In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the U.S. Department of Justice, developed a well known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and the previous one, we consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.

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

Under an exclusive license, the licensor agrees not to license others, and may agree not to practice the patent itself. Generally speaking, an exclusive license—exclusive in the sense that no other licensee is granted rights—does not violate the antitrust laws.

However, an exclusive license

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

DOJ/FTC Antitrust IP Guidelines Section 4.1.2.

In short, if the licensor and licensee are actual or potential competitors, and an exclusive license serves to create or enhance the exercise of market power, the license may raise concerns.

6) Mandatory Package Licenses

According to the federal enforcement agencies’ antitrust/IP guidelines, package licensing—the licensing of multiple items of intellectual property in a single license or in a group of related licenses—may be a form of tying arrangement if the licensing of one product is conditioned upon the acceptance of a license of another, separate product. Package licensing can also be efficiency enhancing under some circumstances and entirely lawful. All things being equal, exclusively offering patent licenses through a package carries more risk than offering them as a package but also offering them separately. Sometimes package licenses are issued by two or more separate companies. The practice of multiple defendants’ pooling patents in a mandatory package license becomes even more problematic when the pooled patents contain technology necessary to practice a technological standard.

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

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

In sum, package licenses—especially nonexclusive ones—are usually procompetitive, but they do not necessarily confer an antitrust immunity to enter into horizontal agreements to suppress competitive technologies.

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

Even monopolists are entitled to engage in business and earn a profit. Hence, as a general rule, patentees—even assuming they have a monopoly—can charge what they wish for their patents.

Often, a patentee will charge royalties based on the number of units of product sold, or that equal a percentage of licensee revenues. If the license is conditioned on royalties on products “which do not use the teaching of the patent,” then it may be unlawful as a matter of patent law. See Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 135 (1969).

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

The Supreme Court in Zenith was addressing patent misuse doctrine. There is a separate inquiry as to whether “metered tying”—where a patentee charges a relatively low price for a patented product, and then ties the product to non-patented products (usually parts or supplies)—should be viewed as an antitrust violation. Under current tying law, such a tie could indeed violate the antitrust laws.

However, a broad royalty base—one which includes nonpatented products—doesn’t really amount to a tie; the element of forced purchases from the patentee seems to be lacking. Instead, the potential antitrust danger with a broad royalty base is that it could, at least in theory, curtail competition in the non-patented product market, because if a licensee is already paying a royalty on non-patented products, it may have a disincentive to purchase or use competing products.

In that connection, in the Microsoft case (United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)), the government challenged operating system license fees paid by original equipment manufacturers calculated according to the number of computers shipped, regardless of whether the computers were loaded with Microsoft’s OS. In other words, Microsoft licensed the OEMs on a “per processor” basis. Since OEMs had to pay Microsoft for each computer shipped, they were arguably less likely to pay to install a competing OS on their computers. Microsoft agreed in a consent decree to charge the OEMs license fees only for computers actually loaded with the Microsoft OS. The precedential value of a consent decree is of course quite limited.

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

Here, we’re concerned with what are vertical restraints: For example, requirements that a licensee sell only to certain customers, or in certain territories. Such restraints are often procompetitive. See DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property § 2.3 and Example 1. See also In re Yarn Processing Patent Validity Litig., 541 F.2d 1127, 1135 (5th Cir. 1976).

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

9) Minimum Resale Price Provisions for the Licensed Products

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

In the early 20th century, the Supreme Court held that an IP owner could condition an IP license on the licensee’s agreement to sell licensed product at a specified price. See United States v. General Electric Co., 272 U.S. 476 (1926). The exclusive right of a patentee, the court wrote, “is to acquire profit by the price at which the article is sold.” Id. at 490. The court concluded that this right extended to ensuring that licensees do not undercut the licensor and destroy its margins.

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

Since General Electric, courts have further limited its application. See, e.g., United States v. Line Material Co., 333 U.S. 287, 312 (1948) (multiple patentees may not enter a crosslicensing scheme that establishes the resale price of products to be manufactured under cross-licenses); Newburgh Moire Co. v. Supreme Moire Co., 237 F.2d 283, 293-94 (3d Cir. 1956).

