[Federal Register Volume 59, Number 154 (Thursday, August 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19657]


[[Page Unknown]]

[Federal Register: August 11, 1994]


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DEPARTMENT OF JUSTICE
Antitrust Division

 

Request for Comments on Draft Antitrust Guidelines for the 
Licensing and Acquisition of Intellectual Property

AGENCY: Antitrust Division, Department of Justice.

ACTION: Notice.

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SUMMARY: The Antitrust Division has drafted proposed new Antitrust 
Guidelines for the Licensing and Acquisition of Intellectual Property. 
The Guidelines, when adopted in final form by the Department of 
Justice, will state the antitrust enforcement policy of the Department 
with respect to the licensing and acquisition of intellectual property, 
and will supersede section 3.6 in Part I, ``Intellectual Property 
Licensing Arrangements,'' and cases, 6, 10, 11, and 12 in Part II of 
the U.S. Department of Justice 1988 Antitrust Enforcement Guidelines 
for International Operations. Comments should be submitted in writing 
within 60 days of publication of these draft Guidelines.

FOR FURTHER INFORMATION CONTACT:
Submit views to Richard Gilbert, Deputy Assistant Attorney General, 
Antitrust Division, Department of Justice, Tenth Street and 
Pennsylvania Avenue, NW., Washington, DC 20530, 202-514-2408.

SUPPLEMENTARY INFORMATION: As announced by the Assistant Attorney 
General in charge of the Antitrust Division, Anne K. Bingaman, in 
published speeches on January 10, 1994 and June 16, 1994, these 
proposed guidelines were drafted to state the current views of 
Antitrust Division with respect to the licensing and acquisition of 
intellectual property.
    The Guidelines are not intended to create or recognize any legally 
enforceable right in any person. They are not intended to affect the 
admissibility of evidence or in any other way necessarily to affect the 
course or conduct of any present of future litigation. Moreover, 
changes in the relevant statutory framework, legal precedent, and 
methods of internal Department analysis may occur over time, and these 
changes will not always be simultaneously reflected in amendments to 
the Guidelines. Parties seeking to know the Department's specific 
enforcement intentions with respect to any particular transaction 
should consider seeking a Business Review pursuant to 28 CFR 50.5.

    Dated: August 8, 1994.
Richard Gilbert,
Deputy Assistant Attorney General, Antitrust Division.

U.S. Department of Justice Antitrust Guidelines for the Licensing and 
Acquisition of Intellectual Property\1\
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    \1\These Guidelines supersede section 3.6 in Part I, 
``Intellectual Property Licensing Arrangements,'' and cases 6, 10, 
11, and 12 in Part II of the U.S. Department of Justice 1988 
Antitrust Enforcement Guidelines for International Operations.
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1. Intellectual Property Protection and the Antitrust Laws

    These Guidelines state the antitrust enforcement policy of the U.S. 
Department of Justice with respect to the licensing and acquisition of 
intellectual property protected by patent, copyright, and trade secret 
law.\2\ By stating its general policy, the Department hopes to assist 
those who need to predict whether the Department will challenge a 
practice as anticompetitive. However, these Guidelines cannot remove 
judgment and discretion in antitrust law enforcement. Moreover, the 
standards set forth in these Guidelines must be applied in 
unforeseeable circumstances. Each case will be evaluated in light of 
its own facts, and these Guidelines will be applied reasonably and 
flexibly.
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    \2\These Guidelines do not cover the antitrust treatment of 
trademarks. Although the same general antitrust principles that 
apply to other forms of intellectual property apply to trademarks as 
well, these Guidelines deal with innovation-related issues that 
typically arise with respect to patents, copyrights, and trade 
secrets, rather than with product-differentiation issues that 
typically arise with respect to trademarks.
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    In the United States, patents confer rights to exclude others from 
making, using, or selling in the United States the invention claimed by 
the patent for a period of seventeen years from the date of issue.\3\ 
To gain patent protection, an invention (which may be a product, 
process, machine, or composition of matter) must be novel, nonobvious, 
and useful. Copyright protection applies to original works of 
authorship embodied in a tangible medium of expression.\4\ A copyright 
protects only the expression, not the underlying ideas. Unlike a 
patent, which protects an invention not only from copying but also from 
independent creation, a copyright does not preclude others from 
independently creating similar expression. Trade secret protection 
applies to information whose economic value depends on its not being 
generally known. Trade secret protection is conditioned upon efforts to 
maintain secrecy and has no fixed term. As with copyright protection, 
trade secret protection does not preclude independent creation by 
others.\5\
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    \3\See 35 U.S.C. 154 (1988). In the case of process patents, the 
protection extends to importation of goods made by a patented 
process. See 19 U.S.C. 1337 (1988 & Supp. V 1993); 35 U.S.C. 271(g) 
(1988).
    \4\See 17 U.S.C. 102 (1988 & Supp. V 1993). Copyright protection 
lasts for the author's life plus 50 years, or 75 years from first 
publication (or 100 years from creation, whichever expires first) 
for works made for hire. See 17 U.S.C. 302 (1988).
    \5\The principles stated in these Guidelines also apply to 
protection of mask works fixed in a semiconductor chip product (see 
17 U.S.C. 901 et seq. (1988)), which is analogous to copyright 
protection for works of authorship. These principles also generally 
apply to licensing of know-how and other collections of information 
which may not be protected by intellectual property rights, but 
which may nonetheless have value to a licensee or transferee because 
of the form into which they are assembled.
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    Although there are clear and important differences in the purpose, 
extent, and duration of protection provided under the intellectual 
property regimes of patent, copyright, and trade secret, the governing 
antitrust principles are the same. Antitrust analysis takes differences 
among these forms of intellectual property into account in evaluating 
the specific market circumstances in which transactions occur, just as 
it does with other particular market circumstances.
    The intellectual property laws and the antitrust laws share the 
common purpose of promoting innovation and enhancing consumer 
welfare.\6\ The intellectual property laws provide incentives for 
innovation and its dissemination and commercialization by establishing 
enforceable property rights for the creators of new and useful 
products, more efficient processes, and original works of expression. 
In the absence of intellectual property rights, imitators could more 
rapidly exploit the efforts of innovators and investors without 
compensation, thereby reducing the commercial value of innovation and 
eroding the incentives to invest. The antitrust laws promote innovation 
and consumer welfare by prohibiting certain actions by firms that deter 
those firms and others from competing with respect to either existing 
or new ways of serving consumers.
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    \6\``[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 actually complementary, as both are aimed at encouraging 
innovation, industry ad competition.'' Atari Games Corp. v. Nintendo 
of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).
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2. General Principles

