Request for Comments on Draft Antitrust Guidelines for the Licensing and Acquisition of Intellectual Property

DEPARTMENT OF JUSTICE

Antitrust Division

Request for Comments on Draft Antitrust Guidelines for the

Licensing and Acquisition of Intellectual Property

AGENCY: Antitrust Division, Department of Justice.

ACTION: Notice.

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SUMMARY: The Antitrust Division has drafted proposed new Antitrust

Guidelines for the Licensing and Acquisition of Intellectual Property.

The Guidelines, when adopted in final form by the Department of

Justice, will state the antitrust enforcement policy of the Department

with respect to the licensing and acquisition of intellectual property,

and will supersede section 3.6 in Part I, ``Intellectual Property

Licensing Arrangements,'' and cases, 6, 10, 11, and 12 in Part II of

the U.S. Department of Justice 1988 Antitrust Enforcement Guidelines

for International Operations. Comments should be submitted in writing

within 60 days of publication of these draft Guidelines.

FOR FURTHER INFORMATION CONTACT:

Submit views to Richard Gilbert, Deputy Assistant Attorney General,

Antitrust Division, Department of Justice, Tenth Street and

Pennsylvania Avenue, NW., Washington, DC 20530, 202-514-2408.

SUPPLEMENTARY INFORMATION: As announced by the Assistant Attorney

General in charge of the Antitrust Division, Anne K. Bingaman, in

published speeches on January 10, 1994 and June 16, 1994, these

proposed guidelines were drafted to state the current views of

Antitrust Division with respect to the licensing and acquisition of

intellectual property.

The Guidelines are not intended to create or recognize any legally

enforceable right in any person. They are not intended to affect the

admissibility of evidence or in any other way necessarily to affect the

course or conduct of any present of future litigation. Moreover,

changes in the relevant statutory framework, legal precedent, and

methods of internal Department analysis may occur over time, and these

changes will not always be simultaneously reflected in amendments to

the Guidelines. Parties seeking to know the Department's specific

enforcement intentions with respect to any particular transaction

should consider seeking a Business Review pursuant to 28 CFR 50.5.

Dated: August 8, 1994.

Richard Gilbert,

Deputy Assistant Attorney General, Antitrust Division.

U.S. Department of Justice Antitrust Guidelines for the Licensing and

Acquisition of Intellectual Property\1\

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\1\These Guidelines supersede section 3.6 in Part I,

``Intellectual Property Licensing Arrangements,'' and cases 6, 10,

11, and 12 in Part II of the U.S. Department of Justice 1988

Antitrust Enforcement Guidelines for International Operations.

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1. Intellectual Property Protection and the Antitrust Laws

These Guidelines state the antitrust enforcement policy of the U.S.

Department of Justice with respect to the licensing and acquisition of

intellectual property protected by patent, copyright, and trade secret

law.\2\ By stating its general policy, the Department hopes to assist

those who need to predict whether the Department will challenge a

practice as anticompetitive. However, these Guidelines cannot remove

judgment and discretion in antitrust law enforcement. Moreover, the

standards set forth in these Guidelines must be applied in

unforeseeable circumstances. Each case will be evaluated in light of

its own facts, and these Guidelines will be applied reasonably and

flexibly.

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\2\These Guidelines do not cover the antitrust treatment of

trademarks. Although the same general antitrust principles that

apply to other forms of intellectual property apply to trademarks as

well, these Guidelines deal with innovation-related issues that

typically arise with respect to patents, copyrights, and trade

secrets, rather than with product-differentiation issues that

typically arise with respect to trademarks.

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In the United States, patents confer rights to exclude others from

making, using, or selling in the United States the invention claimed by

the patent for a period of seventeen years from the date of issue.\3\

To gain patent protection, an invention (which may be a product,

process, machine, or composition of matter) must be novel, nonobvious,

and useful. Copyright protection applies to original works of

authorship embodied in a tangible medium of expression.\4\ A copyright

protects only the expression, not the underlying ideas. Unlike a

patent, which protects an invention not only from copying but also from

independent creation, a copyright does not preclude others from

independently creating similar expression. Trade secret protection

applies to information whose economic value depends on its not being

generally known. Trade secret protection is conditioned upon efforts to

maintain secrecy and has no fixed term. As with copyright protection,

trade secret protection does not preclude independent creation by

others.\5\

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\3\See 35 U.S.C. 154 (1988). In the case of process patents, the

protection extends to importation of goods made by a patented

process. See 19 U.S.C. 1337 (1988 & Supp. V 1993); 35 U.S.C. 271(g)

(1988).

\4\See 17 U.S.C. 102 (1988 & Supp. V 1993). Copyright protection

lasts for the author's life plus 50 years, or 75 years from first

publication (or 100 years from creation, whichever expires first)

for works made for hire. See 17 U.S.C. 302 (1988).

\5\The principles stated in these Guidelines also apply to

protection of mask works fixed in a semiconductor chip product (see

17 U.S.C. 901 et seq. (1988)), which is analogous to copyright

protection for works of authorship. These principles also generally

apply to licensing of know-how and other collections of information

which may not be protected by intellectual property rights, but

which may nonetheless have value to a licensee or transferee because

of the form into which they are assembled.

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Although there are clear and important differences in the purpose,

extent, and duration of protection provided under the intellectual

property regimes of patent, copyright, and trade secret, the governing

antitrust principles are the same. Antitrust analysis takes differences

among these forms of intellectual property into account in evaluating

the specific market circumstances in which transactions occur, just as

it does with other particular market circumstances.

The intellectual property laws and the antitrust laws share the

common purpose of promoting innovation and enhancing consumer

welfare.\6\ The intellectual property laws provide incentives for

innovation and its dissemination and commercialization by establishing

enforceable property rights for the creators of new and useful

products, more efficient processes, and original works of expression.

In the absence of intellectual property rights, imitators could more

rapidly exploit the efforts of innovators and investors without

compensation, thereby reducing the commercial value of innovation and

eroding the incentives to invest. The antitrust laws promote innovation

and consumer welfare by prohibiting certain actions by firms that deter

those firms and others from competing with respect to either existing

or new ways of serving consumers.

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\6\``[T]he aims and objectives of patent and antitrust laws may

seem, at first glance, wholly at odds, However, the two bodies of

law are actually complementary, as both are aimed at encouraging

innovation, industry ad competition.'' Atari Games Corp. v. Nintendo

of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).

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2. General Principles

2.0 These Guidelines embody three general principles: (a) For the

purpose of antitrust analysis, the Department regards intellectual

property as being essentially comparable to any other form of property;

(b) the Department does not presume that intellectual property creates

market power in the antitrust context; and (c) the Department

recognizes that intellectual property licensing allows firms to combine

complementary factors of production and is generally procompetitive.

2.1 Standard Antitrust Analysis Applies to Intellectual Property

The Department applies the same general antitrust principles to

conduct involving intellectual property that it applies to conduct

involving any other form of tangible or intangible property. That is

not to say that intellectual property is in all respects the same as

any other form of property. Intellectual property has important

characteristics that distinguish it from many other forms of property.

These characteristics can be taken into account by standard antitrust

analysis, however, and do not require the application of fundamentally

different principles.

