A Modern Look at the Nine ‘No-Nos’ of Patent Licensing Under U.S. Antitrust Law: The First Four ‘No-Nos’

In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the 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 in a follow-up article that will be published in the next edition of this newsletter, we will 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.

So without further ado, here is a discussion of the first four “no-nos” and their current status under U.S. antitrust law.

1. Tying the purchase of unpatented materials as a condition of a patent license.

Patent/product tying is no longer an automatic “no-no.” It is subject to an analysis that takes into account market power, as well as, at least in some cases, pro-competitive benefits and anti-competitive effects.

A “tying” or “tie-in” or “tied sale” arrangement has been defined as “an agreement by a party to sell one product … on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that [tied] product from any other supplier.” Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992). As the DOJ and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property state, “[c]onditioning the ability of a licensee to license one or more items of intellectual property on the licensee’s purchase of another item of intellectual property or a good or a service has been held in some cases to constitute illegal tying.” However, although tying arrangements may result in anticompetitive effects, such arrangements can also result in significant efficiencies and pro-competitive benefits.

For many decades, the courts have considered tying arrangements involving patents—in particular, ties where a patented product is offered only on the condition that the buyer also purchase an unpatented product. Courts have been concerned that the tie could expand the patentee’s rights or powers beyond the statutory patent monopoly grant into related products or adjacent markets and interfere with competition in those markets.

Ties are potentially problematic when the firm imposing the tie has market power in the tying product market, and can use that power to “force” the consumption of tied products. For a number of decades, patents were presumed to confer market power. This presumption meant that patent/unpatented product ties were particularly troublesome. However, on the patent/patent misuse side of the law, the patent laws were reformed in the 1980s, and under 35 U.S.C. § 271(d)(5), there is no patent misuse absent proof of market power in the relevant market for the patent or patented product. On the antitrust side of the law, a patent also no longer creates a presumption of market power—market power must be proven as in any other antitrust case. See Illinois Tool Works v. Independent Ink, Inc., 547 U.S. 28 (2006). Thus, ties imposed by licensors without market power are unlikely to pose significant concerns.

There remains the question of whether, if the patentee indeed has substantial market power, a tie is “per se” unlawful or whether it is evaluated under the Rule of Reason (which balances pro-competitive benefits and anti-competitive effects). This is often a somewhat academic question. Once courts start examining market power issues, they are necessarily inquiring into effects or potential effects issues, whether they say so or not. Compare NCAA v. Board of Regents, 468 U.S. 85 (1984) at 104 n.26 (“there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct. For example, while the Court has spoken of a ‘per se’ rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis.”) Even those courts that still treat market power ties as per se unlawful sometimes accept business justifications for the ties.

2. Requiring the licensee to assign back subsequent patents.

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

As the DOJ/FTC antitrust and IP guidelines state:

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

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

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

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

3. Restricting the right of the purchaser of the patented product in the resale of the product.

If you own a patent, and sell or license patented products, can you impose restrictions on the resale of the products, and if so, are there any limitations on the types of restrictions you can impose?

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

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

In Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 (Fed. Cir. 1992), the Federal Circuit outlined the framework for evaluating whether an express condition on the post-sale use of a patented product constitutes patent misuse. In reversing a grant of summary judgment to Medipart, the Federal Circuit held that, except as to per se violations such as price-fixing or tying, restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all or part of the patent grant. See id. at 706. “The appropriate criterion is whether Mallinckrodt’s restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.” Id. at 708. The court concluded that the district court erred in holding that the restriction on reuse was, as a matter of law, unenforceable under patent law. If the sale of the apparatus was validly conditioned “under the applicable law such as the law governing sales and licenses,” and if the restriction on reuse was within the scope of the patent grant “or otherwise justified,” then violation of the restriction may be remedied by action for patent infringement. See id. at 709. Field of use restrictions are generally upheld, see B. Braun Medical, 124 F.3d at 1426. A restriction on how and where a product can be resold can be thought of as a field of use restriction.

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

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

Even if Quanta Computer did effectively overrule Mallinckrodt, it did so on the basis of the first-sale doctrine. Nothing in Quanta Computer expressly suggests that Mallinckrodt’s field-of-use analysis of license restrictions, effective prior to or at the time of sale, is no longer valid. But given the complexities in this area, if you are considering any restrictions after the first sale or license of the product, you should consider the potential antitrust implications before implementing them.

4. Restricting the licensee’s ability to deal in products outside the scope of the patent.

Patentees can, of course, offer either exclusive or non-exclusive licenses. In an exclusive license, the licensee receives the sole right to practice the patent in a field or fields. Under a non-exclusive license, the patentee retains the right to license others.

But there is another type of exclusivity: exclusive dealing in connection with a patent license may exist where express terms or incentives created by the license prevent or restrain the licensee from licensing, selling, distributing, or using competing technologies. Under the approach of the DOJ and the FTC, such exclusive dealing arrangements are evaluated under the Rule of Reason, meaning that in evaluating their legality, the Agencies will take into account the extent to which the arrangement (1) promotes the exploitation and development of the licensor’s technology and (2) anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing technologies.

According to the Agencies, “[t]he likelihood that exclusive dealing may have anticompetitive effects is related, inter alia, to the degree of foreclosure in the relevant market, the duration of the exclusive dealing arrangement, and other characteristics of the input and output markets, such as concentration, difficulty of entry, and the responsiveness of supply and demand to changes in price in the relevant markets.”

Note that some old cases talk about exclusivity requirements as per se patent misuse. However, this is not the approach of the Agencies, is generally inconsistent with modern economic theory, and is arguably at odds with the Patent Misuse Reform Act.

The bottom line: exclusive dealing in connection with a patent license is probably no longer per se unlawful. But that does not make exclusive dealing per se lawful, either. If exclusive dealing potentially causes significant market foreclosure in a technology or innovation market, then it could be subject to challenge. In other words, the law on exclusive dealing in connection with patent licenses resembles the law on exclusive dealing more generally.


We’ll cover the remaining five “no-nos” in the next issue—stay tuned.