The 1995 DOJ/FTC Antitrust Guidelines for Intellectual Property went further and suggested that the agencies will enforce the per se rule against resale price maintenance (“RPM”) in the intellectual property context. The agencies took the position that General Electric had been effectively overruled, and that fixing a licensee’s resale price was per se illegal.

However, today, after State Oil Co. v. Khan, 522 U.S. 3 (1997), and Leegin Creative Leather Products Inc. v. PSKS Inc., 551 U.S. 877 (2007), vertical agreements on price are no longer per se illegal under federal law. Although Khan and Leegin did not involve patents, there is little reason to think that the federal antitrust rule would be different for patented products. There is an important caveat: State law can and does differ. Some states continue to treat RPM (or at least minimum RPM) as per se illegal. Thus, some continued caution is necessary.

In sum, most of the licensing restrictions previously thought to be per se unlawful are now subject to the Rule of Reason. However, that does not necessarily mean that such restrictions are automatically lawful. Depending upon the facts and circumstances, some inquiry into the nature of any restriction and its likely effects is warranted to ensure compliance with the antitrust laws.

Respondents initially filed suit against Comcast Corporation and its subsidiaries, alleging that Comcast had conspired with other cable providers to segment the Philadelphia cable market so that providers would be able to maintain exclusivity over the segments, in violation of Section 1 and Section 2 of the Sherman Act. Respondents claimed that Comcast “clustered” their cable television operations within a particular region by swapping their systems outside the region for competitor systems inside the region, thereby eliminating competition and holding prices for cable services above competitive levels. Respondents sought to certify a class under FRCP 23(b)(3), which requires that “the questions of law or fact common to class members predominate over any questions affecting only individual members.”

Respondents proposed four theories of antitrust impact, relying solely upon expert testimony that calculated damages on the basis of all four theories. The District Court accepted only one theory as capable of classwide proof and rejected the rest. The District Court further found that damages resulting from the one theory could be calculated on a classwide basis, even though the expert acknowledged that his model did not isolate damages resulting from any one theory of antitrust impact.  The 3rd U.S. Circuit Court of Appeals affirmed, holding that respondents were not required to “tie each theory of antitrust impact to an exact calculation of damages.” Behrend v. Comcast Corp., 655 F.3d 182, 207 (3d Cir. 2011). Instead, a calculation of supra-competitive prices regardless of the type of anticompetitive conduct was sufficient to satisfy Rule 23(b)(3).  Id.

The Supreme Court disagreed, holding that because the damages model failed to attribute supra-competitive prices specifically to the remaining theory of impact, “Rule 23(b)(3) cannot authorize treating subscribers within the Philadelphia cluster as members of a single class.” Justice Antonin Scalia, writing for the majority, cited the Court’s reasoning in Wal-Mart Stores, Inc. v. Dukes as requiring “a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim.” At the class certification stage, “any model supporting a plaintiff’s damages case must be consistent with its liability case.”

The Court’s ruling will make it more difficult for class plaintiffs to satisfy Rule 23(b)(3)’s requirements without having more detailed expert reports regarding the ability to determine damages on a classwide basis. This likely will result in more robust expert reports and expert discovery during class certification proceedings.

