Constantine Partners Constantine Cannon CC An Overview

Constantine & Partners Constantine Cannon CC An Overview of the Antitrust/IP Intersect By Jeffrey I. Shinder Partner, Constantine Cannon New York City/Washington jshinder@constantinecannon. com Presentation to The In-House Counsel Forum on Pharmaceutical Antitrust May 24 -25, 2005 11

Constantine & Partners Constantine Cannon CC Role of Antitrust • Protect consumer welfare • Reflects policy that competition benefits consumers by ensuring: – Lower prices – Increased output – Incentive to innovate 22

Constantine & Partners Constantine Cannon CC Key Antitrust Statutes • Sherman Act Section 1 • Sherman Act Section 2 • Clayton Act Section 7 • FTC Act Section 5 33

Constantine & Partners Constantine Cannon CC Antitrust Standards • Per se standard -- Practice is anticompetitive on its face; anticompetitive effects are presumed. • Rule of Reason -- Must prove anticompetitive effects with detailed economic analysis. 44

Constantine & Partners Constantine Cannon CC Sherman Act § 1 • Conspiracy to restrain trade – Requires concerted action involving at least two actors • E. g. , patent pools, licensing arrangements 55

Constantine & Partners Constantine Cannon CC Sherman Act § 1 -- Types of Claims • Horizontal Price Fixing -- Per se violation • Vertical Price Fixing – Minimum retail price maintenance -- per se – Maximum retail price maintenance -- Rule of Reason • Vertical Non-Price Restraints – Exclusive Territories--Rule of Reason – Exclusive Dealing--Rule of Reason 66

Constantine & Partners Constantine Cannon CC Sherman Act § 1 -- Types of Claims • Illegal tying -- technically per se claim, but really a hybrid between per se and Rule of Reason. – Elements of per se violation: • The products being “tied” are distinct; • Market power; • Forcing or actual tying; • An effect on a not insubstantial amount of interstate commerce; • Anticompetitive effects (in some circuits). 77

Constantine & Partners Constantine Cannon CC Sherman Act § 1 -- Types of Claims • Group Boycott--per se (if firm(s) have market power and/or deny access to elements essential to competition) • Market Allocation Schemes--per se 88

Constantine & Partners Constantine Cannon CC Sherman Act § 2 • Monopolization claims • Concerns unilateral single firm conduct 99

Constantine & Partners Constantine Cannon CC Sherman Act § 2 • A monopoly in and of itself is not illegal. • Acquiring monopoly power by being better is lawful. • The law places constraints on the behavior of a monopolist to ensure that it is not improperly maintaining its monopoly power or using its monopoly power in one market to monopolize or attempt to monopolize another. • The law constrains improper attempts to acquire monopoly power by firms who are dangerously close to acquiring such power. 10 10

Constantine & Partners Constantine Cannon CC Sherman Act § 2 -- Types of Claims • Elements of Monopolization – Possession of monopoly power – Such power achieved or maintained by exclusionary or anticompetitive conduct – Injury to competition 11 11

Constantine & Partners Constantine Cannon CC Sherman Act § 2 -- Types of Claims • Attempt to monopolize – Specific intent to monopolize markets – Overt acts – Dangerous probability of monopolization • Conspiracy to monopolize 12 12

Constantine & Partners Constantine Cannon CC Clayton Act § 7 • Statute that prohibits mergers that create or enhance or facilitate the exercise of market power in a relevant market. – Forward looking analysis -- incipiency standard • Merger cannot “substantially lessen competition” in a relevant market. 13 13

Constantine & Partners Constantine Cannon CC The Antitrust/IP Intersect History • Perceived tension between Antitrust & IP • Pre 1930 - IP trumps Antitrust; early cases gave patentees wide latitude • 1930 -1970 s-Antitrust Comes Back; Supreme Court retreats from earlier position • 1980 -Present; IP Again Trumps Antitrust? 14 14

