AIPLA Quarterly Journal
Volume 28, Number 1 Page 1
Winter 2000
ANTITRUST AND INTELLECTUAL PROPERTY LAW:
FROM ADVERSARIES TO PARTNERS
Commissioner Sheila F. Anthony(1)
I. Introduction
II. Evolution Of The Relationship Between Antitrust And Intellectual Property Law
A. Historical Review Of The Relationship Between Antitrust And Intellectual Property Law
B. Current Relationship Between Antitrust And Intellectual Property Law
C. Antitrust Guidelines For The Licensing Of Intellectual Property
III. Rule Of Reason Analysis
A. Overview Of The Rule Of Reason Analysis
B. The Treatment Of Grantbacks Under The Rule Of Reason Analysis
IV. Current Antitrust Enforcement Concerns
A. Patent Pooling
1. DVD And MPEG-2 Technology Pools
2. Summit Technology/VISX
3. MPEG-2 And Summit/VISX Patent Pools Distinguished Under Rule Of Reason
B. Mergers
1. Ciba-Geigy/Sandoz (Novartis AG)
2. Glaxo/Wellcome
C. Exclusive Licensing
D. Single-Firm Conduct
1. Intel Corporation
a. Complaint allegations
b. Terms of consent order
2. Dell Computer Corporation
a. Complaint allegations
b. Terms of consent order
V. Checklists For Antitrust Issues
A. Licensing
B. Cross-Licensing
C. Structuring Procompetitive Agreements: Other Factors To Consider
VI. Conclusion
I. Introduction
Intellectual property and antitrust are especially relevant as we approach the new century
because it is more important than ever to encourage innovation and competition, both of
which enhance consumer welfare. Innovations are among the most valuable assets of
American businesses, and in today's global economy, companies must innovate if they
hope to survive and thrive. This is true in industries as diverse as computer hardware and
software, biotechnology, aerospace, and pharmaceuticals. Companies generate wealth
and employment by generating new ideas and developing them into improved products.
Consumers, in turn, benefit enormously from these innovations.
Innovating companies--ranging from modest research boutiques to giant aerospacedefense contractors--all depend vitally on a legal framework that ensures a competitive
market while protecting the rights of inventors and allowing innovators to profit from
their ideas and inventions. Many attorneys bear responsibility for charting companies'
paths through this framework. This responsibility is a real challenge because innovation
moves so quickly and change is the norm. It is my hope that this article will make the job
a little easier by enhancing knowledge of the antitrust aspects of the legal framework.
Due to my experience in private practice,(2) I understand that the natural predilection of
some intellectual property practitioners is to view antitrust issues with a certain degree of
antagonism. Since joining the Federal Trade Commission in October 1997, I have gained
a broader perspective on the relationship between competition policy and intellectual
property rights. Increasingly, many of the Commission's competition cases have an
intellectual property component. Over time, I have found that the goals of intellectual
property and antitrust law are not mutually exclusive and, in fact, are quite similar. In this
article, I hope to demonstrate that the two disciplines are compatible and, importantly,
that old notions should be dispelled. I will attempt to do so by providing an historical
perspective on the interplay between antitrust and intellectual property law, and by
discussing recent Federal Trade Commission ("FTC" or "Commission") and Department
of Justice ("DOJ" or "Department") matters involving intellectual property issues. I will
focus primarily on patent issues because most of the Commission's intellectual property
antitrust enforcement matters have involved patents, although the principles I will discuss
apply equally to all forms of intellectual property.
II. Evolution Of The Relationship Between
Antitrust And Intellectual Property Law
Although many attorneys now recognize the commonality of purpose between the
antitrust and intellectual property laws, such commonality has not always been fully
recognized. Earlier in this century, courts and enforcement agencies often regarded the
two bodies of law as having an adversarial relationship. That "adversarial" thinking is
outdated, and I would like to explain why. First, however, a brief historical overview
gives important context to the current thinking about antitrust and intellectual property
law.
A. Historical Review Of The Relationship Between Antitrust And Intellectual Property
Law
For much of this century, courts and federal agencies regarded patents as conferring
monopoly power in a relevant market.(3) A "relevant market" is an antitrust term of art
that is used to determine which products compete with one another.(4) Historically,
substitute products were not considered in the analysis of whether patents confer
monopoly power.
The thinking that patent law and antitrust worked toward opposite purposes had another
effect. In any given case, courts and the agencies had to find that one or the other concept
took precedence. This meant that in many cases, the courts considered patents to be a
government-endorsed exception to the antitrust laws. In fact, for a long time, the courts
held that the patent exception was so broad as to immunize from antitrust scrutiny the
conduct of firms holding patents. In one case, the Supreme Court even found that conduct
involving price fixing merited immunity.(5)
In the middle of the century, the courts narrowed the immunity. Certain types of conduct
still were considered to be outside the antitrust laws. Others, however, were not. A 1948
Supreme Court opinion described the boundaries of the immunity this way: "the
possession of a valid patent or patents does not give the patentee any exemption from the
provisions of the Sherman Act beyond the limits of the patent monopoly."(6) The Court
had begun to recognize that the antitrust and patent laws could co-exist.