Intellectual property law bestows on the owners of intellectual

property certain rights to exclude others. These rights help the owners

to profit from the use of their property. An intellectual property

owner's rights to exclude are similar to the rights enjoyed by owners

of other forms of private property. As with other forms of private

property, certain acquisitions of intellectual property, and certain

types of agreements with respect to such property, may have

anticompetitive effects against which the antitrust laws can and do

protect. Intellectual property is thus neither particularly free from

scrutiny under the antitrust laws, nor particularly suspect under them.

2.2 Intellectual Property and Market Power

Market power is the ability profitably to maintain prices above, or

output below, competitive levels for a significant period of time.\7\

The Department will not presume that a patent, copyright, or trade

secret necessarily confers market power upon its owner. Although the

intellectual property right confers the power to exclude with respect

to the specific product, process, or work in question, there will often

be sufficient actual or potential close substitutes for such product,

process, or work to prevent the exercise of market power.\8\ If a

patent or other form of intellectual property does confer market power,

that market power does not by itself offend the antitrust laws. As with

any other tangible or intangible asset that enables its owner to obtain

significant supracompetitive profits, market power (or even a monopoly)

that is solely ``a consequence of a superior product, business acumen,

or historical accident'' does not violate the antitrust laws.\9\ Nor

does such market power impose on the intellectual property owner an

obligation to license that technology to others. See, e.g., SCM Corp.

v. Xerox Copy., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S.

1016 (1982). As in other antitrust contexts, however, market power

could be illegally acquired or maintained, or, even if lawfully

acquired and maintained, would be relevant to the ability of an

intellectual property owner to harm competition through unreasonable

conduct in connection with such property.

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\7\Market power can be exercised in other economic dimensions,

such as quality, service and innovation. It is assumed in this

definition that all competitive dimensions are held constant except

the ones in which power is being exercised; it would not, of course,

be indicative of market power that a seller is able to charge higher

prices for a higher-quality product. The definition in text is

stated in terms of a seller with market power; a buyer could also

exercise market power (e.g., by maintaining the price below the

competitive level, thereby depressing output).

\8\The Department notes that the law is unclear on this issue.

Compare Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S.

2, 16 (1984) (expressing the view in dictum that if a product is

protected by a patent, ``it is fair to presume that the inability to

buy the product elsewhere gives the seller market power'') with id.

at 37 n.7 (O'Connor, J., concurring) (``[A] patent holder has no

market power in any relevant sense if there are close substitutes

for the patented product.''). Compare also Abbott Laboratories v.

Brennan, 952 F.2d 1346, 1354-55 (Fed. Cir. 1991) (no presumption of

market power from intellectual property right) with Digidyne Corp.

v. Data General Corp., 734 F.2d 1336, 1341-42 (9th Cir. 1984)

(requisite economic power is presumed from copyright), cert. denied,

473 U.S. 908 (1985).

\9\United States v. Grinnell Corp., 384 U.S. 563, 571 (1966);

see also United States v. Aluminum Co. of America, 148 F.2d 416, 430

(2d Cir. 1945) (Sherman Act is not violated by the attainment of

market power solely through ``superior skill, foresight and

industry'').

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2.3 Procompetitive Benefits of Licensing

Intellectual property typically is one component among many in a

production process and derives value from its combination with

complementary factors. Complementary components of production include

manufacturing and distribution facilities, workforces, and other items

of intellectual property. The owner of intellectual property has to

arrange for its combination with other necessary inputs to realize its

commercial value. Often, the owner finds it most efficient to contract

with others for these inputs, to sell rights to the intellectual

property, or to enter into a joint venture arrangement for its

development, rather than supplying these complementary inputs itself.

Licensing, cross-licensing, or otherwise transferring intellectual

property (hereinafter ``licensing'') can facilitate its integration

with complementary factors of production. This integration can lead to

more efficient exploitation of the intellectual property, benefiting

consumers through the reduction of costs and the introduction of new

products. Such arrangements increase the value of intellectual property

to consumers and to the developers of the technology. By potentially

increasing the expected returns from intellectual property, licensing

also can increase the incentive for its creation and thus promote

greater investment in research and development.

Sometimes the use of one item of intellectual property requires

access to another. An item of intellectual property ``blocks'' another

when the second cannot be practiced without using the first. For

example, an improvement on a patented machine can be blocked by the

patent on the machine. Licensing promotes the coordinated development

of technologies that are in a blocking relationship.

Field-of-use, territorial, and other limitations on intellectual

property licenses may serve procompetitive ends by allowing the

licensor to exploit its property as efficiently and effectively as

possible. These various forms of exclusivity can be used to give a

licensee an incentive to invest in the commercialization and

distribution of products embodying the licensed intellectual property

and to develop additional applications for the licensed property. The

restrictions may do so, for example, by protecting the licensee against

free-riding on the licensee's investments by other licensees or by the

licensor. They may also promote the licensor's incentive to license, by

protecting the licensor from competition in the licensor's own

technology in a market niche that it prefers to keep to itself. These

benefits of licensing restrictions apply to patent, copyright, and

trade secret licenses.

Example 1\10\

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\10\The examples in these Guidelines are hypothetical and do not

represent judgments about the actual market circumstances of the

named industries.

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Situation: Delta, Inc. develops a new software program for

inventory management. The program has wide application in the health

field. Delta licenses the program in an arrangement that imposes both

field of use and territorial limitations. Some of Delta's licenses

permit use only in hospitals; others permit use only in group medical

practices. Delta charges different royalties for the different uses.

All of Delta's licenses permit use only in specified geographic areas.

The license contains no provisions that would prevent or discourage

licensees from developing, using, or selling any other program. None of

the licensees are actual competitors of Delta in the sale of inventory

management programs.

Discussion: The key competitive issue raised by the licensing

arrangement is whether it harms competition that would likely have

taken place in its absence. (See section 3.) Such harm could occur if

the licenses foreclose access to competing technologies (in this case,

most likely competing computer programs), prevent licensees from

developing their own competing technologies (again, in this case most

likely computer programs), structure royalties to impose an effective

requirements contract upon licensees, or facilitate market allocation

or price-fixing for any product or service supplied by the licensees.

If the license agreements contained such provisions, the Department

would analyze their competitive effects as described in sections 3-5 of

these Guidelines. In this hypothetical, there are no such provisions,

and there is no apparent harm to competition. The arrangement appears

to do no more than increase the value of the licensed technology by

subdividing it among different fields of use and territories and

charging royalties that differ among licensees. The Department

therefore would be unlikely to object to this arrangement. The result

would be the same whether the technology was protected by copyright,

patent, or trade secret. The Department's conclusion as to competitive

effects could differ if, for example, the license barred licensees from

using any other inventory management program.

3. Antitrust Concerns and Modes of Analysis

3.1 Nature of the Concerns

While intellectual property licensing arrangements are typically

welfare-enhancing and procompetitive, antitrust concerns may arise when

licensing arrangements impede competition that likely would have taken

place in the absence of the license. Licensing arrangements that may

raise antitrust concerns include restrictions on goods or technologies

other than the licensed technology, contractual provisions that

penalize licensees for dealing with suppliers of substitute

technologies, and acquisitions of intellectual property that lessen

competition in a relevant antitrust market.

For example, a licensing agreement that transfers little or no

useful intellectual property, but imposes restraints upon entities that

otherwise would compete using alternative technologies, might have

significant adverse effects in downstream goods markets or in other

markets. (See, e.g., Example 5.) An arrangement that effectively merges

the research and development activities of two of only a few entities

that could plausibly engage in research and development in the relevant

field might harm competition for development of new intellectual

property. (See section 3.2.3, ``Innovation Markets.'')

