Wagging the Dog? Reconsidering Antitrust-Based Regulation of IP-Licensing

Beginning of article

INTRODUCTION

I. TTBER AND ANTITRUST GUIDELINES
    A. Articles 81(1) and (3) ECT and Block Exemption
       Regulations
    B. The New TTBER
       1. Market-Share Thresholds
       2. Hardcore Restrictions-Article 4 TTBER
       3. Excluded restrictions-Article 5 TTBER
       4. Analysis
          a. Substantive Issues
          b. Institutional Issues
       5. Conclusion
    C. U.S. Antitrust Guidelines
       1. Antitrust Challenges to IP Licensing Prior to 1995
       2. 1995 U.S. Antitrust Guidelines
          a. The Rule of Reason
          b. Differentiation between Horizontal and Vertical
               Relationships of Licensing Parties
          c. Licensing Arrangements Involving Exclusivity
          d. Efficiencies and Justifications
          e. Antitrust "Safety Zone"
       3. Analysis
    D. Comparison
       1. Formal Setup and Binding Force
       2. Content
       3. Institutional Context
    E. Conclusion
II. IP APPROACH TO IPR LICENSING
    A. Adequate Recognition of Antitrust Concerns in IP Law
         Interpretation
       1. Acknowledgement of Public Interests in IP Laws
       2. Public Interest Considerations Through "Property"
            Notion of IPRs
    B. Testing the Assumptions
       1. Example 1--Same Results (Price Fixing)
       2. Example 2--Different Results (Use of Licensee's
            Technology)
    C. Implications of the IP Approach
       1. General Benefits
       2. Institutional Implications
       3. Costs
    D. Conclusion
SUMMARY AND FINAL REMARKS

INTRODUCTION

This Article aims to add another piece to a so far still puzzling picture at the interface of intellectual property and antitrust laws. While past and current discussions mostly revolve around the notion that only one--either Antitrust or IP laws--can prevail, the author favors a differentiated understanding.

This Article compares how IP licensing is scrutinized by antitrust regimes in the European Union (EU) and the United States. The result of that comparison leads to the conclusion that any attempted resolution of the IP-Antitrust "dilemma" will remain inadequate as long as it is "antitrust-based," that is, regulated by antitrust laws or guidelines designed by antitrust-agencies. Unlike by other current approaches, the overall validity of substantive antitrust concerns regarding IP licensing is not called into question, however. It is the institutional setup in which the antitrust policies regarding IP exploitation are designed and enforced that is proposed to be in need of change. The author argues that antitrust concerns can and should be accounted for through proper construction and application of the IP laws themselves.

The proposed "IP-based" approach to IP licensing is claimed to be beneficial in at least two respects: it maintains the dogmatic clarity of the IP laws while preserving the bargain underlying the grant of intellectual property rights. Furthermore, this Article suggests that an "IP-based" regulation of licensing activities will--despite initially increased costs--in the long run be more cost efficient than current approaches and therefore also be economically preferable.

Intellectual Property Rights (IPRs) (1) confer exclusive rights to their owner. This exclusivity of IPRs is often described as providing "monopoly-power," which, were it true, would stand in opposition to antitrust legislation aiming at the control or even breakup of monopolies and at the promotion of competition. It has been shown more than once, however, that this view on IPRs is based on a misconception of the term "monopoly." (2)

Nevertheless, questions traditionally dealt with in antitrust laws frequently arise when IPRs are exploited, especially by licensing. It is almost inherent in license agreements that the licensor imposes restrictions, for instance, as to the territory in which the licensee may use the IPR. Such restrictions in general trade (e.g. sales or distribution contracts) have always been under antitrust scrutiny. It appears logical, therefore, that IPR-licensing agreements containing such exclusivity restrictions should be subject to antitrust control as well. The perception of the interplay between IP and antitrust has changed over the years. It has rarely been called into question, however, that the legality of IP-licensing terms should be analyzed under antitrust laws. It further went unchallenged that the specialized agencies dealing with antitrust violations took on the task to review IP licenses.