The trend towards narrowing the types of conduct exempt from antitrust scrutiny
culminated in the 1970s with a now-infamous government policy called the "Nine NoNos" that was first articulated in a speech by a DOJ official.(7) The Nine No-Nos were
certain types of conduct that the Department always regarded as suspect and likely to
unreasonably harm competition.(8) Such conduct was suspect because courts and agencies
still tended to infer market power from the existence of a patent, without weighing the
significance of substitutes for the patented technology or product.(9)
One no-no was that a patentee should not require a licensee to grant back patented
improvements to the licensee's original technology.(10) Today, the agencies recognize that
such grantbacks can have a greater positive than negative effect on competition,
particularly where the original patentee competes with several other firms and the
grantback is nonexclusive.(11)
Another big no-no was the setting of royalty payments in amounts unrelated to the sales
volume of the patented product.(12) Once again, this conduct might not receive much
attention today, particularly if a patentee were found to lack market power.
The other no-nos were: 1) tying of unpatented supplies; 2) post-sale restrictions on resale
by purchasers of patented products; 3) tie-outs; 4) licensee veto power over the licensor's
grant of future licenses; 5) mandatory package licensing; 6) restrictions on sales of
unpatented products made by a patented process; and 7) specifying the prices a licensee
could charge upon resale of licensed products.(13)
To summarize the historical overview, the antitrust and patent laws once were thought to
represent opposing policies. This dichotomy was encouraged by the antitrust presumption
that a patent not only conferred exclusive rights to one product or process, but also
assured monopoly power in a relevant market, regardless of available substitutes.
B. Current Relationship Between Antitrust And Intellectual Property Law
Today, the federal antitrust enforcement agencies recognize a much closer and
interconnected relationship between antitrust law and intellectual property rights.(14) The
FTC and DOJ no longer consider the two bodies of law to conflict. The agencies' current
thinking is summarized quite well in the Federal Circuit's 1990 opinion in Atari Games
Corp. v. Nintendo of America, Inc., in which the Federal Circuit stated: "[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 complementary, as both are aimed at encouraging
innovation, industry and competition."(15)
This recognition of the complementary purposes of the antitrust and patent laws has been
facilitated by the ongoing dialogue between the patent and antitrust legal communities.(16)
The federal antitrust enforcement agencies have benefitted greatly from our exchanges
with the intellectual property bar, and we at the FTC hope these discussions will
continue.
C. Antitrust Guidelines For The Licensing Of Intellectual Property
The Antitrust Guidelines for the Licensing of Intellectual Property ("IP Guidelines"),
issued jointly by the FTC and DOJ in 1995, describe the agencies' current complementary
approach to applying antitrust principles in cases involving intellectual property rights.(17)
The IP Guidelines were developed in cooperation with the intellectual property bar.
The integrated approach of the IP Guidelines embodies three basic principles. First, the
federal antitrust authorities apply the same general antitrust principles to conduct
involving intellectual property as to conduct involving any other form of property.(18) The
agencies recognize, however, that intellectual property has important characteristics that
distinguish it, such as ease of misappropriation. The antitrust analysis undertaken in cases
involving intellectual property takes such differences into account. Nonetheless, the
governing antitrust principles are the same.
The second principle is that the agencies do not presume that intellectual property creates
market power in the antitrust context.(19) This is important because it represents a
refinement of the thinking that characterized earlier periods of antitrust enforcement.
The third principle is that the agencies generally consider intellectual property licensing
to be procompetitive.(20) The agencies recognize that intellectual property licensing often
allows firms to combine complementary factors of production.(21) Licensing also can help
integrate complementary intellectual property. Consumers may benefit from licensing
because it can expand access to intellectual property and thus increase the speed and
reduce the cost of bringing innovations to market.
In addition to discussing general principles, the IP Guidelines apply the principles of
particular licensing practices, such as arrangements that involve the cross-licensing,
pooling, or acquisition of intellectual property.(22) These examples are useful in assessing
the analysis that might apply to other practices.
III. Rule Of Reason Analysis
A. Overview Of The Rule Of Reason Analysis
The FTC and DOJ generally analyze restraints involved in licensing transactions and
other agreements involving intellectual property using what antitrust law calls the "rule of
reason."(23) The rule of reason analysis involves several steps. First, the agencies ask
whether the restraint is likely to adversely affect competition.(24) Second, if there is a
likely anticompetitive effect, the inquiry determines whether the restraint on competition
is reasonably necessary to achieve procompetitive benefits, or efficiencies, that outweigh
those anticompetitive effects.(25)
The rule of reason analysis applies several basic principles. The first step is to define the
relevant market. Market definition has two dimensions: product market and geographic
market.(26) The key issue in defining the relevant product market is identifying the
existence of substitutes for a given product. As to determination of the relevant
geographic market, a typical question would be whether, if the price of a domestically
produced product goes up, customers will import a substitute product from another
country. The fundamental question answered by relevant market definition is: which
products actually compete with one another in the marketplace?(27)
Once the relevant market is defined, the agencies assess market power, which the IP
Guidelines describe as "the ability profitably to maintain prices above, or output below,
competitive levels [in a relevant market] for a significant period of time."(28) The agencies
look at various factors in assessing market power. Market share--the percentage of a
given relevant market (product and geographic) controlled by a particular company-often is a key determinant of market power.(29) Market share, however, may be an
imperfect surrogate for market power. For example, the ability to exercise market power
will depend on the ease with which new competitors can enter the market.
