Red flags in US competition law on the exercise of IP rights

By Rose Xu and Ason Zhang, Chang Tsi & Partners
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Intellectual property (IP) users may, in the course of exercising their rights, also abuse their IP rights. When, in the exercise of IP rights, market competition is restricted or eliminated, regulation of such abuse by antitrust/anti-monopoly and other such competition laws is necessary. This column will give a brief description of the rules in relevant US law, in the hopes that they will be of value in the establishment of relevant rules in China.

Illegal restriction

Cross-licensing and patent pool arrangements. With respect to collective pricing or output restrictions in a patent pool arrangement, if such restrictive acts do not as a whole contribute to increasing socioeconomic benefits, their existence will be deemed an illegal restriction of market competition. If either a cross-licensing or a patent pool arrangement is used to effect pure price maintenance or a partitioning of the market, it will be deemed as a per se violation of the law.

徐瑞红 Rose Xu 铸成律师事务所 合伙人 Partner Chang Tsi & Partners
徐瑞红
Rose Xu
铸成律师事务所
合伙人
Partner
Chang Tsi & Partners

With respect to a market competitor that has been excluded from a patent pool, if it cannot demonstrate that the other participants in the patent pool collectively have a dominant position in the relevant market, US law enforcement authorities have a tendency to apply the rule of reason when evaluating the reasonableness of the existence of the patent pool.

Resale price maintenance. In the judgment in Dr Miles Medical Co v John D Park & Sons Co, the court established the exhaustion doctrine. Once the licensee of an IP owner has sold a product incorporating its IP onto the relevant market, the owner loses its right to control pricing, or the resale price. Accordingly, resale price maintenance itself is a per se violation of the law.

Exclusive dealing. In the US, exclusive dealing means that an IP licence prohibits the licensee from licensing, selling, transmitting or using a technology that competes with the licensed IP. When determining whether an instance of exclusive dealing is lawful, the law enforcement authority will mainly apply the rule of reason to assess its effect on market competition. The main factor considered is the extent to which the exclusive dealing promotes or hinders use and development of the competing technology.

Grantback. In the US, grantback means that the licensee agrees to provide improvements that it makes to the licensed technology to the licensor for its use. When reviewing the effect of a grantback arrangement on competition, the law enforcement authority will generally apply the rule of reason, and comprehensively consider the grantback clause against the overall background of the entire IP agreement, principally considering whether the licensor has a dominant position in the relevant technology or innovation market; and, subsequently, weigh and compare the effect that the grantback arrangement has on competition.

Weighing the effects

Tying and bundling. Against the background of an IP licence, the licensor, in addition to licensing the IP required by the licensee (the tying IP), will often require the licensee to additionally accept a licence for other IP of the licensor (the tied IP).

张汝全 Ason Zhang 铸成律师事务所 初级律师 Associate Chang Tsi & Partners
张汝全
Ason Zhang
铸成律师事务所
初级律师
Associate
Chang Tsi & Partners

US law enforcement authorities have changed the past judgment principle that all tying and bundling was per se illegal, now using instead the rule of reason to weigh the effects of tying and bundling on the competition environment. The factors that are comprehensively considered include: i) whether the licensor has a dominant position in the relevant market in which the licensee needs the IP; ii) whether the tying and bundling will cause a negative impact on competition in the relevant market of the tied IP; and iii) whether the pro-competitive effect of the tying and bundling outweighs its anti-competitive effect.

Refusal to deal. Refusal to deal is in essence one of the rights of an IP rights holder, however if refusal to deal can enhance a rights holder’s monopoly power in the relevant market and possibly harm the interests of consumers, the same constitutes a violation of the law pursuant to section 2 of the Sherman Act. In Antitrust Enforcement and IP Rights: Promoting Innovation and Competition, published by the US Department of Justice and the Federal Trade Commission in April 2007, the following understanding was reached with regard to refusal to trade in the course of exercising IP rights: 1) Section 271(d)(4) of the Patent Act does not create antitrust immunity for refusals to license patents; 2) statements in Supreme Court jurisprudence support the traditional understanding that the unilateral right to refuse to grant a patent licence is a core part of the patent grant; 3) antitrust liability for mere unilateral, unconditional refusals to license patents would compel IP owners to reach out and affirmatively assist their rivals, a result that is “in some tension with the underlying purpose of antitrust law”. Moreover, liability would restrict the patent holder’s ability to exercise a core part of the patent – the right to exclude; and 4) conditional refusals to license that cause competitive harm are subject to antitrust liability.

Price discrimination. Price discrimination can be reasonable. Some US court cases corroborate this point. In Akzo v International Trade Commission, the patent holder charged differential royalties depending on the sector in which its patented technology was used, and additionally, in the licensing agreements it expressly stated the sectors in which use of its patented technology was restricted or prohibited. The court ultimately ruled that the above-mentioned acts of the patent holder did not hinder market competition. In USM Corp v SPS Technology, the court even held that the patent holder had the right, through price discrimination, to maximise the benefits from its patent.

Restricting competition

Predatory pricing. If there is sufficient evidence, predatory pricing constitutes an illegal act that restricts competition. In the Microsoft case, the district court found that Microsoft’s sale of Internet Explorer (IE) constituted predatory pricing because the sale price of IE at the time was far below its cost price, and its objective was to crush Netscape Navigator, IE’s competitor, in the relevant market.

Rose Xu is a partner and Ason Zhang is an associate at Chang Tsi & Partners

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