- European Union — Copyright — Licensing — Rights — Technology transfer agreements — United States
12.1 In an ideal world, patents would link inventors and technology users. A conduit for know-how, the patent system would bring cutting-edge functionality to firms wishing to market it and reward licensors with sums reflecting their insights. Firms could immediately identify relevant patents, discern their scope, learn their teachings, and bargain freely with patentees. Technology would flow from rightsholders to product markets, creating desirable incentives on all sides. Parties would avoid duplicated R&D efforts and costly disputes, while focusing on their comparative advantage—be it upstream invention or downstream commercialization. Dynamic efficiency would flourish.
12.2 Alas, the patent regime does not always work that way in practice. Transaction costs are positive, and sometimes prohibitive. In electronics industries, thousands of patents can read on a single device, claim language establishing the boundary of a patented invention is often ambiguous, invalid patents abound, and patent ownership is atomized. As a result, much patent licensing flows from ex post assertion—that is, after a patentee accuses a technology user of having infringed its claimed technology, rather than offering a licence to not-yet-practiced know-how. When ex post licensing occurs on threat of suit, only in a small percentage of cases does it accompany allegations of copying. In many cases, patent lawsuits target independent invention. That state of affairs is not ideal.
12.3 That the patent system does not operate flawlessly, of course, is hardly a stunning revelation. It bears emphasizing, however, that patents can spur innovation, too. Many patentees sell to or license those inclined to bring the technology to fruition. Universities develop patented know-how that they sell to private industry, which brings it to market. Semiconductor design houses research technical solutions, which they then provide to private firms. The National Institute of Health funds research in the life-sciences industry, requiring that funding recipients commercialize their patented biopharmaceutical inventions for the public’s benefit. In all of these cases and more, the patent system gives rise to technology transfer.
(p. 408) 12.4 This chapter analyses the terms on which patentees may—and may not—license their technology. The manner in which knowledge cascades by contract from upstream inventors to downstream technology users implicates antitrust policy. As with all deals, technology-transfer agreements create duties and rights that limit economic freedom and hence may restrain competition. In structuring their technology-transfer deals, firms must understand the relevant antitrust rules.
12.5 The competitive relationship between the patentee and licensee/assignee frames the analysis, of course. A patentee has greater freedom to restrict the conduct of a firm with which it does not compete. If there is no horizontal overlap between the parties, a restraint accompanying a technology-transfer contract is vertical. Competition policy gives such restraints a wide birth—though less so in Europe. There are countless ways patentees and their licensees may wish to structure their agreements. Patentees may want to sell narrow licences, permitting licensees to use the technology for a specified end only. A licensor may wish for grantbacks allowing it to use some or all patented technologies belonging to the licensee in the present or future. A patent owner may desire geographical limitations, allowing its licensees to sell its technology in mutually exclusive areas. Perhaps a patentee wants to sell rights to its technology to a manufacturer, but control the price at which any ensuing goods are sold or limit their number. Licensees may not want these things, but that is part of the give-and-take of bargain, and in any event the ultimate price presumably depends on what a party gives up and gets. There are further questions. Can the parties structure a royalty-payment plan over a term exceeding the duration of the licensed patent? Some technology users may prefer to license their know-how only on condition that a licensee also buy another good or pay for another licence. Further, two or more patentees may wish to cross-licence each other’s IPR holdings or enter into a larger patent pool. Antitrust limits freedom of contract. The question for this chapter goes to the limits that competition law imposes on technology transfer.
12.6 This chapter explores those issues, separately for US and EU law. Both jurisdictions publish licensing guidelines, though the European Commission’s guidelines are the more detailed. To reiterate: this chapter focuses on restraints surrounding ex ante technology transfer. Often, licensing occurs after a patentee accuses a technology firm of infringement and the parties resolve their dispute, with or without litigation. Many such licences raise similar questions as to the obligations that a patentee may lawfully impose. Hence, the following analysis remains on point. The enquiry may differ, however, if the context of ex post assertion raises unique competition-law questions. For instance, as discussed in Chapter 10, patent acquisitions and assertion by dominant firms to raise rivals’ costs may trigger antitrust problems. The larger competitive context—including the circumstances in which the patentee obtained its IPR holdings—remains important. In that respect, a patent-licensing agreement’s content may not tell the (p. 409) entire antitrust story when the context is not one of ex ante technology transfer. The reader should bear that point in mind in the pages that follow.
12.7 Antitrust law on patent licensing has changed dramatically over time. At the turn of the twentieth century, competition law was so deferential that it granted patentees ‘absolute freedom in the use or sale of rights under the patent laws’.1 As the Supreme Court explained in 1902, the ‘very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions ... imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld’.2 On that basis, the Court allowed a patent licensor to fix the price of products incorporating its technology.3 It later reiterated that ‘price fixing is usually the essence of that which secures proper reward to the patentee’.4 In 1912, the Court blessed a licensing contract that forced the licensee to use an unpatented product as a condition of using the licensed technology.5
12.8 The view that patentees may lawfully suppress competition did not endure, however, and through the 1910s the Court turned against anticompetitive patent-licensing restraints.6 First employed through patent misuse, that view later found expression in antitrust law.7 The pendulum swung in favour of strong antitrust limits on patentee conduct. The inhospitable view reached its zenith in 1970, when the Department of Justice issued its ‘nine no-nos’ for patent licensing:
(9) minimum resale price provisions for the licensed products.8
12.9 Today, those nine rules stand as an artefact—a relic of a former antitrust era that lacked an appreciation for economics. The prohibited licensing terms were vertical, but vertical restrictions generally enhance welfare when imposed by an upstream supplier. As the Chicago School’s focus on price theory took hold throughout the 1970s, the law evolved away from a hostile view toward a more tempered one. Few vertical restraints harm competition, and terms that circumscribe licensees’ economic freedom can nevertheless serve a larger, procompetitive purpose. That is not to say, of course, that such restrictions invariably promote consumer welfare. Patent-licensing restraints can indeed injure the competitive process. The point is that, absent hardcore restrictions between horizontal rivals, one should not assume anticompetitive effects, but must scrutinize complex licence terms to determine their likely (or actual) market effects.
12.10 Throughout the 1980s, a more conservative view took hold in the antitrust agencies and federal courts, leading to decreased enforcement. The modern view on how antitrust law should police patent-licensing agreement finds expression in the agencies’ 1995 IPR-licensing guidelines. Although two decades old, those guidelines espouse principles that the bar now generally accepts. Given subsequent developments in technology transfer—particularly with respect to secondary licensing markets and patent aggregators—the guidelines could use a refresh, but they are still the first point of reference. This section now addresses patent-licensing provisions that consistently raise antitrust questions.9
B. Antitrust rules governing patent licensing
12.11 Most patent licences advance consumer welfare. Recognizing that fact, the Justice Department and Federal Trade Commission demarcate a ‘safety zone’ in which firms may license each other free of antitrust concern. Absent a facially anticompetitive restraint—such as naked horizontal price fixing or market division—the agencies will not challenge a patent licence where the contracting parties collectively account for no more than 20 per cent of each relevant market that the restraint significantly affects.10 The agencies will go after a licence meeting those criteria only in ‘extraordinary circumstances’.11 Note, however, that that safety zone does not apply to patent acquisitions.12
12.12 We start with a basic rule: patent licensors may not fix prices.13 One might imagine that law to be axiomatic. How odd it is, then, that this elementary principle lends itself to an exception. In 1926 in General Electric and 1902 in Bement, the Supreme Court held that a patentee could lawfully control the price at which its licensee-competitor sells goods incorporating its technology.14 The courts have narrowly construed General Electric and Bement. Indeed, the Supreme Court came within one vote of overruling them in 1948.15 The agencies have largely ignored those decisions, but technically they remain binding law. Despite this quirk in the law, a patentee would be well advised not to try to fix the price of licensed goods in the downstream market, even if it endeavoured to fit within General Electric by entering into just one such licence with only one licensee. This section addresses patent-licence provisions that purport to control prices.