Where market power exists, the agencies examine how that power was or will be
acquired. As the Supreme Court has stated, the market power of a single firm that is
solely "a consequence of a superior product, business acumen, or historic accident" does
not violate the antitrust laws.(30) Sometimes, however, market power may be acquired
illegally--for example, through an agreement that unreasonably restrains competition.
Moreover, even when market power is legally acquired, it can be illegally maintained.(31)
Finally, even when a firm has legally acquired and maintained its market power, conduct
by a firm with market power may be unlawful if it unreasonably harms competition.(32)
B. The Treatment Of Grantbacks Under The Rule Of Reason Analysis
As noted above, in the 1970s grantbacks likely would have provoked an antitrust
challenge because of the DOJ's view that patents conferred market power.(33) Today, the
federal antitrust authorities have a more refined view of the likely effect of grantbacks on
innovation, competition, and consumer welfare. Grantback provisions are now evaluated
under a more detailed rule of reason inquiry, in which we examine the likely effects of
the grantback "in light of the overall structure of the licensing arrangement and
conditions in the relevant markets."(34) The agencies also ask whether the licensor has
market power, since market power no longer is presumed from patent ownership.(35)
The agencies recognize that grantbacks can be procompetitive, especially when they are
non-exclusive.(36) The procompetitive benefits may include: 1) risk sharing between a
licensee and a licensor; 2) incentives for the licensor to engage in further innovation
based on the licensee's improved technology; 3) stimulation of first-generation
innovation; and 4) encouragement of the licensing of improved first-generation
innovation.(37) Grantbacks can affect competition adversely as well, however. Some
grantbacks can reduce substantially a licensee's incentives to engage in research and
development. The result might be to limit competition in research and development.
Generally, a non-exclusive grantback is less likely to produce anticompetitive effects
because the licensee remains free to license its improvements to others.(38) Indeed, the
agencies recognize that a non-exclusive grantback provision sometimes can be necessary
to ensure competition. For example, without a grantback provision, the original licensor
might be "prevented from effectively competing because it is denied access to
improvements developed with the aid of its own technology."(39) On the other hand, even
a nonexclusive grantback might have anticompetitive effects if it prevents the licensee
from earning a return on its innovations.(40)
IV. Current Antitrust Enforcement Concerns
A focus on recent enforcement actions helps to illustrate how the principles articulated in
the IP Guidelines translate into current enforcement priorities and intentions.
A. Patent Pooling
As the IP Guidelines state, the antitrust agencies regard patent pooling arrangements as
"often procompetitive" because these arrangements can promote the dissemination of
technology.(41) Possible procompetitive effects result from: 1) clearing blocking positions;
2) avoiding costly infringement litigation; 3) integrating complementary technologies;
and 4) reducing transaction costs.(42) Concerns arise, however, when a pooling
arrangement harms competition among entities that are actual or potential competitors.
A comparison of three recent matters illustrates how the antitrust agencies approach
patent pooling. The first two patent pools were analyzed by DOJ under its business
review letter procedure, pursuant to which DOJ reviews a prospective transaction and
provides an advisory opinion at a company's request.(43) The third pool involved the
Summit Technology/VISX enforcement action, which was recently settled by the FTC.(44)
1. DVD And MPEG-2 Technology Pools
DOJ reviewed two pools relating to Digital Versatile Disc ("DVD") technology. The first
pool was proposed by eight electronics firms and Columbia University.(45) The pool
concerned MPEG-2, a video data storage compression standard.(46) Video compression
allows savings in data storage and transmission space, a technology used with DVD
production. Participants proposed to pool 27 patents held by numerous different
patentees. The pool planned to issue a blanket, nonexclusive license at a royalty rate
agreed upon by the licensors.(47) The second pool was proposed by Philips, Sony, and
Pioneer and concerned a pool of patents necessary to comply with the standards for the
production of DVDs and DVD players.(48) In each case, DOJ declined to initiate an
enforcement action based on the patent pool descriptions that were provided by the
parties.(49)
The basic features of the MPEG-2 pool, which led DOJ to determine not to bring an
enforcement action, likewise were present in the DVD pool. Thus, the following
discussion will focus on the MPEG-2 pool. When reviewing proposed patent pool
arrangements, however, it would be wise to review DOJ's business review letters in both
cases in order to assure an understanding of the few features where the two pools
differed.
DOJ based its conclusion not to pursue an enforcement action on half a dozen factors.
First, the pool included only complementary, not competing, patents, each of which was
deemed essential to compliance with the MPEG-2 standards.(50) The pooling agreement's
definition of "essential" is particularly noteworthy in that it required (1) that there be no
technical alternative to each patent that was included in the pool and (2) that the pooled
patents be useful for MPEG products only in conjunction with each other.(51) The patentholders were not pooling competing technologies, but rather assembling complementary
components of a single technology.