Intellectual property licensing between actual or likely potential

competitors\11\ may raise antitrust concerns by reducing or eliminating

competition in the market(s) in which they compete or are likely to

compete. In addition, license restrictions with respect to one market

may reduce competition in another market by, for example, foreclosing

access to or raising the price of an important input (other than as a

natural consequence of the licensee acquiring a licensed technology for

its own use).

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\11\A firm will be treated as a likely potential competitor if

its entry is likely under the standards of section 3.3 of the U.S.

Department of Justice and Federal Trade Commission, Horizontal

Merger Guidelines (April 2, 1992), or if there is evidence of likely

actual entry by that firm. Competitive concerns are more likely to

arise when the number of actual and likely potential competitors is

not large.

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3.2 Markets Affected by Licensing Arrangements

A licensing arrangement may affect competition in a variety of

markets. In general, for goods markets and technology markets affected

by a licensing arrangement, the Department will approach the

delineation of relevant market and the measurement of market share in

the intellectual property area in the same way that it treats such

questions under section 1 of the 1992 Horizontal Merger Guidelines. In

addition, the Department may define an innovation market to aid in

assessing whether a licensing arrangement would be likely substantially

to reduce investment in research and development.

3.2.1 Technology Markets

Technology markets consist of the intellectual property that is

licensed, transferred, or acquired and the technologies that are close

substitutes for it. The owner of a process for producing a particular

good may be constrained in its conduct with respect to that process not

only by other processes for making that good, but also by other goods

that compete with the downstream good and by the processes used to

produce those other goods.

In many cases, particularly in the case of a product patent, there

may be little to be gained by analyzing competitive effects in a

separate technology market in addition to analyzing effects in the

associated goods market. Moreover, there may be practical problems in

gathering appropriate data to determine ``prices'' for the technology

and its substitute processes. For example, the technology may be

licensed royalty-free in exchange for the right to use other

technology, or it may be licensed as part of a package license. When

complicating factors preclude delineating a relevant market in which

the licensed technology competes, the Department may focus its

attention on effects in the associated goods markets.

To estimate the market share of a participant using new technology,

the Department generally will forecast market acceptance over a two-

year period using the best available information. For technologies not

yet commercialized, the two-year period will begin with commercial

introduction. When market shares or other indicia of market power are

not readily available, and it appears that competing technologies are

all equally efficient,\12\ the Department's analysis will treat each

participant in the technology market as having an equal market share.

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\12\In this analysis, the Department will regard two

technologies as being ``equally efficient'' if they can be used to

produce, at the same cost, goods perceived by consumers to be close

substitutes.

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3.2.2 Goods markets. A number of different goods markets may be

relevant to evaluating the effects of a licensing arrangement. A

restraint in a licensing arrangement may have competitive effects in

markets for final or intermediate goods made using the intellectual

property, or it may have effects upstream, in markets for goods that

are used as inputs, along with the intellectual property, to the

production of other goods.

3.2.3 Innovation markets. Firms compete in research and

development that may result in new or improved products or processes.

If the capacity for research and development activity that likely will

produce innovation in technology is scarce and can be associated with

identifiable specialized assets or characteristics of specific firms

(which may or may not currently participate in the relevant technology

or goods markets), in may be appropriate to consider separately the

impact of the conduct in question on competition in research and

development among those firms. The firms identified as possessing these

specialized assets or characteristics can be thought of as competing in

a separate innovation market. See Complaint, United States v. General

Motors Corp., Civ. No. 93-530 (D. Del., filed Nov. 16, 1993).

Alternatively, innovation markets may be used to assist with the

identification of competitive effects in relevant goods and technology

markets. See, e.g., Complaint, United States v. Flow International

Corp., Civ. No. 94-71320 (E.D. Mich., filed Apr. 4, 1994).

Example 2

Situation: Two companies agree to cross-license future patents

relating to the development of a new component for aircraft jet

turbines. Innovation in the development of the component requires the

capability to work with very high tensile strength materials. Aspects

of the licensing arrangement raise the possibility that competition in

research and development of this and related components will be

lessened. The Department is considering whether to define an innovation

market in which to evaluate the competitive effects of the arrangement.

Discussion: If the firms that have the capability to work with very

high tensile strength materials can be reasonably identified, the

Department will consider defining a relevant innovation market for

development of the new component. If the number of firms with the

required capability is small, the Department may employ the concept of

an innovation market to analyze the competitive effects of the

arrangement in that market, or as an aid in analyzing competitive

effects in technology or goods markets. In this analysis, the

Department would take into account the specific nature of the

restraint, the likelihood that other firms may in the future acquire

the requisite capability, other competitive factors, and any efficiency

justifications for the licensing arrangement.

If the number of firms with the required capability is very large

(either because there are a large number of such firms in the jet

turbine industry, or because there are many firms in other industries

with the required capability), then the Department will conclude that

the innovation market is competitive. Under these circumstances, it is

unlikely that any single firm or plausible aggregation of firms could

acquire a large enough share of the assets necessary for innovation to

have an adverse impact on competition.

If the Department cannot reasonably identify the firms with the

required capability, it will not attempt to define an innovation

market.

Just as goods markets are improperly defined if the firms in the

market, were they to coordinate their decisions, would not profitably

increase price above competitive levels, so too innovation markets are

improperly defined if hypothetical coordination among the firms in the

candidate market would not profitably retard or restrict innovation in

the technology.

When a relevant innovation market has been defined, the Department

may assess the competitive significance of each participant based on

shares of those identifiable assets or characteristics upon which

innovation depends, on shares of research and development expenditures,

on shares of the related product, or on equal shares assigned to

reflect the equal likelihood of innovating, depending on the facts of

each case. Cf. 1992 Horizontal Merger Guidelines Sec. 1,41 & n.15. In

evaluating competitive effects, the Department would also take into

account other factors such as competitive harms from the elimination of

alternative research paths and efficiency benefits from the integration

of complementary research and development programs.

3.3 Horizontal and Vertical Relationships

As with other property transfers, antitrust analysis of

intellectual property licensing arrangements examines whether the

relationship of the parties to the arrangement is primarily horizontal

or vertical in nature, or whether it has substantial aspects of both.

A licensing arrangement has a horizontal component with respect to

a technology market if it involves the acquisition of rights to

technologies that are economic substitutes for technologies that the

licensee owns or controls. For analytical purposes, the Department

ordinarily will treat a relationship between a licensor and its

licensees as horizontal with respect to a particular goods market when

the licensor and its licensees would be actual or likely potential

competitors in that market absent the license.

An arrangement has a vertical component when it affects activities

that are in a complementary relationship, as is typically the case in a

licensing arrangement. Such a relationship exists when the licensor and

its licensees stand in a seller-buyer relationship, or operate at

different levels of the chain of production and distribution. For

example, the licensor's primary line of business may be in research and

development, and the licensees, as manufacturers, may be buying the

rights to use technology developed by the licensor. Alternatively the

licensor may be a component manufacturer owning intellectual property

rights in a product that the licensee manufactures by combining the

component with other inputs, or the licensor may manufacture the

product, and the licensees may operate primarily in distribution and

marketing. Although licensing arrangements typically have a vertical

component, the licensor and its licensees may also have a horizontal

relationship in the market containing the technology being licensed or

in other markets in which they are actual or likely potential

competitors.

