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Jul 2015
21
July 21, 2015

Avoiding the Collision at the Crossroads of Intellectual Property and Antitrust Laws


After nearly four years of investigation, the auto parts cases have become one of the largest antitrust investigations in Department of Justice history.  Since 2011, the Department’s Antitrust Division has obtained $2.4 billion in criminal fines for antitrust violations from 34 automotive supply companies. To date the Division’s inquiry has focused on per se Sherman Act violations committed by these companies, such as price-fixing and bid-rigging conspiracies. It is not certain, however, that the Division’s multi-year investigation will end with only those large-scale international conspiracies thus far targeted. Successful investigations by the Division in a particular industry can lead to subsequent investigations in the same area, independent of any direct or obvious links between cases. The Division’s string of successes in the auto parts cases may lead to increased scrutiny in the automotive supply industry altogether.

Suppliers should take appropriate measures now to identify risks and ensure they are in full compliance with antitrust laws.

Of particular concern for automotive suppliers is the intersection between intellectual property rights and U.S. antitrust law. Suppliers often use proprietary methods or technology to manufacture a part specifically to a customer’s requirements or may develop new technology during the course of a supply relationship. Hence, suppliers commonly grant an intellectual property license to their customers for patented methods or technology, the terms of which are generally outlined in supplier terms and conditions. These licenses are subject to antitrust review under the Sherman Act (and various other federal and state antitrust laws) for their potential anticompetitive effects.

In 1970, Bruce Wilson, the Division’s then-Deputy Assistant Attorney General, developed the following list of nine patent licensing “No-Nos” – licensing practices that the Division considered per se unlawful under the Sherman Act:
 
  1. Royalties not reasonably related to sales of the patented products;
  2. Restraints on licensees’ commerce outside the scope of the patent (tie-outs);
  3. Requiring the licensee to purchase unpatented materials from the licensor (tie-ins);
  4. Mandatory package licensing;
  5. Requiring the licensee to assign to the patentee patents that may be issued to the licensee after the licensing arrangement is executed (exclusive grantbacks); 
  6. Licensee veto power over grants of further licenses;
  7. Restraints on sales of unpatented products made with a patented process;
  8. Post-sale restraints on resale; and
  9. Setting minimum prices on resale of the patent products.

However, over the past forty years the strict approach to patent licensing agreements has softened. Today, nearly all of the nine “No-Nos” are permissible subject only to the “rule of reason.” That is, to pass muster under antitrust law, these licensing practices must satisfy a balancing test in which their pro-competitive benefits outweigh any anti-competitive effects. Despite this evolution in the law, however, antitrust pitfalls remain. Tying arrangements, for example, may implicate antitrust issues in automotive supply agreements.

A “tie-in” is an agreement in which a licensor conditions its license of a patented product on the licensee’s purchase of a separate, unpatented product in addition (the “tied product”).  A “tie-in” may arise out of an explicit requirement by a licensor that the licensee purchase a tied product in exchange for the license, or it may be obtained via a financial incentive – i.e. where a licensor charges a higher royalty for a patented product if the licensee chooses to purchase the tied product elsewhere. Under the Patent Act, a tie-in will only implicate antitrust law if the licensor has market power in the relevant market for the patented product. Licensors with market power are problematic because the licensor can wield that power to essentially coerce the purchase of tied products. In an industry with a finite number of suppliers and in which only a minor aspect of a product or package of products is patented, the risk of raising antitrust red flags in patent licensing is very real. For these licensors to withstand antitrust scrutiny, the tie-in must satisfy the rule of reason. 

Similarly, a “tie-out” is a form of tying agreement conceptually analogous to exclusive arrangements. More specifically, in a “tie-out,” the licensee is prohibited from practicing or even developing competing technologies (relative to the “tied product”) in favor of the licensed technology.  Tie-outs and exclusive dealing arrangements are increasingly common – including amongst automotive suppliers – to maximize potential royalties associated with the licensed technology. As with tie-ins, courts have commonly found tie-outs to implicate antitrust law only if the licensor has market power in the relevant market for the patented product. Similarly, the Division commonly treats tie-outs as exclusive dealing requirements, which are subject to the rule of reason.

Licenses involving additional forms of intellectual property can present distinct challenges for suppliers. For example, unlike patent tie-outs, courts have been much more liberal in finding misuse in the context of tie-outs relating to copyrights (Lasercomb Am. Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990)). A court may find misuse even if there is no evidence that the tie-out produces anticompetitive effects. These distinctions can become problematic in the auto industry, where supplier technologies may be subject to numerous intellectual property rights licensed together. For example, a particular automotive component may have utilitarian features subject to patent protection and aesthetic features and/or software subject to copyright protection. Thus, in addition to general concerns associated with antitrust implications in licensing, much thought must be given to how various types of intellectual property – commonly aggregated in licensing – are treated differently by the courts.

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