Second, the licenses were non-exclusive.(52) Each covered patent would remain available
on an individual basis from its individual licensor.(53) The pool thus would not be a
mechanism for requiring licensees to take a package of multiple licenses they did not
want. A requirement that multiple licenses be taken sometimes is called "tying" in
antitrust analysis, and tying of licenses can harm competition under certain
circumstances.
Third, the pool would use an independent expert to choose which patents were "essential"
and could be included in the pool.(54) The pool thus avoided being over-inclusive or
including patents that were competitive substitutes for other patents in the pool. The joint
licensor, a separate entity with no intellectual property of its own at stake, would retain
and pay the expert. In addition, because each member's royalties were based on the
number of essential patents it contributed, the royalty structure gave the pool members a
strong incentive to exclude other firms' non-essential patents.
Fourth, the pool promised equal access.(55) The portfolio would be offered on the same
terms and conditions to all licensees. This "equal access" requirement would eliminate
any potential for the pool to be used to disadvantage rivals to the pool members.
Fifth, unilateral competition with the standard was permitted, meaning that nothing in the
agreement restricted licensors from developing alternative technologies.(56) Thus, the
patent pool would not restrain innovation.
Finally, the pool offered significant efficiencies.(57) The pooling arrangement reduced the
time and expense required to accumulate the diverse licenses needed to make MPEG-2
products. By facilitating the creation of those products, the pool's effect was likely to be
procompetitive.(58)
2. Summit Technology/VISX
The third patent pooling case involved an enforcement action initiated by the FTC. In
March 1998, the FTC announced charges against Summit Technology, Inc. and VISX,
Inc. regarding their pooling of patents related to photorefractive keratectomy ("PRK").(59)
PRK is a form of eye surgery that uses lasers to reshape the cornea and frees many people
from the need to wear glasses or contact lenses.(60) Summit and VISX were the only firms
with Food and Drug Administration ("FDA") approval to market PRK equipment.
Summit and VISX licensed most of their PRK patents to a shell entity named Pillar Point
Partnership.(61) This partnership then licensed the full portfolio of patents back to Summit
and VISX, and only to Summit and VISX. Summit and VISX sold or leased PRK
equipment to eye doctors and sublicensed the doctors to perform PRK procedures. The
patent pooling arrangement required Summit and VISX to pay the Partnership a $250 fee
each time a PRK procedure was performed. Summit and VISX, in turn, charged each of
their respective sublicensees a $250 per-procedure fee. Neither Summit nor VISX had an
incentive to reduce this fee because the patent pooling agreement obligated each firm to
pay this amount to the pool.
The Commission's complaint alleged, first, that the agreement eliminated ongoing
competition between Summit and VISX that otherwise would have existed in markets for
PRK equipment, licensing of patents, and licensing of technology related to the
procedure.(62) Second, the exclusive nature of the agreement restricted other firms' access
to PRK technology by reducing each party's incentives to license PRK technology to
other firms.(63) Third, the fee provisions significantly raised the prices that consumers
paid for PRK procedures.(64) In the Commission's view, the $250 licensing fee paid to the
Partnership effectively became a price floor for consumers' fees.(65)
In August 1998, these allegations were settled through a consent order that bars
continuation of the pooling arrangement.(66)
3. MPEG-2 And Summit/VISX Patent Pools Distinguished Under Rule Of
Reason
A comparison of the MPEG-2 and Summit/VISX pools is useful to show how the rule of
reason balancing of procompetitive benefits and anticompetitive effects produced a
different result in each case.
First, the MPEG pool was limited to patents that were useful for MPEG-2 products only
in conjunction with the other patents.(67) In contrast, the Commission alleged that, in the
absence of the patent pooling agreement, VISX and Summit could and would have
competed with one another in the sale or lease of PRK equipment by challenging each
other's patents, by avoiding or inventing around the patents, or by combining both
tactics.(68)
Second, the exclusivity of the two pools differed.(69) The patents covered by the MPEG
pool could be made available by the individual members, as well as by the pool.
Conversely, the Summit/VISX pool prohibited unilateral licensing by either party.
Third, either Summit or VISX individually could veto licensing by the pool to other
companies.(70) This veto power diminished the likelihood that either company's patents
would be licensed to other PRK manufacturers. The complaint alleged that, in fact, the
patents were not licensed to others. The MPEG pool, on the other hand, was specifically
designed to facilitate licensing of the covered patents to a broad spectrum of other
manufacturers on nondiscriminatory terms.(71)
In sum, the MPEG pool was designed to make new products possible, while the
Summit/VISX pool appeared to do little more than grant the parties the power to control
prices.
B. Mergers
Two recent mergers of pharmaceutical companies demonstrate the role of intellectual
property in the Commission's antitrust analysis. The first case involved the merger of
Ciba-Geigy and Sandoz, in which both companies were developing gene therapy
technology.(72) The second matter involved Glaxo's acquisition of Wellcome, in which
both companies were developing non-injectable migraine remedies.(73) In both cases, the
Commission carefully crafted remedies to protect the large up-front investments
necessary to discover and develop new drugs.
1. Ciba-Geigy/Sandoz (Novartis AG)
In March 1996, Ciba and Sandoz agreed to merge to form Novartis AG.(74) The FTC
reached a consent agreement with the parties to address the competitive impact on the
innovation of gene therapies.(75) At the time of the merger, no gene therapy product was
on the market, but potential treatments were in clinical trials.