The existence of a horizontal relationship between a licensor and

its licensees is not inherently suspect. Identification of such

relationships is merely an aid in determining whether there may be

anticompetitive effects arising from a licensing arrangement. Such a

relationship need not give rise to an anticompetitive effect, nor does

a purely vertical relationship assure that there are no anticompetitive

effects.

The following examples illustrate different competitive

relationships among a licensor and its licensees.

Example 3

Situation: Alpha, a manufacturer of farm equipment, develops a new

emission control technology for its tractor engines and licenses it to

Beta, another farm equipment manufacturer. Alpha's emission control

technology is far superior to the technology currently owned and used

by Beta, so much so that Beta's technology does not discipline the

prices that Alpha could charge for its technology. Beta has no

likelihood of developing an improved emissions control technology on

its own.

Discussion: Alpha's and Beta's emission control technologies are

not economic substitutes for each other. Beta is a consumer of Alpha's

technology and is not an actual or likely potential competitor of Alpha

in the relevant market for technologically superior emission control

devices of the kind licensed by Alpha. This means that the relationship

between Alpha and Beta with regard to the supply and use of emissions

control technology is vertical. Assuming that Alpha and Beta sell farm

equipment products that are economic substitutes for each other, their

relationship is horizontal in the relevant markets for farm equipment.

Example 4

Situation: Beta develops a new value technology for its engines and

enters into a cross-licensing arrangement with Alpha, whereby Alpha

licenses its emission control technology to Beta and Beta licenses its

valve technology to Alpha. Alpha already owns an alternative valve

technology that is an economic substitute for Beta's valve technology.

Before adopting Beta's technology, Alpha was using its own valve

technology in its production of engines and was licensing (and

continues to license) that technology for use by others. As in Example

3, Beta does not own or control an emission control technology that is

an economic substitute for the technology licensed from Alpha.

Discussion: Beta is a consumer and not a competitor of Alpha's

emission control technology. As in Example 3, their relationship is

vertical with regard to this technology. The relationship between Alpha

and Beta in the relevant market that includes engine valve technology

is vertical in part and horizontal in part. It is vertical in part

because Alpha and Beta stand in a complementary relationship, in which

Alpha is a consumer of a technology supplied by Beta. However, the

relationship between Alpha and Beta in the relevant market that

includes engine valve technology is also horizontal in part, because

both firms own valve technologies that are economic substitutes for

each other. Whether the firms license their valve technologies to

others is not important for the conclusion that the firms have a

horizontal relationship in this relevant market. Even if Alpha's use of

its valve technology were solely captive to its own production, the

fact that the two valve technologies are economic substitutes means

that the two firms have a horizontal relationship. For the firms to be

in a horizontal relationship, it is also not necessary that Alpha

actually uses its valve technology prior to licensing technology from

Beta, provided that Alpha's technology is an economic alternative to

Beta's.

As in Example 3, the relationship between Alpha and Beta is

horizontal in the relevant markets for farm equipment.

3.4 The Rule of Reason and per se Rules

In the vast majority of cases, restraints in intellectual property

licensing arrangements are evaluated under the rule of reason (see

section 4). In some cases, however, the courts conclude that a

restraint's ``nature and necessary effect are so plainly

anticompetitive'' that it should be treated as unlawful per se, without

an elaborate inquiry into the restraint's purpose and effect, National

Society of Professional Engineers v. United States, 435 U.S. 679, 692

(1978). Among the restraints that have been held per se unlawful are

naked price-fixing, output restraints, and market division among

horizontal competitors, as well as certain group boycotts and resale

price maintenance.

To determine whether a particular restraint in a licensing

arrangement is given per se or rule of reason treatment, the Department

will first determine whether the restraint in question can be expected

to contribute to an efficiency-producing integration of economic

activity. In general, licensing arrangements promote such integration

because they facilitate the combination of the licensor's intellectual

property with complementary factors of production owned by the

licensee. A restraint in a licensing arrangement may further such

integration by, for example, aligning the incentives of the licensor

and the licensees to promote the development and marketing of the

licensed technology, or by substantially reducing transactions costs.

In assessing whether a particular restraint contributes to an

efficiency-producing integration, the Department briefly will review,

inter alia, the business of the parties to the license, the markets in

question, and the purpose and effect of the particular restraint. If

there is no efficiency-producing integration of economic activity and

if the type of restraint is one that otherwise is appropriately

accorded per se treatment, the Department will challenge the restraint

under the per se rule. Otherwise, the Department will apply a rule of

reason analysis.

Because licensing arrangements typically involve vertical

relationships that create significant integrative efficiencies,

restraints associated with those arrangements usually will have

sufficient relationship to an efficiency-producing integration to merit

analysis under the rule of reason. An ordinarily suspect restraint

incorporated in a licensing agreement will not escape per se treatment,

however, if the putative integration itself is a sham or if there is an

insufficient relationship between the restraint and an efficiency-

producing integration.

Example 5

Situation: Gamma, which manufactures Product X using its patented

process, offers a license for its process technology to every other

manufacturer of Product X. The process technology does not represent an

economic improvement over the available existing technologies. Indeed,

although several manufacturers accept licenses from Gamma, none of the

licensees actually uses the licensed technology. The licenses provide

that each manufacturer has an exclusive right to sell Product X

manufactured using the licensed technology in a designated geographic

area and that no manufacturer may sell Product X, however manufactured,

outside the designated territory.

Discussion: The manufacturers of Product X are in a horizontal

relationship in the goods market for product X. Those that are

licensees of Gamma's process technology would also be in a vertical

relationship with Gamma if they actually used Gamma's technology,

although in this example, that is not the case. Any manufacturers of

Product X that control technologies that are economic substitutes for

Gamma's process are also horizontal competitors of Gamma in the

relevant technology market.

The licensing arrangement restricts competition in the relevant

goods market among manufacturers of Product X. The restriction applies

both to Product X that is manufactured with the licensed technology and

to Product X manufactured with any other technology. The latter

restriction is the key competitive concern because it harms competition

that would have taken place in the absence of the licensing agreement.

Such a restriction could conceivably benefit competition by promoting

the adoption of Gamma's technology (see Example 6). In this example,

however, the technology is not being used despite being licensed. If

further investigation shows that there is no likelihood that the

manufacturers of Product X will use Gamma's technology, the Department

is likely to conclude that there are no conceivable benefits from the

license restrictions.

If the Department concludes that the restraint does not contribute

to an efficiency-producing integration of economic activity, the

Department would be likely to challenge the arrangement under the per

se rule as a horizontal territorial market allocation scheme and to

view the intellectual property aspects of the arrangement as a sham

intended to cloak its true nature. Since such a restraint is per se

unlawful, the Department likely would challenge the arrangement even

absent proof of substantial market power by the licensor and the

licensees.

The competitive implications do not generally depend on whether the

licensed technology is protected by patent, is a trade secret or other

know-how, or is a computer program protected by copyright. Nor do the

competitive implications generally depend on whether the allocation of

markets is territorial, as in this example, or functional, based on

fields of use.

Example 6

Situation: As in Example 5, Gamma offers a license to every other

manufacturer of Product X for the patented process that it uses to

manufacture Product X. The license provides that each manufacturer has

an exclusive right to sell Product X manufactured using the licensed

technology in a designated geographic area, and that no manufacturer

may sell Product X, however manufactured, outside its designated

territory. As in Example 5, several manufacturers accept licenses. In

this example, however, the licensed process is an advance over their

previously used process. Furthermore, Gamma's licensed process is the

sole technology used by the licensees.