    2.0  These Guidelines embody three general principles: (a) For the 
purpose of antitrust analysis, the Department regards intellectual 
property as being essentially comparable to any other form of property; 
(b) the Department does not presume that intellectual property creates 
market power in the antitrust context; and (c) the Department 
recognizes that intellectual property licensing allows firms to combine 
complementary factors of production and is generally procompetitive.
2.1  Standard Antitrust Analysis Applies to Intellectual Property
    The Department applies the same general antitrust principles to 
conduct involving intellectual property that it applies to conduct 
involving any other form of tangible or intangible property. That is 
not to say that intellectual property is in all respects the same as 
any other form of property. Intellectual property has important 
characteristics that distinguish it from many other forms of property. 
These characteristics can be taken into account by standard antitrust 
analysis, however, and do not require the application of fundamentally 
different principles.
    Intellectual property law bestows on the owners of intellectual 
property certain rights to exclude others. These rights help the owners 
to profit from the use of their property. An intellectual property 
owner's rights to exclude are similar to the rights enjoyed by owners 
of other forms of private property. As with other forms of private 
property, certain acquisitions of intellectual property, and certain 
types of agreements with respect to such property, may have 
anticompetitive effects against which the antitrust laws can and do 
protect. Intellectual property is thus neither particularly free from 
scrutiny under the antitrust laws, nor particularly suspect under them.
2.2  Intellectual Property and Market Power
    Market power is the ability profitably to maintain prices above, or 
output below, competitive levels for a significant period of time.\7\ 
The Department will not presume that a patent, copyright, or trade 
secret necessarily confers market power upon its owner. Although the 
intellectual property right confers the power to exclude with respect 
to the specific product, process, or work in question, there will often 
be sufficient actual or potential close substitutes for such product, 
process, or work to prevent the exercise of market power.\8\ If a 
patent or other form of intellectual property does confer market power, 
that market power does not by itself offend the antitrust laws. As with 
any other tangible or intangible asset that enables its owner to obtain 
significant supracompetitive profits, market power (or even a monopoly) 
that is solely ``a consequence of a superior product, business acumen, 
or historical accident'' does not violate the antitrust laws.\9\ Nor 
does such market power impose on the intellectual property owner an 
obligation to license that technology to others. See, e.g., SCM Corp. 
v. Xerox Copy., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S. 
1016 (1982). As in other antitrust contexts, however, market power 
could be illegally acquired or maintained, or, even if lawfully 
acquired and maintained, would be relevant to the ability of an 
intellectual property owner to harm competition through unreasonable 
conduct in connection with such property.
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    \7\Market power can be exercised in other economic dimensions, 
such as quality, service and innovation. It is assumed in this 
definition that all competitive dimensions are held constant except 
the ones in which power is being exercised; it would not, of course, 
be indicative of market power that a seller is able to charge higher 
prices for a higher-quality product. The definition in text is 
stated in terms of a seller with market power; a buyer could also 
exercise market power (e.g., by maintaining the price below the 
competitive level, thereby depressing output).
    \8\The Department notes that the law is unclear on this issue. 
Compare Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 
2, 16 (1984) (expressing the view in dictum that if a product is 
protected by a patent, ``it is fair to presume that the inability to 
buy the product elsewhere gives the seller market power'') with id. 
at 37 n.7 (O'Connor, J., concurring) (``[A] patent holder has no 
market power in any relevant sense if there are close substitutes 
for the patented product.''). Compare also Abbott Laboratories v. 
Brennan, 952 F.2d 1346, 1354-55 (Fed. Cir. 1991) (no presumption of 
market power from intellectual property right) with Digidyne Corp. 
v. Data General Corp., 734 F.2d 1336, 1341-42 (9th Cir. 1984) 
(requisite economic power is presumed from copyright), cert. denied, 
473 U.S. 908 (1985).
    \9\United States v. Grinnell Corp., 384 U.S. 563, 571 (1966); 
see also United States v. Aluminum Co. of America, 148 F.2d 416, 430 
(2d Cir. 1945) (Sherman Act is not violated by the attainment of 
market power solely through ``superior skill, foresight and 
industry'').
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2.3  Procompetitive Benefits of Licensing
    Intellectual property typically is one component among many in a 
production process and derives value from its combination with 
complementary factors. Complementary components of production include 
manufacturing and distribution facilities, workforces, and other items 
of intellectual property. The owner of intellectual property has to 
arrange for its combination with other necessary inputs to realize its 
commercial value. Often, the owner finds it most efficient to contract 
with others for these inputs, to sell rights to the intellectual 
property, or to enter into a joint venture arrangement for its 
development, rather than supplying these complementary inputs itself.
    Licensing, cross-licensing, or otherwise transferring intellectual 
property (hereinafter ``licensing'') can facilitate its integration 
with complementary factors of production. This integration can lead to 
more efficient exploitation of the intellectual property, benefiting 
consumers through the reduction of costs and the introduction of new 
products. Such arrangements increase the value of intellectual property 
to consumers and to the developers of the technology. By potentially 
increasing the expected returns from intellectual property, licensing 
also can increase the incentive for its creation and thus promote 
greater investment in research and development.
    Sometimes the use of one item of intellectual property requires 
access to another. An item of intellectual property ``blocks'' another 
when the second cannot be practiced without using the first. For 
example, an improvement on a patented machine can be blocked by the 
patent on the machine. Licensing promotes the coordinated development 
of technologies that are in a blocking relationship.
    Field-of-use, territorial, and other limitations on intellectual 
property licenses may serve procompetitive ends by allowing the 
licensor to exploit its property as efficiently and effectively as 
possible. These various forms of exclusivity can be used to give a 
licensee an incentive to invest in the commercialization and 
distribution of products embodying the licensed intellectual property 
and to develop additional applications for the licensed property. The 
restrictions may do so, for example, by protecting the licensee against 
free-riding on the licensee's investments by other licensees or by the 
licensor. They may also promote the licensor's incentive to license, by 
protecting the licensor from competition in the licensor's own 
technology in a market niche that it prefers to keep to itself. These 
benefits of licensing restrictions apply to patent, copyright, and 
trade secret licenses.

Example 1\10\
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    \10\The examples in these Guidelines are hypothetical and do not 
represent judgments about the actual market circumstances of the 
named industries.
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    Situation: Delta, Inc. develops a new software program for 
inventory management. The program has wide application in the health 
field. Delta licenses the program in an arrangement that imposes both 
field of use and territorial limitations. Some of Delta's licenses 
permit use only in hospitals; others permit use only in group medical 
practices. Delta charges different royalties for the different uses. 
All of Delta's licenses permit use only in specified geographic areas. 
The license contains no provisions that would prevent or discourage 
licensees from developing, using, or selling any other program. None of 
the licensees are actual competitors of Delta in the sale of inventory 
management programs.
    Discussion: The key competitive issue raised by the licensing 
arrangement is whether it harms competition that would likely have 
taken place in its absence. (See section 3.) Such harm could occur if 
the licenses foreclose access to competing technologies (in this case, 
most likely competing computer programs), prevent licensees from 
developing their own competing technologies (again, in this case most 
likely computer programs), structure royalties to impose an effective 
requirements contract upon licensees, or facilitate market allocation 
or price-fixing for any product or service supplied by the licensees. 
If the license agreements contained such provisions, the Department 
would analyze their competitive effects as described in sections 3-5 of 
these Guidelines. In this hypothetical, there are no such provisions, 
and there is no apparent harm to competition. The arrangement appears 
to do no more than increase the value of the licensed technology by 
subdividing it among different fields of use and territories and 
charging royalties that differ among licensees. The Department 
therefore would be unlikely to object to this arrangement. The result 
would be the same whether the technology was protected by copyright, 
patent, or trade secret. The Department's conclusion as to competitive 
effects could differ if, for example, the license barred licensees from 
using any other inventory management program.