The FTC identified five relevant product markets relating to gene therapy, all of which
were located in the United States.(76) The first relevant market encompassed the
technology and research and development for gene therapy overall.(77) The other markets
each involved the research and development, manufacture, and sale of a specific type of
gene therapy, for cancer; graft-versus-host disease ("GVHD"); hemophilia; and
chemoresistance.(78)
In the first market, for overall gene therapy, the Commission alleged that Ciba and
Sandoz controlled the key intellectual property rights necessary to commercialize gene
therapy products.(79) For each of the four specific gene therapy markets, the Commission
asserted that the relevant market was highly concentrated and that Ciba and Sandoz were
the two leading commercial developers of the gene therapy product.(80) Moreover, entry
into the gene therapy markets was difficult and time-consuming because any entrant
would need patent rights, significant human and capital resources, and FDA approvals.(81)
In a separate statement, the Commission majority said that the case presented "a postmerger picture of potentially life-saving therapies whose competitive development could
be hindered by the merged firm's control of substantially all of the proprietary rights
necessary to commercialize gene therapy products. Preserving long-run innovation in
these circumstances is critical."(82)
The remedies centered, not surprisingly, on the intellectual property rights. The new
company, Novartis, was required to grant to all requesters a non-exclusive license to
certain patented technologies essential for development and commercialization of gene
therapy products.(83) Depending on the patent, Novartis could receive an up-front
payment of $10,000 and royalties of one to three percent of net sales.(84) Novartis also
was required to grant a non-exclusive license of certain technology and patent rights
related to specific therapies for cancer, GVHD, and hemophilia to a Commissionapproved licensee.(85) Novartis could request from the licensee consideration in the form
of royalties and/or an equivalent cross-license.(86)
Further, the merged company could not acquire exclusive rights in certain intellectual
property and technology related to chemoresistance gene therapy.(87) The Commission
said this would ensure that at least one other company had access to the needed gene
sequences.(88)
In many mergers that raise antitrust concerns, the Commission orders divestitures.(89) In
Ciba-Geigy, the Commission chose remedial licensing instead.(90) With respect to the
development and commercialization of gene therapy products generally, competitors to
varying degrees already possessed the hard assets, such as production facilities, research
scientists, and technological know-how. What the competitors lacked were the patent
rights to complementary technologies that they previously were able to obtain either
through Ciba or Sandoz, but which, absent the Commission's order, would have been
monopolized post-merger.
With respect to specific therapies for cancer, GVHD, and hemophilia, a new competitor
was needed to replace the competition that would be lost through the merger.(91)
Divestiture of hard assets and/or ongoing businesses, not just intellectual property rights,
might have disrupted the merging parties' ongoing research and development efforts in a
large number of other products not threatened by the merger. Such divestitures likely
would have harmed, rather than helped, competition. Instead, the parties found a licensee,
Rhone Poulenc-Rorer, that needed only to license certain intellectual property rights and
technological know-how in order to compete effectively.(92) As Business Week noted at
the time the settlement was announced, "The Trustbusters Get One Right."(93) I agree.
2. Glaxo/Wellcome
The second merger, which also involves research and development of pharmaceuticals,
was Glaxo's 1995 acquisition of Wellcome.(94) The FTC was concerned that the
companies were competitors in the highly concentrated market for a specific type of
advancement in migraine treatment.(95) The Commission alleged that the acquisition
would eliminate actual competition between the two companies in researching and
developing migraine remedies.(96) The Commission also alleged that the acquisition
would reduce the number of research and development tracks for these migraine remedies
and increase Glaxo's unilateral ability to reduce research and development of these
drugs.(97)
Glaxo and Wellcome reached a consent agreement with the Commission that allowed
them to proceed with their merger.(98) The agreement required the combined firm to
divest Wellcome's assets related to the research and development of the migraine
remedy.(99) Among those assets were patents, technology, manufacturing information,
testing data, research materials, and customer lists.(100) The assets also included inventory
needed to complete all trials and studies required to obtain FDA approval.(101) The
acquirer, Zeneca Pharmaceuticals, had to be approved by the Commission.(102) The
Commission's purpose in requiring this divestiture was to ensure continued research and
development of Wellcome's potential product in the same manner in which the product
would be developed without the merger.(103) The Commission believed the remedy would
lessen the anticompetitive effects of the merger.(104)
The remedy in the Glaxo merger has been successful. Zeneca received FDA approval for
its migraine drug, marketed under the name Zomig, within fifteen months after the
Commission approved Glaxo's application to divest its migraine drug assets to
Zeneca.(105)
C. Exclusive Licensing
A case currently pending in federal district court demonstrates how exclusive licensing
arrangements may raise antitrust concerns. In December 1998, the Commission filed a
complaint against Mylan Laboratories, the nation's second largest generic drug
manufacturer, along with three other companies that participate in the generic drug
industry.(106) These companies were charged with restraint of trade, monopolization, and
conspiracy to monopolize the markets for generic lorazepam and clorazepate, two
widely-used anti-anxiety drugs for which over 21 million prescriptions are written in the
United States each year.(107)
As the complaint sets forth, generic drug manufacturers require FDA approval to market
their products in the United States.(108) A generic drug manufacturer typically purchases
an active pharmaceutical ingredient ("API") from a specialty chemical manufacturer.(109)