In 1995, the U.S. Department of Justice and the Federal Trade Commission ("the Agencies") issued the Antitrust Guidelines for the Licensing of Intellectual Property ("Antitrust Guidelines"). These Guidelines state the general enforcement policy of the Agencies concerning IP licensing. (3) Thereby the Agencies manifested their claim to scrutinize IP-licensing agreements. In the same spirit, the Commission of the European Union ("the Commission") in 2004 issued a renewed "block exemption" regulation for certain technology-transfer agreements ("TTBER"). (4) This regulation renders Article 81(1) of the Treaty establishing the European Community (5) ("ECT") inapplicable on certain kinds of IPR-licensing agreements. (6) The mere fact that certain IP licenses are regulated in regard to Article 81(1) ECT establishes that the EU--like the United States--regards IPR licensing as an antitrust issue.

However, court decisions in the United States as well as in Europe give reason to question this general assumption of the Agencies' supervisory power over IP licenses. In Lasercomb America, Inc. v. Reynolds, (7) the court found that the analysis to prove copyright misuse is "similar to but separate from the analysis necessary to a finding of an antitrust violation." (8) This judgment could be read to suggest that although IPR licensing might touch on both antitrust and IP-law issues, the respective statutory regimes have a distinct realm of applicability. Once it has been determined which body of law prevails, only its distinctive tests must be employed. With this reading, the Agencies might not be the authorities to issue general guidelines on the treatment or evaluation of IP licenses. In Illinois Tool Works Inc. v. Independent Ink, Inc., (9) the Supreme Court ruled that an IPR (10) does not of itself confer market power. (11) Thereby it ruled out the "monopoly-presumption" long held. As a consequence, arguably, the Agencies now have to demonstrate a restraint of trade (12) to justify antitrust scrutiny of IPR-licensing agreements. (13)

The European Court of Justice ("ECJ") has also established that the ownership of an IPR does not confer market power and that conduct that falls within the scope of an IPR--and this generally includes licensing--can never be reviewed in relation to antitrust laws. (14) Thus, in both major IPR-producing jurisdictions, IP licensing is under the general scrutiny of the antitrust authorities despite the fact that, in both jurisdictions, courts have issued judgments suggesting that such a general antitrust scrutiny of IPR licenses might be misplaced.

The interface of IPRs and antitrust laws as it appears in the context of license agreements should therefore be revisited. It needs to be clarified if the Commission's and the Agencies' approaches are valid or if they unduly scrutinize legitimate practices of IPR owners. The following analysis introduces the TTBER and the Antitrust Guidelines and compares the legal status of both sets of rules including their scope and basic principles. This comparison will first show if and to what extent the antitrust views on IPR exploitation vary between Europe and the United States. Secondly, it will serve as a starting point for an analysis of the merits of the Agencies' and the Commission's general approach. It will be analyzed to what extent this approach is coherent with intellectual property law legislation. (15) It will be suggested that the "external" antitrust perspective on IPR licensing agreements is legally questionable and unnecessary. To remedy some of the perceived disadvantages identified in the current approach, a new, IP-driven approach to the analysis of IP licenses will be suggested. This approach attempts to step away from the "isolated" application of the antitrust system and suggests an integrated regulatory system based on the specialized IP agencies and courts.

I. TTBER AND ANTITRUST GUIDELINES

The TTBER and the Antitrust Guidelines both evaluate and limit IPR licensing from the antitrust perspective, i.e., guided by antitrust concerns and objectives. Apart from this similarity, by their very nature (regulation vs. guideline) and due to the different jurisdictions they emerge from, the TTBER and the Antitrust Guidelines form two distinct approaches to deal with the interface of antitrust laws and IPRs.

A. Articles 81(1) and (3) ECT and Block Exemption Regulations

To understand the different approaches, and especially the TTBER, one first has to consider the legal environment of the TTBER.

Article 81(1) ECT prohibits all agreements between undertakings that may affect trade between member states and which have as their object or effect the prevention, restriction, or distortion of competition within the common market. According to Article 81(3) ECT, an agreement is exempt from the prohibition of Article 81(1) ECT if it is beneficial for consumers. To benefit consumers, the agreement must contribute to the improvement of production or distribution of goods or promote technical or economic progress.