12.13 First, competitors that cross-license each other may not agree on the prices at which they sell their licensed products.16 In Line Material, the Supreme Court held that, ‘when patentees join in agreement ... to maintain prices on their several products, that agreement ... is unlawful per se’.17 It distinguished General Electric, holding that, while ‘a patentee may, under certain conditions, lawfully control the price the licensee of his several patents may charge the patented device, no case of this Court has construed the patent and anti-monopoly statutes to permit separate owners of separate patents by cross-licences ... to fix the prices to be charged by them and their licensees for their respective products’.18 Importantly, that conclusion holds even if the competitors that cross-license one another hold blocking patents.19 Note further that, if rivals used patents that were either invalid or not infringed, the licensing arrangement would mask a naked cartel. Finally, the Court stressed that ‘cross-licensing to promote efficient production’ is lawful, which is a cornerstone of the law that allows competitors to cross-license one another in order to achieve clearing positions and marketing freedom.20
12.14 Second, licensees may not conspire to stabilize the price of their products by each entering into a patent licence, which includes the same minimum-price provision, with the same patentee.21 In United States Gypsum, a firm of the same name was dominant in the production of gypsum—an input in the manufacture of References(p. 412) plaster—and held the industry’s most important patents. From 1926, it licensed its patents to seven firms that, with United States Gypsum, accounted for almost the entire industry’s production. Each patent licence had a minimum-price provision for the sale of gypsum board. The question was whether that arrangement fell within the lawful patent grant. There was no patent cross-licensing between competitors that controlled price, as was the case in Line Material. Yet, unlike in General Electric, the patentee that licensed the manufacture of infringing products at a minimum price licensed multiple rivals on that price condition, not just one. The Supreme Court found the arrangement illegal on the basis of an inferred horizontal conspiracy among the licensees themselves and with the patentee. General Electric did not apply because ‘[c]onspiracies to control prices and distribution ... we believe to be beyond any patent privilege’.22
12.15 Thus, a conspiracy between competitors to fix price is illegal, even if they realize their plan as common licensees of a patentee that includes a price-setting provision in each licence. The Supreme Court laid any doubt on that proposition to rest in New Wrinkle.23
12.16 Third, even absent a Gypsum-style conspiracy among its licensees, a patentee may lose the protections of the General Electric rule if it enters into more than one licence with a price-setting provision. That possibility goes to the breadth of the General Electric rule. As the courts have interpreted that decision narrowly, a patentee would take a grave risk in entering into multiple patent-licence contracts that restrain sale prices.
12.17 At least one US federal appellate court has held that General Electric reaches no further than one patentee’s granting a single licence with a price-fixing provision to a single licensee.24 In that 1956 decision, the Third Circuit limited General Electric to its facts, observing that ‘the 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’.25 Thus, a patentee may violate antitrust law in fixing price with multiple licensees in the same product market. The Supreme Court enhanced this distinction in 2013 in Actavis, characterizing General Electric as a case in which ‘the Court permitted a single patentee to grant to a single licensee a licence containing a minimum resale price requirement’.26 Although there has been some suggestion that General Electric extends to multiple price-fixing licences between non-conspiring licensees, that proposition looks increasingly dubious in light of General Electric’s tortured history and Actavis’s narrow reading.
References(p. 413) 12.18 Finally, the flip side of price-fixing is agreeing on output. Unsurprisingly, rivals may not use a patent-cross-licensing arrangement to mask a conspiracy to set production levels in the industry.27 Nor may they divide up territories among themselves, masking the deal behind an illusory patent-licensing arrangement.28 Pretextual IPR licences will not deflect antitrust scrutiny.
b. Exclusive licences
12.19 Technology transfer conveys rights in know-how susceptible to commercialization. Often, when rights change hands, the claimed product or method is untested in the market. Assignees can thus undertake risk. Firms must invest capital in developing know-how from its state at the time of acquisition—which may be the minimum conception, utility, and enablement sufficient for patentability—to the point where they are ready to sell. In return for accepting such risk, firms may require a discounted acquisition price, a guarantee that other firms will not obtain rights to practise the technology, or other compensation.
12.20 One possibility is for the patentee to convey all rights in the technology, such that the owner relinquishes control over the patent. The parties can accomplish that goal through an outright sale—that is, an assignment—or an exclusive licence that does not grant anyone other than the licensee—even the patentee—a right to practise the technology.29 Either such arrangement leaves the acquiring party free to invest in the claimed method or product free of fear of undercutting from other firms. Yet, standing alone, such a deal leaves the original patentee vulnerable to infringement claims should it decide to practise the technology. A solution may be an exclusive licence in which the patentee transfers all rights—including the right to sue—under the IPR, but maintains title to the patent and permission to practise its claims. Exclusive licences can thus promote technology transfer, allowing parties to structure mutually beneficial deals based on their respective goals, appetites for risk, and price or royalty preferences.
12.21 Exclusive licences rarely create antitrust issues. In the setting of technology transfer, they take the form of vertical restraints that generally promote efficiency. As noted, they protect technology users from free-riding that would undermine their R&D incentives. Further, when the relationship between the parties to an exclusive patent licence is exclusively vertical, the transaction cannot itself harm competition. Exceptions would arise, if at all, when the acquiring party has the ability and incentive to assert the patent to exclude competition in a manner that the original patentee did not have. In short, when the parties to an exclusive patent licence have a vertical relationship, competition problems are unlikely to result.
(p. 414) 12.22 Antitrust issues may arise, however, if horizontal competitors enter into exclusive patent licences. First, if the licence is strongly exclusive—that is, the licensee alone can practise the technology, such that not even the licensor can do so—the rivals agree not to compete within the scope of the licensed patent. Second, if the licensor reserves the right to practise the know-how, then the parties agree that no other competitor in the market may practise the technology. In neither situation is there an automatic antitrust violation, but potential danger remains. The issue lies in the fact of exclusivity—an agreement among competitors establishing who may practise a technology. Similarly, an exclusive licence between rivals in a technology-licensing market could extinguish competition in the development of a substitute for the licensed technology. The common thread is that horizontal overlap invites antitrust concern. That is why the US antitrust agencies conclude that ‘an exclusive license may raise antitrust concerns only if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship’.30
12.23 Even when the parties to an exclusive licence compete, however, antitrust liability would be the exception rather than the rule. As the arrangement has the potential for efficiencies, the per se rule does not apply. Thus, if there are substitutes to the licensed technology, viable design-around alternatives, or the parties lack power in the relevant market, a violation is unlikely to exist.
12.24 What if the patentee or its exclusive licensee compete and have market power? That situation creates the potential for an antitrust problem, but does not guarantee one. For instance, suppose that the licensed patent is valid, infringed, and consistently enforced by its owner. The assignment or exclusive licence of such a patent to a competitor could not harm competition. Market power could flow from such a patent, but the ensuing distortion would be a function purely of the patent grant and invariant to the patent owner’s identity. The exclusive licensing of such a patent could injure the competitive process only if it were a ruse to cover a separate deal (such as for the licensee not to develop a substitute technology).
12.25 Competitive dangers loom when the licensed patent is invalid, not infringed, or not enforced by its owner. Suppose that a firm owns an invalid or irrelevant patent and exclusively licenses it to its rival on condition that, in return for a large sum (i.e. a share of the ensuing monopoly profits), the rival alone will manufacture the goods incorporating the ‘claimed’ technology. In such cases, an exclusive patent licence would be a pretext for a cartel. Similarly, licensing a patent to one’s competitor to mask an agreement that the licensee cease developing a viable alternative technology would be illegal. This result reflects a universal rule: any arrangement licensing a patent as cover for a horizontal cartel violates antitrust law. Whether the mechanism employed to disguise the hardcore restraint is an exclusive patent licence or something else, a Sherman Act violation ensues.
(p. 415) 12.26 Consistent with these principles, courts rarely find an antitrust violation based on a mere exclusive licence standing alone, even when the parties are competitors.31 Finally, note that exclusive patent licences can be asset acquisitions for the purposes of Section 7, and may trigger reporting requirements under the Hart-Scott-Rodino Act.32
c. Field of use restrictions
12.27 Many patent licences dictate how the licensee may use the proprietary technology. Field of use restrictions typically limit authorized practice to a specific product market or use. Their utility derives from the fact that some technologies bear multiple applications, while others benefit from commercial development by multiple firms with distinct areas of expertise. Thus, to realize the full value of their inventions and efficient commercialization, patentees often grant their licensees incomplete rights.