The generic drug manufacturer then combines the API with fillers, binders, colorings,
and other ingredients to create a finished product.(110)
To sell an API in the United States legally, an API supplier must establish a Drug Master
File ("DMF") with the FDA.(111) A generic drug manufacturer, in turn, must reference a
specific DMF when it applies for FDA approval to sell a generic drug.(112) For example,
Mylan's applications to sell generic lorazepam and clorazepate tablets each referred to
DMFs established by Profarmaco S.r.l., an Italian wholly-owned subsidiary of Cambrex
Corporation.(113) Through a U.S. distributor named Gyma Laboratories of America, Inc.,
Profarmaco supplied most of the APIs for the generic versions of lorazepam and
clorazepate sold in the United States.(114)
The complaint alleges that Mylan sought and obtained ten-year exclusive licenses for
Profarmaco's DMFs for both the lorazepam and clorazepate APIs.(115) By obtaining total
control over Profarmaco's supply of these APIs in the United States, Mylan would be able
to prevent other generic drug manufacturers from gaining access to the raw materials
needed to market competing products.(116) In return for these exclusive licenses, Mylan
offered to pay Profarmaco, Cambrex, and Gyma a percentage of Mylan's gross profits on
sales of lorazepam and clorazepate tablets.(117)
The complaint also alleges that Mylan sought a similar ten-year exclusive license from
SST Corporation ("SST"), the U.S. distributor for a competing lorazepam API
manufacturer, FIS, that once had supplied lorazepam API in the United States and still
had a valid DMF.(118) Mylan sought this license despite the fact that Mylan's FDA
application to sell generic lorazepam tablets made no reference to the DMF for this
alternate source of lorazepam API, which meant that Mylan could not legally sell
lorazepam tablets containing the FIS API sold by SST.(119) The complaint alleged that
Mylan's intent in attempting to acquire the exclusive license from SST was to block
access to the FIS API by Mylan's generic lorazepam competitors.(120) Again, Mylan
offered to pay the distributor a percentage of gross profits on Mylan's sales of lorazepam
tablets, even though the tablets would not even contain the FIS API.(121) SST turned down
the exclusive licensing offer.(122) The Commission's complaint alleges that Mylan had no
procompetitive justification for its conduct.(123)
According to the complaint, shortly after Mylan obtained exclusive licenses from
Profarmaco and Gyma, Mylan significantly raised its prices for generic clorazepate and
lorazepam tablets, in amounts ranging from 1,900 to as much as 3,200 percent.(124) An
example in the complaint alleges that a 500-count bottle of 7.5 mg clorazepate tablets
increased in price from approximately $11.36 to $377.00.(125) Mylan's competitors--other
generic drug manufacturers--matched these price increases.(126) As a result, the complaint
alleges that many purchasers have paid substantially higher prices for these drugs, and
that patients also may have sought to save money by reducing the quantities of these
important medicines that they use.(127)
In its complaint, the FTC sought a permanent injunction, along with disgorgement and
restitution of $120 million from Mylan.(128) The U.S. District Court for the District of
Columbia recently denied defendants' motions to dismiss the FTC's complaint.(129) While
the entire decision is informative, one holding by the court deserves special mention here.
Judge Thomas F. Hogan held that it is within the Commission's remedial powers to seek
not only a cease and desist order but also disgorgement of profits from Mylan.(130) For
those of us who are particularly interested in seeing the Commission craft strong and
effective remedies, this holding is viewed as a victory for consumers who may have been
forced to pay higher prices as a result of Mylan's alleged conduct. It remains to be seen
what will happen as this case winds its way through the courts.
D. Single-Firm Conduct
1. Intel Corporation
The FTC's Intel case involved single-firm conduct in an intellectual property context. On
August 6, 1999, the Commission announced that it had entered a final consent order in
this matter.(131) The consent agreement was tailored to resolve a number of competitive
concerns alleged in the Commission's June 1998 administrative complaint against
Intel.(132)
When a monopolist uses unjustified exclusionary conduct to maintain its dominance, it
raises serious competitive concerns by removing incentives to compete.(133) Typically,
consumers benefit from competition in at least two ways: 1) competition brings lower
prices; and 2) competition is a powerful spur to the development of new, better, and more
diverse products and processes.(134) A monopolist's unjustified conduct that removes
competitive incentives for other firms to innovate and challenge the monopolist's
dominant position has a direct and substantial impact on future competition and consumer
welfare.(135) Absent a legitimate business justification that outweighs these concerns, such
conduct constitutes a violation of the antitrust laws.(136)
a. Complaint allegations
The Commission's complaint against Intel alleged that Intel has monopoly power in the
worldwide market for general purpose microprocessors.(137) According to the complaint,
Intel's market dominance is reflected in a market share approximating 80 percent of
dollar sales and reinforced by high barriers to entry into the microprocessor market.(138)
The Commission believed that Intel had engaged in exclusionary conduct to maintain its
dominance by coercing computer manufacturers, who also were actual or potential Intel
competitors, into licensing their patented innovations to Intel to resolve intellectual
property disputes.(139) If these manufacturers refused to grant the desired licenses, Intel
denied them access to advance technical information and microprocessor product
samples, and also threatened to withhold product from these customers.(140) It was
particularly important that the manufacturers--which included Digital Equipment
Corporation, Intergraph Corporation, and Compaq Computer Corporation--were longterm Intel customers who relied on the Intel information and product samples to design
computer systems featuring Intel microprocessors.(141) In an intellectual property context,
it is also noteworthy that intellectual property was at issue on both sides of the dispute:
Intel's intellectual property and the intellectual property belonging to its customers.