Constantine & Partners Constantine Cannon CC The Antitrust/IP Intersect • 1995 DOJ/FTC Guidelines for the Licensing of Intellectual Property – IP should be treated like other forms of property under the antitrust laws – IP rights do not necessarily create market power in a relevant antitrust market – Licensing is generally pro-competitive 15 15

Constantine & Partners Constantine Cannon CC The Antitrust/IP Intersect • Is IP the same as other property for antitrust purposes? NO – Power to exclude derives from US Constitution – Power to exclude is designed to encourage innovation – Power to exclude is absolute – IP can be used simultaneously by competitors 16 16

Constantine & Partners Constantine Cannon CC Sherman Act § 2 • When Can Obtaining a Patent Violate Section 2? – When obtained through fraud on the PTO and enforced against alleged infringers – Impropriety defined by Patent Act – Other elements of Section 2 violation must be present 17 17

Constantine & Partners Constantine Cannon CC Sherman Act § 2 • Fraud on the PTO-Walker Process Claims – Misrepresentation or omission of material fact – Intent to deceive – Materiality: patent would not have issued but for misrepresentation or omission – Other elements of Section 2 claim: monopolization or dangerous probability of monopolization 18 18

Constantine & Partners Constantine Cannon CC Patent Acquisitions • When can acquiring a patent violate the antitrust laws? – IP acquisitions can violate Section 2 of the Sherman Act and Section 7 of the Clayton Act – Must show monopolization or dangerous probability of monopolization for Section 2 claim – Must show threatened substantial lessening of competition for Section 7 claim 19 19

Constantine & Partners Constantine Cannon CC Sherman Act § 2 --Patent Acquisition • Analyzing the antitrust risks of potential IP acquisitions – Does the acquiring firm have market power? If yes – Does the acquisition involve “exclusive rights”? – Does the acquisition concern rights in patents related to the subject matter of the monopoly? 20 20

Constantine & Partners Constantine Cannon CC Patent Acquisitions • If firm with market power – Acquires exclusive rights to related patents: serious antitrust issues – Acquires non-exclusive rights to related patents: likely permissible despite risks to competition – Acquires exclusive rights to unrelated patents: no antitrust issues 21 21

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Enforcing IP Rights • When can a firm violate the antitrust laws by attempting to enforce its IP rights? – If enforcement is a “sham” it can violate Section 2 of the Sherman Act – If “sham” enforcement is done collectively it can violate Section 1 of the Sherman Act 22 22

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Enforcing IP Rights • Basic Rule for Sham Litigation: Professional Real Estate Investors – “Suit must be objectively baseless … no reasonable litigant could realistically expect success on the merits” and – Suit must conceal an attempt to harm rivals 23 23

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Enforcing IP Rights • When wrongful – Action based on fraudulently obtained patent – Action based on valid patents that are known to be unenforceable – Action based on valid patent where infringement plaintiff knew there was no infringement – Action based on clearly incorrect legal theory 24 24

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Enforcing IP Rights • Does the immunity conferred by Professional Real Estate Investors extend to certain pre and post-litigation conduct? – Threats to enforce IP: Yes – Publication of infringement in the marketplace: Probably Yes – Threats and publication where litigation is never initiated: Maybe Not. – Settlements: Open question, probably not 25 25

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Refusals to Deal • Can the owner of a lawfully-acquired patents ever violate Section 2 of the Sherman Act by refusing to license? – Most authorities say no 26 26

Constantine & Partners Constantine Cannon CC Sherman Act § 2: Refusals to Deal • Recent Case Law & Enforcement Activity – Image Technical (9 th Cir. )- lawful patent creates rebuttable presumption that refusal was lawful, but presumption was rebutted in that case – Intel – Xerox- refusal to license immune from antitrust, with three exceptions • Walker Process claim (i. e. , patent was fraudulently obtained) • Sham litigation • Illegal tying 27 27

Constantine & Partners Constantine Cannon CC Sherman Act § 1 • Greater tolerance for restraints involving IP – Most IP restraints have an ancillary character – Patent Act commands a tolerance for such agreements – Licenses are vertical restraints 28 28