3. Antitrust Concerns and Modes of Analysis

3.1  Nature of the Concerns
    While intellectual property licensing arrangements are typically 
welfare-enhancing and procompetitive, antitrust concerns may arise when 
licensing arrangements impede competition that likely would have taken 
place in the absence of the license. Licensing arrangements that may 
raise antitrust concerns include restrictions on goods or technologies 
other than the licensed technology, contractual provisions that 
penalize licensees for dealing with suppliers of substitute 
technologies, and acquisitions of intellectual property that lessen 
competition in a relevant antitrust market.
    For example, a licensing agreement that transfers little or no 
useful intellectual property, but imposes restraints upon entities that 
otherwise would compete using alternative technologies, might have 
significant adverse effects in downstream goods markets or in other 
markets. (See, e.g., Example 5.) An arrangement that effectively merges 
the research and development activities of two of only a few entities 
that could plausibly engage in research and development in the relevant 
field might harm competition for development of new intellectual 
property. (See section 3.2.3, ``Innovation Markets.'')
    Intellectual property licensing between actual or likely potential 
competitors\11\ may raise antitrust concerns by reducing or eliminating 
competition in the market(s) in which they compete or are likely to 
compete. In addition, license restrictions with respect to one market 
may reduce competition in another market by, for example, foreclosing 
access to or raising the price of an important input (other than as a 
natural consequence of the licensee acquiring a licensed technology for 
its own use).
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    \11\A firm will be treated as a likely potential competitor if 
its entry is likely under the standards of section 3.3 of the U.S. 
Department of Justice and Federal Trade Commission, Horizontal 
Merger Guidelines (April 2, 1992), or if there is evidence of likely 
actual entry by that firm. Competitive concerns are more likely to 
arise when the number of actual and likely potential competitors is 
not large.
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3.2  Markets Affected by Licensing Arrangements
    A licensing arrangement may affect competition in a variety of 
markets. In general, for goods markets and technology markets affected 
by a licensing arrangement, the Department will approach the 
delineation of relevant market and the measurement of market share in 
the intellectual property area in the same way that it treats such 
questions under section 1 of the 1992 Horizontal Merger Guidelines. In 
addition, the Department may define an innovation market to aid in 
assessing whether a licensing arrangement would be likely substantially 
to reduce investment in research and development.
3.2.1  Technology Markets
    Technology markets consist of the intellectual property that is 
licensed, transferred, or acquired and the technologies that are close 
substitutes for it. The owner of a process for producing a particular 
good may be constrained in its conduct with respect to that process not 
only by other processes for making that good, but also by other goods 
that compete with the downstream good and by the processes used to 
produce those other goods.
    In many cases, particularly in the case of a product patent, there 
may be little to be gained by analyzing competitive effects in a 
separate technology market in addition to analyzing effects in the 
associated goods market. Moreover, there may be practical problems in 
gathering appropriate data to determine ``prices'' for the technology 
and its substitute processes. For example, the technology may be 
licensed royalty-free in exchange for the right to use other 
technology, or it may be licensed as part of a package license. When 
complicating factors preclude delineating a relevant market in which 
the licensed technology competes, the Department may focus its 
attention on effects in the associated goods markets.
    To estimate the market share of a participant using new technology, 
the Department generally will forecast market acceptance over a two-
year period using the best available information. For technologies not 
yet commercialized, the two-year period will begin with commercial 
introduction. When market shares or other indicia of market power are 
not readily available, and it appears that competing technologies are 
all equally efficient,\12\ the Department's analysis will treat each 
participant in the technology market as having an equal market share.
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    \12\In this analysis, the Department will regard two 
technologies as being ``equally efficient'' if they can be used to 
produce, at the same cost, goods perceived by consumers to be close 
substitutes.
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    3.2.2  Goods markets. A number of different goods markets may be 
relevant to evaluating the effects of a licensing arrangement. A 
restraint in a licensing arrangement may have competitive effects in 
markets for final or intermediate goods made using the intellectual 
property, or it may have effects upstream, in markets for goods that 
are used as inputs, along with the intellectual property, to the 
production of other goods.
    3.2.3  Innovation markets. Firms compete in research and 
development that may result in new or improved products or processes. 
If the capacity for research and development activity that likely will 
produce innovation in technology is scarce and can be associated with 
identifiable specialized assets or characteristics of specific firms 
(which may or may not currently participate in the relevant technology 
or goods markets), in may be appropriate to consider separately the 
impact of the conduct in question on competition in research and 
development among those firms. The firms identified as possessing these 
specialized assets or characteristics can be thought of as competing in 
a separate innovation market. See Complaint, United States v. General 
Motors Corp., Civ. No. 93-530 (D. Del., filed Nov. 16, 1993). 
Alternatively, innovation markets may be used to assist with the 
identification of competitive effects in relevant goods and technology 
markets. See, e.g., Complaint, United States v. Flow International 
Corp., Civ. No. 94-71320 (E.D. Mich., filed Apr. 4, 1994).

Example 2

    Situation: Two companies agree to cross-license future patents 
relating to the development of a new component for aircraft jet 
turbines. Innovation in the development of the component requires the 
capability to work with very high tensile strength materials. Aspects 
of the licensing arrangement raise the possibility that competition in 
research and development of this and related components will be 
lessened. The Department is considering whether to define an innovation 
market in which to evaluate the competitive effects of the arrangement.
    Discussion: If the firms that have the capability to work with very 
high tensile strength materials can be reasonably identified, the 
Department will consider defining a relevant innovation market for 
development of the new component. If the number of firms with the 
required capability is small, the Department may employ the concept of 
an innovation market to analyze the competitive effects of the 
arrangement in that market, or as an aid in analyzing competitive 
effects in technology or goods markets. In this analysis, the 
Department would take into account the specific nature of the 
restraint, the likelihood that other firms may in the future acquire 
the requisite capability, other competitive factors, and any efficiency 
justifications for the licensing arrangement.
    If the number of firms with the required capability is very large 
(either because there are a large number of such firms in the jet 
turbine industry, or because there are many firms in other industries 
with the required capability), then the Department will conclude that 
the innovation market is competitive. Under these circumstances, it is 
unlikely that any single firm or plausible aggregation of firms could 
acquire a large enough share of the assets necessary for innovation to 
have an adverse impact on competition.
    If the Department cannot reasonably identify the firms with the 
required capability, it will not attempt to define an innovation 
market.
    Just as goods markets are improperly defined if the firms in the 
market, were they to coordinate their decisions, would not profitably 
increase price above competitive levels, so too innovation markets are 
improperly defined if hypothetical coordination among the firms in the 
candidate market would not profitably retard or restrict innovation in 
the technology.
    When a relevant innovation market has been defined, the Department 
may assess the competitive significance of each participant based on 
shares of those identifiable assets or characteristics upon which 
innovation depends, on shares of research and development expenditures, 
on shares of the related product, or on equal shares assigned to 
reflect the equal likelihood of innovating, depending on the facts of 
each case. Cf. 1992 Horizontal Merger Guidelines Sec. 1,41 & n.15. In 
evaluating competitive effects, the Department would also take into 
account other factors such as competitive harms from the elimination of 
alternative research paths and efficiency benefits from the integration 
of complementary research and development programs.
3.3  Horizontal and Vertical Relationships
    As with other property transfers, antitrust analysis of 
intellectual property licensing arrangements examines whether the 
relationship of the parties to the arrangement is primarily horizontal 
or vertical in nature, or whether it has substantial aspects of both.
    A licensing arrangement has a horizontal component with respect to 
a technology market if it involves the acquisition of rights to 
technologies that are economic substitutes for technologies that the 
licensee owns or controls. For analytical purposes, the Department 
ordinarily will treat a relationship between a licensor and its 
licensees as horizontal with respect to a particular goods market when 
the licensor and its licensees would be actual or likely potential 
competitors in that market absent the license.
    An arrangement has a vertical component when it affects activities 
that are in a complementary relationship, as is typically the case in a 
licensing arrangement. Such a relationship exists when the licensor and 
its licensees stand in a seller-buyer relationship, or operate at 
different levels of the chain of production and distribution. For 
example, the licensor's primary line of business may be in research and 
development, and the licensees, as manufacturers, may be buying the 
rights to use technology developed by the licensor. Alternatively the 
licensor may be a component manufacturer owning intellectual property 
rights in a product that the licensee manufactures by combining the 
component with other inputs, or the licensor may manufacture the 
product, and the licensees may operate primarily in distribution and 
marketing. Although licensing arrangements typically have a vertical 
component, the licensor and its licensees may also have a horizontal 
relationship in the market containing the technology being licensed or 
in other markets in which they are actual or likely potential 
competitors.
    The existence of a horizontal relationship between a licensor and 
its licensees is not inherently suspect. Identification of such 
relationships is merely an aid in determining whether there may be 
anticompetitive effects arising from a licensing arrangement. Such a 
relationship need not give rise to an anticompetitive effect, nor does 
a purely vertical relationship assure that there are no anticompetitive 
effects.
    The following examples illustrate different competitive 
relationships among a licensor and its licensees.