Intel's exclusionary conduct tended to reinforce its domination of the general purpose
microprocessor market in at least three ways.(142) First, Intel would get preferential access
to a wide range of technologies being developed by other firms in the industry.(143)
Second, Intel's coercive tactics would force customers to license away patent rights,
which would tend to diminish the customers' incentives to develop new and improved
microprocessors or related technologies.(144) This behavior had the ability to harm
competition and consumers by reducing innovation. Third, a computer maker's inability
to enforce its patent rights would make it more difficult to develop and maintain a brand
name based on superior technology.(145) Finally, Intel's exclusionary conduct was not
reasonably necessary to serve a legitimate, procompetitive purpose.(146)
b. Terms of consent order
It is important to understand what the Intel order does not do. Specifically, it does not
impose any kind of broad "compulsory licensing" regime upon Intel.(147) Intel is free to
license to whomever it wishes--or to choose not to license it at all.(148) But once Intel does
grant a license, and a computer manufacturer relies on the license to design computer
systems based on Intel microprocessors, Intel cannot leverage its dominant position in
microprocessors to extract intellectual property grants from its customers.(149)
The order protects the rights of Intel customers to seek full and fair market value for their
intellectual property, free from the risk of losing necessary advance technical information
or product.(150) The order prohibits certain conduct by Intel if such conduct arises in the
context of an intellectual property dispute with an existing customer. First, Intel is
prohibited from withholding or threatening to withhold certain advance technical
information from a customer (or taking other specified actions with respect to such
information).(151) Second, Intel is prohibited from refusing or threatening to refuse to
continue to sell microprocessors to an existing customer.(152)
The order contains one noteworthy exception to the relief otherwise available. If a
customer maintains the right to seek an injunction against Intel's manufacture, use, sale,
offer to sell, or importation of Intel's microprocessors, the customer is not entitled to the
order's protections.(153) In all likelihood, this exception would become available only if a
customer tried to shut down Intel's core business pending resolution of an intellectual
property dispute. This one exception is designed to strike an appropriate balance between
the interests of Intel and its customers on a prospective basis.(154) Intel, like its customers,
has a strong and legitimate interest in protecting and commercializing its intellectual
property--an interest that can co-exist with the antitrust laws.
2. Dell Computer Corporation
a. Complaint allegations
A second case involving single-firm conduct was the Commission's action against Dell
Computer Corporation.(155) The complaint involved Dell's membership in the Video
Electronics Standards Association ("VESA"), a non-profit standards-setting organization
comprising the vast majority of leading U.S. computer hardware and software
manufacturers.(156)
In 1992, VESA was developing a standard for a computer bus design that later became
known as the "VL-bus."(157) As part of the development and approval process, VESA
required each member to certify in writing that the standard did not infringe any patents,
trademarks, or copyrights owned by the member company.(158) On two occasions, Dell
voted to approve the VL-bus standard and certified that the standard did not infringe its
intellectual property.(159) After the standard became very successful, Dell asserted an
earlier-issued patent against several computer manufacturers using the standard.(160)
In the Commission's view, this type of behavior imposed considerable costs upon
competition and consumers.(161) The Commission alleged that further industry acceptance
of the new standard was hindered and that systems using the VL-bus were avoided
because of the patent dispute.(162) In addition, according to the Commission, uncertainty
about the acceptance of the design standard raised not only the costs of implementing the
new design, but also the costs of developing competing bus designs.(163) The Commission
also was concerned that Dell's behavior would chill participation in private industry
standard-setting.(164)
b. Terms of consent order
Dell and the FTC ultimately entered into a consent order prohibiting Dell from enforcing
its patent against those who wanted to use the VL-bus standard.(165) The FTC's order also
prohibited Dell from enforcing patent rights in the future when it intentionally failed to
disclose those rights upon request of a standards-setting organization.(166)
As in Intel, Dell is interesting not only for what the FTC did, but for what it did not do.
The decision is fundamentally patent-friendly and limited to the facts of this particular
case, in part because the Commission had reason to believe that Dell had not acted in
good faith to identify and disclose patent conflicts.(167) Barring other antitrust concerns,
had VESA adopted the standard with the knowledge of Dell's patent interest, FTC action
likely would not have been warranted.(168) Similarly, if VESA did not have policies
requiring its members to act in good faith to identify patent conflicts, FTC action also
might have been unlikely.(169) Relief in this case should not be read to impose a general
duty to search, nor does this enforcement action suggest that standard-setting bodies
should impose a duty to disclose.