12.28 For instance, a claimed method may bear lucrative potential both in a market where the patentee competes and one in which it does not. Wishing to maintain its cost advantage vis-à-vis its rivals, the patentee may wish to have exclusive use of its invention in the first market, but also want to monetize its process in the second. A licence with a field of use restriction limiting authorized practice to the market where the patentee does not compete would protect the inventor, bring the benefits of a new technology to a further market, and magnify the inventor’s return from invention. Those benefits may be significant if the patentee were disinclined to enter the second market, and would not license a third party absent protection in the first market. In short, field of use restrictions allow patentees to guide their technologies’ development and path to market, in the process boosting their bottom line.
12.29 So, why is there an antitrust issue? Typically, there is none. As restraints that accompany technology transfer, field of use restrictions are vertical and presumptively procompetitive. As noted, the restrictions carry potential for strong efficiencies and should be upheld in most cases. The Supreme Court has long held that field-of-restrictions may pass muster under antitrust scrutiny.33 The Federal Circuit has held that ‘[f]ield of use licensing restrictions, i.e., permitting the use of inventions in one field and excluding it in others, are also within the scope of the patent grant’.34 The Seventh Circuit has rejected misuse allegations that ‘it was unlawful for [the patentee] to restrict the classes of consumers to whom (p. 416) manufacturer-licensees could sell’.35 Finally, consistent with modern economic analysis, the antitrust agencies recognize that ‘[f]ield-of-use ... limitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible’.36 When a patentee merely subdivides its exclusive rights, it is unlikely to harm competition if it and its licensee would not been actual or likely competitors but-for the licence.37
12.30 Yet, the agencies once looked upon field of use restrictions with disfavour. Why? The answer was an impressionistic aversion to restraints that inhibit any discernible form of competition. For instance, a licensee that agrees to a field of use restriction lacks the right to compete using the technology in fields outside the licence. Had the patentee sold a licence that were not so restricted, competition within the technology may have been greater. This line of thinking makes the perfect the enemy of the good, and overlooks that the restraint may have been a but-for cause of the licence. Failing to ask what the restraint makes possible is a significant mistake. Intra-brand restraints inhibit commercial freedom within the chain of distribution, but they enhance more valuable competition between brands. The same principle applies to technology. If not allowed to restrict its licensee’s field of use, a patentee may elect not to license at all, which is hardly a boon to competition, especially if the prospective licensee could have practised the technology at lower cost.
12.31 As with all IPR-related vertical restraints, however, field of use restrictions may harm competition when the parties have a horizontal relationship. Even competitors, of course, can enter into bona fide technology transfer, as when an inventor charges its rival a monopoly price in return for granting rights to practise a valuable new technology. There, too, limiting a rival’s scope of practice may be legitimate, and perhaps a sine qua non for the patentee in agreeing to license its competitor. Where the patent licence conveys rights to technology that the licensee will practise, the deal remains vertical even if the parties otherwise compete. Yet, scrutiny is warranted to ensure that the licence does not mask a horizontal restriction. A field of use restriction—like a territorial restriction—could be an effective mechanism for horizontal competitors to divvy up a market among themselves.38 Parties should thus be prepared to show that such a licensing restraint is indeed vertical.
d. Grantback provisions
12.32 Many licensor-patentees wish to protect their marketing freedom. A potential threat is that a licensee may build upon the licensed technology, get an improvement patent, and prevent the original licensor from using it. Given the ‘patent (p. 417) thicket’ that can encumber commercialization, firms have ample reason to clear their operating space. Further, a patentee may lose out on a share of the value of its technology when a licensee alone realizes the fruits of its development. Grantback clauses are therefore popular.
12.33 Grantback provisions require the licensee to provide the patentee a reciprocal right to practise certain future technologies developed by the licensee. The competitive effects of such agreements depend on the breadth of the duty imposed. Grantback clauses that require non-exclusive licences over improvements to the licensed technology promote competition in all but the most outlandish situations. They invariably pass muster because they allow patentees to practise future iterations of their technologies, and also permit licensees to license other firms. Both features promote competition. Meanwhile, its non-exclusive nature means that the clause is unlikely to compromise licensees’ incentive to improve the licensed know-how.
12.34 By contrast, an exclusive grantback provision untethered to the licensed technology would raise concerns. Where a grantback clause embraces technologies invented by the licensee that do not derive from the licensed technology, it encumbers the licensee’s incentive to invent other know-how. The grantback’s exclusive nature may also enable a dominant patentee to maintain its market position by acquiring rights to new technologies that will not be available to its competitors. Obviously, the competitive danger depends on the patentee’s market position at the time of the exclusive grantback licence and the market power, if any, that it enjoys.
We are quite aware of the possibilities of abuse in the practice of licensing a patent on condition that the licensee assign all improvement patents to the licensor. Conceivably the device could be employed with the purpose or effect of violating the anti-trust laws. He who acquires two patents acquires a double monopoly. As patents are added to patents a whole industry may be regimented. The owner of a basic patent might thus perpetuate his control over an industry long after the basic patent expired. Competitors might be eliminated and an industrial monopoly perfected and maintained.Through the use of patent pools or multiple licensing agreements the fruits of invention of an entire industry might be systematically funneled into the hands of the original patentee.40
12.36 The enforcement agencies recognize that grantback agreements allow the parties to a technology-transfer deal to share the risks and reward, and may promote(p. 418) innovation and future licensing.41 They also agree that non-exclusive grantback clauses are more likely to promote competition and less prone to have anticompetitive effects.42 In analysing such arrangements, the agencies will consider the extent of the licensor’s market power in the technology or innovation market, determine whether the clause will likely hamper licensees’ incentive to improve the licensed technology, and if necessary consider any offsetting procompetitive effects like wider dissemination of the licensed and improved technologies.43 In practice, the courts approve non-exclusive grantback provisions.44 Even exclusive grantback clauses will not run afoul of antitrust law if the patentee lacks market power in licensing its technology, such as if good substitutes for that technology exist.45
e. Patent-based tying
12.38 A classic way for patentees to get themselves in trouble was to insist that their licensees buy products or IPRs beyond the patent licence of interest. Long viewed with hostility, patent-related bundling and tying have found greater favour in recent times.46 In 1988, Congress amended the Patent Act to provide that a patentee could not misuse its IPRs in tying a licence to another patent or product unless it had market power.47 With the holding in Illinois Tool Works that the law will not presume market power from patent ownership, the result is a space far more accommodating of patent-related bundles and tie-ins than before.48 That is all the more so after the Federal Circuit’s opinion in Philips that package licensing is not per se misuse and does not violate the rule of reason, at least when the tied (unwanted or irrelevant) patents are included for free.49
References(p. 419) 12.39 Despite the law’s evolution away from outright hostility, lawyers would do well to advise their clients not to require licensees to buy or take something other than the patent licences they want. A quasi-per se rule against product tying remains.50 As the Supreme Court observed in 2015, tie-ins remain unlawful ‘if the patent holder wields power in the relevant market’.51 Given the storied precedent against patent-related tying, it is easy for accused infringers or unhappy licensees to assert misuse or an antitrust violation based on tying. Whether such parties could ultimately prove their defence or claim is a different matter, but tie-ins can invite trouble.
12.40 Nevertheless, it is entirely legitimate for a patentee to grant a package licence to its portfolio, thus saving the parties the difficulty of identifying which specific patents are relevant to the licensee’s business.52 That practice is common because it reduces licensing costs. The circumstances should make clear, however, that the parties agree to the patent bundle for convenience.53 Coercion by a patentee bearing market power likely falls within prohibitory Supreme Court precedent.54 The distinction can be difficult to tease out in practice, though, since many patent licences materialize under threat of suit. As many licensees sign the dotted line facing claimed infringement, allegations of coercion may be hard to dispel at the pleading stage. It would be good practice, then, for patentees to make clear that a portfolio licence is not the only option.
f. Portfolio cross-licensing and patent pools
12.41 Technology transfer classically involves the one-way flow of proprietary knowledge from patentees to technology users. Many patent-licensing agreements, however, involve reciprocal licensing. Cross-licensing invites antitrust considerations not always present in the classic case of technology transfer, and thus merits stand-alone treatment. The concern is that the mutual exchange of patent rights implies horizontal overlap between the contracting parties.
12.42 Reciprocal licensing takes one of two forms. The first is a portfolio cross-licensing agreement that allows the contracting firms to practise each other’s claimed technologies. Such arrangements rarely provide for third-party licensing. Some portfolio cross-licences involve reciprocal royalty-free permissions, but in others one party pays the other a royalty, in addition to providing a licence. That outcome typically follows when one party has a relatively weaker portfolio or bore the brunt of patent litigation that the cross-licence settles.
