What Happens When the Intellectual Property Laws Clash with the Antitrust Laws?
October 31 2019
Should a company be required to license its patents to a competitor? That’s one question that arises when intellectual property law and antitrust law intersect.
The Sherman Act, section 1, prohibits concerted action (agreements, combinations, or conspiracies) that restrain trade. Four types of conduct are per se unlawful; i.e., illegal regardless of the reason. They all involve agreements between competitors, also called horizontal agreements. It is per se unlawful to agree with a competitor to fix prices, rig bids, participate in group boycotts, or allocate markets. Other types of conduct are unlawful under the Rule of Reason; their illegality depends on the conduct in the relevant market (the product market and the geographic market) and whether there is a rational business reason for the conduct. Examples of unlawful conduct include certain types of exclusive dealing arrangements, some kinds of price discrimination or restrictions on sales, tying arrangements, and some mergers and acquisitions.
The Sherman Act, section 2, prohibits the acquisition or maintenance of a monopoly, or attempted monopolization, through anti-competitive practices. The illegality depends on the company’s market share in the relevant market. Section 2 does not require concerted action.
Intellectual property laws provide limited monopolies to those who create intellectual property. Patents provide the owners with a twenty-year term of exclusivity for the invention, as long as the invention is new and not obvious based on the existing technology in the field, and has not been disclosed (for over one year) such that is has become part of the public domain. In order to obtain a patent, however, the inventor must disclose the invention in detail in the patent application so that others can develop new technology around the patented invention, to promote innovation.
Copyrights and trademarks also provide exclusivity. A copyright is good for the life of the author plus 70 years, or longer if the work is a work for hire. A trademark is good indefinitely, as long as renewal fees are paid every ten years.
In general, a patent owner is not required to license the patent to others. The owner can keep the technology for themselves, until the patent expires, when it becomes part of the public domain. If the owner wishes to license the patent to others, they can choose to license the patent to some and decline to license it to others, as long as they are not engaged in conduct violating the antitrust laws. This rule was recently addressed by the Ninth Circuit Court of Appeals: “It is well-settled that, as a general matter, the Sherman Act does not restrict the …right of a trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties to who he will deal.” FTC v. Qualcomm Inc., 935 F.3d 752, 755 (Aug. 23, 2019), quoting Verizon Communications Inc. v. the Law Offices of Trinko, 540 U.S. 398, 408 (2004).
However, there are some exceptions to this rule. The Qualcomm court explained that the Supreme Court has “recognized a very limited exception to the general rule when a monopolist terminated a voluntary and profitable course of dealing with a competitor and sacrificed short-term benefits to exclude competition in the long run.” FTC v Qualcomm, supra, at id., referring to Aspen Skiing Co. v. Aspen Highlights Skiing Corp., 472 U.S. 585 (1985). The Qualcomm court noted that the exception is “at or near the outer boundary of Sherman Act liability,” quoting Verizon.
In Qualcomm, the FTC sued Qualcomm, alleging that Qualcomm had refused to license its standard essential patents to its competing chip competitors, going against commitments Qualcomm had made to standard-setting groups in the chip industry. The complaint also alleged that Qualcomm refused to sell its chips to manufactures who did not take licenses with Qualcomm, and that Qualcomm charged excessive royalty rates. The FTC alleged that Qualcomm did these acts to maintain its monopoly in the chip market. The district court for the Northern District of California ruled in favor of the FTC and issued a permanent injunction. The injunction required Qualcomm to license its standard essential patents to its competitors and to cease conditioning the sale of its chips on the purchase of a patent license. Qualcomm filed an expedited appeal and moved for a stay of the injunction pending appeal.
The Ninth Circuit granted Qualcomm’s motion for a stay. The court held that there were “serious questions of the merits of the district court’s determination that Qualcomm has an antitrust duty to license its standard essential patents to rival chip suppliers.” Qualcomm, supra, at 756. The court noted that while the FTC contended that Qualcomm had violated the antitrust laws, the Department of Justice had disagreed, filing a statement arguing that Qualcomm did not have a duty to deal with its competitors. In fact, the Department of Justice, the Department of Defense, and the Department of Energy had all filed statements contending that the injunction would risk national security interests and also harm consumers.
Based on these facts, the court concluded that Qualcomm had shown that the injunction would cause irreparable harm and injury to other parties, and that the balance of equities favored maintaining the status quo. In granting the stay, the court said: “whether the district court’s order and injunction represent a trailblazing application of the antitrust laws, or instead, an improper excursion beyond the outer limits of the Sherman Act, is matter for another day.” Id. at 757.