Example 3

    Situation: Alpha, a manufacturer of farm equipment, develops a new 
emission control technology for its tractor engines and licenses it to 
Beta, another farm equipment manufacturer. Alpha's emission control 
technology is far superior to the technology currently owned and used 
by Beta, so much so that Beta's technology does not discipline the 
prices that Alpha could charge for its technology. Beta has no 
likelihood of developing an improved emissions control technology on 
its own.
    Discussion: Alpha's and Beta's emission control technologies are 
not economic substitutes for each other. Beta is a consumer of Alpha's 
technology and is not an actual or likely potential competitor of Alpha 
in the relevant market for technologically superior emission control 
devices of the kind licensed by Alpha. This means that the relationship 
between Alpha and Beta with regard to the supply and use of emissions 
control technology is vertical. Assuming that Alpha and Beta sell farm 
equipment products that are economic substitutes for each other, their 
relationship is horizontal in the relevant markets for farm equipment.

Example 4

    Situation: Beta develops a new value technology for its engines and 
enters into a cross-licensing arrangement with Alpha, whereby Alpha 
licenses its emission control technology to Beta and Beta licenses its 
valve technology to Alpha. Alpha already owns an alternative valve 
technology that is an economic substitute for Beta's valve technology. 
Before adopting Beta's technology, Alpha was using its own valve 
technology in its production of engines and was licensing (and 
continues to license) that technology for use by others. As in Example 
3, Beta does not own or control an emission control technology that is 
an economic substitute for the technology licensed from Alpha.
    Discussion: Beta is a consumer and not a competitor of Alpha's 
emission control technology. As in Example 3, their relationship is 
vertical with regard to this technology. The relationship between Alpha 
and Beta in the relevant market that includes engine valve technology 
is vertical in part and horizontal in part. It is vertical in part 
because Alpha and Beta stand in a complementary relationship, in which 
Alpha is a consumer of a technology supplied by Beta. However, the 
relationship between Alpha and Beta in the relevant market that 
includes engine valve technology is also horizontal in part, because 
both firms own valve technologies that are economic substitutes for 
each other. Whether the firms license their valve technologies to 
others is not important for the conclusion that the firms have a 
horizontal relationship in this relevant market. Even if Alpha's use of 
its valve technology were solely captive to its own production, the 
fact that the two valve technologies are economic substitutes means 
that the two firms have a horizontal relationship. For the firms to be 
in a horizontal relationship, it is also not necessary that Alpha 
actually uses its valve technology prior to licensing technology from 
Beta, provided that Alpha's technology is an economic alternative to 
Beta's.
    As in Example 3, the relationship between Alpha and Beta is 
horizontal in the relevant markets for farm equipment.
3.4  The Rule of Reason and per se Rules
    In the vast majority of cases, restraints in intellectual property 
licensing arrangements are evaluated under the rule of reason (see 
section 4). In some cases, however, the courts conclude that a 
restraint's ``nature and necessary effect are so plainly 
anticompetitive'' that it should be treated as unlawful per se, without 
an elaborate inquiry into the restraint's purpose and effect, National 
Society of Professional Engineers v. United States, 435 U.S. 679, 692 
(1978). Among the restraints that have been held per se unlawful are 
naked price-fixing, output restraints, and market division among 
horizontal competitors, as well as certain group boycotts and resale 
price maintenance.
    To determine whether a particular restraint in a licensing 
arrangement is given per se or rule of reason treatment, the Department 
will first determine whether the restraint in question can be expected 
to contribute to an efficiency-producing integration of economic 
activity. In general, licensing arrangements promote such integration 
because they facilitate the combination of the licensor's intellectual 
property with complementary factors of production owned by the 
licensee. A restraint in a licensing arrangement may further such 
integration by, for example, aligning the incentives of the licensor 
and the licensees to promote the development and marketing of the 
licensed technology, or by substantially reducing transactions costs.
    In assessing whether a particular restraint contributes to an 
efficiency-producing integration, the Department briefly will review, 
inter alia, the business of the parties to the license, the markets in 
question, and the purpose and effect of the particular restraint. If 
there is no efficiency-producing integration of economic activity and 
if the type of restraint is one that otherwise is appropriately 
accorded per se treatment, the Department will challenge the restraint 
under the per se rule. Otherwise, the Department will apply a rule of 
reason analysis.
    Because licensing arrangements typically involve vertical 
relationships that create significant integrative efficiencies, 
restraints associated with those arrangements usually will have 
sufficient relationship to an efficiency-producing integration to merit 
analysis under the rule of reason. An ordinarily suspect restraint 
incorporated in a licensing agreement will not escape per se treatment, 
however, if the putative integration itself is a sham or if there is an 
insufficient relationship between the restraint and an efficiency-
producing integration.

Example 5

    Situation: Gamma, which manufactures Product X using its patented 
process, offers a license for its process technology to every other 
manufacturer of Product X. The process technology does not represent an 
economic improvement over the available existing technologies. Indeed, 
although several manufacturers accept licenses from Gamma, none of the 
licensees actually uses the licensed technology. The licenses provide 
that each manufacturer has an exclusive right to sell Product X 
manufactured using the licensed technology in a designated geographic 
area and that no manufacturer may sell Product X, however manufactured, 
outside the designated territory.
    Discussion: The manufacturers of Product X are in a horizontal 
relationship in the goods market for product X. Those that are 
licensees of Gamma's process technology would also be in a vertical 
relationship with Gamma if they actually used Gamma's technology, 
although in this example, that is not the case. Any manufacturers of 
Product X that control technologies that are economic substitutes for 
Gamma's process are also horizontal competitors of Gamma in the 
relevant technology market.
    The licensing arrangement restricts competition in the relevant 
goods market among manufacturers of Product X. The restriction applies 
both to Product X that is manufactured with the licensed technology and 
to Product X manufactured with any other technology. The latter 
restriction is the key competitive concern because it harms competition 
that would have taken place in the absence of the licensing agreement. 
Such a restriction could conceivably benefit competition by promoting 
the adoption of Gamma's technology (see Example 6). In this example, 
however, the technology is not being used despite being licensed. If 
further investigation shows that there is no likelihood that the 
manufacturers of Product X will use Gamma's technology, the Department 
is likely to conclude that there are no conceivable benefits from the 
license restrictions.
    If the Department concludes that the restraint does not contribute 
to an efficiency-producing integration of economic activity, the 
Department would be likely to challenge the arrangement under the per 
se rule as a horizontal territorial market allocation scheme and to 
view the intellectual property aspects of the arrangement as a sham 
intended to cloak its true nature. Since such a restraint is per se 
unlawful, the Department likely would challenge the arrangement even 
absent proof of substantial market power by the licensor and the 
licensees.
    The competitive implications do not generally depend on whether the 
licensed technology is protected by patent, is a trade secret or other 
know-how, or is a computer program protected by copyright. Nor do the 
competitive implications generally depend on whether the allocation of 
markets is territorial, as in this example, or functional, based on 
fields of use.