Constantine & Partners Constantine Cannon CC Sherman Act § 1 • Key Question: Does the license have a horizontal aspect? – Would the parties to the agreement have been actual or likely potential competitors in the absence of the license? – Horizontal relationship could be found in product, technology, or innovation markets – If license is purely vertical • IP creates no additional complications for defendants • IP often provides compelling justifications • tying claims may be a concern 29 29

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Licenses Affecting Price • Price of the license does not raise antitrust concerns • What if license requires the licensor to sell at prices set by licensor? – Permissible if patent covers all or a significant portion of resulting product – United States v. General Electric (1926 Supreme Court Case) 30 30

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Licenses Affecting Price • GE still stands but has been limited to its facts – Line Material: declined to extend GE to cross-licensing arrangement in which resale price imposed on sub-licensees – United States Gypsum: declined to extend GE to licenses with resale price restrictions imposed on every producer in the industry • Other limitations to GE – Price limitation beyond first sale – Price restraint extends beyond the patent – Fixing prices of unpatented goods produced by patented process 31 31

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Output Restraints • General Principles – Naked output limitations are illegal per se – Quantity limitations in vertical patent licenses are treated under the rule of reason and are generally lawful – May violate the antitrust laws when • Concerns unpatented product made with a patented process • Cross-licenses used as a façade by competing licensors and/or licensees to limit output and fix prices 32 32

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Patent Pools/Cross. Licensing • Antitrust recognizes that they are often pro-competitive • IP Guidelines explain why they may be pro-competitive – Integrate complementary technology – Reduce transaction costs – Clear blocking positions – Avoid costly infringement actions • Cross-licensing without restrictions almost always lawful 33 33

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Patent Pools/Cross. Licensing • They can violate the antitrust laws when: – Pool/cross-license includes restraints on price or output – Pool/cross-license is used to exclude rivals – Pool/cross-license includes agreement not to engage in certain types of research 34 34

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Market Allocation Agreements • Territorial Divisions – Patent Act specifically permits them – Immune from antitrust challenge if relationship is purely vertical – Immunity does not extend to territorial restrictions after first sale – Reviewed under the Rule of Reason if license has a horizontal aspect 35 35

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Market Allocation Agreements • Field of Use and Customer Restrictions – Treated as non-price vertical restraints and are usually lawful – Cannot be used to impose price restrictions on purchasers of products with unlimited right to sell the product – Can be illegal per se if used to create horizontal market allocation scheme • Patent is invalid • Patent is trivial component of final product 36 36

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Exclusive Dealing • Can patentee condition its license or sale of patented good on agreement not to purchase competing goods? – Yes, if sufficient percentage of market is available to competitors – Yes, if exclusive is easily terminated – Yes, if efficiencies outweigh possible harm to competition 37 37

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Tying • Background – Early Supreme Court cases held that market power can be presumed from patent – Courts condemned tying as patent misuse without inquiring into market power or anti-competitive effects – 1988 Patent Misuse Reform Act: must show market power – Courts mixed: some follow early Supreme Court market power presumption, some do not – Courts mixed: some say patent misuse same as tying under antitrust law, others do not 38 38

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Tying • Distinct Products – Bundles with staples are distinct products – Bundles with non-staples are single products – Blocking patents are one product 39 39

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Tying • Market Power in Tying Product Market – Courts have inferred market power from IP – Leading Supreme Court case demanded actual proof of market power, but appeared to allow the inference of such power from a patent – Lower courts generally demanded actual proof of market power – 1988 Patent Misuse Reform Act: requires market power over tying product 40 40

Constantine & Partners Constantine Cannon CC Sherman Act § 1: Tying • Anti-competitive Effects in Tied Product Market – Supreme Court decisions suggest that de minimis foreclosure of commerce is sufficient – Lower courts are mixed, many Circuits now require anti-competitive effects in tied product market – IP Guidelines require an adverse effect on competition 41 41