To put Dell in a context that may be more familiar to intellectual property lawyers, note
the Commission's statement that "the remedy in this case is consistent with those cases,
decided under the concept of equitable estoppel, in which courts precluded patent-holders
from enforcing patents when they failed properly to disclose the existence of those
patents."(170) Under patent law, equitable estoppel is a complete defense against a charge
of infringement.(171)
V. Checklists For Antitrust Issues
To assist practitioners in counseling their clients on the proper use of their intellectual
property under the antitrust laws, the following three checklists regarding licensing,
cross-licensing, and structuring more procompetitive intellectual property agreements
may be useful to consider.
A. Licensing
The following questions should be asked regarding licensing arrangements:
First, does the intellectual property agreement, and any restraint that is part of the
agreement, have a procompetitive justification? For example, licensing
agreements may be justified because they facilitate the combination of a licensor's
intellectual property with complementary factors of production owned by the
licensee.(172) Antitrust concerns are more likely when such a procompetitive
justification appears absent.
Second, do restraints in the licensing agreements further those procompetitive
purposes, for example, by aligning the incentives of the licensor and the licensees
to promote the development and marketing of the licensed technology and/or
products that are the result of that technology, or by substantially reducing
transaction costs?(173)
Third, if a procompetitive justification can be made for the agreement and any
restraint therein, does the agreement qualify for "safety zone" treatment under the
IP Guidelines?(174) If not, do the agreement and any included restraints have any
possible anticompetitive effects? If there are possible anticompetitive effects, are
the restraints "reasonably necessary" to achieve the asserted procompetitive
effect?(175)
Be aware that an agreement or restraint with no procompetitive justification may be
susceptible to a challenge by the antitrust authorities, especially where the agreement or
restraint is of the type that always, or almost always, tends to raise price or reduce output,
or is otherwise of a type that the courts have condemned per se, e.g., naked price-fixing,
output restraints, market allocation, and group boycotts.(176)
B. Cross-Licensing
In cross-licensing situations (including patent pools), ask the following questions:
First, are the patents "blocking" or do they actually compete with each other? (177)
In the latter context, cross-licensing may be anticompetitive.(178)
Second, how will future patents be treated? Are the participants obligated to
contribute future patents? If so, are these future obligations restricted to
improvements of the fundamental patents, or do they encompass anything the
participants invent in the field? Obligations to contribute future patents can have
the effect of stifling innovation, especially where such obligations are not limited
to improvements of the fundamental patents.
Third, is the patent contribution uncompensated? A lack of compensation could
reduce the parties' incentives to innovate.(179) Even if a reasonable royalty is
allowed, innovation can be stifled where royalty amounts for new inventions are
set by the rest of the pool, i.e., by the innovator's competitors.
Fourth, is the future obligation justified? For instance, a contribution obligation that is
limited to improvement patents might be justified because it may insure against the
possibility that a licensee might expropriate a patent's entire value in the field. Are
members free to license their future patents independently of the pool, or is the pool the
only way to get technology to the market? If the pool is the only alternative, what is the
justification for this arrangement?
Fifth, is the cross-licensing related to a settlement of patent infringement litigation? In
such settlements, parties may give up rights that they would otherwise vindicate if
litigation costs and risks were not prohibitive. One consequence of such settlement
compromises may be to align the settling patentees' interests against the interests of
consumers. Thus, a proposed settlement's competitive effects must be analyzed carefully,
with particular attention to whether the settlement may blunt competition that would
otherwise take place.
C. Structuring Procompetitive Agreements: Other Factors To Consider
Licensing agreements can be written to include particular features that increase the
likelihood of procompetitive results and, therefore, are less apt to raise antitrust concerns.
For example, make the license non-exclusive--i.e., make patents available to others who
are not parties to the arrangement. Along similar lines, allow each party to license its own
patents independently, without requiring the consent of other parties. Include within the
agreement only those patents that are complementary, not those in competition with one
another.
VI. Conclusion
Issues of intellectual property and innovation have become central in our economy and,
therefore, increasingly prominent in antitrust enforcement. Numerous areas of intellectual
property law are being revised or expanded to adjust to current technologies. For
example, Congress is considering legislation to expand intellectual property protection
for factual databases and other collections of information.(180) Similarly, states are
attempting to create a uniform system for enforcing intellectual property licensing
agreements.(181)
We at the FTC are monitoring these developments. In recent years, our cases, hearings,
and other dialogues with the intellectual property bar have endowed us with significant
knowledge and experience about the nature of innovation in our economy. These
experiences have helped to refine the Commission's appreciation for the crucial balance
among competition, innovation, and intellectual property protection. In return, one hopes
that continual exchanges among the Commission and the intellectual property and
antitrust bars will help practitioners to better understand how the Commission approaches
antitrust cases involving intellectual property issues. We encourage contacts with the
Commission, including taking advantage of the useful resources at our web site,
<http://www.ftc.gov>, whenever questions arise regarding the interplay between antitrust
and intellectual property.
Going forward, I hope readers will share my belief that intellectual property and antitrust
laws are no longer adversaries. Indeed, these laws share common purposes: to stimulate
innovation and to confer benefits on the American economy and the American public.