Example 6

    Situation: As in Example 5, Gamma offers a license to every other 
manufacturer of Product X for the patented process that it uses to 
manufacture Product X. The license provides that each manufacturer has 
an exclusive right to sell Product X manufactured using the licensed 
technology in a designated geographic area, and that no manufacturer 
may sell Product X, however manufactured, outside its designated 
territory. As in Example 5, several manufacturers accept licenses. In 
this example, however, the licensed process is an advance over their 
previously used process. Furthermore, Gamma's licensed process is the 
sole technology used by the licensees.
    Discussion: The competitive relationships of the firms in this 
example are the same as in Example 5 and the licensing restraint has a 
similar effect on competition among the manufacturers of Product X. 
This example is distinguished from the previous example in that the 
licensed technology is useful, and, indeed, is used extensively by the 
licensees. As a consequence, the vertical dimension of the licensing 
agreement, and the benefits of the licensing restrictions in promoting 
the adoption of the technology, assume greater importance.
    Again, the key competitive issue is the effect of the territorial 
restraint in the licensing arrangement on competition in the goods 
market that includes Product X. The restraint applies to all sales of 
Product X, without regard to whether it was made using the licensed 
technology. Such a restraint could have a benefit in promoting 
manufacturing and marketing efforts on behalf of the licensed 
technology, in part by making it easier for Gamma to monitor use of its 
licensed technology. The benefits come at the cost of restricting 
competition that would have taken place in the absence of the licensing 
arrangement. If the restraint contributes to an efficiency-enhancing 
integration of economic activity, the Department would evaluate this 
arrangement under the rule of reason. It would take into account such 
factors as the share of the licensor and the licensees in the relevant 
markets affected by the licensing arrangement, the level of 
concentration and difficulty of entry in these markets, and the 
promotional benefits to be gained by focusing manufacturing and 
marketing efforts on the licensed technology.

4. General Principles Concerning the Department's Evaluation of 
Licensing Arrangements Under the Rule of Reason

4.1  Antitrust ``Safety Zone''
    Absent extraordinary circumstances, the Department will not 
challenge a restraint in a licensing arrangement if (1) The restraint 
is not of a type that normally warrants condemnation under the per se 
rule and (2) the licensor and its licensees collectively account for no 
more than twenty percent of each relevant market affected by the 
restraint.\13\ This ``safety zone'' is designed to provide owners of 
intellectual property with a degree of certainty, so as to encourage 
procompetitive licensing arrangements. It is not intended to discourage 
parties falling outside the safety zone from adopting restrictions in 
their license arrangements that are reasonably necessary to achieve an 
efficiency-producing integration of economic activity. The Department 
will analyze arrangements falling outside the ``safety zone'' based on 
the considerations outlined in this section.
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    \13\As stated in section 1.41 of the 1992 Horizontal Merger 
Guidelines, market shares for goods markets ``can be expressed 
either in dollar terms through sales, shipments, or production, or 
in physical terms through measurement of sales, shipments, 
production, capacity, or reserves.'' Special considerations affect 
the measurement of market shares in some technology markets. The 
measurement of market shares in that context is discussed in section 
3.2.1.
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    This ``safety zone'' does not apply to transactions that amount to 
mergers or acquisitions, which are governed by the 1992 Horizontal 
Merger Guidelines.
    The Department will include innovation market shares in its 
evaluation of whether a licensing arrangement falls within the safety 
zone only if the assets required to compete in research and development 
are specialized and identifiable. If not, the Department will confine 
its analysis to the goods and technology markets affected by the 
licensing arrangement.
4.2  General Statement of the Rule of Reason
    In analyzing a restraint in a licensing arrangement under the rule 
of reason, the Department first inquires whether the restraint has an 
anticompetitive effect. If so, the Department next inquires whether the 
restraint is reasonably necessary to achieve procompetitive benefits 
that outweigh those anticompetitive effects. See NCAA v. Board of 
Regents of the University of Oklahoma, 468 U.S. 85 (1984); see also 7 
Phillip A. Areeda, Antitrust Law, Sec. 1502 (1986). In pursuing these 
inquiries, the Department will be guided by several general principles. 
These principles apply to both vertical and horizontal licensing 
restraints that are analyzed under the rule of reason.
4.3  Analysis of Anticompetitive Effects
    The existence of anticompetitive effects resulting from a restraint 
in a licensing arrangement may be evaluated on the basis of a variety 
of factors taken together, including the following.
    4.3.1  Market structure, coordination, and foreclosure. When a 
licensor and its licensees compete in technology or goods markets, a 
restraint in a licensing arrangement may increase the risk of 
coordinated pricing, output restrictions, or the acquisition or 
maintenance of monopoly power. The potential for competitive harm 
generally increases with the degree of concentration in, the difficulty 
of entry into, and the inelasticities of supply and demand in markets 
in which the licensor and licensees are in a horizontal relationship. 
Cf. 1992 Horizontal Merger Guidelines, Secs. 1.5, 3.
    When the licensor and licensees are in a vertical relationship, 
harm to competition from a restraint may occur if it forecloses access 
to, or increases competitors' costs of obtaining, important inputs 
(other than as a natural consequence of the licensee acquiring a 
licensed technology for its own use). An example is a licensing 
arrangement with most of the established manufacturers in an industry 
preventing those manufacturers from using any technology. The risk of 
foreclosing access or increasing competitors' costs is related to the 
fraction of markets affected by the licensing restraint and to other 
characteristics of the input and output markets, such as concentration, 
difficulty of entry, and elasticities of supply and demand.
    Harm to competition from a restraint in a vertical licensing 
arrangement also may occur if a licensing restraint facilitates 
coordination to raise prices or reduce output in markets in which one 
of the parties participates. For example, if owners of competing 
technologies impose similar restraints on their licensees, the 
licensors may find it easier to coordinate their pricing. Similarly, 
licensees that are horizontal competitors may find it easier to 
coordinate their pricing if they are subject to common license 
restraints imposed either by a common licensor or by competing 
licensors. The risk of anticompetitive coordination is increased when 
the relevant markets are concentrated and difficult to enter.
    4.3.2  Licensing arrangements involving exclusivity. A licensing 
arrangement may involve exclusivity in two distinct respects. First, 
the licensor may grant one or more exclusive licenses, which restrict 
the right of the licensor to license others and possibly also to 
practice the technology itself. Generally, such as grant to exclusivity 
may raise antitrust concerns only if the licensees themselves, or the 
licensor and its licensees, are actual or potential competitors in a 
relevant technology or goods market in the absence of the licensing 
arrangement. Examples of exclusive licenses with possible competitive 
consequences include cross-leasing by parties collectively possessing 
market power (see section 5.5), grantbacks (see section 5.6), and 
acquisitions of intellectual property rights (see section 5.7).
    A second form of exclusivity, exclusive dealing, arises when a 
license prevents or restrains the licensee from using competing 
technologies. Such restraints can have the effect of denying rivals 
sufficient outlets for exploiting their technologies and thus be 
anticompetitive. Exclusivity may be required by the licensor, as in an 
explicit exclusive dealing arrangement (see section 5.4), or induced 
through economic incentives. For example, a royalty arrangement based 
on total sales of a licensee's product, regardless of whether it is 
made using the licensed technology, may increase the cost to a licensee 
of substituting alternative technologies, and thus may have effects 
similar to an exclusive dealing arrangement. See Complaint, United 
States v. Microsoft, Inc., Civ. No. 94-1564 (D.D.C., filed July 15, 
1994); Competitive Impact Statement, id. (filed July 27, 1994). Whether 
a restraint of this kind has anticompetitive effects depends, inter 
alia, on the availability of other outlets for competitively viable 
exploitation of rival technologies.
    Restraints that impose or encourage exclusive dealing may have 
procompetitive effects. For example, a licensing arrangements that 
prevents the licensee from dealing in other technologies may encourage 
the licensee to develop and market the licensed technology or 
specialized application of that technology. See, e.g., Example 7. The 
Department will take into account such precompetitive effects in 
evaluating the reasonableness of the arrangement. See section 4.4.
    The Department will focus on the actual practice and its effects, 
not to the formal terms of the arrangement. A license denominated as 
non-exclusive (either in the sense of exclusive licensing or in the 
sense of exclusive dealing) may nonetheless give rise to the same 
concerns posed by formal exclusivity. A non-exclusive license may have 
the effect of exclusive licensing if it is structured so that the 
licensor is unlikely to license others or to practice the technology 
itself. A license that does not explicitly require exclusive dealing 
may have the effect of exclusive dealing if it is structured to make it 
costly for licensees to use competing technologies. However, a 
licensing arrangement will not automatically raise these concerns 
merely because a party chooses to deal with a single licensee or 
licensor, or confines his activity to a single field of use or 
location, or because only a single licensee has chosen to take a 
license.