(p. 420) 12.43 The second form of reciprocal licence is a patent pool. That structure usually arises when firms create a separate entity that (a) receives licensing authority over the members’ relevant patents; (b) licenses third parties on terms reflecting the members’ agreement; (c) distributes royalty revenues among the members according to an agreed-upon formula; and (d) administers the pool to ensure that it operates properly, such as by siphoning off patents that expire, are deemed invalid, or that are no longer essential for practising the technology or standard for which the parties created the pool. The dividing lines between portfolio cross-licences and patent pools are not always crystal clear, but both reciprocal licensing arrangements can create similar antitrust issues.
12.44 Why do competitors cross-license one another or pool their patents? Certainly, an anticompetitive goal could underlie such an arrangement, which possibility we consider momentarily. Far more often, however, reciprocal-licensing deals are procompetitive, even when they involve rivals. The impetus can lie in joint ventures or standard-setting organizations, leading patentees to allow each other to practise collaboratively developed, new technologies. Other multi-directional licensing contracts may not involve technology transfer in the strict sense—that is, the licences may grant rights to practise technologies already in use. Many such deals arise from a wish to foster ‘patent peace’, as when firms settle infringement disputes by allowing each other to practise their claimed technologies. Also, reciprocal licensing eases patent-related burdens to technology marketing, such as the patent-thicket and anticommons effects that inhibit firms’ ability to achieve clearing positions. Those problems arise in industries, like semiconductors and information technology, where firms must combine a great many discrete technologies to create a larger product. In that setting, the sheer number of patents and the unclear scope of claim language make guaranteed clearing positions hard to achieve.
12.45 Thus, firms can use reciprocal licensing for socially beneficial ends, often as private-ordering solutions to problems borne of the patent system. Yet, dangers to competition lurk all the same. Cross-licensing typically involves some horizontal overlap in a product or technology market, meaning that the firms could use the contract to inhibit competition. For example, two firms in a market may collectively own essential technologies, and use an exclusive cross-licence to deny any other competitor access to those rights. Separately, by pooling their patents, owners of functionally interchangeable technologies may eliminate competition and share the ensuing monopoly profits through a collaboratively fixed pool royalty rate. Further, a monopsonist or collectively dominant group of firms may force the owner of a compelling technology to license it at no or little cost, thus depriving the patentee of an optimal return. In the most brazen case, competitors may simply agree to stabilize prices or output in a product market, and hide their arrangement behind the veneer of an ostensibly legitimate cross license. For such reasons, antitrust agencies properly scrutinize reciprocal patent licences.
12.46 Despite potential dangers to competition, the starting point is that cross-licences and pooling arrangements generally promote competition.55 By pooling complementary patent rights, such deals can yield static-efficiency benefits in the form of higher output and lower royalties. Mutual blocking positions can encumber competition, delaying the arrival of new technologies and increasing their cost. Cross-licences may alleviate that problem, and patent pools may create one-stop shops. Similarly, when technology users end patent litigation and instead invest in R&D, consumers win. Cross-licences are the mechanism through which such peace is typically made.
12.47 It is no surprise, then, that the agencies believe that ‘cross-licensing and pooling arrangements are often procompetitive’.56 When problems arise, it is usually because the parties suppress competition in a manner unnecessary to achieve the efficient purposes of the cross-licence.57 The most extreme case is where a cross-licence masks a hardcore restraint on price or output. In such cases, per se condemnation results.58 A classic example is Singer, where competitors settled patent litigation, but through a pooling arrangement agreed to assign patents to the conspirator best placed to exclude their mutual rival.59 The Supreme Court found that the arrangement was per se unlawful.60 By contrast, in 1979 the Court declined to find a per se violation when a performing-rights organization—an aggregator and licensor of copyrights to musical works—sold rights to its repertory in blanket-licence format.61 Pooling those IPRs created powerful efficiencies in the form of a one-stop-shop, the restraint was necessary if the blanket licence were to exist at all, and the arrangement protected competition by ensuring that music users had a ‘real choice’ between buying the aggregator’s blanket licence and buying licences directly from the rightsholders.62 The analysis of patent pools and cross-licences as to whether they inhibit competition more than is necessary mirrors the law applicable to joint ventures.63
The rate of royalties may, of course, be a decisive factor in the cost of production . . . Where domination exists, a pooling of competing process patents, or an exchange of licenses for the purpose of curtailing the manufacture and supply of an unpatented product, is beyond the privileges conferred by the patents and constitutes a violation of the Sherman Act. The lawful individual monopolies granted by the patent statutes cannot be unitedly exercised to restrain competition. But an agreement for cross-licensing and division of royalties violates the Act only when used to effect a monopoly, or to fix prices, or to impose otherwise an unreasonable restraint upon interstate commerce.67
12.49 Under Standard Oil and its progeny, price fixing through a patent pool is per se unlawful if it goes to products in the downstream market.68
12.50 Closed pools and exclusive cross-licences also raise competition issues. As antitrust policy promotes competition, restraints that inhibit access to inputs and customers can invite scrutiny. Exclusivity invites greater antitrust danger, and reciprocal patent licensing is no exception. Of course, exclusivity provisions are typically lawful and procompetitive. Vertical restraints allow manufacturers to optimize their distribution chain, thus fostering interbrand competition. Even horizontal restraints can pass muster, such as in a joint venture when provisions limiting competition between the parties can be necessary for the venture to work at all.69 It is no different for portfolio cross-licences and patent pools. Patentees can agree to license each other exclusively—that is, agree not to license anyone not privy to the cross-licence—if that restraint does not injure the competitive process.70 A principal justification for closed licensing arrangements may be elimination of References(p. 423) free-riding and inculpating incentives to invest.71 No antitrust rule categorically prohibits the exclusion of licensors from a pool.72 Indeed, the Supreme Court has held that it is not per se unlawful for pool members to exclude a competitor from the pool absent market power.73
12.51 Yet, exclusivity can cause problems. Exclusive reciprocal licensing may sometimes deprive rivals of technology needed to compete in the market. Thus, the agencies are unlikely to challenge a pool or cross-licence that excludes a competitor unless the cross-licensing parties collectively have market power and the exclusion deprives rivals of the ability to compete effectively in the relevant market.74 These principles can result in antitrust liability for some closed patent pools. For example, a pool agreement that grants every member a veto as to whether the pool may license a third party can violate the Sherman Act if the patentees collectively have market power.75 Similarly, a closed pool may trigger antitrust problems if those privy to it agreed to license exclusively through the pool and exercise veto power over pool licences.76 In that event, the parties may restrain competition beyond what is reasonably necessary to realize the benefits of the pool.77 Finally, agreeing to pool patents and assert them against rivals is per se unlawful.78
12.52 A recurring antitrust concern in patent pools involves the economic relationship of the constituent patents. Technology markets comprise substitute patents that are reasonably interchangeable with each other at the marginal cost of their licensing. When two or more substitute technologies fall within a single pool, price may rise due to a loss of competition. The most extreme case would be a pool comprised exclusively of substitute patents—a cartel. In practice, however, it is seldom clear how many patents within a pool occupy the same technology market. Substitutability and complementarity are polar opposites in economic theory, but badges can be difficult to apply to claimed technologies, especially to ones susceptible of multiple applications and competing interpretations. Further, there is no per se rule against including nonessential patents in a pool.79 The Justice Department has provided useful insight on this question through its business-letter-review procedure. Responding to formal patent-pool proposals from private firms, the Antitrust Division has approved proposed pools that employ an independent (p. 424) procedure to try to ensure that constituent patents are essential and hence complements, rather than substitutes.80
12.53 Finally, the agencies are sensitive to the risk that a pooling arrangement may deter innovation by foisting suboptimal royalty terms on current or future patentees through monopsony power.81 Nevertheless, an antitrust violation on that ground would require strong facts. Ongoing cross-licensing duties at low rates may promote the pool’s raison d’être: eliminating blocking positions and fostering commercialization. For that reason, the Federal Trade Commission and Justice Department are likely to challenge mandatory-licensing duties in pools and cross-licences only where the arrangement would implicate a large fraction of the potential R&D in an innovation market.82
12.54 EU law recognizes the virtues of patent licensing. To encourage technology transfer, the European Commission has created a legal safe harbour for certain licensing contracts that fall within 20 and 30 per cent market-share thresholds (for competitors and non-competitors, respectively) and that do not contain hardcore restrictions on competition.83 For parties that do not qualify for the safe harbour, the Commission has published detailed guidelines on restraints commonly found in technology licences.84 The result is a rich source of law and insight on the Commission’s enforcement thinking.
