Distribution, Competition, and Antitrust / IP Law

Nine Potential Patent Licensing “No-Nos”

Check the List of “No Nos”

I’ve now completed this series.  For ease of reference, here is a list of all the posts.

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

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.

Thanks for reading.

Potential Patent Licensing “No-No” #9: Minimum Resale Price Provisions for the Licensed Products

Yes or No?

This post is the last in the series of nine posts concerning potential patent licensing “no-nos.” The previous post can be found here.

Today, generally speaking, restrictions on a licensee’s resale prices are not per se illegal as a matter of federal law.  Recent non-patent cases have breathed new life into old doctrine in this area.

In the early 20th century, the Supreme Court held that an IP owner could condition an IP license on the licensee’s agreement to sell licensed product at a specified price. See United States v. General Electric Co., 272 U.S. 476 (1926).  “We think [the patentee] may [limit the sales price], provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.”  Id. at 490.

The exclusive right of a patentee, the Court wrote, “is to acquire profit by the price at which the article is sold.” Id. The Court concluded that this right extended to ensuring that licensees do not undercut the licensor and destroy its margins.

General Electric diverged from the basic rule announced in Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and reconciling the decisions was not entirely easy.  Arguably, General Electric may have been limited to the situation where a patent owner itself manufactures and sells the patented product and also licenses licensees to sell the product.

Since General Electric, courts have further limited its application. See, e.g., United States v. Line Material Co., 333 U.S. 287, 312 (1948); (multiple patentees may not enter a cross-licensing scheme that establishes the resale price of products to be manufactured under cross-licenses); Newburgh Moire Co. v. Supreme Moire Co., 237 F.2d 283, 293-94 (3d Cir. 1956) (“[T]he patent laws were not intended to empower a patentee to grant a plurality of licenses, each containing provisions fixing the price at which the licensee might sell the product or process to the company, and that, if a plurality of licenses are granted, such provisions therein are prohibited by the antitrust laws.”).

The 1995 DOJ/FTC Antitrust Guidelines for Intellectual Property went further and suggested that the agencies will enforce the per se rule against resale price maintenance (“RPM”) in the intellectual property context.  The agencies took the position that General Electric had been effectively overruled, and that fixing a licensee’s resale price was per se illegal.  In the agencies’ view, General Electric actually concerned the first sale of a licensed product, not the resale.  Cf., e.g.United States v. Univis Lens Co., 316 U.S. 241 (1942); Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940) (suggesting IP RPM is in fact unlawful).

However, today, after State Oil Co. v. Khan, 522 U.S. 3 (1997), and Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), vertical agreements on price are no longer per se illegal under federal law. Although Khan and Leegin did not involve patents, there is little reason to think that the federal antitrust rule would be different for patented products.

There is an important caveat: as discussed repeatedly on this blog, state law can and does differ. Some states continue to treat RPM (or at least minimum RPM) as per se illegal. Thus, some continued caution is necessary.

* * *

That’s the end of the nine no-nos series.  As we’ve seen, in very many cases, what used to be a clear “no-no” is now no longer so, and is often permissible.

Potential Patent Licensing “No-No” #8: Restrictions on a Licensee’s Use of a Product Made by a Patented Process

Yes or No?

This post is the eighth in a series concerning potential patent licensing “no-nos.” The previous post can be found here.

Here, we’re concerned with what are vertical restraints: for example, requirements that a licensee sell only to certain customers, or in certain territories. Such restraints are often pro-competitive. See DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property § 2.3 and Example 1.

See also In re Yarn Processing Patent Validity Litig., 541 F.2d 1127, 1135 (5th Cir. 1976) (“But in this case, if the patents are assumed to be valid, then the restrictions on sale were within the scope of the patent grant because they were applied to a manufacturing licensee . . . and because they did no more than to prevent contributory infringement by resale to unlicensed users.”).

However, because of the first sale doctrine (which I’ve covered in prior posts in this series – see here), patent rights are exhausted after the first true sale (not license) of a product. Thus, a territorial restriction on a customer of a licensed manufacturer would not be enforceable under the Patent Act. Nevertheless, it might be enforceable as an ordinary vertical restraint under traditional antitrust law. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

We’re down to one more post in this series: minimum resale price provisions for licensed products. I’ll publish that post by next week.

New Article on Reverse Payment Patent Settlements

Downloads

I’ve added to the downloads section my May 2012 article for E-commerce Law Reports on the Eleventh Circuit’s decision in Federal Trade Commission v. Watson Pharmaceuticals, Inc.  In that case, the Eleventh Circuit rejected the argument that a reverse payment by a branded pharmaceutical manufacturer to a generic manufacturer in exchange for the generic’s agreement to stay off the market violates the antitrust laws, where the agreement resulted from a settlement of patent litigation.

Non-Payment of Patent Royalties Doesn’t Render Sales “Unauthorized”

Patent exhaustion is triggered by a sale “authorized” by the patent holder.  Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 636, 128 S. Ct. 2109  (2008).  I previously covered the doctrine of patent exhaustion here and here.  The doctrine prevents patentees from enforcing patent rights against downstream product purchasers.

In Tessera, Inc. v. ITC, 646 F.3d 1357 (Fed. Cir. 2011), the Federal Circuit held the doctrine of patent exhaustion applies even when a licensee has not yet paid royalties (or has been late paying some royalties).  This Tuesday, the Supreme Court declined to review the Federal Circuit’s decision.

According to the Federal Circuit, there was “nothing in any of the license agreements [at issue] to even remotely suggest that the existence of a condition subsequent, namely, the payment of royalties, operates to convert initial authorized sales into unauthorized sales for purposes of patent exhaustion.”  In focusing on whether the sales were authorized, the Federal Circuit noted that the license agreements expressly authorized licensees to sell licensed products and to pay up at the end of a reporting period.  A subsequent non-payment of royalties would be a licensor/licensee dispute, not a licensor/licensee’s customer dispute.  The Federal Circuit found Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment to be “hollow and unpersuasive.”

Could any non-payment of royalties prevent application of the exhaustion doctrine?  This is not entirely clear, I would say.  One can imagine very clear and precise license language that demonstrates the parties’ express agreement that no sale is authorized until all royalties are paid.  That case, however, has not yet been decided.

(Disclosure: Orrick represented some of the downstream chip manufacturers/purchasers in the Tessera case.)

Patent Law and Self-Replicating Technologies

I blogged about patents, the first-sale doctrine, and self-replicating technologies (genetically-modified plants) here.

I recently came across an interesting post by Jeremy Sheff on application of the first-sale doctrine in the context of self-replicating technologies.  You can find it on the Patently-O blog.  Link below.

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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).

Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

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.

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