A Modern Look At The Nine Patent Licensing ‘No-Nos’ (Part Two): The Last Five ‘No-Nos’

In our last edition, we addressed the first four “no-nos” and their current status under U.S. antitrust law. Here’s a discussion of the remaining five.

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.