12.55 This section explores the 2014 Technology Transfer Block Exemption Regulation (TTBER), which allows firms to license free of antitrust risk within set parameters. We present the TTBER’s key provisions in light of the regulation’s accompanying guidelines. The section then addresses common licensing restrictions to explain how the Commission would likely evaluate them should they fall outside the TTBER. Those restraints include exclusive licences, sales and output restrictions, field of use restrictions, non-compete obligations, grantbacks, and patent pools.
a. The TTBER’s core provisions
12.56 The TTBER exempts technology-transfer agreements (1) between two competitors where their combined market shares do not exceed 20 per cent in any (p. 425) relevant market and (2) between two non-competitors where no party’s individual share in any relevant market exceeds 30 per cent, but only insofar as the agreement lacks any hardcore restriction of competition.85 The regulation takes qualifying technology-transfer deals outside of Article 101 by presuming that they satisfy the conditions of Article 101(3).86
12.57 Since market share controls the scope of the TTBER’s exemption, it is important to understand how the Commission calculates the 20 and 30 per cent market-share thresholds. The agency looks to the preceding calendar year using market-sales value data, where available, but relying on other reliable market information, such as market-sales volumes, otherwise.87 To calculate a licensor’s share of the relevant market for the relevant technology rights, the Commission looks to the downstream product and geographical market in which the goods made with the licensed technology (contract products) are sold.88 It calculates market share based on the sales data of all contract products sold by the licensor and its licensees.89 Finally, if the parties’ market share is initially below the operative 20 or 30 per cent threshold, the fact that that share later rises above the limit does not immediately bring the technology-transfer agreement outside the TTBER.90 Rather, the exemption continues to apply for two consecutive calendar years beyond when the parties exceeded the market-share threshold.91
12.58 There are important limitations on the scope of the TTBER. First, the regulation governs technology-transfer agreements between two undertakings.92 Thus, portfolio cross-licensing agreements among three or more firms, and patent pools, do not qualify.93 Even there, however, the TTBER remains influential because the Commission will follow the principles espoused in, and underlying, the block exemption.94
12.59 Second, hardcore restrictions of competition do not qualify.95 If a licensing contract includes a severely anticompetitive provision, such as fixing the price of their competing goods in a downstream market, then the entire agreement loses protection under the TTBER.96
12.60 Third, the TTBER does not exempt ‘excluded restrictions’, but the effect differs from hardcore restraints. Excluded restrictions mean exclusive grantback References(p. 426) obligations—non-exclusive grantback terms qualify for safe-harbour protection—clauses requiring a party not to challenge the validity of the other party’s IPRs, and provisions that limit a non-competing licensee’s use or development of its own technology.97 Any such restriction requires individual scrutiny to determine its effect on competition but, unlike a hardcore restriction, an excluded restriction does not disqualify the larger technology-transfer agreement from exemption if the restriction is severable.98 Fourth, the TTBER does not apply to contracts subject to the Research and Development Regulation (No. 1217/2010) or to the Specialisation Agreement Regulation (No. 1218/2010).99
12.61 Although the TTBER gives qualifying undertakings comfort that their patent licenses satisfy EU competition rules, the Commission may lift the exemption in individual cases.100 Withdrawal is most likely where licences that restrict access to technologies or markets proliferate to the point that their cumulative effect inhibits competition.101 Standing alone, such agreements would satisfy the TTBER, but the Commission will not close its eyes to the larger commercial context. Where such restrictions cover more than half of a relevant market, the Commission may declare by regulation that the TTBER will not apply to technology-transfer agreements containing those restrictions in the relevant market.102 In that latter case, however, the agreements are not prohibited, but are subject to challenge before courts that are otherwise bound by the block exemption. In other words, withdrawal necessarily implies prohibition, whereas disapplication does not.
b. Hardcore restrictions
12.63 As a hardcore restriction strips the entire agreement of safe-harbour protection under the TTBER, undertakings must not include one. There is no surprise in what restrictions the Commission considers to be severely anticompetitive. Under the TTBER, whether a restraint is ‘hardcore’ depends on the contracting parties’ relationship. We include the precise language below, but in short this is as follows.
12.64 If firms compete, they may not fix the price of a product, limit output, allocate markets, or encumber the licensee’s right to exploit or develop its own technology.103 Where the firms have a vertical relationship—and thus do not (p. 427) compete—the universe of restrictions deemed hardcore is more limited. In such cases, and again with qualifications, undertakings may not control the price of a product, other than as to a maximum or recommended sale price, limit the territorial scope of passive sales of goods used making the licensed technology, or restrict active or passive sales to end-users by a retail-operating licensee that is a member of a selective-distribution system.104 Finally, if two undertakings do not compete when they enter into a technology-transfer agreement and include a provision that would be a hardcore restriction if they were rivals, their subsequently becoming competitors does not retroactively deprive their agreement of exemption.105 Only if such firms materially alter their agreement after becoming rivals will the hardcore-restrictions rules applicable to competitors apply.106
12.65 The devil is in the details, of course, and so the first two paragraphs of Article 4 of the TTBER are worth reproducing in full:107
1. Where the undertakings party to the agreement are competing undertakings, the exemption provided for in Article 2 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object any of the following:
(a) the restriction of a party’s ability to determine its prices when selling products to third parties;
(b) the limitation of output, except limitations on the output of contract products imposed on the licensee in a non-reciprocal agreement or imposed on only one of the licensees in a reciprocal agreement;
(c) the allocation of markets or customers except:
(i) the obligation on the licensor and/or the licensee, in a non-reciprocal agreement, not to produce with the licensed technology rights within the exclusive territory reserved for the other party and/or not to sell actively and/or passively into the exclusive territory or to the exclusive customer group reserved for the other party,
(ii) the restriction, in a non-reciprocal agreement, of active sales by the licensee into the exclusive territory or to the exclusive customer group allocated by the licensor to another licensee provided the latter was not a competing undertaking of the licensor at the time of the conclusion of its own licence,
(iii) the obligation on the licensee to produce the contract products only for its own use provided that the licensee is not restricted in selling the References(p. 428) contract products actively and passively as spare parts for its own products,
(iv) the obligation on the licensee, in a non-reciprocal agreement, to produce the contract products only for a particular customer, where the licence was granted in order to create an alternative source of supply for that customer;
(d) the restriction of the licensee’s ability to exploit its own technology rights or the restriction of the ability of any of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent the disclosure of the licensed know-how to third parties.
2. Where the undertakings party to the agreement are not competing undertakings, the exemption provided for in Article 2 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object any of the following:
(a) the restriction of a party’s ability to determine its prices when selling products to third parties, without prejudice to the possibility of imposing a maximum sale price or recommending a sale price, provided that it does not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;
(b) the restriction of the territory into which, or of the customers to whom, the licensee may passively sell the contract products, except:
(ii) the obligation to produce the contract products only for its own use provided that the licensee is not restricted in selling the contract products actively and passively as spare parts for its own products,
(c) the restriction of active or passive sales to end-users by a licensee which is a member of a selective distribution system and which operates at the retail level, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment.108
12.66 Certain restrictions cannot presumptively satisfy Article 101(3), even if the parties account for a modest market share, and yet are not so inherently destructive of competition as to warrant summary condemnation. The TTBER tackles such provisions by withholding them from safe-harbour protection, but exempting the larger technology-transfer deals of which they are part if the offending clause isseverable.109 The TTBER refers to such clauses as ‘excluded restrictions’, which it defines as follows:
(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new applications of, the licensed technology;
(b) any direct or indirect obligation on a party not to challenge the validity of intellectual property rights which the other party holds in the Union, without prejudice to the possibility, in the case of an exclusive licence, of providing for termination of the technology transfer agreement in the event that the licensee challenges the validity of any of the licensed technology rights.