Discussion: The competitive relationships of the firms in this

example are the same as in Example 5 and the licensing restraint has a

similar effect on competition among the manufacturers of Product X.

This example is distinguished from the previous example in that the

licensed technology is useful, and, indeed, is used extensively by the

licensees. As a consequence, the vertical dimension of the licensing

agreement, and the benefits of the licensing restrictions in promoting

the adoption of the technology, assume greater importance.

Again, the key competitive issue is the effect of the territorial

restraint in the licensing arrangement on competition in the goods

market that includes Product X. The restraint applies to all sales of

Product X, without regard to whether it was made using the licensed

technology. Such a restraint could have a benefit in promoting

manufacturing and marketing efforts on behalf of the licensed

technology, in part by making it easier for Gamma to monitor use of its

licensed technology. The benefits come at the cost of restricting

competition that would have taken place in the absence of the licensing

arrangement. If the restraint contributes to an efficiency-enhancing

integration of economic activity, the Department would evaluate this

arrangement under the rule of reason. It would take into account such

factors as the share of the licensor and the licensees in the relevant

markets affected by the licensing arrangement, the level of

concentration and difficulty of entry in these markets, and the

promotional benefits to be gained by focusing manufacturing and

marketing efforts on the licensed technology.

4. General Principles Concerning the Department's Evaluation of

Licensing Arrangements Under the Rule of Reason

4.1 Antitrust ``Safety Zone''

Absent extraordinary circumstances, the Department will not

challenge a restraint in a licensing arrangement if (1) The restraint

is not of a type that normally warrants condemnation under the per se

rule and (2) the licensor and its licensees collectively account for no

more than twenty percent of each relevant market affected by the

restraint.\13\ This ``safety zone'' is designed to provide owners of

intellectual property with a degree of certainty, so as to encourage

procompetitive licensing arrangements. It is not intended to discourage

parties falling outside the safety zone from adopting restrictions in

their license arrangements that are reasonably necessary to achieve an

efficiency-producing integration of economic activity. The Department

will analyze arrangements falling outside the ``safety zone'' based on

the considerations outlined in this section.

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\13\As stated in section 1.41 of the 1992 Horizontal Merger

Guidelines, market shares for goods markets ``can be expressed

either in dollar terms through sales, shipments, or production, or

in physical terms through measurement of sales, shipments,

production, capacity, or reserves.'' Special considerations affect

the measurement of market shares in some technology markets. The

measurement of market shares in that context is discussed in section

3.2.1.

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This ``safety zone'' does not apply to transactions that amount to

mergers or acquisitions, which are governed by the 1992 Horizontal

Merger Guidelines.

The Department will include innovation market shares in its

evaluation of whether a licensing arrangement falls within the safety

zone only if the assets required to compete in research and development

are specialized and identifiable. If not, the Department will confine

its analysis to the goods and technology markets affected by the

licensing arrangement.

4.2 General Statement of the Rule of Reason

In analyzing a restraint in a licensing arrangement under the rule

of reason, the Department first inquires whether the restraint has an

anticompetitive effect. If so, the Department next inquires whether the

restraint is reasonably necessary to achieve procompetitive benefits

that outweigh those anticompetitive effects. See NCAA v. Board of

Regents of the University of Oklahoma, 468 U.S. 85 (1984); see also 7

Phillip A. Areeda, Antitrust Law, Sec. 1502 (1986). In pursuing these

inquiries, the Department will be guided by several general principles.

These principles apply to both vertical and horizontal licensing

restraints that are analyzed under the rule of reason.

4.3 Analysis of Anticompetitive Effects

The existence of anticompetitive effects resulting from a restraint

in a licensing arrangement may be evaluated on the basis of a variety

of factors taken together, including the following.

4.3.1 Market structure, coordination, and foreclosure. When a

licensor and its licensees compete in technology or goods markets, a

restraint in a licensing arrangement may increase the risk of

coordinated pricing, output restrictions, or the acquisition or

maintenance of monopoly power. The potential for competitive harm

generally increases with the degree of concentration in, the difficulty

of entry into, and the inelasticities of supply and demand in markets

in which the licensor and licensees are in a horizontal relationship.

Cf. 1992 Horizontal Merger Guidelines, Secs. 1.5, 3.

When the licensor and licensees are in a vertical relationship,

harm to competition from a restraint may occur if it forecloses access

to, or increases competitors' costs of obtaining, important inputs

(other than as a natural consequence of the licensee acquiring a

licensed technology for its own use). An example is a licensing

arrangement with most of the established manufacturers in an industry

preventing those manufacturers from using any technology. The risk of

foreclosing access or increasing competitors' costs is related to the

fraction of markets affected by the licensing restraint and to other

characteristics of the input and output markets, such as concentration,

difficulty of entry, and elasticities of supply and demand.

Harm to competition from a restraint in a vertical licensing

arrangement also may occur if a licensing restraint facilitates

coordination to raise prices or reduce output in markets in which one

of the parties participates. For example, if owners of competing

technologies impose similar restraints on their licensees, the

licensors may find it easier to coordinate their pricing. Similarly,

licensees that are horizontal competitors may find it easier to

coordinate their pricing if they are subject to common license

restraints imposed either by a common licensor or by competing

licensors. The risk of anticompetitive coordination is increased when

the relevant markets are concentrated and difficult to enter.

4.3.2 Licensing arrangements involving exclusivity. A licensing

arrangement may involve exclusivity in two distinct respects. First,

the licensor may grant one or more exclusive licenses, which restrict

the right of the licensor to license others and possibly also to

practice the technology itself. Generally, such as grant to exclusivity

may raise antitrust concerns only if the licensees themselves, or the

licensor and its licensees, are actual or potential competitors in a

relevant technology or goods market in the absence of the licensing

arrangement. Examples of exclusive licenses with possible competitive

consequences include cross-leasing by parties collectively possessing

market power (see section 5.5), grantbacks (see section 5.6), and

acquisitions of intellectual property rights (see section 5.7).

A second form of exclusivity, exclusive dealing, arises when a

license prevents or restrains the licensee from using competing

technologies. Such restraints can have the effect of denying rivals

sufficient outlets for exploiting their technologies and thus be

anticompetitive. Exclusivity may be required by the licensor, as in an

explicit exclusive dealing arrangement (see section 5.4), or induced

through economic incentives. For example, a royalty arrangement based

on total sales of a licensee's product, regardless of whether it is

made using the licensed technology, may increase the cost to a licensee

of substituting alternative technologies, and thus may have effects

similar to an exclusive dealing arrangement. See Complaint, United

States v. Microsoft, Inc., Civ. No. 94-1564 (D.D.C., filed July 15,

1994); Competitive Impact Statement, id. (filed July 27, 1994). Whether

a restraint of this kind has anticompetitive effects depends, inter

alia, on the availability of other outlets for competitively viable

exploitation of rival technologies.

Restraints that impose or encourage exclusive dealing may have

procompetitive effects. For example, a licensing arrangements that

prevents the licensee from dealing in other technologies may encourage

the licensee to develop and market the licensed technology or

specialized application of that technology. See, e.g., Example 7. The

Department will take into account such precompetitive effects in

evaluating the reasonableness of the arrangement. See section 4.4.