CAFA, which Congress enacted in 2005, provides that federal district courts (subject to certain exceptions) have jurisdiction over class actions if the proposed class has 100 or more members, the parties are minimally diverse, and the amount in controversy exceeds the aggregate sum or value of $5 million. Since CAFA was enacted, lawyers for class action plaintiffs have tried to avoid federal court jurisdiction under CAFA by stipulating that they will not seek more than $5 million for the putative class. In Knowles, the plaintiff sought to employ this very tactic. When the defendant removed the plaintiff’s case from Arkansas state court to federal court, the district court held the plaintiff’s stipulation that the class would not seek to recover total aggregate damages more than $5 million was sufficient for the case to fall outside the reach of CAFA, and remanded the case to state court.Although the Court of Appeals declined to hear the defendant’s appeal of the remand order, the Supreme Court granted certiorari and, in a 9-0 opinion, rejected the district court’s approach. Writing for the Court, Justice Stephen Breyer held that the plaintiff’s stipulation might be binding on the individual plaintiff who filed the suit but cannot bind other members of the proposed class (which had not been certified). The Court also noted that allowing class plaintiffs to use this tactic would lead to abuses of the system, where, for example, plaintiffs could divide a $100 million class action into 21 separate actions that each seek just below $5 million in state court, and therefore avoid CAFA simply by using non-binding stipulations to limit the amount in controversy for each one of those state court actions. This, the Court held, subverted a major congressional objective in passing CAFA: ensuring that the federal courts consider class action cases with national importance.

This decision will have an obvious and direct effect on the efforts of class action plaintiffs who wish to keep their cases in state court—it will be more difficult for them to do so going forward.

In Phoebe Putney, the Hospital Authority of Albany-Dougherty County owned one of two hospitals in the county, Phoebe Putney Memorial Hospital, which was in turn managed by Phoebe Putney Health System, Inc. (PPHS).  The Hospital Authority decided to purchase the other hospital in the county and lease it to PPHS. The Federal Trade Commission sued to enjoin the transaction under Section 5 of the FTC Act and Section 7 of the Clayton Act. The District Court denied the FTC’s request on the basis that the transaction was immune under the state action doctrine. The 11th Circuit affirmed, holding that the state legislature would have foreseen that conduct such as the acquisition would occur and could lessen competition, given the broad powers state law granted to the local authorities to purchase and lease hospitals.Writing for the Court, Justice Sonia Sotomayor reviewed the Court’s prior state action decisions starting with Parker v. Brown, 317 U.S. 341 (1943). She explained that state action immunity is disfavored and for it to apply to a local government’s activity the action must be undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition.

In certain circumstances, state action immunity would apply if the anticompetitive conduct was the “foreseeable result” of the state action. However, the Court held that the mere grant of authority to act is not enough to confer immunity. Rather, the lessening of competition must be “affirmatively contemplated” by the state action—the local authority must show that it was granted authority not only to act, but “to act or regulate anti-competitively.” In the case of the Hospital Authority, the Court held that “while the Law does allow the Authority to acquire hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.” Further, the Court held, the 11th Circuit “applied the concept of ‘foreseeability’ from [its] clear articulation test too loosely.” State action immunity would apply if the effect on competition is the “inherent, logical, or ordinary result” of the exercise of the state’s authority. But “‘simple permission to play in a market’ does not ‘foreseeably entail permission to roughhouse in that market unlawfully.’”

The Court’s opinion is a reaffirmation of case law holding that state action immunity is disfavored and will be applied narrowly. Private entities seeking to pursue a course of potentially anticompetitive conduct they believe is authorized under state law should review the authorizing law closely to determine whether it “clearly articulates and affirmatively expresses,” explicitly or implicitly, state policy to displace competition.

In addition, under established case law, the statutory scheme must provide for adequate supervision of authorized conduct by local governmental authority to ensure that state action immunity applies.

Sunbeam, a Miami-area broadcaster, purchased ratings from Nielsen. Sunbeam alleged that, among other things, Nielsen violated antitrust laws by excluding competition from three potential competitors:  Arbitron, ADcom, and erinMedia. Sunbeam claimed that as a customer, its burden to show causation between Nielsen’s exclusionary conduct and Sunbeam’s injury was less than that required of a competitor. Specifically, Sunbeam claimed that it need not establish the same degree of preparedness to enter the market by competitors Arbitron, ADcom, and erinMedia that would be required if one of the competitors brought the claim.The Court disagreed, adopting the D.C. Circuit’s holding in Meijer, Inc. v. Biovail Corp., 533 F.3d 857, 862 (D.C. Cir. 2008), that “a would-be purchaser [or customer] suing an incumbent monopolist for excluding a potential competitor from which it might have bought a product at a lower price must prove the excluded firm was willing and able to supply it but for the incumbent firm’s exclusionary conduct.” To prove that a competitor was “willing and able,” Sunbeam must have established “affirmative steps” by the competitor to enter the market, including that it had “prepared cash flow estimates and financial statements in order to determine the profitability of the expansion, had existing capabilities that would have allowed it to serve the market, and took affirmative steps to obtain necessary government permits, etc.” Absent these concrete indications of preparedness to enter the market, Sunbeam could not establish that it was an efficient enforcer of the antitrust laws. On March 26, Sunbeam filed a petition seeking a rehearing en banc.