2. Where the undertakings party to the agreement are not competing undertakings, the exemption provided for in Article 2 shall not apply to any direct or indirect obligation limiting the licensee’s ability to exploit its own technology rights or limiting the ability of any of the parties to the agreement to carry out research and development, unless such latter restriction is indispensable to prevent the disclosure of the licensed know-how to third parties.110
12.67 Technology transfer does not lose its social value simply because one or more of the parties has market power or is dominant. Patent licensing is ubiquitous in the new economy, involving the smallest and the most powerful technology companies alike. While the risk of anticompetitive effects rises with market power, harm remains the exception rather than the rule. For that reason, an antitrust prohibition of patent licensing by dominant firms would harm economic welfare. Thus, the law should facilitate efficient technology transfer, but prohibit the relatively few licensing contracts that injure competition. Obviously, then, a safe-harbour exemption would be inappropriate for firms with significant market power. Yet, dominant firms require some measure of legal certainty to craft patent-licensing terms that respect competition rules.
References(p. 430) 12.68 The Commission recognizes that licensing restrictions do not presumptively satisfy Article 101(3) when undertaken by powerful firms. That is why the TTBER denies protection to competitors that have more than 20 per cent market share and to non-competitors that have over 30 per cent market share. Nevertheless, technology-transfer agreements between firms with significant market power can still promote consumer welfare. Hence, the Commission’s guidelines also analyse common licensingrestrictions in contracts that do not fall within the TTBER’s safe harbour. Above all, the Commission emphasizes that ‘[t]he great majority of licence agreements are ... compatible with Article 101’.111 Further, the fact that a technology-transfer agreement does not fall within the TTBER’s block exemption does not create a presumption that the contract triggers Article 101(1) or fails to satisfy Article 101(3).112
a. Exclusive and sole licences
12.70 The European Commission distinguishes exclusive licences from sole licences. In an exclusive licence, the patentee agrees that the licensee is the only entity that may practise the licensed technology for a particular use or in a given territory—not even the licensing patentee may do so.113 By contrast, in a sole licence, the patentee only agrees not to license third parties within a given territory.114 Thus, in the latter case, the patentee may continue to practise the claimed technology, potentially allowing some competition to occur within the scope of the patent. The distinction matters for the restrictions upon which the parties to a patent licence may agree.
12.71 Reciprocal exclusive licensing between competitors is a no-no.115 That conclusion holds true regardless of the parties’ market share because the agreement is a hardcore restriction.116 The prohibition does not extend to reciprocal sole licences, however, into which competitors may enter and enjoy block exemption if their market share does not exceed 20 per cent. Beyond that level, full scrutiny attaches to reciprocal sole licences, which may facilitate collusion.117
12.72 Exclusive licensing between rivals still qualifies for block exemption, however, absent reciprocity and if the parties’ market share does not rise above 20References(p. 431) per cent.118 Above that threshold? A non-reciprocal exclusive licence means that the patentees agree not to compete within the territory specified by the agreement. Therefore, if the patentee lacks significant market position or could not effectively exploit the technology within the licensee’s territory, the competitive implications are minimal and the agreement is not likely to implicate Article 101(1).119
12.73 Where non-competitors are involved, the analysis of exclusive licences is different. Such situations involve vertical restrictions that do not affect potential competition between the patentee and its licensee. As with many other such restraints, agreeing not to compete with one’s licensee may encourage the licensee to invest in the technology. Thus, exclusive licensing between non-competitors will likely satisfy the conditions of Article 101(3), regardless of the licence’s territorial scope.120 The principal exception is if the licensee already has rights to a substitute technology before acquiring an exclusive licence to the patentee’s technology.121 Should the licensee have market power—and especially if it is dominant—the exclusive licence may foreclose entry into the downstream product market by depriving potential rivals of access to a technology that is a real source of competition on the market.122
12.74 As a general matter, agreements in which parties cross-license one another whilst agreeing not to license third parties are especially worrisome if the licensed technology constitutes a de facto industry standard.123 In that situation, the parties create a closed standard, which may have substantial exclusionary effects if rivals cannot compete effectively without the cross-licensed technology.124
b. Sales restrictions
12.75 Certain patent-licensing agreements limit one or more of the parties’ freedom to sell in a particular territory or to specified customer groups. As always, the competitive effect of such a restriction depends on whether it facilitates a larger procompetitive good.
12.76 The antitrust problem is most obvious when competitors cross-license one another on terms that limit each party’s freedom to sell to certain customers or within particular areas. Such terms constitute a market-sharing agreement between rivals, and thus are hardcore restrictions.125 Not all inter-competitor sales restrictions, however, are subject to condemnation. Where the contract is non-reciprocal—such that only the licensee agrees not to sell in a certain territory or to (p. 432) particular customer groups—the patentee sets the terms on which competition in its own technology may proceed. If the parties have less than 20 per cent market share, the sales restriction enjoys block exemption.126 Where competitors agree on non-reciprocal sales restrictions, but have market share exceeding that level, Article 101(1) applies if any of the parties has significant market power.127 Even then, however, the parties may be able to satisfy Article 101(3). For example, if the patentee has a peripheral market position in the area where it markets its technology, its inability to prohibit licensees from actively selling in that territory could lead it not to license at all.128 Similarly, a licensee asked to make a risky investment in a new technology may refuse to do so absent a contractual promise by the patentee not to sell actively in the licensee’s assigned territory.129
12.77 Some patent licences arise after the patentee has already licensed another licensee. Where the first licensee did not compete with the patentee when they completed their technology-transfer agreement, the patentee may require its new licensee not to sell actively into the pre-existing licensee’s assigned territory or customer group. In doing so, the parties can qualify for block exemption, but only if the contract is non-reciprocal.130 Beyond the market-share threshold, however, Article 101(1) will apply if the parties have a significant degree of market power.131 Even then, however, the agreement can satisfy Article 101(3) for the time needed for the protected licensee to penetrate the market.132 Nevertheless, a patentee can never restrict its licensee from selling passively into the territory or to a customer group given to another licensee.133 Such restraint are hardcore restrictions.134
12.78 As to sales restrictions on the licensor, the Commission recognizes that they will likely satisfy Article 101(3) because they are necessary to induce the licensee to invest in commercializing the licensed technology.135 With respect to licensing contracts between non-competitors, restrictions on active sales qualify for block exemption up to the 30 per cent market-share threshold.136 Article 101(3) is likely to permit such restrictions even above that market share if they are necessary to prevent free-riding or to spur investment on the part of the licensee.137 Restrictions on passive sales, however, constitute hardcore violations, even between non-competitors.138
12.79 The ultimate antitrust offence is a horizontal agreement to reduce output. Thus, if competitors cross-license one another purporting to restrict the other’s output, they enter into a hardcore restriction.139 That basic prohibition does not extend, however, to non-reciprocal agreements between competitors, which qualify for block exemption under the 20 per cent threshold.140 Above that market share, Article 101(1) is likely to apply if the parties have significant market power. Nevertheless, Article 101(3) may save the restriction if the licensor would be reluctant to license its rival without the term or if the patentee’s technology surpasses that of the licensee and the output limitation substantially exceeds the licensee’s output prior to concluding the agreement.141 Still, Article 101(3) is unlikely to save a non-reciprocal patent-licensing agreement in which a patentee limits its licensee’s output if the parties have substantial market power.142 More generally, output restrictions in patent-licensing contracts present greater dangers to competition when a patentee combines them with exclusive territories or customer groups.143
12.80 The calculus differs when a patentee limits the output of its non-competitor licensee because such restrictions can enhance patentees’ incentives to transfer technology. In the Commission’s view, ‘the licensor should normally be free to determine the output produced with the licensed technology by the licensee’.144 Were it otherwise, the licensee may produce a large volume of goods that may end up within the patentee’s sales area. Still, the Commission considers output restrictions in such cases less likely to be necessary when sales restrictions are already in place prohibiting the licensee from selling into an area or to a customer group that the patentee has reserved for itself.145
12.81 Finally, output restrictions between non-competitors qualify for block exemption within the standard 30 per cent limit.146 Beyond that threshold, the Commission will watch for reduced intra-technology competition between licensees.147
12.82 A field of use restriction allows a licensee only to use the patented technology within a particular industry, product market, or technical field of application, whilst allowing the licensor to use its claimed technology as it sees fit. Such limitations commonly feature in patent-licensing contracts. As many technologies (p. 434) bear multiple applications, patentees may wish to reserve certain uses to themselves and to divide other applications among different licensees according to their respective skill sets. The Commission recognizes the procompetitive potential of field of use restrictions, which can promote technology transfer and reduce the price of patent licences.148 As a result, a field of use limitation is not in itself a hardcore restriction, though the Commission has noted that restraints going beyond fields of use to restrict selling to specific customer groups or to limit output may be subject to summary condemnation.149