Prior to May 1, 2004, exemptions according to Article 81(3) ECT required an evaluation and a subsequent formal decision by the Commission. This procedure was criticized for giving the Commission a monopoly on decisions about the antitrust relevance of agreements while producing enormous administrative costs. (16) To reduce these costs and provide legal certainty for undertakings, the Council of the European Union passed Regulation 19/65/EEC. (17) In accordance with this regulation, the Commission could and did issue "block exemption regulations," exempting categories of practices that are considered to normally be consistent with Article 81(1) ECT. (18)

Regulation (EC) 1/2003, which took effect May 1, 2004, brought about fundamental changes. According to its Article 1(2), agreements that fall within the scope of Article 81(3) ECT are now automatically legal without prior evaluation by the Commission. This change necessarily affected the block exemption regulations issued by the Commission. (19) Prior to Regulation (EC) 1/2003, undertakings had to apply for exemption by the Commission even if they believed their agreement to be "block exempted." (20) Now, the possibility to obtain a formal exemption is unavailable. Unlike in the United States, there is furthermore no option to obtain an (non-binding) informal evaluation of the validity of a license agreement. (21) According to the new legislative approach they are unnecessary anyway.

The flipside of this new approach is that the undertakings bear a heavy burden of legal uncertainty. They have to determine and evaluate all factors relevant for the analysis of Article 81(3) ECT as well as the factors concerning the applicability of a block exemption. Should the determination by the undertakings differ from a subsequent evaluation by the Commission (for example, in the course of antitrust litigation), the agreement will be declared void due to a violation of Article 81(1) ECT.

B. The New TTBER

Within this new general framework, on May 1, 2004, the new TTBER came into effect. (22) It replaced the previous block exemption from 1996 and introduced the Commission's "more economic," i.e., economic-based approach, to IPR licensing. (23) The TTBER is based on three different assumptions. First, the Commission is of the opinion that intellectual property laws and competition laws share the basic objective of promoting consumer welfare and an efficient allocation of resources. (24) Second, the IPR owner must not be unduly restricted in the exploitation of his IPRs so as to allow him to recover sufficient monetary gain including recovery of sunk costs. (25) Third, there is no presumption that IPR licensing as such gives rise to competition law concerns. (26) To the contrary, "[t]echnology transfer agreements can give rise to economic efficiencies that outweigh the negative impact of restrictions that might be indispensable to the attainment of such efficiencies." (27)

According to Article 2(1) TTBER, only technology transfer agreements between two undertakings can be block exempted. Multiparty agreements fall outside the scope of the TTBER. (28) Furthermore, a technology-transfer agreement must concern the production of "contract products"--that is, goods or services which are produced with or incorporate the licensed technology. (29) If the main purpose of an agreement is not the production and distribution of a contract product, the agreement falls outside the scope of the TTBER. (30)

The TTBER only covers license agreements concerning patents, know-how, mixed patent/know-how agreements, design rights, and software. (31) Agreements merely relating to trademark or copyright licensing (except for software) are not covered by the TTBER. (32)

Within this framework the new TTBER provides a "safe harbor" in which licensing agreements will not be challenged for antitrust reasons. This safety zone exists upon two conditions: first, it requires certain market-share thresholds not to be exceeded by the contracting parties; second, the agreement must not include any of the so called "hardcore restrictions" exhaustively listed in Article 4 TTBER. If one of these requirements is not met, the entire agreement lies outside of the safe harbor and is subject to individual assessment under Article 81(1), (3) ECT. (33) Even worse, the inclusion of a hardcore restriction will in most cases render the entire agreement void. (34)

Article 5 TTBER finally contains so-called "excluded restrictions." Agreements containing those clauses will not be void in their entirety. Only the specific term will require individual assessment in light of Article 81(1), (3) ECT. (35)

1. Market-Share Thresholds

The Commission believes that an agreement's impact on the market is insignificant if the parties have no substantial market power. (36) A collective market share up to twenty percent if the contracting parties are competitors and thirty percent if they are not competitors is regarded as insubstantial market power. (37) The inclusion of market-share thresholds is motivated by the Commission's "economic-based approach" that bases the exemption of an agreement on the assessment of its impact on the relevant market. (38) The relevant market for purposes of the TTBER is determined …