The Department will focus on the actual practice and its effects,

not to the formal terms of the arrangement. A license denominated as

non-exclusive (either in the sense of exclusive licensing or in the

sense of exclusive dealing) may nonetheless give rise to the same

concerns posed by formal exclusivity. A non-exclusive license may have

the effect of exclusive licensing if it is structured so that the

licensor is unlikely to license others or to practice the technology

itself. A license that does not explicitly require exclusive dealing

may have the effect of exclusive dealing if it is structured to make it

costly for licensees to use competing technologies. However, a

licensing arrangement will not automatically raise these concerns

merely because a party chooses to deal with a single licensee or

licensor, or confines his activity to a single field of use or

location, or because only a single licensee has chosen to take a

license.

Example 7

Situation: Eta, the inventor of a new flat panel display

technology, lacking the capability to bring a flat panel display

product to market, grants Rho an exclusive license to make and sell a

product embodying Eta's technology. Rho does not currently sell a

product that would compete with the product embodying the new

technology or control rights to another display technology. Several

firms offer competing displays, the relevant markets for manufacturing

and distribution of such displays are unconcentrated, and entry into

these markets is relatively easy. Demand for the new technology is

uncertain and successful market penetration will require considerable

promotional effort. The license contains an exclusive dealing

restriction preventing Rho from selling products that compete with the

product embodying the licensed technology.

Discussion: This example illustrates both types of exclusivity in a

licensing arrangement. The license is exclusive in that it restricts

the right of the licensor to grant other licenses. In addition, the

license has an exclusive dealing component in that it restricts the

licensee from selling competing products.

The inventor of the display technology and its licensee are in a

vertical relationship and do not compete in the manufacture or sale of

display products or in the sale of technology. Hence, the grant of an

exclusive license does not affect competition between the licensor and

the licensee. The exclusive license may promote competition by

encouraging Rho to develop and promote the new product in the face of

uncertain demand by rewarding Rho for its efforts if they lead to large

sales. Although the license bars the licensee from selling competing

products, this exclusive dealing aspect is unlikely in this example to

harm competition by foreclosing access or facilitating anticompetitive

pricing because several firms offer competing products, the relevant

manufacturing and distribution markets are unconcentrated, and entry is

easy. On these facts, the Department would be unlikely to challenge the

arrangement.

4.3.3 Benefits to the parties from reduction of competition. In

some cases, the benefits of a restraint in a licensing arrangement to

the licensor or its licensees may derive primarily from reductions in

competition that likely would have occurred absent the license rather

than from the restraint's relationship to efficiency-producing

objectives of the arrangement. In determining whether to challenge a

particular restraint in a licensing arrangement, the Department will

assess evidence indicating which of these possibilities better

describes the purpose and effect of the restraint.

4.3.4 Other factors. Factors such as a history of rivalry and a

rapid pace of innovation are also relevant to an analysis of the

potential for harm to competition. The presence of these factors may

indicate that licensors and licensees are less likely successfully to

engage in coordinated behavior to raise prices or restrict output, and

their absence may signal a greater likelihood of such behavior.

4.4 Efficiencies and Justifications

If the Department finds that a restraint in a licensing arrangement

has an anticompetitive effect, the Department will consider whether the

restraint produces offsetting procompetitive effects, such as by

facilitating the efficient development and exploitation of intellectual

property. If offsetting benefits are established, the Department will

determine whether the restraint is reasonably necessary to achieve the

efficiencies. If the restraint is reasonably necessary, and if the

efficiencies outweigh the anticompetitive effect, the Department will

not challenge the licensing arrangement.

The Department's comparison of anticompetitive harms and

procompetitive efficiencies is necessarily a qualitative one. The risk

of anticompetitive effects in a particular case may be insignificant

compared to the expected benefits, or vice versa. As the expected

anticompetitive effects in a particular licensing arrangement increase,

the Department will look for evidence establishing with greater

certainty that the arrangement achieves net benefits.

The existence of practical and significantly less restrictive

alternatives is relevant to a determination of whether a restraint is

reasonably necessary. If it is clear that the parties could have

achieved similar efficiencies by means that are significantly less

restrictive, then the Department will not give weight to the parties'

efficiency claim. In making this assessment, however, the Department

will not engage in a search for a theoretically least restrictive

alternative that might be easier to construct in hindsight than in the

practical prospective business situation faced by the parties.

When a restraint has an anticompetitive effect, the duration of

that restraint can be an important factor in determining whether it is

reasonably necessary to achieve the putative procompetitive effect. The

effective duration of a restraint may be dependent on a number of

factors, including the option of the affected party to terminate the

arrangement unilaterally and the presence of contract terms (e.g.,

unpaid balances on minimum purchase commitments) that encourage the

licensee to renew a license arrangements. Consistent with its approach

to less restrictive alternative analysis generally, the Department will

not attempt to draw fine distinctions regarding duration; rather, its

focus will be on situations in which the duration clearly exceeds the

period needed to achieve the procompetitive effect.

The evaluation of procompetitive efficiencies, of the reasonable

necessity of a restraint to achieve them, and of the duration of the

restraint may depend on the market context. A restraint that may be

justified by the needs of a new entrant, for example, may not have a

procompetitive efficiency justification in different market

circumstances. Cf. United States v. Jerrold Electronics Corp., 187 F.

Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961).

4.5 Restraints Subject to a Quick-Look Analysis

A rule of reason analysis may require no more than a ``quick look''

at the anticompetitive effects of a particular restraint and the extent

to which the restraint is reasonably necessary to achieve an

efficiency-producing integration. When the restraint is one that

ordinarily warrants per se treatment, and a quick look at the claimed

efficiencies reveals that the restraint is not reasonably necessary to

achieve procompetitive efficiencies, the Department will likely

challenge the restraint without further analysis. See FTC v. Indiana

Federation of Dentists, 476 U.S. 447, 459-60 (1986); NCAA v. Board of

Regents of the University of Oklahoma, 468 U.S. 85, 109-10 & n.39

(1984).

5. Application of General Principles

This section illustrates the application of these principles to

particular licensing restraints and to arrangements that involve the

cross-licensing, pooling, or acquisition of intellectual property. The

restraints and arrangements identified are typical of those that are

likely to encounter antitrust scrutiny; however, they are not intended

as an exhaustive list of practices that could raise competitive

concerns.

5.1 Horizontal Restraints

While licensing arrangements among horizontal competitors, like

joint ventures, often promote rather than hinder competition, there are

a number of circumstances in which antitrust scrutiny is warranted.

Generally speaking, the licensor and the licensee are deemed to be

horizontal competitors only if they own or control technologies that

are economic substitutes for each other or if they are competitors in a

goods market other than through the use by the licensee of the licensed

technology. See section 3.3. Consistent with the principles set forth

in section 3.4, the Department will challenge certain types of

horizontal restraints as per se unlawful in appropriate cases.

Horizontal restraints in licensing arrangements that constitute price

fixing, allocation of markets or customers, agreements to reduce

output, and certain group boycotts may merit per se treatment. In other

cases, the restraints will be evaluated under the rule of reason,

following the general principles set forth in section 4.

Example 8

Situation: Two of the leading manufacturers of a consumer

electronic product hold patents that cover alternative circuit designs

for the product. None of the patents is blocking; that is, each of the

patents can be practiced without infringing a patent owned by the other

firm. The different circuit designs are economic substitutes. Each

permits the manufacture at similar cost of products that consumers

consider to be interchangeable. The manufacturers assign their patents

to a separate corporation wholly owned by the two firms. That

corporation licenses the right to use the circuit designs to other

consumer product manufacturers and establishes the license royalties.

