be found here. (The nine “no-nos” were articulated some forty years ago, and as we’ve already seen, the law has changed between that time and today in certain important respects.  Some “no-nos” are no longer problematic — at least not always.)

Consider the following: you own a patent, and sell or license patented products. Can you impose restrictions on the resale of the products, and if so, are there any limitations on the types of restrictions you can impose? These are the issues addressed — primarily through the prism of patent misuse doctrine — below. This article is a bit longer than usual, so bear with me, or you can read the first few paragraphs and skip to the end for the punch line.

To preview: the treatment of a non-price, non-tying restriction probably depends upon whether it is (i) a license restriction (or a conditional sale) (and thus probably permissible) or (ii) a post-sale restriction the patentee attempts to impose in connection with an unconditional sale.  Note, though, that the law in this area can be complex, and the following is one attempt to make coherent sense of it.

Patent Exhaustion / First Sale Doctrine

Early case law focused on the distinction between restrictions on licensees of the right to make and/or sell patented articles (permissible) and restrictions on end users who use articles in the ordinary pursuits of life (not permissible).  See Adams v. Burke, 84 U.S. 453 (1873).

It is not clear that the manufactuer/end user distinction makes sense.  Under more recent case law, as a general matter, an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of the device thereafter. See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed. Cir. 1997). The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. See id. (citing cases). This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the “use” rights conferred by the patentee. As a result, express conditions accompanying the sale or license of a patented product are generally upheld. See id. These contractual conditions are subject to antitrust, patent, and other applicable law, as well as equitable considerations such as patent misuse. See id.

In Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 (Fed. Cir. 1992), the Federal Circuit outlined the framework for evaluating whether an express condition on the post-sale use of a patented product constitutes patent misuse. Mallinckrodt manufactured a patented apparatus for the delivery of radioactive or therapeutic material in aerosol mist form to the lungs of a patient, for diagnosis and treatment of pulmonary disease. Mallinckrodt provided the apparatus with a package insert that stated: “For Single Patient Use Only.” Medipart received used apparatuses from hospitals, cleaned and reconditioned them, and returned them to the hospitals from whence they came. Mallinckrodt sued Medipart for patent infringement and inducement to infringe.

In reversing a grant of summary judgment to Medipart, the Federal Circuit held that, except as to per se violations such as price-fixing or tying, restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all or part of the patent grant. See id. at 706. “The appropriate criterion is whether Mallinckrodt’s restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.” Id. at 708. The Federal Circuit concluded that the district court erred in holding that the restriction on reuse was, as a matter of law, unenforceable under patent law. If the sale of the apparatus was validly conditioned “under the applicable law such as the law governing sales and licenses,” and if the restriction on reuse was within the scope of the patent grant “or otherwise justified,” then violation of the restriction may be remedied by action for patent infringement. See id. at 709.  Field of use restrictions are generally upheld. See B. Braun Medical, 124 F.3d at 1426.  A restriction on how and where a product can be resold can be thought of as a field of use restriction.

Impact of Quanta Computer

Some authorities believe that in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), the Supreme Court overruled Mallinckrodt sub silentio. See, e.g., Herbert Hovenkamp, Innovation and the Domain of Competition Policy, 60 ALA. L. REV. 103, 11 n.35 (2008); Static Control Components, Inc. v. Lexmark Int’l, Inc., 615 F. Supp. 2d 575, 585 (E.D. Ky. 2009).

In Quanta Computer, LG owned certain patents, and licensed the technology to Intel for use in microprocessors and chipsets, subject to a stipulation that no license was granted to any third-party chip purchasers using the Intel products in combination with non-Intel components. Quanta built computers that employed Intel chips with non-Intel components, and LG sued for patent infringement. The Supreme Court held that the first-sale doctrine barred the suit. LG argued that there was no authorized sale because the license agreement did not permit Intel to sell its products for use in combination with non-Intel products to practice the LG patents. In rejecting this argument, the Court noted that nothing in the license agreement actually restricted Intel’s rights to sell products to purchasers who intended to combine them with non-Intel parts. See id. at 636. “Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.” Id. at 637.  In other words, the LG-Intel agreement did not impose conditions on the sale of patented products, but attempted to impose conditions on the use of those products after an authorized sale.

Even if Quanta Computer did effectively overrule Mallinckrodt, it did so on the basis of the first-sale doctrine. Nothing in Quanta Computer suggests that Mallinckrodt’s field-of-use analysis of license restrictions, effective prior to or at the time of sale, is no longer valid.  This interpretation is consistent with Lexmark.