Example 7

    Situation: Eta, the inventor of a new flat panel display 
technology, lacking the capability to bring a flat panel display 
product to market, grants Rho an exclusive license to make and sell a 
product embodying Eta's technology. Rho does not currently sell a 
product that would compete with the product embodying the new 
technology or control rights to another display technology. Several 
firms offer competing displays, the relevant markets for manufacturing 
and distribution of such displays are unconcentrated, and entry into 
these markets is relatively easy. Demand for the new technology is 
uncertain and successful market penetration will require considerable 
promotional effort. The license contains an exclusive dealing 
restriction preventing Rho from selling products that compete with the 
product embodying the licensed technology.
    Discussion: This example illustrates both types of exclusivity in a 
licensing arrangement. The license is exclusive in that it restricts 
the right of the licensor to grant other licenses. In addition, the 
license has an exclusive dealing component in that it restricts the 
licensee from selling competing products.
    The inventor of the display technology and its licensee are in a 
vertical relationship and do not compete in the manufacture or sale of 
display products or in the sale of technology. Hence, the grant of an 
exclusive license does not affect competition between the licensor and 
the licensee. The exclusive license may promote competition by 
encouraging Rho to develop and promote the new product in the face of 
uncertain demand by rewarding Rho for its efforts if they lead to large 
sales. Although the license bars the licensee from selling competing 
products, this exclusive dealing aspect is unlikely in this example to 
harm competition by foreclosing access or facilitating anticompetitive 
pricing because several firms offer competing products, the relevant 
manufacturing and distribution markets are unconcentrated, and entry is 
easy. On these facts, the Department would be unlikely to challenge the 
arrangement.
    4.3.3  Benefits to the parties from reduction of competition. In 
some cases, the benefits of a restraint in a licensing arrangement to 
the licensor or its licensees may derive primarily from reductions in 
competition that likely would have occurred absent the license rather 
than from the restraint's relationship to efficiency-producing 
objectives of the arrangement. In determining whether to challenge a 
particular restraint in a licensing arrangement, the Department will 
assess evidence indicating which of these possibilities better 
describes the purpose and effect of the restraint.
    4.3.4  Other factors. Factors such as a history of rivalry and a 
rapid pace of innovation are also relevant to an analysis of the 
potential for harm to competition. The presence of these factors may 
indicate that licensors and licensees are less likely successfully to 
engage in coordinated behavior to raise prices or restrict output, and 
their absence may signal a greater likelihood of such behavior.
4.4  Efficiencies and Justifications
    If the Department finds that a restraint in a licensing arrangement 
has an anticompetitive effect, the Department will consider whether the 
restraint produces offsetting procompetitive effects, such as by 
facilitating the efficient development and exploitation of intellectual 
property. If offsetting benefits are established, the Department will 
determine whether the restraint is reasonably necessary to achieve the 
efficiencies. If the restraint is reasonably necessary, and if the 
efficiencies outweigh the anticompetitive effect, the Department will 
not challenge the licensing arrangement.
    The Department's comparison of anticompetitive harms and 
procompetitive efficiencies is necessarily a qualitative one. The risk 
of anticompetitive effects in a particular case may be insignificant 
compared to the expected benefits, or vice versa. As the expected 
anticompetitive effects in a particular licensing arrangement increase, 
the Department will look for evidence establishing with greater 
certainty that the arrangement achieves net benefits.
    The existence of practical and significantly less restrictive 
alternatives is relevant to a determination of whether a restraint is 
reasonably necessary. If it is clear that the parties could have 
achieved similar efficiencies by means that are significantly less 
restrictive, then the Department will not give weight to the parties' 
efficiency claim. In making this assessment, however, the Department 
will not engage in a search for a theoretically least restrictive 
alternative that might be easier to construct in hindsight than in the 
practical prospective business situation faced by the parties.
    When a restraint has an anticompetitive effect, the duration of 
that restraint can be an important factor in determining whether it is 
reasonably necessary to achieve the putative procompetitive effect. The 
effective duration of a restraint may be dependent on a number of 
factors, including the option of the affected party to terminate the 
arrangement unilaterally and the presence of contract terms (e.g., 
unpaid balances on minimum purchase commitments) that encourage the 
licensee to renew a license arrangements. Consistent with its approach 
to less restrictive alternative analysis generally, the Department will 
not attempt to draw fine distinctions regarding duration; rather, its 
focus will be on situations in which the duration clearly exceeds the 
period needed to achieve the procompetitive effect.
    The evaluation of procompetitive efficiencies, of the reasonable 
necessity of a restraint to achieve them, and of the duration of the 
restraint may depend on the market context. A restraint that may be 
justified by the needs of a new entrant, for example, may not have a 
procompetitive efficiency justification in different market 
circumstances. Cf. United States v. Jerrold Electronics Corp., 187 F. 
Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961).
4.5  Restraints Subject to a Quick-Look Analysis
    A rule of reason analysis may require no more than a ``quick look'' 
at the anticompetitive effects of a particular restraint and the extent 
to which the restraint is reasonably necessary to achieve an 
efficiency-producing integration. When the restraint is one that 
ordinarily warrants per se treatment, and a quick look at the claimed 
efficiencies reveals that the restraint is not reasonably necessary to 
achieve procompetitive efficiencies, the Department will likely 
challenge the restraint without further analysis. See FTC v. Indiana 
Federation of Dentists, 476 U.S. 447, 459-60 (1986); NCAA v. Board of 
Regents of the University of Oklahoma, 468 U.S. 85, 109-10 & n.39 
(1984).

5. Application of General Principles

    This section illustrates the application of these principles to 
particular licensing restraints and to arrangements that involve the 
cross-licensing, pooling, or acquisition of intellectual property. The 
restraints and arrangements identified are typical of those that are 
likely to encounter antitrust scrutiny; however, they are not intended 
as an exhaustive list of practices that could raise competitive 
concerns.
5.1  Horizontal Restraints
    While licensing arrangements among horizontal competitors, like 
joint ventures, often promote rather than hinder competition, there are 
a number of circumstances in which antitrust scrutiny is warranted. 
Generally speaking, the licensor and the licensee are deemed to be 
horizontal competitors only if they own or control technologies that 
are economic substitutes for each other or if they are competitors in a 
goods market other than through the use by the licensee of the licensed 
technology. See section 3.3. Consistent with the principles set forth 
in section 3.4, the Department will challenge certain types of 
horizontal restraints as per se unlawful in appropriate cases. 
Horizontal restraints in licensing arrangements that constitute price 
fixing, allocation of markets or customers, agreements to reduce 
output, and certain group boycotts may merit per se treatment. In other 
cases, the restraints will be evaluated under the rule of reason, 
following the general principles set forth in section 4.