A cy pres provision in a settlement typically allows any settlement funds leftover after distribution to the class members to be distributed to a third party (typically, a charity) if the third party’s activities relate to the injury suffered by the class. The settlement in In re Baby Products was for $21.5 million, but only $3 million was ultimately distributed to the class, leaving cy pres recipients with $18.5 million. Although the 3rd Circuit joined the 1st and 9th Circuits in generally approving the permissibility of cy pres provisions in class action settlements, the Court ultimately vacated the district court’s approval of the settlement—as well as the attorneys fees awarded based on it—because the parties never advised the district court that such a minimal amount would go directly to the class members.

For attorneys contemplating a cy pres provision in a settlement agreement, the 3rd Circuit’s opinion provides important guidance. For example, cy pres provisions are more likely to survive scrutiny where individual distributions are impractical or too difficult. A cy pres distribution should be a small percentage of the total settlement funds, with direct distributions to the class being the primary focus of the settlement. Further, if the district court does not receive sufficient information from the parties to make this determination, the court might withhold approval of the settlement until information is provided.

AT&T’s claims, which accused Samsung Electronics Co., LG Display Co., Sharp Corp., and other manufacturers of conspiring to fix the prices of TFT-LCDs used in AT&T’s products, had been dismissed in November 2010. See AT&T Mobility LLC v. AU Optronics Corp., et al., No. 09-4997 (N.D. Cal. Nov. 12, 2010).  The district court had held that AT&T failed to establish a sufficient nexus between California and its claims, because AT&T did not allege that it purchased TFT-LCDs screens in California.

In the 9th Circuit, AT&T argued that its allegations regarding defendants’ price-fixing activities in California established a sufficient link to the state to allow their Cartwright claims to proceed beyond the motion to dismiss stage. The 9th Circuit agreed, ruling that “in-state conduct that causes out-of-state injuries can be relevant to a due-process analysis” under the Cartwright Act. Furthermore, the 9th Circuit noted that the application of California law would not undermine the policies of other states.

Of the four manufacturer-defendants, one was not sued for monetary damages because its sales contracts contained arbitration clauses that required any claims for such damages to be resolved by arbitration. Another manufacturer settled the case before trial for $9 million. A third manufacturer settled the case during the trial for $22.5 million. The jury found the overcharges amounted to $54.3 million dollars. After trebling and a reduction for amounts paid in settlement, the defendant against which the court entered judgment will be liable for $131.7 million plus attorney’s fees.

Anheuser-Busch and Modelo are the largest and third largest beer firms, respectively, in the U.S. beer market and collectively control about 46 percent of that market. According to DOJ, the $20.1 billion transaction would substantially lessen competition in the U.S. beer market as a whole, as well as in 26 metropolitan areas across the U.S., and result in higher beer prices for consumers, with fewer new products to choose from. DOJ argued that because of the U.S. beer market’s size and existing high concentration, even a small increase in the price of beer could result in billions of dollars to harm to American consumers. The lawsuit, filed in Washington, D.C., paints Modelo as an important competitor that puts pressure on Anheuser-Busch to maintain or lower prices, particularly in states like California, New York, Texas and other markets.

On March 20, U.S. District Court Judge Richard Roberts granted an extended stay of the government’s suit until April 9, after the parties informed the court that they were close to a settlement. The court advised the parties that if an agreement is reached pursuant to the Antitrust Procedures and Penalties Act, the parties should submit a statement to the court illustrating how the settlement would eliminate the anticompetitive effects of the merger.