12.83 In light of their procompetitive potential, field of use restrictions within the scope of the licensed technologies are block exempted under the TTBER between competitors up to 20 per cent market shares and between non-competitors up to 30 per cent market shares.150 Even beyond the 30 per cent threshold, field of use restrictions between non-competitors are unlikely to harm competition or efficiency.151 Further, between rivals and beyond the 20 per cent market-share threshold, field of use limitations are still unlikely to fall within Article 101(1) if they are symmetrical, as when rival firms cross-license one another to practise each other’s technologies within the same field of use.152 By contrast, under asymmetric field of use restrictions between competitors, each firm’s output in applications outside the scope of each licence may decline.153 If a field of use restriction between rivals causes a licensee to reduce output, Article 101(1) will likely capture the restraint.154
12.84 Some patented technologies are useful as inputs in the production of larger goods. The owner of such a patent may wish to keep its technology to itself or prefer to monetize it by licensing another firm. If the patentee competes in a product market, however, it may wish to prevent its technology redounding to the benefit of its rivals. To protect itself against competition from its own novel product or method, then, a patentee may license its technology on condition that the licensee only use it to build and to repair its own goods. That limitation prevents a licensee from selling its products made using or incorporating the licensed technology to other firms as inputs into their goods. Such captive-use restrictions qualify for block exemption under the standard market-share thresholds.155
12.85 Where the parties exceed the requisite market shares under the TTBER, the Commission will examine captive-use restrictions to determine whether their net effect (p. 435) is anticompetitive. Between competitors, such restraints prevent other rivals from obtaining inputs from the licensee. The effect of the restraint thus turns on the but-for world. If the licensee would likely have supplied components to competitors absent the captive-use restriction, then the patent licence may remove the licensee as a supplier. If the licensor has significant market power, then the restriction is likely to have serious negative market effects.156 By contrast, if the licensee would not have been a supplier regardless of the patent licence, then the Commission will scrutinize the captive-use restriction in the same manner as it would if the parties were not competitors.157
12.86 Captive-use restrictions between non-rivals may promote competition by inducing patentees to license in circumstances when they would otherwise not do so.158 As noted, the absence of such a restraint may subject a patentee to competition from its own technology. Thus, if the patentee supplies components and a captive-use limitation is necessary to protect it from competition in the component market, the restriction is likely either not to fall within Article 101(1) or to satisfy Article 101(3).159 Nevertheless, the contract must allow the licensee to serve the after-market for its own goods.160 If the patentee is not a component supplier, however, the Commission’s view is that a restriction on the licensee not to sell into customer groups reserved for the licensor is normally a less restrictive alternative.161 Thus, if a patentee that is not a component supplier wishes to protect itself from competition, a captive-use restriction will normally be unnecessary.162
12.87 Finally, when the Commission scrutinizes captive-use restrictions between non-competitors, it will do so with an eye to two potential anticompetitive risks.163 The first danger is that the restraint will limit intra-technology competition in the relevant technology market.164 The second risk is that the restriction will exclude inter-licensee arbitrage, thus magnifying the patentee’s ability to impose discriminatory royalties on licensees.165
12.88 EU competition law has long taken a dim view of product tying and bundling, as it does with respect to other areas of perceived coercion by undertakings with market power. Yet, the economic effects of tying, while complex, are not generally References(p. 436) anticompetitive. Game-theoretic models do show that firms can rationally exclude rivals through tie-ins, but only under stringent assumptions.166 Despite the economic literature pointing away from outright prohibition, EU law strictly limits dominant-firm tying arrangements. The law on tying thus remains an enclave into which economics has yet to make full inroads.
12.89 Under the TTBER, tying and bundling qualify for exemption when the market shares meet the 20 and 30 per cent thresholds applicable to competitors and non-competitors, respectively.167 Beyond the market-share limit, analysis is required. The Commission recognizes that tying can promote competition, as when the tying and tied products have an economic relationship making their combination efficient.168 For instance, if the licensee must have the tied product to exploit the licensed technology in a technically satisfactory way, no Article 101 violation will normally follow.169 The same is true if the tied product is necessary to conform to quality standards respected by the patentee and its licensees in using the tying technology.170 Indeed, if the patentee has a legitimate interest in ensuring that the quality of the products incorporating its licensing technology promotes its reputation and the value of its technology—such as when licensees use the patentee’s brand name or trademark—tying likely promotes competition.171 In all of these situations, an antitrust problem is unlikely, even if the parties’ market share is too large to qualify for block exemption.
12.90 Nevertheless, in the Commission’s view, a patentee may harm competition by tying its technology to another technology or product.172 The principal danger is foreclosure, as when the patentee has significant market power in licensing its technology and deprives competitors in the tied market of scale economies needed to enter viably. When consumers use the tied products in variable proportions and those products are partially substitutable, the Commission also worries that a tie-in may allow the patentee to increase royalties.173 To injure competition through a tying arrangement, however, the patentee must have significant market power in the tying technology.174 Further, the tie must cover a sufficient proportion of the tied market to foreclose competition.175 If the patentee only has market power in the tied market, the Commission will analyse the restriction as a non-compete References(p. 437) clause, rather than as a tie-in.176 It is to non-compete obligations that we now turn.
12.91 Some patentees require that their licensees not use third-party technologies that compete with the licensed technology.177 Such restrictions reduce demand for substitute technologies, suggesting that a patentee could use them to exclude rivals. Nevertheless, absent market power, a patentee cannot make its licensees abandon superior alternative technologies. Non-compete obligations are thus block exempted up to the relevant 20 and 30 per cent market-share levels.178
12.92 When the block exemption does not apply, the Commission scrutinizes non-compete clauses to discern whether they foreclose third-party technologies.179 The danger is most acute when the patentee has significant market power.180 For problematic exclusion to occur, a non-compete obligation imposed by a licensor with significant market power need not cover a substantial part of the market.181 Unlawful foreclosure may result if a patentee with market power targets the firms that are most likely to license competing technologies.182 The risk also rises in proportion to the volume of similar restrictions already in the market.183 In the Commission’s view, however, a serious cumulative effect is unlikely if non-compete obligations tie less than half of the market.184 Above that level, significant foreclosure is likely if entry barriers are relatively high.185 The Commission will also consider whether the presence of several non-compete obligations in the market involving different patentees facilitates collusion among the licensors.186
12.93 As with other licensing restrictions, non-compete obligations are susceptible of procompetitive justifications, even where the licensor has market power. A patentee can use such clauses to prevent licensees from using its technology in combination with that of its competitors, which result would undermine its market position and potentially deter licensing in the first place.187 Non-compete licensing clauses can also incentivize licensees and licensors to invest, though the Commission notes that, in such cases, less restrictive alternatives will normally be available.188
12.94 Patent pools combine IPRs and license them to third parties—that is, to firms not contributing patents to the pool. Such arrangements fall outside the TTBER, regardless of the number of pool members, whether a specially created entity runs the pool, or the terms on which the pool licenses the technology or allocates its revenue.189 Patent pools vary but, unless they are closed and their licences are indispensable to accessing a downstream product market, they are generally procompetitive. Often emerging in tandem with an industry standard, pools may allow firms to achieve a clearing position to sell their technological goods. As a one-stop licensing shop, a pool can reduce transaction costs and eliminate double-marginalization problems caused by separate licensing of complementary patent rights.
12.95 The European Commission recognizes those efficiencies.190 Yet, because horizontal competitors typically create and run patent pools, risks to competition arise. In upstream technology-licensing markets, firms could eliminate competition by pooling functionally interchangeable IPRs. The Commission thus warns that ‘pools composed solely or predominantly of substitute technologies amounts to a price fixing cartel’.191 Further, when a pool licence becomes sufficiently important to compete downstream, a pool could refuse to license or do so on terms that hobble third-party licensees’ ability to compete. An influential pool may also suppress the emergence of substitutes to technologies licensed by the pool.192 As with all instances of competitor collaboration, of course, patent pools may become vehicles to realize (and hide) conspiracies in downstream product markets.