Example 8

    Situation: Two of the leading manufacturers of a consumer 
electronic product hold patents that cover alternative circuit designs 
for the product. None of the patents is blocking; that is, each of the 
patents can be practiced without infringing a patent owned by the other 
firm. The different circuit designs are economic substitutes. Each 
permits the manufacture at similar cost of products that consumers 
consider to be interchangeable. The manufacturers assign their patents 
to a separate corporation wholly owned by the two firms. That 
corporation licenses the right to use the circuit designs to other 
consumer product manufacturers and establishes the license royalties.
    Discussion: In this example, the manufacturers are horizontal 
competitors in the goods market for the consumer product and in the 
related technology markets. The competitive issue with regard to a 
joint assignment of patent rights is whether the assignment has an 
adverse impact on competition in technology and goods markets that is 
not outweighed by procompetitive benefits in the use or dissemination 
of the technology. Each of the patent owners has a right to exclude 
others from practicing its patent. That right does not extend, however, 
to the agreement to assign rights jointly. To the extent that the 
patent rights cover technologies that are substitutes, the joint 
determination of royalties may result in higher royalties and higher 
goods prices than the owners would have charged on their own. In the 
absence of evidence establishing efficiencies from the joint assignment 
of patent rights, the Department may conclude that the joint marketing 
of competing patent rights constitutes horizontal price fixing and 
could be challenged as a per se unlawful horizontal restraint of trade. 
If there are plausible efficiency justifications for the joint 
marketing arrangement, the Department would evaluate the arrangement 
under the rule of reason. However, the Department may conclude that the 
anticompetitive effects are sufficiently apparent, and the proposed 
integrative efficiencies are sufficiently weak or unrelated to the 
restraints, to require only a ``quick look'' rule of reason analysis 
(see section 4.5).
5.2  Resale Price Maintenance
    Resale price maintenance is illegal when ``commodities have passed 
into the channels of trade and are owned by dealers.'' Dr. Miles 
Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). It has 
been held per se illegal for a licensor of an intellectual property 
right in a product to fix a licensee's resale price of that product. 
United States v. Univis Lens Co., 316 U.S. 241, 243-45, 249-51 (1942); 
Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 446-48, 452, 457 
(1940).\14\ Consistent with the principles set forth in section 3.4, 
the Department will enforce the per se rule against resale price 
maintenance in the intellectual property context.
---------------------------------------------------------------------------

    \14\But cf. United States v. General Electric Co., 272 U.S. 476 
(1926) (holding that an owner of a product patent may condition a 
license to manufacture the product on the fixing of the first sale 
price of the patented product). Subsequent lower court decisions 
have distinguished the GE decision in various contexts. See, e.g., 
Royal Indus. v. St. Regis Paper Co., 420 F.2d 449, 452 (9th Cir. 
1969) (observing that GE involved a restriction by a patentee who 
also manufactured the patented product and leaving open the question 
whether a nonmanufacturing patentee may fix the price of the 
patented product); Newburgh Moire Co. v. Superior Moire Co., 237 
F.2d 283, 293-94 (3rd Cir. 1956) (grant of multiple licenses each 
containing price restrictions does not come within the GE doctrine); 
Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646, 647 
(5th Cir.) (owner of an intellectual property right in a process to 
manufacture an unpatented product may not fix the sale price of that 
product), cert. denied, 323 U.S. 726 (1944); Barber-Colman Co. v. 
National Tool Co., 136 F.2d 339, 343-44 (6th Cir. 1943) (same).
---------------------------------------------------------------------------

5.3  Tying Arrangements
    A transaction is said to involve tying if: (1) There are two 
separate products, and (2) the sale of one product is conditioned on 
the purchase of the other. Thus, conditioning the ability of a customer 
to license one or more items of intellectual property on the customer's 
purchase of another item of intellectual property or a good or service 
has been held to constitute illegal tying. See, e.g., United States v. 
Paramount Pictures, Inc., 334 U.S. 131, 156-58 (1948) (copyrights); 
International Salt Co. v. United States, 332 U.S. 392 (1947) (patents). 
Tying can, however, be efficiency-enhancing under some circumstances. 
See, e.g., Jerrold Electronics Corp. v. Westcoast Broadcasting Co., 341 
F.2d 653 (9th Cir.), cert. denied, 382 U.S. 817 (1965). The Department 
would be likely to challenge a tying arrangement if: (1) The seller has 
sufficient economic power in the market for the tying product to enable 
it to restrain trade in the market for the tied product, (2) the 
arrangement has an adverse effect on competition in the relevant market 
for the tied product, and (3) efficiency justifications for the 
arrangement do not outweigh the anticompetitive effect.\15\ The 
Department will not presume market power solely from the existence of a 
patent or other intellectual property right.\16\
---------------------------------------------------------------------------

    \15\As is true throughout these Guidelines, the factors listed 
are those that guide the Department's internal analysis in 
exercising its prosecutorial discretion. They are not intended to 
circumscribe how the Department will conduct the litigation of cases 
that it decides to bring, nor to opine on how the courts should 
resolve questions that are currently unsettled in the case law.
    \16\See section 2.2. This policy is consistent with the 
requirement that market power be demonstrated to establish patent 
misuse based on tying. 35 U.S.C. Sec. 271(d) (1988) (as amended by 
Pub. L. No. 100-703, 201 Stat. 4676 (1988)).
---------------------------------------------------------------------------

    Package licensing--the licensing of multiple items of intellectual 
property in a single license or in a group of related licenses--may be 
a form of tying arrangement, but only if the items licensed constitute 
``separate products'' and the licensing of one product is used to force 
the acceptance of a license of another. Such practices can be 
efficiency enhancing under some circumstances. When multiple licenses 
are needed to practice any single item of intellectual property, for 
example, a package license may present such efficiencies. If a package 
license constitutes a tying arrangement, the Department will evaluate 
its competitive effects under the same principles it applies to other 
tying arrangements.
5.4  Exclusive dealing
    In the intellectual property context, exclusive dealing occurs when 
a license prevents the licensee from licensing, selling, distributing, 
or using a competing technology. Although such restraints can be 
procompetitive in some circumstances, in other situations they can deny 
rivals sufficient outlets for competitively viable exploitation of 
their technologies and thus can be anticompetitive. See section 4.3.2.
5.5  Cross-Licensing and Pooling Arrangements
    Cross-licensing and pooling arrangements are agreements of two or 
more owners of different items of intellectual property to license one 
another or third parties. These arrangements may promote economic 
welfare by integrating complementary technologies, reducing 
transactions costs, clearing blocking positions, and avoiding costly 
infringement litigation. By promoting the dissemination of technology, 
cross-licensing and pooling arrangements are often procompetitive.
    Cross-licensing and pooling arrangements can have anticompetitive 
effects in certain circumstances. When these arrangements are a 
mechanism to accomplish price fixing, or market or customer allocation, 
they can lead to a significant lessening of competition. See United 
States v. New Wrinkle, Inc., 342 U.S. 371 (1952) (price fixing); United 
States v. United States Gypsum Co., 333 U.S. 364 (1948) (customer 
allocation). The joint marketing of pooled intellectual property 
rights, with collective price setting or coordinated output 
restrictions, may violate section 1 of the Sherman Act. Compare NCAA v. 
Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984) 
(output restriction on college football broadcasting held unlawful 
because it was not reasonably related to any purported justification) 
with Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979) (blanket license 
for music copyrights upheld because the cooperative price was found 
necessary to the creation of a new product).
    Settlements involving the cross-licensing of intellectual property 
rights can be an efficient means to avoid litigation over infringement 
and interference proceedings, and, in general, courts favor such 
settlements. When such cross-licensing involves horizontal competitors, 
however, the Department will consider whether the effect of the 
settlement is to diminish rivalry that would otherwise have occurred. 
In the absence of offsetting efficiencies, such settlements may be 
challenged as unlawful restraints of trade. Cf. United States v. Singer 
Manufacturing Co., 374 U.S. 174 (1963) (cross-license agreement was 
part of broader combination to exclude competitors).
    Pooling arrangements and the like generally need not be open to all 
who would like to join. Cross-licensing and pooling arrangements among 
parties that collectively possess market power may, under some 
circumstances, harm competitions by significantly disadvantaging 
competitors. Cf Northwest Wholesale Stationers, Inc v. Pacific 
Stationery & Printing Co., 472 U.S. 284 (1985) (exclusion of a 
competitor from a purchasing cooperative not unlawful absent a showing 
of market power).
    Another possible anticompetitive effect of pooling arrangements may 
occur when participation in the arrangement deters or discourages 
participants from engaging in research and developing, thus retarding 
innovation. A pooling arrangement in which members grant licenses to 
each other for current and future technology at minimal cost may 
encourage free-riding and reduce the incentives of its members to 
compete in their research and development efforts. See generally United 
States v. Automobile Manufacturers Association, 307 F. Supp. 617 (C.D. 
Cal 1969), modified sub nom. United States v. Motor Vehicle 
Manufacturers Association, 1982-83 Trade Cas. (CCH)  65,088 (C.D. Cal 
1982); United States v. Manufacturers Aircraft Association, 1976-1 
Trade Cas. (CCH)  60,810 (S.D.N.Y. 1975). Such an arrangement is more 
likely to cause competitive problems where the arrangement includes a 
large fraction of the potential participants in research and 
development.