Discussion: In this example, the manufacturers are horizontal

competitors in the goods market for the consumer product and in the

related technology markets. The competitive issue with regard to a

joint assignment of patent rights is whether the assignment has an

adverse impact on competition in technology and goods markets that is

not outweighed by procompetitive benefits in the use or dissemination

of the technology. Each of the patent owners has a right to exclude

others from practicing its patent. That right does not extend, however,

to the agreement to assign rights jointly. To the extent that the

patent rights cover technologies that are substitutes, the joint

determination of royalties may result in higher royalties and higher

goods prices than the owners would have charged on their own. In the

absence of evidence establishing efficiencies from the joint assignment

of patent rights, the Department may conclude that the joint marketing

of competing patent rights constitutes horizontal price fixing and

could be challenged as a per se unlawful horizontal restraint of trade.

If there are plausible efficiency justifications for the joint

marketing arrangement, the Department would evaluate the arrangement

under the rule of reason. However, the Department may conclude that the

anticompetitive effects are sufficiently apparent, and the proposed

integrative efficiencies are sufficiently weak or unrelated to the

restraints, to require only a ``quick look'' rule of reason analysis

(see section 4.5).

5.2 Resale Price Maintenance

Resale price maintenance is illegal when ``commodities have passed

into the channels of trade and are owned by dealers.'' Dr. Miles

Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). It has

been held per se illegal for a licensor of an intellectual property

right in a product to fix a licensee's resale price of that product.

United States v. Univis Lens Co., 316 U.S. 241, 243-45, 249-51 (1942);

Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 446-48, 452, 457

(1940).\14\ Consistent with the principles set forth in section 3.4,

the Department will enforce the per se rule against resale price

maintenance in the intellectual property context.

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\14\But cf. United States v. General Electric Co., 272 U.S. 476

(1926) (holding that an owner of a product patent may condition a

license to manufacture the product on the fixing of the first sale

price of the patented product). Subsequent lower court decisions

have distinguished the GE decision in various contexts. See, e.g.,

Royal Indus. v. St. Regis Paper Co., 420 F.2d 449, 452 (9th Cir.

1969) (observing that GE involved a restriction by a patentee who

also manufactured the patented product and leaving open the question

whether a nonmanufacturing patentee may fix the price of the

patented product); Newburgh Moire Co. v. Superior Moire Co., 237

F.2d 283, 293-94 (3rd Cir. 1956) (grant of multiple licenses each

containing price restrictions does not come within the GE doctrine);

Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646, 647

(5th Cir.) (owner of an intellectual property right in a process to

manufacture an unpatented product may not fix the sale price of that

product), cert. denied, 323 U.S. 726 (1944); Barber-Colman Co. v.

National Tool Co., 136 F.2d 339, 343-44 (6th Cir. 1943) (same).

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5.3 Tying Arrangements

A transaction is said to involve tying if: (1) There are two

separate products, and (2) the sale of one product is conditioned on

the purchase of the other. Thus, conditioning the ability of a customer

to license one or more items of intellectual property on the customer's

purchase of another item of intellectual property or a good or service

has been held to constitute illegal tying. See, e.g., United States v.

Paramount Pictures, Inc., 334 U.S. 131, 156-58 (1948) (copyrights);

International Salt Co. v. United States, 332 U.S. 392 (1947) (patents).

Tying can, however, be efficiency-enhancing under some circumstances.

See, e.g., Jerrold Electronics Corp. v. Westcoast Broadcasting Co., 341

F.2d 653 (9th Cir.), cert. denied, 382 U.S. 817 (1965). The Department

would be likely to challenge a tying arrangement if: (1) The seller has

sufficient economic power in the market for the tying product to enable

it to restrain trade in the market for the tied product, (2) the

arrangement has an adverse effect on competition in the relevant market

for the tied product, and (3) efficiency justifications for the

arrangement do not outweigh the anticompetitive effect.\15\ The

Department will not presume market power solely from the existence of a

patent or other intellectual property right.\16\

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\15\As is true throughout these Guidelines, the factors listed

are those that guide the Department's internal analysis in

exercising its prosecutorial discretion. They are not intended to

circumscribe how the Department will conduct the litigation of cases

that it decides to bring, nor to opine on how the courts should

resolve questions that are currently unsettled in the case law.

\16\See section 2.2. This policy is consistent with the

requirement that market power be demonstrated to establish patent

misuse based on tying. 35 U.S.C. Sec. 271(d) (1988) (as amended by

Pub. L. No. 100-703, 201 Stat. 4676 (1988)).

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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, but only if the items licensed constitute

``separate products'' and the licensing of one product is used to force

the acceptance of a license of another. Such practices can be

efficiency enhancing under some circumstances. When multiple licenses

are needed to practice any single item of intellectual property, for

example, a package license may present such efficiencies. If a package

license constitutes a tying arrangement, the Department will evaluate

its competitive effects under the same principles it applies to other

tying arrangements.

5.4 Exclusive dealing

In the intellectual property context, exclusive dealing occurs when

a license prevents the licensee from licensing, selling, distributing,

or using a competing technology. Although such restraints can be

procompetitive in some circumstances, in other situations they can deny

rivals sufficient outlets for competitively viable exploitation of

their technologies and thus can be anticompetitive. See section 4.3.2.

5.5 Cross-Licensing and Pooling Arrangements

Cross-licensing and pooling arrangements are agreements of two or

more owners of different items of intellectual property to license one

another or third parties. These arrangements may promote economic

welfare by integrating complementary technologies, reducing

transactions costs, clearing blocking positions, and avoiding costly

infringement litigation. By promoting the dissemination of technology,

cross-licensing and pooling arrangements are often procompetitive.

Cross-licensing and pooling arrangements can have anticompetitive

effects in certain circumstances. When these arrangements are a

mechanism to accomplish price fixing, or market or customer allocation,

they can lead to a significant lessening of competition. See United

States v. New Wrinkle, Inc., 342 U.S. 371 (1952) (price fixing); United

States v. United States Gypsum Co., 333 U.S. 364 (1948) (customer

allocation). The joint marketing of pooled intellectual property

rights, with collective price setting or coordinated output

restrictions, may violate section 1 of the Sherman Act. Compare NCAA v.

Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984)

(output restriction on college football broadcasting held unlawful

because it was not reasonably related to any purported justification)

with Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979) (blanket license

for music copyrights upheld because the cooperative price was found

necessary to the creation of a new product).

Settlements involving the cross-licensing of intellectual property

rights can be an efficient means to avoid litigation over infringement

and interference proceedings, and, in general, courts favor such

settlements. When such cross-licensing involves horizontal competitors,

however, the Department will consider whether the effect of the

settlement is to diminish rivalry that would otherwise have occurred.

In the absence of offsetting efficiencies, such settlements may be

challenged as unlawful restraints of trade. Cf. United States v. Singer

Manufacturing Co., 374 U.S. 174 (1963) (cross-license agreement was

part of broader combination to exclude competitors).

Pooling arrangements and the like generally need not be open to all

who would like to join. Cross-licensing and pooling arrangements among

parties that collectively possess market power may, under some

circumstances, harm competitions by significantly disadvantaging

competitors. Cf Northwest Wholesale Stationers, Inc v. Pacific

Stationery & Printing Co., 472 U.S. 284 (1985) (exclusion of a

competitor from a purchasing cooperative not unlawful absent a showing

of market power).