12.96 In its 2014 guidelines, the Commission explained that parties can decrease antitrust risk by structuring patent pools in a particular way. First, open pools that allow all interested parties to participate are more likely to be procompetitive than closed pools.193 Second, pools should strive to exclude substitute technologies.194 Recognizing that some patents display complementary and interchangeable qualities, the Commission will treat as complements those patents that are so efficiently integrated that licensees are likely to demand all of them.195 Further indirect evidence of complementarity may also exist.196 Nevertheless, if a pool includes significant substitute technologies, a violation of Article 101(1) follows References(p. 439) and is unlikely to be cured by Article 101(3).197 That result holds true even if the parties remain free independently to license, since the patentees may lack an incentive to compete with IPRs already included in the pool.198
12.97 Third, by hiring independent experts to scrutinize its patents, a pool can bolster itself against antitrust scrutiny. When specialists—suitably qualified in the art and lacking a connection to the licensors or the pool’s licensing activities—assess candidate patents to determine their validity or their essentiality to a technical standard underlying the pool, for example, it is more likely that the pool will be procompetitive.199 Finally, in oligopolistic markets, pools should enact safeguards against the exchange of competitively sensitive information.200 Protections are especially important when firms participate in two or more competing pools at the same time.201
(g) the parties contributing technology to the pool and the licensee remain free to develop competing products and technology.202
12.100 Nevertheless, the Commission recognizes that not every procompetitive pool will satisfy each of the seven criteria required for safe-harbour protection. For instance, References(p. 440) a pool that both includes non-essential patents for procompetitive reasons (such as licensees’ convenience) and allows licensees to purchase à la carte licences at proportionally discounted royalties is likely to satisfy Article 101(3).203 The Commission thus provides further guiding principles for those pooling arrangements that fall outside the safe harbour. If a pool has a significant position on a relevant market, it will likely have to screen out non-essential patents, as well as substitute ones, to avoid Article 101(1).204 Of course, whether a patent is ‘essential’ can change over time. A pool should thus monitor its IPR holdings and, if apprised that a third-party technology makes a particular patent non-essential, it can avoid foreclosure concerns by offering a new licence not including the now-non-essential patent at a discounted rate.205
12.101 In assessing pools that comprise non-essential but complementary patents—but do not include substitute patents—the Commission will consider several factors. Those considerations include: (a) procompetitive reasons for including non-essential patents, such as the cost of a patent-by-patent assessment of essentiality; (b) licensors’ freedom to license independently, as assessed in light of the technology space in which the pool operates; and (c) whether the pool offers partial-pool licences at discounted prices, allowing technology users to buy rights only to essential technologies and reducing the risk of excluding third-party technologies lying outside the pool.206
12.102 Even if the agreement establishing a pool passes muster, the Commission will still scrutinize licences between the pool and its licensees. Such agreements generally do not qualify for exemption under the TTBER because the terms typically reflect the input of pool members, making the deal a multi-party affair.207 The Commission follows four main principles in assessing patent-pool licences: (a) the risk of anticompetitive effect rises with the strength of the pool’s market position; (b) an agreement not to license all potential licensees or to license on discriminatory terms becomes more likely to violate Article 101 as the pool’s market position grows; (c) pools should not unduly foreclose third-party technologies or stifle the emergence of alternative pools; and (d) no pool licence may include a hardcore restriction as defined in the TTBER.208
12.103 Importantly, members of a patent pool may agree upon the royalties for licensing the technology package, as well as upon the division of ensuing licensingReferences(p. 441) revenue.209 This law is true of joint ventures generally, as efficient combinations must agree on core terms if the arrangement is to exist at all.210 Nevertheless, pools may not limit licensees’ freedom to price goods manufactured under a pool licence.211
12.104 A pool that enjoys a dominant position is subject to distinct obligations. Such a pool may not impose excessive royalties, sell exclusive licences, or engage in discriminatory licensing practices.212 By contrast, a pool lacking market power is normally free to do so, since its lack of power suggests that agreed-upon royalty terms are efficient.213 Although it is unclear where the dividing line is between an ‘excessive’ and legitimate pool royalty rate, the Commission has explained that a dominant pool need not issue homogeneous licences to satisfy the prohibition of discriminatory licensing terms.214 Different uses properly involve different royalty rates.215 Still, it is inappropriate for a dominant pool to license differently depending on whether the licensee also licenses the pool.216
12.105 Some obligations attach to pool licences generally. For instance, no pool licence should inhibit the development of competing products and standards.217 Nor may a pool member agree not to license outside of the pool.218 It is inappropriate for a pool licence to include an exclusive grantback clause.219 By contrast, non-exclusive grantbacks limited to improvements on the pooled technology appropriately foster operating freedom and protect against hold-up.220 Finally, Article 101(1) likely captures no-challenge clauses that limit a pool licensee’s freedom to attack patent validity.221(p. 442)
8 Bruce B. Wilson, Deputy Ass’t Atty. Gen., Antitrust Div., Dep’t of Justice, Patent and Know-How Licence Agreements: Field of Use, Territorial, Price and Quantity Restrictions, Remarks Before the Fourth New England Antitrust Conference 9 (6 Nov. 1970).
9 The reader should also refer to the patent-misuse discussion in Chapter 11, which explains pitfalls that patentees should avoid in licensing their technologies.
13 United States v. Line Material Co., 333 U.S. 287, 308 (1948) (‘By aggregating patents in one control, the holder of the patents cannot escape the prohibitions of the Sherman Act.’). See generally IP Licensing Guidelines §§ 3.4, 5.1.
44 See, e.g., Binks Mfg. Co. v. Ransburg Electro-Coating Corp., 281 F.2d 252, 259 (7th Cir. 1960); PNY Techs., Inc. v. SanDisk Corp., No. C-11-4689, 2012 WL 1380271, at *12 (N.D. Cal. Apr. 20, 2012); Wuxi Multimedia, Ltd v. Koninklijke Philips Elecs., N.V., No. 04cv1136, 2006 WL 6667002, at *8 (S.D. Cal. Jan. 5, 2006); Van Dyk Research Corp. v. Xerox Corp., 478 F. Supp. 1268, 1325 (D.N.J. 1979).
46 For the earlier, inhospitable cases, see, e.g., International Salt Co. v. United States, 332 U.S. 392 (1947); Morton Salt v. G.S. Suppiger Co., 314 U.S. 488 (1942); Carbice Corp. v. Am. Patents Dev. Corp., 283 U.S. 27 (1931). Modern case law is more permissive. See, e.g., U.S. Philips v. Int’l Trade Comm’n, 424 F.3d 1179, 1191–92, 1197–99 (Fed. Cir. 2005) (package licensing—patent-to-patent tying—is not per se misuse, and establishing an onerous burden on an accused infringer trying to show misuse under the rule of reason); Ill. Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 45–46 (2006) (patents do not presumptively confer market power sufficient to support a tying claim); Jefferson Parish Hosp. Dist. No. 2. v. Hyde, 466 U.S. 2, 17–18 (1984) (a per se violation based on product tying requires sufficient market power to force customers to buy an unwanted product).
54 See Auto. Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 838–40 (1950); see also United States v. Loew’s, Inc., 371 U.S. 38, 44–51 7 (1962); United States v. Paramount Pictures, Inc., 334 U.S. 131, 156–59 (1948).
59 Singer, 374 U.S. at 174, passim. More generally, when horizontal rivals settle litigation with a cross-licence, the agencies will examine whether the deal forecloses competition that may have otherwise resulted. IP Guidelines, § 5.5.
63 For a famous example of a joint venture found to be illegal for restraints going beyond what was necessary to realize the venture, see NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, passim (1984).
76 Fed. Trade Comm’n, Complaint, Summit-VISX, 127 F.T.C. at 208 (No. 9286). Cf. Matsushita Elec. Indus. Co. v. Cinram Int’l Inc., 299 F. Supp. 2d 370, 376–77 (D. Del. 2004) (no restraint of trade if ‘the antitrust plaintiff has the opportunity to license independently’).
107 Art. 4 reflects a core principle of the TTBER, which accepts certain restrictions because they promote dissemination of technology and innovation. The quid pro quo is that the technology-transfer agreement must not restrict the parties in their own competing, innovative efforts.