In Lexmark, Lexmark produced printers and toner cartridges. It allowed consumers to buy printer cartridges free of any restrictions. It also offered “prebate” cartridges at a discount, in exchange for consumers’ agreement to use the cartridges only once and return the empty cartridges to Lexmark. Lexmark sued Static Control for patent infringement because it sold to certain re-manufacturers parts and supplies for reworking used toner cartridges. According to the Lexmark court, Quanta Computer distinguished between conditions restricting the right to sell, like the condition in the license agreement between the patent holder and the manufacturer in General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175 (1938), on reh’g, 305 U.S. 124 (1938), which prohibited the manufacturer from making its initial sales of patented amplifiers to commercial users, and post-sale conditions on use. See Lexmark, 615 F. Supp. 2d at 584-85. Sales of Lexmark prebate cartridges were unconditional. Anyone could walk into a store and purchase a prebate cartridge, or purchase one from the Lexmark website. See id. at 585. Thus, Lexmark’s sales were authorized and unconditional, just like the sales of LG’s patented products in Quanta Computer. See Lexmark, 615 F. Supp. 2d at 585. As such, the sales exhausted Lexmark’s patent rights. See id.

Compare Monsanto Co. v. Scruggs, 459 F.3d 1328 (Fed. Cir. 2006), later proceeding, 2009 WL 536833 (N.D. Miss. Mar. 3, 2009), leave to appeal denied, 345 F. App’x 552 (Fed. Cir. 2009). Monsanto developed patented herbicide-resistant soybeans and cotton. It licensed its biotechnology to seed companies, and imposed licensing restrictions. (For example, seed companies were prohibited from selling seeds to growers who had not signed a Monsanto license agreement. Additionally, seed sold to licensed growers could only be used to grow a single commercial crop. See 459 F.3d at 1333.) Scruggs purchased seeds from seed companies without signing a license agreement, planted them, retained the new generation of seeds and used them to plant subsequent generations of crops. See id. Monsanto won summary judgment for patent infringement. Monsanto’s “no replant policy simply prevents purchasers of the seeds from using the patented biotechnology when that biotechnology makes a copy of itself. This restriction is therefore a valid exercise of its rights under the patent laws.” Id. at 1340. The district court rejected a motion to reconsider predicated upon Quanta Computer. See 2009 WL 536833. Scruggs’ purchases were unauthorized. See id. at *1.


In short, this is one way to square the case law: pre-sale or license conditional restrictions on the use or resale of patented products are generally enforceable — at least if they are supported by contract and licensing law.  When such restrictions are within the scope of the patent grant, they do not usually pose a patent misuse or a Sherman Act concern.  [Note, though, that licensing restrictions that impose a tie requiring the purchase of non-patented products (a practice covered in an earlier post in this series) or that require or impose resale price maintenance (to be discussed in an upcoming post) may be problematic.]  However, per Quanta Computer, unconditional sales accompanied by purported post-sale restraints might constitute misuse (or at least may result in the restraints being unenforceable).

Given the complexities in this area (e.g., is there a true license involved? or is it an unconditional sale?), some forethought is required before implementing any resale restriction.

Potential Patent Licensing “No-No” #2: Requiring the Licensee to Assign Back Subsequent Patents

Yes or No?

This post continues the series about potential patent licensing “no-nos.” The last installment may be viewed here.

Sometimes, patent owners require licensees to grant the patentee rights to any improvements to the licensed technology or to any subsequently-developed and related patents. These provisions – known as “grantbacks” – can be either exclusive or non-exclusive.

As the DOJ / FTC antitrust and IP guidelines state:

Grantbacks can have procompetitive effects, especially if they are nonexclusive. Such arrangements provide a means for the licensee and the licensor to share risks and reward the licensor for making possible further innovation based on or informed by the licensed technology, and both promote innovation in the first place and promote the subsequent licensing of the results of the innovation. Grantbacks may adversely affect competition, however, if they substantially reduce the licensee’s incentives to engage in research and development and thereby limit rivalry in innovation markets.

Grantbacks are not per se unlawful. For example, in Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637 (1947), the Supreme Court applied a rule of reason analysis to a grantback provision in an exclusive license agreement.

Non-exclusive grantbacks are, everything else being equal, much less likely to raise competition concerns. In analyzing grantbacks, courts also look at a number of other factors, including: (i) whether the parties are competitors, (ii) the parties’ market power, (iii) the effect of the grantbank on R&D incentives, (iv) the grantback’s duration, (v) whether the grantbank extends to inventions which would not infringe the licensed patent(s); and (vi) whether the grantback permits sub-licenses. Patentees’ market power, long duration grantbacks, grantbacks that extend beyond the licensed patent(s), and grantbacks that prevent any sub-licenses are – again, everything else being equal – potentially more anti-competitive than grantbacks lacking these features or provisions.

So in closing: patent grantbacks can raise competitive concerns. In most cases, at least some back-of-the-envelope sort of analysis is warranted to make sure that a grantback does not violate any antitrust law. In some cases, a more in-depth analysis may be required.

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