Licensing and Antitrust

The principle is that no one is allowed to create a monopoly by licensing their intellectual property. The Sherman Act and the Clayton Act are the foundations of law governing restraint of trade in the United States, and they form the basis of many related foreign laws as well.

The Sherman Act declares that any contract that restrains trade is illegal, including monopolizing or attempting to monopolize any trade or commerce.

The Clayton Act forbids price discrimination, forcing customers to refrain from buying from competitors, acquiring another company to lessen competition and other unfair or deceptive acts.

In addition, misuse of intellectual property is forbidden. Fraudulently obtained patents cannot be enforced and licensed. If the license of a patent is conditioned on paying royalties covering non-patented technology, patent misuse may be claimed.

In European Union, Article 101(1) of EU Treaty prohibits all agreements between undertakings, decisions by association of undertakings, or concerted practices which may affect trade between Member States and which have as their object of effect, the prevention, restriction or distortion of competition with the common market.

Article 102 provides that any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market. It prohibits unfair pricing or selling conditions, refusals to license, discrimination, and bundling or typing.

We must avoid all these forbidden practices when developing license agreement terms. Otherwise the agreement can be terminated and, in some cases, the intellectual property protection can be voided.

For example, fixing of prices for unpatented goods would be a violation of Section 1 of the Sherman Act.

Section 2 of the Sherman Act forbids monopolization or attempts or conspiracies to monopolize. Even if licensing of these rights does not actually create a monopoly under Section 2 of the Sherman Act, it may violate Section 2 of the Clayton Act. Furthermore, Section 3 of the Clayton Act forbids a licensor from requiring that the licensee or purchaser not to deal with a particular competitor.

The U.S. Department of Justice and the courts generally viewed certain patent licensing practices as per se illegal as follows:

1. Typing the purchase of unpatented materials to the grant of the license
2. Requiring the licensee to assign back to the licensor subsequent patents
3. Restricting the right of the purchaser of the product in the resale of the product
4. Restricting the licensee’s ability to deal in products outside the scope of the patent
5. A licensor’s agreement not to grant further licenses.
6. Mandatory package licenses
7. Royalty provisions not reasonably related to the licensee’s sales
8. Restrictions on a licensee’s use of product made by a patented process
9. Minimum resale price provisions for the licensed products.

You are permitted to acquire monopoly power through patents or through ability, imitative or efficiencies. You will not be penalized for obtaining or maintaining monopoly power as a consequence of superior product, business accuracy or historic accident. However, the courts will examine the unlawful purpose or intent to exercise that monopoly power.

A patent owner can enjoy the market power conferred by the property itself. However, using the patent rights to gain some additional competitive advantage can result in liability under the Sherman Act as well as jeopardize the continuing validity of the underlying patent.

Although generally the accumulation of internally developed patent is of itself not a violation of the antitrust laws, patent accumulation may violate Section 2 of the Sherman Act under certain circumstances and where acquisitions are involved, Section 7 of the Clayton Act. For instances, filing trivial patents primarily as a means of creating an impediment to market entry by others may create antitrust liability under Section 2 of the Sherman Act.

It is doubtful that a patent accumulation case based solely on internally produced patents would under ordinary circumstances succeed. A case may exist, however, where there is a multitude of internally developed patents along with the purchase of several related patents. It may also be necessary to establish that the patent purchaser had market power before the acquisitions took place.