Another possible anticompetitive effect of pooling arrangements may

occur when participation in the arrangement deters or discourages

participants from engaging in research and developing, thus retarding

innovation. A pooling arrangement in which members grant licenses to

each other for current and future technology at minimal cost may

encourage free-riding and reduce the incentives of its members to

compete in their research and development efforts. See generally United

States v. Automobile Manufacturers Association, 307 F. Supp. 617 (C.D.

Cal 1969), modified sub nom. United States v. Motor Vehicle

Manufacturers Association, 1982-83 Trade Cas. (CCH)  65,088 (C.D. Cal

1982); United States v. Manufacturers Aircraft Association, 1976-1

Trade Cas. (CCH)  60,810 (S.D.N.Y. 1975). Such an arrangement is more

likely to cause competitive problems where the arrangement includes a

large fraction of the potential participants in research and

development.

Example 9

Situation: As in Example 8, two of the leading manufacturers of a

consumer electronic product hold patents that cover alternative circuit

designs for the product. The manufactures assign several of their

patents to a separate corporation wholly owned by the two firms. That

corporation licenses the right to use the circuit designs to other

consumer product manufacturers and establishes the license royalties.

In this example, however, the manufacturers assign to the separate

corporation only patents that are blocking. None of the patents

assigned to the corporation can be practiced without infringing a

patent owned by the other firm.

Discussion: Unlike the previous example, the joint assignment of

patent rights to the wholly owned corporation in this example can have

procompetitive benefits in the use of dissemination of the technology.

Because the manufacturer's patents are blocking, the manufacturers are

not in a horizontal relationship with respect to those patents. Neither

patent can be practiced without the right to a patent owned by the

other firm, so the patents are not economic substitutes. (The pooling

of patents also would not raise competitive problems in the relevant

technology market if the pool involved complementary patents and

enabled licensing of a package whose value exceeded the sum of its

component patents.)

As in Example 8, the firms are horizontal competitors in the

relevant goods market. In the absence of evidence suggesting that the

joint assignment of patent rights is also contributing to coordinated

pricing of the firms' final products, the Department would be unlikely

to challenge this arrangement.

5.6 Grantbacks

A grantback is an arrangement under which a licensee agrees to

extend to the licenser of intellectual property the right to use the

licensee's improvements to the licensed technology. Grantbacks can have

procompetitive effects, such as providing a means for the licensee and

the licensor to share risks and rewarding the licensor for making

possible further innovation based on or informed by the licensed

technology. Such arrangements can both promote innovation in the first

place and promote the subsequent licensing of the results of the

innovation.

Grantbacks may adversely affect competition, however, if they

substantially reduce the licensee's incentives to engage in research

and development and limit rivalry in innovation markets. In deciding

whether to challenge a grantback, the Department will consider the

extent to which, as compared with no license at all, the license with

the grantback provision may diminish total research and development

investment or lessen competition in innovation or technology markets.

5.7 Acquisition of Intellectual Property Rights

The legality of transactions resulting in an actual or effective

acquisition of intellectual property rights is analyzed under section 7

of the Clayton Act and sections 1 and 2 of the Sherman Act. SCM Corp.

v. Xerox Corp., 645 F.2d 1195, 1210 (2d Cir. 1981) (patents); United

States v. Columbia Pictures Corp., 189 F. Supp. 153, 183 (S.D.N.Y.

1960) (copyrights). The Department will analyze such transactions as

acquisitions of assets just as it does other asset acquisitions. When a

license is non-exclusive, the exclusivity is temporary, or the

acquisition is otherwise structured to allow the parties freedom to

compete independently in related products, the Department will take

these aspects of the arrangement into account, as it does in the case

of other asset acquisitions and joint ventures.

With respect to horizontal acquisitions, the Department will apply

the analysis contained in the 1992 Horizontal Merger Guidelines. The

Department will evaluate the effects of an acquisition of intellectual

property in affected technology, innovation, and goods markets. As

described in section 4 of the 1992 Horizontal Merger Guidelines, the

Department takes into account integrative efficiencies that could not

reasonably be achieved without the acquisition as well as any

anticompetitive effects of the acquisition from the lessening of

competition among existing technologies or goods or from the lessening

of competition to develop new technologies.

Example 10

Situation: Omega develops a new, patented pharmaceutical for the

treatment of a particular disease. The only drug on the market approved

for the treatment of this disease is sold by Zeta, which has invested

large sums in advertising to achieve brand name recognition. Omega's

patented drug has almost completed regulatory approval by the Food and

Drug Administration. Omega has invested considerable sums in testing

market acceptance for its new drug. However, rather than enter the

market as a direct competitor of Zeta, Omega licenses to Zeta the

exclusive right to manufacture and sell Omega's patented drug.

Discussion: Assuming that Zeta would manufacture and sell Omega's

patented drug, the relationship of Omega and Zeta is in part vertical,

because Zeta would be a customer of Omega in the technology market.

However, their relationship is also horizontal in part, because Omega

is a likely potential competitor of Zeta in the relevant goods market

as well as in the relevant technology market. Although the vertical

aspects of this arrangement pose no threat to competition in this

example, the horizontal aspects would require further analysis. The

Department would evaluate Zeta's acquisition of Omega's patent rights

as an acquisition of the assets of a likely potential competitor, using

the methodology described in the Department's merger guidelines. The

Department would consider the impact of the acquisition on market

concentration, other factors that affect the likelihood that

competition would be affected by the acquisition, and possible

efficiency defenses. In this example, Zeta's market position prior to

the acquisition as the only seller of a drug treatment of this disease

makes it more likely that the acquisition would have anticompetitive

effects.

6. Enforcement of Invalid Intellectual Property Rights

The Department may challenge the enforcement of invalid

intellectual property rights as antitrust violations. The Supreme Court

has held that enforcement of a patent obtained by fraud on the Patent

and Trademark Office can violate section 2 of the Sherman Act if all

the elements otherwise necessary to establish a section 2

monopolization charge are proved. Walker Process Equipment, Inc. v.

Food Machinery & Chemical Corp., 382 U.S. 172 (1965). Enforcement of a

patent obtained by mere inequitable conduct before the Patent and

Trademark Office, however, cannot be the basis of a section 2 claim,

because inequitable conduct does not involve knowing and willful patent

fraud. Argus Chemical Corp. v. Fibre Glass-Evercoat Co., 812 F.2d 1381

(Fed. Cir. 1987). An objectively baseless infringement action, brought

in bad faith, when the complainant knows the intellectual property

right to be invalid, may violate section 2 of the Sherman Act. See

Professional Real Estate Investors, Inc. v. Columbia Pictures

Industries, Inc., 113 S. Ct. 1920, 1928 (1993); Handgards, Inc. v.

Ethicon, Inc., 743 F.2d 1282, 1288-89 (9th Cir. 1984). cert. denied,

469 U.S. 1190 (1985) (patents); Handgards, Inc., v. Ethicon, Inc., 601

F.2d 986, 992-96 (9th Cir. 1979), cert. denied, 444 U.S. 1025 (1980)

(patents); CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985)

(trade secrets).

[FR Doc. 94-19657 Filed 8-10-94; 8:45 am]

BILLING CODE 4410-01-M