Example 9

    Situation: As in Example 8, two of the leading manufacturers of a 
consumer electronic product hold patents that cover alternative circuit 
designs for the product. The manufactures assign several of their 
patents to a separate corporation wholly owned by the two firms. That 
corporation licenses the right to use the circuit designs to other 
consumer product manufacturers and establishes the license royalties. 
In this example, however, the manufacturers assign to the separate 
corporation only patents that are blocking. None of the patents 
assigned to the corporation can be practiced without infringing a 
patent owned by the other firm.
    Discussion: Unlike the previous example, the joint assignment of 
patent rights to the wholly owned corporation in this example can have 
procompetitive benefits in the use of dissemination of the technology. 
Because the manufacturer's patents are blocking, the manufacturers are 
not in a horizontal relationship with respect to those patents. Neither 
patent can be practiced without the right to a patent owned by the 
other firm, so the patents are not economic substitutes. (The pooling 
of patents also would not raise competitive problems in the relevant 
technology market if the pool involved complementary patents and 
enabled licensing of a package whose value exceeded the sum of its 
component patents.)
    As in Example 8, the firms are horizontal competitors in the 
relevant goods market. In the absence of evidence suggesting that the 
joint assignment of patent rights is also contributing to coordinated 
pricing of the firms' final products, the Department would be unlikely 
to challenge this arrangement.
5.6  Grantbacks
    A grantback is an arrangement under which a licensee agrees to 
extend to the licenser of intellectual property the right to use the 
licensee's improvements to the licensed technology. Grantbacks can have 
procompetitive effects, such as providing a means for the licensee and 
the licensor to share risks and rewarding the licensor for making 
possible further innovation based on or informed by the licensed 
technology. Such arrangements can both promote innovation in the first 
place and promote the subsequent licensing of the results of the 
innovation.
    Grantbacks may adversely affect competition, however, if they 
substantially reduce the licensee's incentives to engage in research 
and development and limit rivalry in innovation markets. In deciding 
whether to challenge a grantback, the Department will consider the 
extent to which, as compared with no license at all, the license with 
the grantback provision may diminish total research and development 
investment or lessen competition in innovation or technology markets.
5.7  Acquisition of Intellectual Property Rights
    The legality of transactions resulting in an actual or effective 
acquisition of intellectual property rights is analyzed under section 7 
of the Clayton Act and sections 1 and 2 of the Sherman Act. SCM Corp. 
v. Xerox Corp., 645 F.2d 1195, 1210 (2d Cir. 1981) (patents); United 
States v. Columbia Pictures Corp., 189 F. Supp. 153, 183 (S.D.N.Y. 
1960) (copyrights). The Department will analyze such transactions as 
acquisitions of assets just as it does other asset acquisitions. When a 
license is non-exclusive, the exclusivity is temporary, or the 
acquisition is otherwise structured to allow the parties freedom to 
compete independently in related products, the Department will take 
these aspects of the arrangement into account, as it does in the case 
of other asset acquisitions and joint ventures.
    With respect to horizontal acquisitions, the Department will apply 
the analysis contained in the 1992 Horizontal Merger Guidelines. The 
Department will evaluate the effects of an acquisition of intellectual 
property in affected technology, innovation, and goods markets. As 
described in section 4 of the 1992 Horizontal Merger Guidelines, the 
Department takes into account integrative efficiencies that could not 
reasonably be achieved without the acquisition as well as any 
anticompetitive effects of the acquisition from the lessening of 
competition among existing technologies or goods or from the lessening 
of competition to develop new technologies.

Example 10

    Situation: Omega develops a new, patented pharmaceutical for the 
treatment of a particular disease. The only drug on the market approved 
for the treatment of this disease is sold by Zeta, which has invested 
large sums in advertising to achieve brand name recognition. Omega's 
patented drug has almost completed regulatory approval by the Food and 
Drug Administration. Omega has invested considerable sums in testing 
market acceptance for its new drug. However, rather than enter the 
market as a direct competitor of Zeta, Omega licenses to Zeta the 
exclusive right to manufacture and sell Omega's patented drug.
    Discussion: Assuming that Zeta would manufacture and sell Omega's 
patented drug, the relationship of Omega and Zeta is in part vertical, 
because Zeta would be a customer of Omega in the technology market. 
However, their relationship is also horizontal in part, because Omega 
is a likely potential competitor of Zeta in the relevant goods market 
as well as in the relevant technology market. Although the vertical 
aspects of this arrangement pose no threat to competition in this 
example, the horizontal aspects would require further analysis. The 
Department would evaluate Zeta's acquisition of Omega's patent rights 
as an acquisition of the assets of a likely potential competitor, using 
the methodology described in the Department's merger guidelines. The 
Department would consider the impact of the acquisition on market 
concentration, other factors that affect the likelihood that 
competition would be affected by the acquisition, and possible 
efficiency defenses. In this example, Zeta's market position prior to 
the acquisition as the only seller of a drug treatment of this disease 
makes it more likely that the acquisition would have anticompetitive 
effects.

6. Enforcement of Invalid Intellectual Property Rights

    The Department may challenge the enforcement of invalid 
intellectual property rights as antitrust violations. The Supreme Court 
has held that enforcement of a patent obtained by fraud on the Patent 
and Trademark Office can violate section 2 of the Sherman Act if all 
the elements otherwise necessary to establish a section 2 
monopolization charge are proved. Walker Process Equipment, Inc. v. 
Food Machinery & Chemical Corp., 382 U.S. 172 (1965). Enforcement of a 
patent obtained by mere inequitable conduct before the Patent and 
Trademark Office, however, cannot be the basis of a section 2 claim, 
because inequitable conduct does not involve knowing and willful patent 
fraud. Argus Chemical Corp. v. Fibre Glass-Evercoat Co., 812 F.2d 1381 
(Fed. Cir. 1987). An objectively baseless infringement action, brought 
in bad faith, when the complainant knows the intellectual property 
right to be invalid, may violate section 2 of the Sherman Act. See 
Professional Real Estate Investors, Inc. v. Columbia Pictures 
Industries, Inc., 113 S. Ct. 1920, 1928 (1993); Handgards, Inc. v. 
Ethicon, Inc., 743 F.2d 1282, 1288-89 (9th Cir. 1984). cert. denied, 
469 U.S. 1190 (1985) (patents); Handgards, Inc., v. Ethicon, Inc., 601 
F.2d 986, 992-96 (9th Cir. 1979), cert. denied, 444 U.S. 1025 (1980) 
(patents); CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985) 
(trade secrets).

[FR Doc. 94-19657 Filed 8-10-94; 8:45 am]
BILLING CODE 4410-01-M